In addition to Transparency International’s Corruption Perception Index (“CPI”), the UK-based Risk Advisory Group’s Corruption Challenges Index is a reliable source for assessing the risk of corruption in specific countries. The Risk Advisory Group’s approach and methods differ from those of the CPI. It will come as little surprise that Europe gets good marks on average according to this new index as well.
Risk Advisory Group
Risk Advisory Group Ltd. (“Risk Advisory”) is an independent global risk management consultancy with its registered office in London, offering intelligence, investigations and security management. Risk Advisory offers clients a strategic information service that provides information and advice worldwide on investment projects, strategic expansion, important invitations to tender and other business opportunities. Risk Advisory prepares strategic and consistent security information and analysis to support decision-making as part of business risk management when clients expand into new and unfamiliar countries.
Corruption Challenges Index 2018
Risk Advisory’s Corruption Challenges Index 2018 (“CCI 2018”) has now been complied for the second time. The index provides an overview of countries and markets that represent the greatest and the least corruption challenges for investing companies.
The index is based on Risk Advisory’s direct experience of working in the most challenging counties in the world. Markets representing the greatest and the least corruption challenges for foreign investors are highlighted. Risk Advisory assesses various factors including the local threat of corruption, foreign investment risks, and the scope of FCPA enforcement action. The accessibility and availability of information when internal investigations are carried out for companies is also critically reviewed.
According to CCI 2018, the country with the lowest risk of corruption is New Zealand, followed by Ireland and Denmark. Germany takes 4th place. Germany is also listed in the top ten countries with the least corruption challenges, likewise led by New Zealand. The overall analysis also shows that Europe generally gets good marks according to the index criteria and leads the list of countries at least risk. Kosovo is the only European country to be found in the list of the 20 countries with the greatest risk of corruption.
The greatest corruption challenges exist in Turkmenistan, Somalia and Libya. The last two countries also have the greatest risk of corruption, according to CCI 2018.
Globally, the construction sector, urban development, infrastructure, and the oil and gas sector represent the most challenging sectors as regards corruption risks.
In addition to the global overview, the report also contains assessments broken down according to the individual continents and sets out key developments there.
Risk Advisory’s methods
The Corruption Challenges Index is prepared by Risk Advisory’s due diligence, political and security experts. The index assesses the threat of corruption, a regime’s stability or instability, and the accessibility of information in 187 countries in order to obtain a “Corruption Challenge” score and from this a “Most Challenging Jurisdiction” ranking.
In countries with an increased threat of corruption, an integrity due diligence plays a key role in risk management. But where information is restricted or unreliable, due diligence requires specialist knowledge and research skills. The most challenging countries are those in which the threat is high and due diligence is hard to achieve. The index serves to quantify this interrelationship.
To assess this situation, experts are required to evaluate each country according to the likelihood of two scenarios: 1) foreign investors face corruption when seeking to obtain an important government contract, a licence or a permit (“major corruption”); and 2) a company working on the ground has to put up with low-level corruption in order to operate its daily business (“minor corruption”). These scores are added together to obtain a regime stability score, from which a “Corruption Threat Rating” is derived.
This is matched against an opacity score based on expert assessments of how complete and reliable public information is, how open the media are, how much scope human sources have to speak freely, and what particular linguistic barriers exist, such as transliteration or complex translation.
The index’s most challenging countries are those with a high risk of minor and major corruption, a relatively unstable regime, and low availability of public information and business intelligence.
In addition to compiling the index, the analysts are instructed to take into account the three sectors most impacted by corruption in each country.
Transparency CPI and CCI – a comparison
Until now, the best-known corruption risk index has been Transparency CPI. Transparency CPI lists countries according to the degree of corruption perceived in the public sector. It is a composite index compiled from surveys and investigations based on corruption-related data collected by several independent and reputable institutions.
Transparency CPI 2017 was calculated using 13 data sources and 12 different institutions covering corruption perception over the last two years. These are shown on a scale of 0 to 100. 0 means that the sector in the country in question is perceived as being very corrupt. 100 means that it is perceived as having a high degree of integrity. By calculating means based on the reference year’s parameters, it is ensured that Transparency CPI scores since 2012 are comparable from year to year.
As both indexes deal with the risk of corruption, they can be easily compared with each other in spite of the differing methodologies they employ. Transparency CPI and CCI come to similar or comparable conclusions regarding countries such as New Zealand, Denmark or Finland, for example. Germany also gets good marks according to both indexes.
There is also agreement when it comes to the greatest risk of corruption assessed for Somalia, Libya or South Sudan.
There are differences in positive assessments, such as for Ireland. According to CCI, Ireland has the second lowest risk of corruption, while CPI places it “only” in the second highest group, with a “low” risk level. The situation is similar for Japan. The CCI places Japan in the 10 countries with the lowest risk of corruption, while CPI places it “only” in the group with a “low” risk level.
What this means for compliance advice
The CCI can therefore be used in two ways in company compliance roles or when performing due diligence. Firstly, it can be used to confirm and fine-tune the CPI assessment, thus improving the validity of the risk assessment. For internal company advice, this permits a more reliable statement to be made as regards a possible risk of corruption.
Secondly, there is the option of looking critically at the frequently used CPI in cases where the two indexes differ in their assessment. In many cases, this deviation may be minor, but it may give cause to look critically at business actions to be taken in certain countries and if necessary to modify the overall assessment.
As an independent expert assessment, therefore, the CCI may become a further, fully fledged compliance tool over the next few years with its own value when evaluating country-specific risks.
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