January 28, 2016
Yesterday, Transparency International published its Corruption Perceptions Index ("CPI") 2015. The CPI, which measures the perception of public sector corruption worldwide, was created in 1995 to raise awareness of international corruption and to encourage governments to act against it. Since then, the business community has relied on the CPI to assess corruption risk. At the time it was first launched, the CPI was a trailblazer in a relatively enforcement-free field (in 1995 there were no FCPA or related enforcement actions filed), but now, 20 years later, anti-bribery enforcement has evolved and a risk assessment based on perception is no longer enough.
In 2014, TRACE, in collaboration with RAND Corporation, launched the TRACE Matrix, a business bribery risk index designed specifically for compliance officers and in-house counsel. Based on a conceptual framework of business bribery rather than perceptions of general, even petty, corruption, the TRACE Matrix focuses on demands on businesses – licenses, customs, government contracts – which makes it much more relevant to companies than the CPI. It provides an overall risk score that is composed of scores from 4 domains – business interactions with government; anti-bribery laws and enforcement; government and civil service transparency; and the capacity for civil society oversight, including the role of the media. Nine subdomains further break down the risk indicators resulting in a total of 14 scores.
The difference between the TRACE Matrix and the CPI lies in the methods employed for assessing corruption risk in each country. The correlation between the two indices is stronger than random, but there are indeed many notable differences. For example (note: CPI scores are inverted and rescaled), on a scale of 0 (very low risk) to 100 (very high risk) the CPI scores India as 62, and the TRACE Matrix scores India as 80, primarily because of a very high score (92) in Domain 1 - business interactions with government. In another example, the CPI scores Indonesia as 64, and the TRACE Matrix scores Indonesia as 51, given the low score (24) in Domain 3 - government and civil service transparency - and the moderate scores in the other domains.
Measuring country risk is a key component of any sound risk assessment or third party evaluation. By allowing users to understand what is driving the overall risk score, the TRACE Matrix brings more granularity and precision to the risk assessment process and encourages users to apply their own analysis to a country score. This means companies can use the TRACE Matrix to understand where they are vulnerable to corruption risks based on the nature of their particular business activities, and to implement tailored mitigation measures. The TRACE Matrix is updated every two years and is publicly available at http://www.traceinternational.org/trace-matrix/.
For more on this topic, please see the following resources:
Global Enforcement Report (GER) 2014
Business Bribery Risk Assessment
Corruption Perceptions Index 2015
TRACE Compendium Alstom SA
Steptoe & Johnson LLP 2014 FCPA Year in Review
US Department of Justice
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