It’s fair to say that a large number of otherwise interesting and newsworthy developments during the last 12 months have been overshadowed - in the UK at least - by Brexit, which has infected every part of the body politic and, at the time of writing at least, shows no indication of abating. On the other side of the Atlantic, meanwhile, the partisan divisions that we remarked on this time last year show few signs of being bridged, with the Democrats’ reassertion of control over the House in the midterm elections a guarantee of two years of administrative gridlock. And the trade war between the US and China threatens to create ripples in the global economy whose eventual impact may be felt far from Washington DC or Beijing. You could argue that 2018 ended up - despite our more optimistic predictions in last year’s Corruption Challenges Index - being a demoralising year.
Away from cliff-edges and tariffs, though, the wheels of law enforcement keep turning. Both the US and UK authorities have continued to pursue corporate criminality with persistence and dedication. In the US, 16 companies paid out a record $2.89 billion to resolve cases brought under the FCPA, including a $1.78 billion payment by Petrobras and $585 million from Société Générale, while at the SFO the appointment of Lisa Osofsky has brought with it hopes of a more flexible approach to investigation and enforcement, with special attention being paid both to the trial of former senior Barclays executives and to the continuing pursuit of Unaoil over alleged bribery by its personnel in Iraq.
Elsewhere, it’s still too early to say what effect recent revisions and additions to ABC-focused legislation might have. Sapin II in France, for example, which was implemented in 2017, has so far seen only relatively minor enforcement events in the form of two Convention judiciaire d'intérêt public (CJIP) - broadly equivalent to Deferred Prosecution Agreements - while Brazil, Argentina, Chile and South Korea have also recently introduced new laws to try to counter corruption. (A cynic might say that this comes a little late in the case of Brazil, where the Lava Jato scandal continues to bring new revelations some five years after the investigation first started.)
Across the regions and countries where Risk Advisory works most frequently, several upcoming elections in 2019 are likely to prove an interesting test of whether a campaign commitment to greater transparency and accountability will reap dividends at the ballot box. Africa, for example, will have no fewer than seven polls this year, including two of the continent’s most important economies, Nigeria and South Africa. In Asia, Indonesia will choose in April whether to reward incumbent president Jodowi’s attempts to improve anti-corruption enforcement. And of course recently elected president Jair Bolsonaro’s promise to clean up corruption in Brazil will be monitored closely.
It remains the case, however, that the laws against corrupt activity are only as strong as the institutions and individuals whose job it is to enforce them. Anyone who has researched the facts behind Netflix’s extraordinary Narcos series will know how corruption can corrode a country from the inside, and how the failure of politicians, judges and police to hold criminals to account can bring a society to the brink of collapse. But they cannot do this alone; businesses also have a responsibility to insist on transparency and accountability, both in their own organisations and from their counterparties, and to call out wrongdoing in the activities of competitors of whatever nationality, wherever they see it. In a time of division, surely that is something everyone can agree on.
Pan-African political trends are hard to identify with any real conviction. Our scores reflect ongoing divergence between sub-Saharan Africa’s 31 countries; the Democratic Republic of Congo (DRC) is the scene of violent, disputed elections, and Somalia’s government has been forced to meet in aircraft hangers to ensure security, but these contrast sharply with Botswana’s strong history of multi-party elections and peaceful transfer of power. Somewhere in the middle sit Rwanda’s authoritarian democracy along with Angola and Ethiopia’s one-party states. Then, Cameroon, Equatorial Guinea, the Republic of Congo and Uganda, whose leaders have remained the same for more than 30 years.
Political uncertainty translates reliably into business risk. The Corruption Challenges Index risk scores show that four of the top ten most challenging jurisdictions to work in, are sub-Saharan African; Somalia, DRC, Eritrea and South Sudan. In Somalia and South Sudan ongoing violence, effectively non-functioning governments, and almost non-existent private sectors saw no discernible change compared to the 2018 scores. Eritrea has had a public rapprochement with its historical regional rival, Ethiopia that has the potential to impact positively a closed business environment. However, the prospect of significant practical change is remote. The DRC continues to hover in the bottom ten. High corruption risk at both the petty and grand level has consistently been combined with limited public reporting. To this mix has been added serious security and political unrest.
Last January we wrote that ‘not everything in Africa is doom and gloom’ and, despite the above, this continues to be true. The continent continues to suffer from perceptions that do not match its reality. For example, we score Namibia’s jurisdiction challenge on a par with Switzerland; Botswana and South Africa are easier to operate in than Luxembourg; and Mauritius, Africa’s favourite offshore jurisdiction, has a lower corruption risk than the Cayman Islands, the Bahamas or Cyprus. In 2018 we have worked with clients, across multiple sectors and geographies, who know the value of what hides behind Africa’s complexities and are willing to seek the intelligence required to forge the best path.
