Corruption Challenges Index 2018 Corruption danger spots for business in 2018 The world’s most and least challenging places for foreign investors in relation to corruption levels
Welcome to Risk Advisory’s Corruption Challenges Index 2018, our second edition. Like our first survey, this draws on our direct experience of working in the world’s most challenging countries, revealing the markets that pose the most – and the fewest – corruption challenges for foreign investors. We have evaluated various factors – local corruption threat, foreign investors' exposure, the level of FCPA enforcement action – and have refracted these through the prism of accessibility and availability of information when carrying out investigative research.
The countries that pose the greatest challenges are not necessarily bad places to do business: for some countries and sectors, the higher the risk, the greater the reward. But an essential part of navigating these challenges is to have a robust risk mitigation programme in place, based on adequate integrity due diligence.
Three maps visually representing Corruption Challenges, Corruption Threat, Opacity
Top 10 league tables – Corruption Challenges, Corruption Threat, Opacity
Top 3 sectors exposed to corruption globally
Viewpoints – analysis from regional experts on what the data shows
2017 started on a doubtful note from a corruption and transparency perspective. Progress in fighting corruption continued to be dampened by governments’ determination to quell dissent and suppress reform; some longstanding quasi-despots showed every sign of holding onto power; and the new incumbent of the White House had gone on record in 2012 as describing the US Foreign Corrupt Practices Act as “ridiculous” and a “horrible law”.
Recently, however, there have been more positive signs. In South Africa and Zimbabwe, Jacob Zuma and Robert Mugabe have been removed, with their successors promising a new era of transparency and adherence to the law; western countries have updated and reinforced anti-corruption legislation, Sapin II in France being a notable example; and the first full year of the Trump administration has, from an enforcement point of view at least, not quite lived down to the low expectations many people had at the start of the year, with 23 FCPA enforcement actions in 2017 against 28 for 2016. And in the UK, too, there have been successes, with the effective use in certain quarters of deferred prosecution agreements.
As you will read in the regional viewpoints and see from the maps, there are both surprising and more predictable outcomes around the world. Africa, for so long regarded as more or less impenetrable when it comes to retrieving information, is on an improving trend, as increased FDI, digitisation and centralisation encourage greater transparency. Some former pariah countries, such as Iraq and Libya, are gradually, and at different speeds, rejoining western economic structures. And the due diligence process for potential investors is not always as painful as they fear; our clients looking to engage with the Nigerian market, for example, are often happily surprised to find that you can find out a remarkable amount about companies there (although the same cannot be said – yet – for Libya, unfortunately).
However, these positive developments are offset by challenges elsewhere. The very notion of transparency differs hugely from country to country, and there is an ongoing tension between transparency and privacy that is becoming increasingly politicised, as campaigners push to reveal money flows and highlight corporate tax optimisation strategies. Press freedom, meanwhile, is under increasing threat in countries such as Mexico and Russia. With the rise of ‘fake news’ and the polarisation of political debate, a free and independent press is vital in holding both elected officials and companies to account. And there is still more to be done on databases of beneficial ownership of assets. Light has been shone in some dark corners – not to everyone’s delight, it must be said – by the Panama Papers and the Paradise Papers, but the ability of criminals to launder the proceeds of crime and corruption through a combination of low disclosure and lack of political appetite remains a major challenge.
There is, of course, a natural tendency when dealing with corruption, money-laundering and general misbehaviour to assume the worst of humanity, whereas in some ways the overall picture is actually improving. As writer Steven Pinker has pointed out, that the number of democracies has risen from 31 in the early 1970s to over 100 now, which should be a cause for, if not perpetual celebration, or at least cautious optimism. But despite this broad improvement, work remains to be done to ensure that the rule of law and robust institutions are fully rooted, and that bribery and corruption of all kinds and at all levels becomes universally unacceptable.
Sub-Saharan Africa continues to pose a challenging corruption environment for investors, with nine of the worst twenty countries in our challenge index coming from the continent.
Not everything in Africa is doom and gloom, however, in our experience, some of the old tropes about African corruption are overstated or incorrect, particularly in regard to investigating corruption allegations. Let’s take Nigeria as an example. No one would argue that Nigeria does not have severe problems with high-level government corruption, particularly with former oil minister Diezani Alison-Madueke facing US, UK, and Nigerian investigations for embezzling tens of millions of dollars. In addition, the country is well known, and rightly so, for having a deeply embedded culture of corruption at all levels that permeates society and poses major challenges for international investors.
