Corruption Perception Index (CPI) - Indicator of Business Risks?

What is the Corruption Perception Index (CPI)?

Transparency International’s Corruption Perceptions Index (CPI) is widely known and used as the leading global indicator of corruption. However, recent headlines and scandals might lead one to question the accuracy of the index. Countries such as Denmark and the United Kingdom score high on the index, indicating low risk, but nevertheless, are struggling with recent high-profile corruption cases. Should compliance professionals trust the CPI as an indicator for business risks stemming from corruption? Let’s investigate.

What does the Corruption Perception Index Measure?

Transparency International publishes the Corruption Perception Index (CPI) once a year. The index ranks 180 countries on a scale from 0 (very corrupt) to 100 (very clean). It draws upon data sources in which experts and business people assess several corrupt behaviors such as bribery, diversion of public funds, use of public office for private gain, and nepotism in the civil service. Some sources also assess corruption prevention mechanisms like the government’s ability to enforce integrity mechanisms, the effective prosecution of corrupt officials or red tape, and excessive bureaucratic burden.

Corruption Perception Index by Country - A Look at Clean Countries

Let’s take a look at Denmark for example. The Scandinavian country, known for its happy people and their love for cycling, has a score of 88 on the CPI of 2017, which places it second after New Zealand with a score of 89. However, recently the country has been making very different headlines, the most prominent one being the money-laundering allegations against Danske Bank. What is especially interesting to observe in this case is that, although Danske was being warned internally several times, no one saw the necessity to take a closer look at the proceedings. The warnings were ignored. Is it possible that Danish companies have been lulled into a false sense of security and trust that corruption will not occur in one of the world’s least corrupt countries? Might this have been one of the reasons for continuously ignoring the warnings? Although it is hard to say definitively, it is most certainly a possibility.

When looking at another recent development, the same thought comes to mind: This September, Denmark was placed in the Council of Europe’s non-compliance procedure as the Council’s anti-corruption body concluded that the country had not taken sufficient measures to prevent corruption with regards to members of parliament and judiciary. In response to this report, the speaker of the Danish parliament argued that the Danish system is based on trust and that this, together with a free press, ensures a country free of corruption. Here again, this very belief in a culture of trust might be keeping organizations and the government alike from implementing proper control mechanisms. To get a better understanding of corruption in Denmark, consider checking out the Denmark country risk report on our Business Anti-Corruption Portal.

The United Kingdom is another example that raises legitimate questions about the accuracy of the CPI. The UK is currently ranked eighth on the CPI with a score of 82. The British capital London, one of the world’s biggest and most important financial hubs, however, is paradisiac for money launderers. The National Crime Agency estimates roughly 117 billion US dollars of illicit funds are laundered through the UK each year. Recent developments show that the UK is slowly acknowledging corruption problems and are taking the first steps towards combating it. One of these measures is, for instance, this year’s newly established Unexplained Wealth Order which allows British courts to ask for the sources of wealth of suspicious individuals.

A Review of the Corruption Perception Index

In general, no tool or scale can provide the one and only definitive answer of how much corruption your business will face in a country. After all, corruption is a complex issue, which is hard to summarize in a single number. It should also be emphasized that the CPI is about the perception of corruption. In this regard, the index has been criticized various times about its reliance on a small number of experts and business people, which results in a misleading bias. Actual corruption levels might differ from the one indicated by the CPI. Additionally, the index looks only at public sector corruption but the private sector plays a significant role in corruption risks for businesses.

Does the Corruption Perceptions Index indicate business risks?

At the end of the day, the CPI constitutes a good baseline tool to gain a general overview of corruption levels. With that said, you should neither rely on it too much nor get blindsided by the fact that a country scores high on the CPI. Despite a high score, the reality might differ significantly because the perception of those surveyed does not correspond with reality. Corruption might be more sophisticated, better hidden or —in the case of Denmark— a culture of trust might keep organizations and business people from implementing proper controls. Thus, it is important to note that no index or measure can replace proper due diligence and careful risk assessment.

To help you with your risk assessment and due diligence, consider using the 130+ country risk reports on our Business Anti-Corruption Portal. Rather than providing a risk score, our country risk reports give a nuanced view of corruption risks in a variety of sectors in each country.