FCPAméricas Blog

Assessing the Assessments: Using the TI Corruption Perceptions Index and other corruption risk metrics

Author: Juanita Riaño

Guest Blog Post – Today FCPAméricas features author Juanita Riaño, an Integrity Officer at the Inter-American Development Bank and former Manager of the program “Global Tools to Measure Corruption” in the Transparency International-Secretariat. The opinions expressed in this blog post are entirely those of the author and do not reflect the position of the Inter American Development Bank.

Matt Ellis posted here last week that “enforcement officials and ‘best practice’ descriptions stress that adequate anti-corruption compliance programs [should be] based in sound corruption risk assessments.”

This is easier said than done. The truth is, there is no silver bullet to assess corruption risks. Measuring corruption is tricky because corruption is clandestine in nature: how can we expect to accurately assess the magnitude of a transaction that takes place under the table, in a brown envelope, or through a series of bank transfers around the globe?

The good news is that there has been tremendous progress in the development of integrity risk indicators. In this blog post I will give you a taste of some these tools and some suggestions about how to best use them to assess corruption risk. An in-depth review of these topics, however, would require a book. If you are interested, useful information can be found in the 2008 Users’ Guide to Measuring Corruption by the UNDP Oslo Governance Centre and Global Integrity, as well as on the Transparency International’s online platform Gateway Project.

In order to make sense of the myriad corruption metrics, I classify them below as aggregate indicators, mezzo indicators and micro indicators. To assess corruption-related risks, these different types of indicators are best used in combination with each other. Compliance officers should get familiar with these offerings, and then assess risk using several indicators across these general categories.

Aggregate Indicators

Last week Transparency International launched its flagship indicator: The Corruption Perceptions Index 2011 (CPI). The CPI ranks countries according to the perceived levels of public sector corruption using a scale that goes from zero (lowest level of perceived corruption) to 10 (highest level of perceived corruption). Another indicator to be aware of is the World Bank Worldwide Governance Indicators (WGI). Both the CPI and the WGI are “aggregate” indicators that combine several sources of information into a single index to assess a broad concept (perceptions of public sector corruption) and compare it across different countries. These two indicators use almost the same sources of information: both use assessments of experts and businesspeople, but the WGI also uses assessments from households. In the case of the WGI, the scores can also be compared across time.

Aggregate indicators are broad indicators of a problem, like an emergency siren. Their disadvantage is that they do not tell you the magnitude of the risk, the form a problem will take, or where to look. On the other hand, they are easy to understand and let readers get a general sense of the issue. While they do not help countries prioritize reforms, they can help companies prioritize their efforts.

The CPI and the WGI are the first magnifying glass compliance officers can use to analyze corruption risk relative to other countries. However, they should not be the only metrics consulted, because if looked at in isolation they can lead you to the wrong conclusion. Let’s take some examples from the Americas:

• Canada is the regional top scorer in the CPI, but does this mean that there is no corruption, no reason for integrity due diligence? Some juicy stories from the Quebecois construction sector here and here tell us otherwise.

• In the 2010 WGI, Peru scored better than Mexico, Colombia and Argentina, but does this finding indicate that the corruption risk is lower in Peru? Not necessarily. Along with the scores, the World Bank publishes the margin of error of the indicator. If the margin of error is taken into consideration the three countries’ scores might be considered “tied”. (For more details on the confidence intervals please see here.)

Both indicators are also based mostly on perceptions based data – a subjective and indirect indicator of corruption. Perceptions are based on people’s experiences, and therefore provide us with information that should not be discarded. Perceptions-based indicators must be read carefully, however, because the underlying information can be influenced by external factors (for example, a lack of enforcement can be perceived as an absence of corruption).

The debate about pros and cons of using subjective data to measure corruption is well documented and goes beyond the scope of this blog post. If you are interested some very interesting papers that illustrate the debate can be found here, here, here and here.

Mezzo indicators

In addition to aggregate indicators, there is a second group of indicators known as mezzo indicators, which serve to assess and compare a particular issue across several countries. They have the advantage of being relatively concrete and narrow. The Transparency International Bribe Payers Index (BPI), the World Bank Doing Business Project (DB) and the Global Competitiveness Report (GCR) from the World Economic Forum are a few examples.

The BPI ranks 28 leading economies according to the propensity of their companies to bribe when operating abroad. The DB assesses specific aspects of business regulations in 183 countries to assess where opportunities for corruption may arise. Meanwhile the GCR uses responses from businesspeople to analyze (among other aspects) the transparency of a country’s policy-making process and the frequency of irregular payments or bribes in 139 countries.

While very useful for tracking a particular issue (e.g., corruption in the construction sector) by country, if used in isolation to assess the likelihood of corruption to occur, important risks factors can be overlooked. How do institutional arrangements in a country serve to prevent or foster corruption? For example, by looking exclusively at corruption in the construction sector, compliance officers are missing the role played by other key sectors as risk mitigating or exacerbating factors. Therefore it is crucial to include information on the country anti-corruption systems and structures (see the useful assessment produced by the Global Integrity here).

Making hard data accessible           

Other helpful developments for compliance professionals are tools that better communicate corruption risks. One of these tools is the James Mintz Group interactive map “Where the bribes are”. As previously explained in this blog, the Mintz Map visualizes the U.S. enforcement actions under the FCPA in a very transparent manner. The beauty of the Mintz Map and similar exercises such as Dinero y Politica is that they translate hard data previously stored (some would say lost) in complex reports into user-friendly tool available to everyone. Thanks to the progress made by the open data movement unlocking information, we can expect more and more organizations to develop new tools turning hard corruption data into useful indicators.

These interactive tools are not about producing new information to assess corruption – they are about making data available to a broader audience. This is what makes them useful for compliance officers. However, not even these user-friendly, data-based indicators provide a measure of the bribes paid on the ground. The basic problem of measuring clandestine activity persists: does an increase in the number of corruption-related convictions imply that corruption levels in this country have gone up? Maybe, maybe not. Increased convictions can result from policies that look at professionalization of prosecutors, or implementation of a new voluntary disclosure program.

In summary, there are myriad metrics to measure corruption, and all of them have pros and cons. There is no silver bullet to assess corruption related risks, but there is a bundle of indicators that can be used in combination to shed light on the magnitude of corruption risks, and to help identify systemic strengths and weaknesses vis a vis corruption.

The crucial point for compliance officers is “get yourself familiarized with the menu and make sure you always pick a three-or-four-course sampler.” As Daniel Kaufmann, one of the authors of the World Bank Worldwide Governance Indicators has said: measuring corruption is like having a group of people sitting around a table describing a cup. Each person will only describe the side of the cup she is able to see from her chair. For the full picture, all descriptions need to be put together. But more data will not make the assessment more accurate.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

© 2011 Matteson Ellis Law, PLLC

Post authored by Juanita Riaño, FCPAméricas Author

Categories: Anti-Corruption Compliance, FCPA, Mintz Group, Transparency International, World Bank

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