But when we at Risk Advisory are approached to conduct an investigation in Nigeria, we do not do so with the same sense of caution we feel in certain other jurisdictions. This is because while Nigerian cases often encounter corruption allegations, the country’s high degree of transparency allows us to make informed judgments about their veracity.
For us, this transparency is based on three main pillars. First is press freedom; Nigeria has a large number of hard copy and online publications that represent all points on the political spectrum and are not shy about exposing possible corruption. This is not always a blessing; a lack of meaningful enforcement of libel laws means such allegations are often thrown about to settle personal or political scores, and turn out to have little basis in truth. Nonetheless, the richness of the media environment is a huge benefit in knowing whether there are potential problems related to case subjects.
A second pillar, which allows us to verify whether such allegations are true, is the openness and willingness of Nigerians to speak to us in confidence in regard to our casework. It is a cultural characteristic that is by no means universally shared on the continent, but it is extremely valuable in our work. Everyone has an opinion, and many - more pertinently - have factual observations, that they are willing to share. With our excellent networks in Nigeria, we are able to track down information about the reputations and activities of even the smallest companies.
The third and final pillar is the availability and reliability of public information, in which Nigeria excels. Its’ Corporate Affairs Commission (CAC) is probably the most accessible and easily searchable on the continent. Even beyond Africa, the CAC is a model for transparency and simplicity. At the end of the day, we cannot argue that Nigeria is unchallenging from a corruption standpoint; it most certainly is, and it is a market in which companies should prioritise due diligence of counterparties. However, hearing “Nigeria” should not make potential investors baulk. Through diligent casework and thorough research, we are able to help clients make informed decisions about potential partners and investments in the country.
Looking at the Americas, there is a striking divide between north and south. While the US and Canada – perhaps unsurprisingly – rank among the least opaque jurisdictions on our index, many countries south of the US border compare quite poorly.
Chief among them is Venezuela, a country apparently headed towards political and economic collapse, but also some of the region’s largest and most developed economies,
including Mexico and Brazil. Connecting factors include political instability and pervasive corruption that often go hand in hand with challenging information environments.
The impact that organised crime has on central and south American countries – more often than not connected to drug trafficking that supplies the region’s largest market,
the US – is another pertinent issue. And exposing narco crimes, corruption and money laundering, especially if they involve politicians and government officials, can lead to
threats and physical violence. Mexico continues to be one of the western hemisphere’s deadliest countries for the media; local journalists covering organised crime or
political corruption here, are as likely to be killed as those in the war zones of Syria or Afghanistan. So what is the good news? Among all this noise it is easy to ignore the strides that some countries have taken to curb corruption and fight crime. The signing of the historic peace accords between the Colombian government and the Revolutionary Armed Forces of Colombia (FARC) in 2016, for example, dispelled a great deal of tension and bodes well for freedom of information. There has also been notable progress in improving access to information in countries such as Brazil, Chile, Mexico or Argentina, for example through continuous efforts to digitise public records. And the quantity and quality of information about public procurement processes and government contracts in many countries in the region has also improved.
In Guatemala, investigations by the public prosecutor’s office in conjunction with the International Commission against Impunity in Guatemala (CICIG), a UN-backed anticorruption commission set up in 2006, have gained significant traction over the last few years, resulting in the resignation and subsequent arrest of President Otto
Pérez Molina and Vice President Roxana Baldetti amid corruption allegations. In December 2017, Ecuador’s Vice President Jorge Glas was sentenced to six years in prison in a corruption case that emanated from Operação Lava Jato, Brazil’s sweeping corruption investigation surrounding state-owned oil company Petrobras. And this same probe led to the arrest of Brazil’s former president, Luiz Inácio ‘Lula’ da Silva, in April 2018.
What drives these developments is often the dire need for investment. The lesson learned here is that foreign investment from both private companies and international
development finance institutions – for example for much needed infrastructure and energy supply projects in Central America – will only find its way into the region
by ensuring transparency and fighting corruption. This is the message that we hear from our clients in the region and it is also what encourages many local businesses to
do better – to change corporate culture and comply with international anti-corruption and anti-money laundering legislation.
While North Korea was the only country to make it into our top ten list this year, the Asia Pacific region is generally a poor performer when it comes to corruption. While Singapore, Hong Kong, and Japan stand out for their transparency, most other countries in the region lag far behind comparably-sized economies in western Europe and North America.