The business possibilities for the continent are clear. It continues to be resource-rich, growing in consumers and increasingly industrialising. Protectionist policies are also relaxing as evidenced by Ethiopia’s privatisation plans among others.
Reliable and targeted intelligence is even more important this year. 2019 is going to see leadership elections in seven countries, including in two of the continent’s giants, South Africa and Nigeria. In addition, tension continues to build in those pockets of the continent where the slow transition from post-independence leaders has led to unrest and dissatisfaction. These factors do not – and should not – dissuade informed investment but they do highlight the importance of contextualising relevant risk.
The US and Canada consistently rank among the least opaque jurisdictions on our index. Partly as a result of this, we view North America as a comparatively low risk region for corruption concerns – especially compared to others in the Western hemisphere. However, transparency concerns remain; the continent is home to several nations that are widely perceived as tax and secrecy havens. While these lie primarily in the Caribbean, increasing attention in the compliance field has fallen on low-disclosure jurisdictions within the continental US – Delaware being the most prominent.
That said, both the US and Canada have some of the most robust anti-corruption regimes in the world. The US FCPA provides a sterling example. Despite concerns that enforcement would decline during the Trump administration, the Securities and Exchange Commission completed 14 civil FCPA-related enforcement actions in 2018 against American, Canadian, Israeli, and Japanese companies accused of foreign bribery. Likewise, the US Department of Justice reiterated its commitment to prosecutions of individuals for FCPA violations early in the year. But the numbers of related prosecutions of individuals remain comparatively low compared to corporate enforcement actions, with only three occurring in 2018.
This is not to say that risk-conscious investors in North America do not face challenges. In the US, petty corruption at the state and municipal levels remains a primary concern for our clients. This is a particular concern in the real estate and infrastructure sectors, where permitting and licensing regimes provide incentives to unscrupulous firms to seek advantages through corruption, and opportunities for local officials to peddle influence in exchange for improper inducements.
Likewise, in Canada the real estate and construction sectors remain a focus of law enforcement attention in the wake of corruption allegations against Montreal-based engineering conglomerate SNC Lavalin in 2013. The conglomerate was accused of bribing officials in Bangladesh that year, and was subsequently debarred from bidding on World Bank contracts. The influence of organised crime within the country’s construction sector – especially in Quebec – has also remained a concern in the wake of the Charbonneau Commission’s investigation into the sector in the early 2010s. Quebec’s native Italian mafia clan, the Rizzuto family, remains an active player both in the construction sector and in criminal activity throughout eastern Canada.
Despite the reputation of both Canada and the US for strong anti-corruption regimes, vigilance is thus required on the part of investors in those countries. Vigorous law enforcement regimes in both countries are minutely focused on corruption issues, and the risks to unscrupulous - and careless - actors in these markets cannot be overstated.
In Latin America, corruption continues to be a serious source of concern for many of the region’s economies. The worst of these is still Venezuela, where successive political scandals, weak institutions, and the introduction of sanctions on national oil company PDVSA have led the country to the brink of collapse. Recent developments have seen a challenge to the incumbent administration’s legitimacy from a parliamentary leader and another failed coup d’état, this one organised by members of the country’s increasingly divided military establishment.
Elsewhere in South America, the corruption investigation known as ‘Lava Jato’, which began in Brazil, has continued to metastasize to other countries in the region, where they have contributed to the removal of a Peruvian president and implicated many of that country’s leading businessmen. Offshoots of that investigation are also under way in Ecuador, as well as leading to the implication of several leading businessmen in Argentina. In addition to Lava Jato, another potentially significant investigation into widespread bribery and other corruption threatens to impact Argentina later this year.
Central America continues to be a difficult region for businesses to work in. Optimism that a UN-sponsored investigation led by The International Commission against Impunity in Guatemala (CICIG) would lead to political reform in Guatemala has all but evaporated amid that body’s expulsion from the country and allegations of cronyism directed at incumbent president Jimmy Morales. The activity of organised criminal syndicates in El Salvador and Honduras has created physical security risk and heightened concerns that banks in the region will continue to be used as conduits for money laundering and other financial crime associated with the international drug trade. Comparatively weak anti-money laundering controls in Belize and Panama have also drawn the attention of anti-corruption investigative bodies and law enforcement agencies in the US and elsewhere.
The silver lining of a year without as many tangible victories for anti-corruption advocates is, perhaps, the energetic means by which these successes have been achieved throughout Latin America. With the exception of Guatemala, where the government has actively opposed efforts to investigate state-sponsored corruption, each of the South American economies referenced above has taken concrete steps to combat corruption and prevent the incidence of similar scandals in the future. In Brazil, for example, transparency in licensing processes has increased remarkably in the wake of Lava Jato, and access to reliable corporate and regulatory information has improved.
