Wonky perceptions of risk

I’ve been mulling, as you do, and I’m a bit concerned about the Corruption Perceptions Index published annually by Transparency International.  It is a fine index, to be sure, and one I consult regularly myself, but it’s not the answer to all ills.  I mentioned it last week in a post about the FCA (unwisely, in my opinion) bandying about the (weighted) phrase “high risk jurisdictions”, and I’ve been thinking about it ever since.

The clue really is in the name: it is a index (incomplete: the 2014 edition features 175 countries, when the UN recognises 206 states) of the perceptions (not facts – perceptions) of corruption (which is only one of the many, many crimes that can lead to money laundering).  Consulting the CPI is excellent practice for the MLRO, as a list of high risk jurisdictions should take inspiration from a wide range of sources, but it cannot – must not – be the only thing that counts.  Indeed, the Guidance Notes from the UK’s Joint Money Laundering Steering Group make this abundantly clear, in paragraph 4.26 of Part I: “Countries may be assessed using publicly available indices from HM Treasury Sanctions, FATF high-risk and non-cooperative jurisdictions, Moneyval evaluations, Transparency International Corruption Perceptions Index, FCO Human Rights Report, UK Trade and Investment overseas country risk pages and quality of regulation.”

Given this more balanced explanation, it is alarming when the regulator – the agency that will decide whether a business’s AML regime is up to snuff – suggests that checking just one incomplete ranking of thoughts about one crime can give a reliable indicator of jurisdictional risk.  Right, I’m over it.

This entry was posted in AML, Bribery and corruption, Due diligence and tagged , , , , , , , . Bookmark the permalink.

2 Responses to Wonky perceptions of risk

  1. Robert James Long says:

    A time ago I used to work in the anti-corruption world so my opinions on these matters are coloured by that. I heard a charming (likely fictional) anecdote about a certain ex Russian state which shares its name with a state in the US. It had achieved a massive reduction in its place on corruption index in only a few years. Allegedly they had worked out that although there wasa incredibly high degree of “state capture” by wealthy individuals and groups, the type of corruption most commonly encountered by visitors and citizens was being shaken down by traffic cops. So they fired all the traffic cops. All of them.

    All the other corruption that had occurred before went on, but because it was harder to see, the perceived corruption went down. To wit they could legitimately claim corruption was being fought, because for most people in their day to day life, it was. Roll in foreign investment which then received a nasty shock…

    I am pretty sure that story is a lie, it is too neat a tale but it does capture the issue with corruption is that it is often hard to see as even TI has to acknowledge. I don’t mean to do my own nation down, but I generally believe the UK is far more corrupt than TI or other indices might allow, maybe not a cesspit of malfeasance or bribe taking, but certainly not as clean and equal as people believe (A key trigger phrase for me is anyone declaring “I have done nothing illegal/against the rules/wrong.”). I would also generally accept the proposition that most definitions of corruption used in the UK (or even Western Europe) are written in such a way as to exclude certain behaviours that would match most peoples definitions of corruption. Put another way they have created a very narrow and precise legal language that narrows down the broader moral sense of wrong.

    (As I say, past history influences that sometimes bleak view)

    Where does this leave institutions in these specific cases? Well while I can imagine it may in the short term benefit them to embrace this new definition of what a risky country is (I expect it will rapidly appear in defence statements “But we followed the FCA’s guidance! This country is not on the TI list” et cetera) I would think for their own long term viability it would be better to have a far more robust risk assessment process. Like those using certain black market websites to buy illict goods who then discover the admins have run off with all the funds held in escrow or the foreign investors in the above fable, a firm might get a very nasty surprise forma regime that was perceived as clean.

  2. I agree wholeheartedly with you, Robert. MLROs (and their institutions) need to take a broad view of these things, and not rely simply on one index or one source of information. And always applying your own judgement is important too – no matter what an index says, if you know that a jurisdiction is corrupt (perhaps your own local office there has been targeted), then it is unwise to ignore that knowledge.
    Best wishes from Susan

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.