2017 Magnitsky Act and Other Global Initiatives Underscore Vital Importance of Corruption Perception Index in Risk Assessment

March 12, 2018
By: Anna Sayre, Legal Content Writer SanctionsAlert.com

Though the use of sanctions as an international means for deterring global corruption is not a novel concept, the consequence shave become broader than ever before and can expose a business to a number of risks and business disruptions.

Since last year, a number of new sanctions initiatives have been imposed that specifically target corrupt officials and practices.The 2017 U.S. Global Magnitsky Act, and equivalent regimes in Canada and the U.K, targets corrupt conduct by government officials regardless of where they are located in the world.Similarly – though not globally imposed – countries such as Syria (E.O. 13460), Zimbabwe (E.O. 13469), and most recently Venezuela (E.O.13692), have also targeted various individuals due to human rights violations as well as the presence of significant public corruption.

With broader new regimes in place, sanctions compliance officers must consider human rights and anti-corruption risks now more than ever before. This could include opening up more regular lines of communication between your company’s sanctions, anti-corruption and anti-money laundering departments, or enhancing reviews of the company’s customer due diligence and risk rating tools.No matter the appropriate measures needed,it is undeniable that anti-corruption considerations are taking a front seat in the building of a robust compliance program.

Broad Reach of the U.S.Global Magnitsky Sanctions

The new Global Magnitsky Sanctions, or Executive Order (E.O. 13818), “declares a national emergency with respect to serious human rights abuses and corruption globally” and identifies these issues as serious threats to U.S. national security.

According to Casey Kelso, Advocacy Director at Transparency International (TI) U.K., “the best example of anti-corruption sanctions against individuals came up at the end of last year, with the U.S. government’s Global Magnitsky sanctioning of individuals connected with grave human rights violations and corrupt acts.  The U.S. decided to freeze the assets of named individuals, and deny them entry visas. The list included YahyaJammeh, former president of Gambia who came to power in 1994 and fled to Equatorial Guinea with much of the country’s foreign reserves in 2017. Another person designated for sanctioning by the U.S. was Dan Gertler, who did business in the Democratic Republic of Congo, and is the subject of many Global Witness corruption exposes.”

The Global Magnitsky Sanctions is a U.S. regime. As such, these sanctions not only block all assets under U.S. jurisdiction (i.e. held by U.S. persons wherever located), but also prevent U.S. persons from dealing with individuals and entities designated under the sanctions.

Though this may make them seem limited, given the dominance of the U.S. financial system, the Global Magnitsky Sanctions effectively shut out a large number of corrupt government officials and business persons from the international system.

In a December 2017, a telebriefing on the roll out of the Global Magnitsky Sanctions 2017, U.S. government officials said:“Practically speaking (…) our understanding and our experience is that non-U.S. financial institutions, including French – for example, a French bank – may well consult the OFAC designations (…) as an indicator of risk and out of an abundance of caution. So while they may not be strictly prohibited by the terms of our law from engaging in these transactions, practically speaking, our – the list and OFAC’s actions are implemented on a broader scale,” the person added.

U.K. and Canadian “Magnitsky-Style” Initiatives

The U.S. is not the only country to consider imposing a sanctions regime that targets corruption globally. Both the U.K. and Canada have now also imposed or are in the process of imposing “Magnitsky-style” legislation on a global scale.

In October 2017, mirroring U.S. legislation, the Canadian Senate passed a bill called the “Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law)”. Though its preamble only mentions high-profile cases linked to Russia, the Actenvisions imposing sanctions on any foreign national. In fact, Canada issued its first round of Magnitsky-style sanctions in November 2017, targeting 52 human rights violators in Russia, Venezuela and South Sudan.

In the U.K., Members of Parliament are currently campaigning for a “Magnitsky amendment” to be included in the Sanctions and Anti-Money Laundering Bill, which is in its final stages to pass through Parliament. This would give the U.K. similar powers to sanction human rights violators and corrupt actors anywhere in the world under the same legislation.

Theses numerous initiatives not only demonstrate the world’s commitment to fighting corruption, but also the important role that compliance professionals can play in attempting to stop such practices dead in their tracks.

Using Transparency International’s Corruption Perception Index

In addition to screening customers and business partners against the lists issued under the Magnitsky-style sanctions regimes, how does one identify where to tackle corruption and which countries are the most vulnerable to corrupt practices?

Transparency International (TI)’s annual Corruption Perceptions Index, or CPI, provides a useful overview of which countries around the world are perceived to be the most corrupt, and as such, which countries compliance professionals should be most aware of when performing their daily duties.

How the CPI Scores Countries

Each year, TI scores countries on how corrupt their public sectors are seen to be by the global community. This includes analysts, business people, and experts in countries around the world.

According Maggie Murphy, Senior Global Advocacy Manager at TI, the methodology for creating the CPI is as follows: “a question on corruption is included into 13 different surveys and polls and assessments run by agencies – such as the World Economic Forum, the Economist Intelligence Unit, Freedom House and the World Bank. Some of those surveys include the thoughts of a few hundred country experts and business people; the largest survey involving tens of thousands of contributors. Transparency International compiles and aggregates the country data, and generates a score for each country. The methodology has been slightly adapted in the past but country performance can be compared back to 2012.”