In China, while Xi Jinping has aggressively pursued corruption within the Communist Party, increasing media and internet censorship has made the country less transparent and more challenging in which to conduct anti-corruption due diligence work. The country’s proposed new anti-corruption supervision agency is probably going to ensnare many more actors in the public sector, but ultimately its lack of independence from the Party will limit its effectiveness and inevitably lead to accusations that its investigations are tainted by politics.
In South Asia, India remains less of a corruption challenge than Pakistan, but companies still face a difficult operating environment there. Our work in the past year in the real estate sector in particular, shows an industry beset with demands for bribes for all manner of licences to obtain rights to develop land, seriously undermining the prospects of law-abiding investors. In Bangladesh, one of the most challenging countries to conduct due diligence in the region, much of our work on the country’s leading companies all too often shows unethical ties to the ruling Awami League government.
As for South-East Asia, with the exception of Singapore which is taking more aggressive steps to fight financial crime in the wake of the 1MDB scandal, the region poses
significant challenges. Indonesia features a high degree of corruption, particularly in obtaining licences and permits at the regional governmental level. While the archipelago’s press is lively and better at exposing corruption than some of its peers, the country still lacks some of the basic tools to investigate companies, such as an easily accessible corporate register to confirm ownership information. In Vietnam, we have seen a marked increase in interest from foreign investors, heavy state involvement in many sectors of the economy, and an opaque information environment; it has become one of the most demanding countries in which to conduct anti-corruption due diligence.
The overall picture for Europe is fairly positive. Only one European country has made it into the list of the 20 most challenging nations in our index – Kosovo, Europe’s youngest state where institutional frameworks are still being built. Only three other European countries made it into the top 50.
The Old Continent, more than any other, carries the most diverse range of nations and working cultures, making it difficult to identify continent-wide trends. We do, however,
see certain regional patterns in attitudes to, and tolerance for, corruption. South-eastern European countries find themselves with the worst rankings in our index; the
former Yugoslavian states continue to struggle with corruption in the judiciary and opacity in the states’ dealings with investors. Curbs on press freedoms have
undermined the quality of available information in Turkey, and large-scale purges of suspected supporters of the socalled ‘Gulenists’ have left a vacuum of expertise in key
public sector institutions; while tax fraud remains acute in Greece, despite the efforts of the National Anti-Corruption Action Plan (NACAP).
Some countries in Europe are relatively challenging when it comes to finding data, in particular those that have built their economies around private wealth management
(e.g. Liechtenstein, Andorra, Malta and Cyprus). In other regions, the picture is more nuanced. This is particularly so in southern Europe, where the environment remains
challenging, such as in the construction sectors in Italy and Spain, but both countries rank fairly well in our index owing to the possibility of entering these markets with
open eyes (both countries are data-rich and records are largely reliable).
Leaving the best for last, Europe holds 13 of the top 20 positions in our index this year. Risk of corruption remains relatively low in northern and western Europe, although
lack of availability of information (in countries like Germany, where data privacy laws remain strong) impacts some of the rankings. In other countries, certain legislative
steps (like the UK’s introduction of the ‘person with significant control’ test, which in our view introduces opacity and could be used to hide the presence of politically
exposed persons in a company’s ownership structure) are largely counterbalanced by the broader accessibility of information.
There have also been encouraging signs that corporate attitudes to corruption, at least in western Europe, will continue to improve. The UK’s Bribery Act is finally showing some bite, and people we speak to tell us that it’s being used in their respective countries as the gold standard for anti-corruption legislation. Even more heartening from our perspective is the impact that France’s Sapin II legislation has had in its first year of operation. French companies have been given rigorous obligations under the law, with clear associated timelines for implementing new policies and practices. We frequently hear from clients in the country that Sapin II has already made a substantial impact on French corporate culture and attitudes to bribery.
Anti-corruption campaigns have attracted headlines in the Middle East, but although the governments of the region have voiced their support for stricter regulations and oversight, it remains to be seen whether there will be any real traction.
From Saudi Arabia and Egypt to Iran, government-led corruption probes have been lauded by officials in their respective countries as addressing the problem. In our
view, however, they rarely deal directly with the structures and mechanisms in place that have allowed corrupt business practices, cronyism and other impropriety to flourish.
