Compliance officers, beware: A lack of transparency in public reporting in many countries where U.S. companies do business may enhance the risk of violating the Foreign Corrupt Practice Act and other anti-bribery laws around the world.
A first-of-its-kind report examining the public disclosure practices in 215 countries revealed significant deficiencies in the availability and transparency of corporate disclosure, litigation records, and media outlets in many emerging-market countries. Without access to such information, multinational companies looking to expand their global footprint expose themselves to greater bribery and corruption risks.
“One major way of containing corruption risks is by doing due diligence on your counter-parties,” says David Buxton, founder of risk analysis firm Arachnys, which conducted the report. The simplest, most cost-effective way to do that, he says, is to verify the ownership of the third parties with which you're doing business; check that they're not engaged in excessive amounts of litigation; and verify that they're not associated with government officials. But getting access to that information can be difficult in many countries, or the information can be unreliable.
Companies run into trouble when they don't perform these simple measures. “What we're trying to help companies do is stop making really stupid mistakes that, in fact, businesses are making all the time,” says Buxton.
To assess the degree to which countries are aiding companies in conducting due diligence, the Arachnys Open Data Compass index assessed three main aspects of public disclosure transparency:
Availability of corporate data from corporate registries, stock exchanges, chambers of commerce, and government documents;
Availability of litigation records from court Websites, bar associations, and third-party case law repositories, such as World Legal Information Institute; and
Development of the country's media environment.
According to the index, New Zealand received the top rank in all three areas of public disclosure transparency, with an overall score of 86 out of a possible 100. It fared best in the areas of corporate and litigation transparency, with a perfect score of 100, but received a low score of 59 when it came to the development of the country's media sources.
On the opposite end of the spectrum, the Middle East and Africa regions occupied the lowest rankings in the overall index, with an overall average score of 29 and 39 out of a possible 100, respectively. Nations in these regions fared most poorly when it comes to the availability of litigation records, and only slightly better when it comes to the reliability of corporate data, and the maturity of its media environment.
Nigeria, in particular, poses a significant amount of corruption risk for multinational companies, which flock to the country for its abundance of natural resources. The country ranked 83rd, with an overall score of 48. It received a low score of 58 on transparency of litigation records, and even poorer scores for its media environment (52), and corporate records where it scored a 36. “That makes it a very high-risk jurisdiction,” says Buxton.
Engineering company Bilfinger, and joint venture companies Kellogg Brown & Root, Technip, and JGC are just a few companies that have been charged with violating the FCPA for business dealings in Nigeria.
“Continued secrecy in business dealings and a lack of accountability has continued to allow corruption to flourish,” says Barnaby Pace, an oil campaigner for Global Witness, a non-profit group that campaigns to prevent natural resource-related conflict and corruption. “This secrecy is reflected in Nigeria's middling score for litigation transparency and poor score for corporate transparency in the Arachnys Compass.”
Transparency vs. Corruption
There are other indications that a lack of transparency in corporate disclosures and shoddy corporate recordkeeping are good indicators of corruption risk. Countries that scored low on availability of corporate data, for example, correlate strongly with Transparency International's Corruption Perceptions Index. In TI's index, for example, New Zealand ranked first place with a score of 91, reflecting low levels of state sector corruption.
In comparison, countries in Africa and the Middle East—such as Libya and Iraq—ranked among the worst in TI's index. Libya fell 12 places from 160 in 2012 to 172 in 2013; Iraq also from 169th place in 2012 to 171 in 2013. According to the Arachnys index, the findings indicate that investments in anti-corruption measures generally go hand-in-hand with greater corporate transparency.
“Continued secrecy in business dealings and a lack of accountability has continued to allow corruption to flourish.”
—Barbaby Pace,
Oil Campaigner,
Global Witness
The BRIC nations—Brazil, Russia, India, and China—are the exception to this general trend, receiving overall high scores in the Arachnys transparency index, although they generally perform poorly on TI's Corruption Index. India ranked 14th in transparency with an overall score of 69, but ranks 94th on TI's Corruption Index; Brazil ranked 16th and 72nd respectively; China ranked 20th and 80th. Russia holds the greatest disparity, with a transparency ranking of 23 and a TI ranking of 127.
Buxton stresses that these countries' rankings observed in the Arachnys index clearly aren't a reflection of their level of corruption.
In Brazil, for example, “access restrictions limit the information freely available from the centralized court record database, and federalism makes the consolidation of corporate data difficult across Brazil's 26 states,” says Gitanjali Patel, a researcher for Arachnys Information Systems in Latin America.
Brazil's corporate data availability score of 54 indicates room for improvement. “Brazil's lack of corporate openness can largely be attributed to the reluctance of Brazilian companies to publicly expose financial information, or indeed, the lack of obligation for them to do so,” says Patel.
Cultural nuances in India also increase bribery risks; many Indian companies are family owned, which raises concerns about corporate governance, “notably the effectiveness of checks and balances over decision making,” says Gareth Price, a senior research fellow of the Chatham House, a London-based non-profit independent analysis group. Corruption risk in India is further reinforced by “a culture of deference and reluctance to question,” he says.
Some countries, including the United States and Canada, ranked surprisingly low on the transparency of information index, despite mature disclosure regimes and well-developed media. The United States, for example, ranked 26th with an overall score of 64, and Canada ranked 70th, with an overall score of 53. “Much of this is due to federal political systems and federalized corporate registration systems in both countries, which make the consolidation of corporate and, to a lesser extent, litigation data difficult,” the report stated.
ANTI-BRIBERY RANKINGS
Below is a list of 20 countries ranked by Arachnys Compass “Country Rankings,” which scored 215 countries based on three criteria: media, corporate, and litigation. Each country's score is to the right.
Source: Arachnys Compass.
Access to litigation information—such as court transcripts, dockets, and criminal records—is essential, because it makes it easy to spot potential red flags for potential legal risks of doing business with companies in high-risk countries, the report stated.
Only two countries—New Zealand and the Netherlands—achieved a perfect score of 100 on litigation transparency. Other countries that ranked high in this area include Finland, France, Australia, and Hong Kong, which all scored a 90.
Media Outlets
The Arachnys index also evaluated the diversity of each country's media sources, as compared to the size of the country's news market. “The media is a rich source of information for everything from macro political and economic trends to specifics and even hearsay pertaining to an entity or individual,” the report stated.
Uncovering the affiliations that government officials have at the federal level is typically fairly easy to find. At the local level, however, “it's really only in newspapers where you're going to get that information,” says Buxton.
In the report, the clear outlier was China, which scored a high of 74, despite tight restrictions on both national and foreign media, and a highly censored Internet. This may be because the country's media sector is quite vast, and often is the only informant of corporate wrongdoers, crime bosses, and corporate disputes.
“The Chinese press is still an underused resource for many compliance professionals carrying out research in the country,” the report stated.
Robust media disclosure, however, doesn't necessarily mean unbiased reporting. Brazil, for example, scored even higher than China, with a score of 83. “The media is dominated by the giant conglomerate Rede Globo, which prioritizes news from larger states such as Rio de Janeiro and São Paulo,” says Patel. Unbiased reporting is more difficult to come by in Brazil's smaller regions, where many local newspapers are run by wealthy families, she says.
The news was not all bad: The report indicates that it's becoming increasingly possible and easier to perform the kind of basic due diligence necessary to prevent fraud and corruption, “even in jurisdictions where you wouldn't think it would be very easy,” says Buxton. “From an anti-corruption point of view and from a compliance point of view, U.S. companies have reason to be optimistic.”
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