Concluding these investigations and introducing more stringent anti-corruption legislation should bode well for continued investment in these countries. Indeed, we view the fact that they are treated seriously as recognition of how important combating corruption is, both from a reputational standpoint and as a means of attracting increased investment. Clients of ours in the region continue to stress the need to improve the culture of corporate governance and introduce rigid standards of compliance with anti-corruption and financial crime legislation.
In Asia Pacific North Korea and Laos feature in the global top ten most corrupt countries, but the most important growth markets in the region for foreign investors continue to present pervasive corruption risks.
In South Asia, India is a case of extremes in our survey. The country’s relatively high standards of corporate disclosures make it easier to acquire reliable information on potential business partners than in many first-world countries. However, despite prime minister Modi’s focus on anti-corruption, bribery remains entrenched in many sectors, particularly, as our work has shown in the past year, in real estate, infrastructure and defence. In Bangladesh the re-election of Sheikh Hasina to her third term last December, has not inspired confidence about meaningful anti-corruption reform, although economic growth does at least remain strong. By contrast the Maldives, where the Solih administration came to power last December, has an opportunity to restore confidence among international investors by cleaning up the licensing process for leasing private islands.
In Southeast Asia, Malaysia’s place in our corruption table has improved from last year with the defeat of the 1MDB scandal-plagued Najib Razak’s administration. While prime minister Mahathir Mohamad’s first term in office (1981-2003) also featured high levels of corruption, perhaps at the age of 93 he has less to lose now by taking more concrete action to clean up the bureaucracy. In Vietnam, where we have seen a marked increase in demand for our services from foreign investors in the past 12 months, the opaque information environment and corruption that exists in obtaining licences make it one of the most challenging countries in which to invest. In Indonesia corruption is not (currently anyway) the focus of the upcoming presidential elections in April. This reflects in some ways Jokowi’s efforts to take certain meaningful steps to improve accountability in the country, although he too has been held back by his political allies in taking a harder line on graft-busting, and our work suggests that corruption continues to deter some foreign investors from investing.
In Northeast Asia, China is a shade darker this year on our corruption map, reflecting the increasing difficulty of gathering reliable information on companies, a challenge we also highlighted last year. The common use of proxies in ownership structures, whether it be a family’s nanny - as we saw in one case recently, makes identifying the real owners behind businesses much more time-consuming. On a more positive note, the government continues to prioritise the prosecution of corruption. In South Korea, the jailing of two former presidents in 2018 for accepting bribes from prominent chaebols underscores the risks of partnering even with the best known international companies in that market.
The picture for Europe remains positive. No European countries have made it onto our list of the ten most challenging nations. However, while the rest of northern Europe overall continues to perform well, the picture in southern Europe remains nuanced.
In December 2018 the Italian parliament approved a package of new measures aimed at combating public sector corruption and increasing transparency requirements. The so-called spazzacorrotti or ‘bribe destroyer’ law, championed by the populist Five Star Movement, is the most recent move in the country’s fight against corruption. Key elements include the introduction of a lifetime ban on holding public office for those found to have engaged in corruption, and stricter measures with regard to the applicability of the statute of limitations in corruption trials. However, it will be some years until we can start to assess the impact of spazzacorrotti. Our corruption score for Italy remains one of Europe’s highest, not far below those for Montenegro and Kosovo, and it is estimated that the country loses nearly €237 bn annually (approximately 13 percent of GDP) to the cost of corruption.
Elsewhere in southern Europe one of the largest political corruption scandals in recent history, the Gürtel case, led to the overthrow of Spain’s conservative People’s Party (PP). In June 2018 then-prime minister Mariano Rajoy lost a vote of no confidence, the first such event since Spain’s transition to democracy more than three decades ago. This followed the conviction a month earlier of 29 businessmen and politicians, including former PP party treasurer Luis Bárcenas, on multiple charges of corruption. Going forward, Spain needs to continue to take a tough stance on such matters. A good place to start may be plugging some of the (more serious) gaps in the country’s whistleblower protection laws through the drafting into national law of the 2018 EU directive on whistleblower protection.
Spain’s PP administration has not been the only European government rocked by corruption scandals over the last year. In Israel, the embattled chairman of the Likud party Benjamin Netanyahu faces charges of fraud, bribery, and breach of trust in connection with three separate corruption cases. Indeed, public support for the enforcement of anti-corruption and bribery offences in Israel is strong. Several high-profile convictions over recent years, including that of NIP Global (the first Israeli company convicted in a domestic court of bribing a foreign government official), have ensured that the need to combat corruption and bribery remains very much in the public consciousness.
