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Transparency International Publishes New Corruption Perceptions Index: A Brief Overview


Today, Transparency International, a non-partisan organization working to end global corruption, published its 25th annual Corruption Perceptions Index (CPI).


What is the Corruption Perceptions Index?

The CPI was first released in 1995 and has become the leading global indicator of public sector corruption. Each country is assigned a score based on its level of corruption as perceived by experts and business people, but not the general public. The index for 2019 scores 180 countries and territories and ranks them on a scale of zero to 100, where zero is highly corrupt and 100 is very clean.


What factors are considered in country rankings?

Some of the aspects of corruption that are taken into account for ranking purposes include a country's level of bribery, diversion of funds, successful prosecution of corruption cases, and the effectiveness of the country's legal frameworks. Interestingly, money laundering, financial secrecy, illicit money flows, and tax evasion are not factored into the scoring methodology.


Are there other country risk rating systems?

The CPI isn't the only corruption risk barometer. There are a number of others, including the TRACE Bribery Risk Matrix (TRACE Matrix), which was developed in 2014 by Trace International, an anti-bribery standard-setting organization. Also updated and released annually, the TRACE Matrix measures bribery risk in 200 countries, territories, and regions. Like the CPI, the TRACE Matrix ranks counties on a zero to 100 scale. In contrast to the CPI however, the lower the score, the cleaner the country. TRACE released its most recent matrix in November 2019.


What are the highest and lowest ranked countries per the 2019 CPI?

According to the 2019 CPI, the three cleanest countries are:

  1. Denmark

  2. New Zealand

  3. Finland

The three most corrupt countries are:

  1. Syria

  2. South Sudan

  3. Somalia

The United States ranks in 23rd place out of 180 on the CPI. This is down one spot from 2018 when the U.S. ranked in 22nd place, and down seven spots from 2017 when the U.S ranked 16th.


What are the highest and lowest ranked countries per the 2019 TRACE Matrix?

According to the 2019 TRACE Matrix, the three cleanest countries are:

  1. New Zealand

  2. Norway

  3. Denmark

The three most corrupt countries are:

  1. North Korea

  2. South Sudan

  3. Somalia

The United States ranks in 15th place out of 200 in the TRACE Matrix.


How are the bribery risk ratings used?

Financial institutions and other businesses use bribery risk rating indices and matrices, such as the CPI and the TRACE Matrix, to help them evaluate business risk. More specifically, one reason that a company may reference a specific country's risk rating is to assess the potential risk of doing business in that jurisdiction. For example, a country's corruption or bribery risk score may be considered when evaluating a merger and acquisition target, or to assess the risk of a new market in which to invest or operate.


Additionally, businesses use these risk-rating tools, in coordination with others, to risk-rate customers in compliance with the Bank Secrecy Act's (BSA) Know Your Customer (KYC) and Customer Due Diligence (CDD) requirements.

What are some limitations and criticisms?

Although each of the above-mentioned country rating systems uses well-developed and highly defined methodologies to assess and calculate the bribery and corruption risk of each country, they are not without limitations and criticisms. For one, declining potential business based on a country's risk score can result in the loss of otherwise worthwhile opportunities. Also, the country ranking systems have been criticized as unfairly overstating the corruption risk in poorer countries and thus favoring wealthier economies. This in turn limits investment in poor economies. Additionally, one of the noted criticisms of the CPI is that it is too general and does not consider or point out specific corruption-related risks.


Conclusion

No system will be without flaws or constraints. There are simply far too many considerations and fluid factors, not to mention the clandestine nature inherent in bribery and corruption, all of which make it difficult to obtain a truly accurate measure of a country's corruption risk. However, so long as the science and methodology are solid and defensible, country risk rating systems can provide value. Furthermore, when several different rating systems are used in conjunction, they can yield useful information that would otherwise be difficult to obtain. Therefore, when used as just one tool in a company's overall risk management arsenal, country risk rankings can be effective. Business just need to be aware of their limitations.


Links for additional information

The latest Corruption Perceptions Index can be accessed here.

A video in which the Corruption Perceptions Index is explained (with closed captioning available) can be found here.

The TRACE Matrix information packet can be download here.


#corruption #bribery #riskmanagement #CPI