The Saudi Arabian government probe that started in late 2017 can be viewed overall as politically motivated and as an attempt by the state to secure significant funds to
address short-term budgetary issues, under the guise of a confiscation of ill-gotten gains. Crown Prince Mohammad bin Salman and other officials in the kingdom have tried to
persuade observers that they are taking a hard stance in implementing anti-corruption measures. Following the arrest of several hundred individuals in late 2017, the Saudi
Arabian authorities initially suggested that they would pursue legal action against the accused. Over the course of the past three months, however, they have shown a
preference for negotiating financial settlements as opposed to taking the detained individuals to court on corruption charges. This ambivalence in addressing what has been presented as widespread and costly corruption in the kingdom relies on instilling fear to prevent future impropriety but also points to the government’s reluctance
to properly penalise offenders.
Other countries in the region have taken steps to address corruption issues in a more public and transparent manner, opting to publish charges levelled against private
businesses, state-owned enterprises, technocrats, officials and businessmen. In Iran and Egypt, for example, the local media have widely reported – with input and commentary provided by officials of the Rouhani and El-Sisi governments – on illicit deals and controversial business ventures. Despite the plethora of reporting on these matters and the wider public’s awareness of the issues at hand, both the Iranian and Egyptian governments, like the Saudi Arabians, do not appear to have the resoluteness to
take part in any prolonged criminal or regulatory investigations or take major legal action.
Although recent events suggest that these governments are not yet in a comfortable enough position to properly tackle corruption, the names of individuals and businesses that stand accused of corruption read like a who’s-who of billionaires, prominent merchant families and politically well-connected executives. Indirectly, these probes have shed light on the lack of regulation and transparency in major deals, including large infrastructure and real estate projects that are supported by public funds. More
importantly, there are several reputational issues as the individuals and entities that have been accused of corrupt business practices have longstanding and lucrative
partnerships with international firms and are industry leaders in their sectors.
Former Soviet Union countries continue to have a mixed record with respect to corruption. The regional outliers are Central Asian countries and Azerbaijan, where ruling families dominate. They control key business assets, as demonstrated by the recent and ongoing FCPA investigations in the Uzbek telecoms sector.
The governments pursue few if any anti-corruption policies, independent media is suppressed and basic corporate information is not available. For example, in Azerbaijan
company ownership information is treated as confidential. There is hope that the new Uzbek leadership will move towards greater transparency, especially after the resignation of the old-guard state security chief, Rustam Inoyatov. Turkmenistan is the most challenging country according to our index. Why? Partly because the government does not disclose all of its members and it does not even have a website. Also, Turkmenistan exports oil and gas, and it’s these commodities that give rise to concern over the illicit enrichment of its political elite.
The Russian national symbol, the double-headed eagle, is a metaphor for the country’s fight with corruption. On one hand, the country has made evident progress with low-level bribery. Online cameras have been installed at police stations and in offices of other regulatory agencies, and multifunctional civil service centres opened across the country with layouts similar to those of bank branches. Corrupt governors have been removed from office in a number of regions (some have been sentenced or are facing trial) and replaced with young, and ostensibly honest, technocrats who are closely watched by law enforcement. On the other hand, the Russian government has recently classified information about certain government contracts, including those relating to the military sector or supplies to Crimea, while land registry data about properties of top government officials and their families have also been designated as confidential, all in a direct effort to safeguard companies from foreign sanctions. Additionally, seniorlevel corruption and nepotism appear to remain high.
In Ukraine, the government and its supporters in parliament are aiming to curb the independence of the National Anti-Corruption Bureau and to obstruct the establishment of an independent anti-corruption court. The IMF is demanding that the country’s anti-corruption legislation be strengthened, but even a threat to freeze the fund’s loans is not forcing the government to move swiftly. Wealthy businessmen, or oligarchs, dictating their will to government remain the ruling class.
Nevertheless, we continue to assess the quality of corporate information disclosure in both Russia and Ukraine as high.
The Baltic countries have the best scores in the region in our index, but their banking sectors, as recent developments show, have not stopped providing clandestine transaction services to clients east and south-east of their borders. The US Treasury has accused Latvia’s third largest bank of “institutionalised money laundering” linking it to “illicit activity … [in] Azerbaijan, Russia and Ukraine” and to parties “involved in North Korea’s procurement or export of ballistic missiles”. A few days later, Ilmars Rimsevics , the head of the Latvian Central Bank was arrested by the national anti-corruption agency on bribery charges.