Ms. Murphy also reminds us that, “the CPI measures perceptions of corruption in the public sector. It does not cover perceptions of corruption in the business or financial sector.”

The index uses a score of 0 to 100, with 0 being highly corrupt and 100 being very clean. This year, the index found that more than two-thirds of countries score below 50, with an average score of 43.

CPI Scores – the Best and Worst Countries for Perceived Corruption

In 2017, the majority of top performing countries were unsurprisingly from the Western European region, with New Zealand (89) and Denmark (88) ranking the highest in the world. Taking the region as a whole, Western Europe scored an average of 66. Both The U.S. (75) and the U.K. (82) gained a point from the previous year, but failed to beat Canada (82) though the country dropped a point on the scale since 2016.

Top ten best performing Country 2017 Score
1 New Zealand 89
2 Denmark 88
3 Finland, Norway, Switzerland 85
4 Singapore, Sweden 84
5 Canada, Luxembourg, Netherlands, United Kingdom 82
6 Germany 81
7 Australia, Hong Kong, Iceland 77
8 Austria, Belgium, United States 75
9 Ireland 74
10 Japan 73

* Data taken from www.transparency.org

The worst performing regions were Sub-Saharan Africa (average score 32)and Eastern Europe/Central Asia (average score 34).South Sudan and Somalia, both in the Sub-Saharan Africa region, rank the lowest in the world with scores of 12 and 9 respectively.

Top ten worst performing Country name(s) 2017 Score*
1 Somalia 9
2 South Sudan 12
3 Syria 14
4 Afghanistan 15
5 Yemen, Sudan 16
6 Libya, North Korea, Guinea-Bissau, Equatorial Guinea 17
7 Venezuela, Iraq 18
8 Turkmenistan, Angola 19
9 Eritrea, Chad 20
10 Tajikistan, Republic of Congo, Democratic Republic of the Congo, Cambodia 21

*Data taken from www.transparency.org

CPI Scores – Significant Changes in Perceived Corruption

Despite its bad overall score, however, a few Sub-Saharan countries, such as Côte d’Ivoire and Senegal, have significantly improved their CPI score over the last six years due to governmental changes and the setting up of national anti-corruption authorities. In fact, some African countries, namely Botswana (61), Namibia (51), and even Rwanda (55), are scoring better than their European counterparts, such as Italy (50), Hungary (45), and Greece (48).

The Asia Pacific region has also made a few key improvements. Afghanistan, though generally scoring very low on the index, increased its score by seven points in the last six years. TI believes this may be attributed to some nationwide efforts to improve key policies, including better regulation of national procurement activities. Similarly, though a relatively low-scorer, Indonesia has also climbed up the index, increasing an overall of five points in the last five years. TI believes this may be due to the work of Indonesia’s leading anti-corruption agency in taking action against corrupt individuals.

Country 2017 Score 2016 Score 2015 Score 2014 Score 2013 Score 2012 Score Region
Côte d´Ivoire 36 34 32 32 27 29 Sub-Saharan Africa
Senegal 45 45 44 43 41 36 Sub-Saharan Africa
Afghanistan 15 15 11 12 8 8 Asia Pacific
Indonesia 37 37 36 34 32 32 Asia Pacific

*Data taken from www.transparency.org

Other countries, such as Syria, Yemen, and especially Liberia have unfortunately been on the decline for perceived corruption. Turkey has also significantly declined in the last 6 years, purportedly due to its being governed under a state of emergency for the past 19 months.

Country 2017 Score 2016 Score 2015 Score 2014 Score 2013 Score 2012 Score Region
Syria 14 13 18 20 17 26 Middle East and North Africa
Yemen 16 14 18 19 18 23 Middle East and North Africa
Liberia 31 37 37 37 38 41 Sub-Saharan Africa
Turkey 40 41 42 45 50 49 Europe and Central Asia

*Data taken from www.transparency.org

Though many countries have made good progress toward combatting corruption, TI warnson its website that “the majority of countries are moving too slowly in their efforts. While stemming the tide against corruption takes time, in the last six years many countries have still made little to no progress.”

Building a Successful Compliance Program with the CPI

Though the CPI itself cannot predict what country or individuals might be sanctioned next, it remains an extremely helpful tool for compliance officers looking to build a robust sanctions and anti-money laundering/bribery/corruption (ABC) program.In fact, a growing number of compliance positions advertised today include “coordination with anti-bribery/corruption officer” or “risk mitigation related to ABC” as an ‘Essential Function’ of the role.

Katja Bechtel, Head of the Business Integrity Programme at Transparency International UK, says “I don’t know any compliance officer that does not use the CPI.” According to Ms. Bechtel, “compliance officers use the CPI in their risk assessments, which is the foundation for the design of an effective anti-corruption program, as it enables the identification and prioritization of corruption risks and allows for the design of a program that mitigates and controls these risks”. She advises that, “risk assessments should be done regularly to allow for adaptations– changes in CPI scores of a country may thus trigger modifications in the anti-corruption program.”

“However”, warns Ms.Bechtel,“companies should be aware of what the CPI measures (expert perception of public sector corruption) and that the CPI cannot provide a complete picture of corruption risks in a country. It should be seconded by other studies, including TI’s Transparency in Corporate Reporting studies, TI BICA and NIS studies as well as information from other sources such as the World Bank.”

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