Corruption risks are heightened across the MENA region, against a backdrop of political repression. This political trend is likely to continue, and further limit the flow of reliable information. Three of the ten most challenging countries worldwide are in the region – Libya, Syria and Yemen – although war in all three has limited foreign business activity. Even in countries where the investment climate is generally better, such as Saudi Arabia, the UAE and Egypt, the authorities’ approach either encourages or does little to discourage corrupt practices, which has a trickle-down effect on attitudes across MENA.
The Saudi government has not addressed the root of the problems that have plagued the country’s business environment; cronyism, corruption and bribery. No major laws or regulatory frameworks have come to fruition in the kingdom since the 2017 arrests of princes, entrepreneurs and technocrats. That politically-motivated move, combined with the consolidation of assets in the kingdom under the control of the Crown Prince, including the Public Investment Fund has simply enabled favoured royals and businessmen to fill the same privileged positions as their predecessors.
In the UAE, the official response to the 1MDB scandal and the collapse of Abraaj suggests that the regulatory authorities do not have the proper mechanisms to deal with major fraud. Meanwhile, the Egyptian judiciary has reached settlements with some of the most controversial businessmen linked with former president Mubarak. This is paving the way for entities controlled by the military and intelligence forces to secure their hold over the Egyptian economy. Like most MENA governments they appear reluctant to enforce harsh penalties on any major conglomerates or on businesspeople in case this undermines the ‘moderate’ economic recoveries forecast by the IMF.
The 2019 Corruption Challenges Index found that high level corruption risks rose in several countries, including Algeria, Iran, Tunisia and Yemen; which partly reflects an atmosphere of impunity as states prioritise political stability and continuity over change. High-profile corruption cases in Iran seem to be serving as a cover for the elites who benefitted from and authorised the activities of defendants. With a devalued currency and economic opportunities disappearing due to reinforced US sanctions, the Iranian government will probably close ranks and resort to any means to circumvent embargos.
Meanwhile, the Qatar-GCC (Gulf Cooperation Council) and Arab-Iranian polarisation are accompanied by disinformation and outright lies. Further complicating the situation is that social media and online platforms are flourishing and the Arab press is being weakened by funding cutbacks, censorship and propaganda. Social media is enabling the dissemination of poor information. It seems reasonable to say, therefore, that in 2019, informed human sources and expert analysis will become even more important in the process of gathering and interpreting reliable information.
All countries in the former Soviet Union (FSU) and the Eastern Bloc continue to suffer from high levels of corruption, even though most of them have declared war on graft. Even in the more advanced, EU-member countries, such as the Baltic states, corruption scandals continue to rock local government. The most recent example is the bribery of officials in the Riga municipal transport authority by Latvian, Polish, Czech and offshore companies over bus supply contracts. An investigation by Latvian and Polish anti-corruption watchdogs has led to the arrests of eight individuals in both countries and the resignation of the Latvian capital’s deputy mayor, Andris Ameriks (the opposition is demanding that the mayor, Nils Ušakovs, step down too).
In the FSU we expect Armenia and Uzbekistan to lead the way in the numbers of investigations of corruption by senior officials. Corruption was one of the main causes of the Armenian protests which brought down the Republican Party’s near 19-year rule in April 2018. In the October elections, the Republican Party failed to break through the five percent threshold, and prime minister Nikol Pashinyan will have the full support of parliament both in launching inquiries into senior officials and strengthening anti-bribery regulations and enforcement.
Purges continue to shake the Uzbek state security apparatus. A number of former regional National Security Service heads and other senior generals are facing criminal charges, including for bribery. Some of them were accused of taking bribes from criminal syndicates trafficking Afghan drugs to Kazakhstan, Russia and Europe.
In 2019, Armenia and Uzbekistan could be joined by Ukraine as a rising regional leader in high-level investigations, should Petro Poroshenko, as is forecast, fail to win reelection to the presidency. Dealing effectively with corruption is one of the main challenges which Ukraine has failed to meet under his leadership.
While Russia has had (and will probably continue to have) its own fair share of graft investigations, it is positive developments in regulations and enforcement that has mainly caught our attention, along with a relatively low Corruption Challenges Index score. In 2018, a small IT company was exempted by a court from a fine imposed for bribery. The company proved that it had proper anti-corruption procedures in place and that the attempted bribery was the personal initiative of a rogue employee. We regard this as an important precedent which will motivate more companies of all sizes to improve anti-bribery compliance. Additionally, an article in the country’s Code of Administrative Violations on fines for bribery was amended to relieve companies from financial sanctions if they report attempted bribery and extortion and cooperate with the investigative authorities.