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The "America" Brand: A "Decliner" and "Country to Watch" on the Corruption Index and What that Means for Your Business

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Jean G. Schtokal
Foster Swift Business & Tax Law News
August 13, 2019

There has been a subtle but perceptible increase, reflected in Foster Swift’s transactional and corporate work for clients, of enhanced due diligence requests from foreign clients doing business in the U.S., and foreign potential or current business partners of U.S. clients. Whenever a shift or change in practice like this occurs, it is essential to dig deeper to determine the cause in order to assess whether it reflects an anomaly or an actual trend that will have a broader impact on our clients. Research and analysis has revealed some interesting changes in data which may explain the trend.

This article summarizes some preliminary findings which, along with other recent U.S. legal and regulatory changes, suggest the world is taking a closer look at alliances, transactions, and business activities with American companies and the ease with which other businesses around the world conduct business with us. In short, the American company "brand" has tarnished.

Transparency International is a non-profit, non-governmental organization created for the purpose of fighting corruption. The organization is politically non-partisan, and since 1995, the organization has prepared a useful international due diligence business tool called the Corruption Perception Index (CPI) on an annual basis.

In assisting clients with locating and selecting foreign business partners, and in developing risk based compliance programs for U.S. companies that do business outside the U.S., I have utilized Transparency International as a helpful resource. The Transparency International CPI ranks 180 countries and territories by their perceived levels of public sector corruption according to experts and business people. It uses a 0 to 100 scale. A higher score means less corruption. The CPI for 2018 was released in January of 2019.

The United States dropped out of the top 20 on the 2018 CPI for the first time in seven years.  Countries with the least corruption score in the high to mid-80s. The U.S. scored 71 on the 2018 CPl. According to Transparency International The United States is one of three “Countries to Watch.” "With a score of 71, the United States lost four points since last year, dropping out of the top 20 countries on the CPI for the first time since 2011. The low score comes at a time when the U.S. is experiencing threats to its system of checks and balances as well as an erosion of ethical norms at the highest levels of power.” 

Transparency International noted that in its most recent report, more than two-thirds of the countries scored below 50. In the Americas, the U.S. score now hovers close to that of Uruguay in South America, which has a score of 70.

Transparency International also highlighted that the CPI reveals that the continued failure of countries to control corruption is contributing to a crisis in democracy around the world. According to Delia Ferreira Rubio, Chair of Transparency International, "Corruption is much more likely to flourish where democratic foundations are weak and, as we have seen in many countries, where undemocratic and populist politicians can use it to their advantage."

In fact, as noted by Transparency International, "Throughout the world, political leaders who run on a populist platform are gaining power and undermining democracy. High corruption rates can contribute to increased support for populist candidates." Transparency International quotes the Tony Blair Institute for Global Change from an Empirical Assessment dated December 26, 2018, noting that 40% of populist leaders are also indicted on corruption charges.

That quote leads me to another resource, The Economist Intelligence Unit (EIU), which is the research and analysis division of The Economist Group. It is the sister company to The Economist magazine. The Economist Group has "nearly 70 years' experience in helping businesses, financial firms and governments to understand how the world is changing and how that creates opportunities to be seized and risks to be managed." 

The EIU country reports are also among the reliable resources I use to quantify international business risk in a particular jurisdiction, region, or country. More risk means there must be more reward to enter those markets, and for me it means more (and more careful) drafting of contracts and agreements to attempt to reduce the identifiable risks to the extent possible, and mechanisms to shift some liability and risk (more guarantees, more due diligence into partners, more reps and warranties, more indemnification rights, tighter provisions on ability to terminate, more conditions and performance requirements, enhanced and expedited dispute resolution provisions, enhanced compliance measures, audit and reporting requirements, etc.).       

The EIU has maintained a Democracy Index for 11 years. According to EIU, "The Democracy Index is based on five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. Based on their scores on 60 indicators within these categories, each country is then itself classified as one of four types of regime: full democracy; flawed democracy; hybrid regime; and authoritarian regime."

The EIU' s 2018 Democracy Index indicates the U.S. scored in the range of a "flawed democracy.”  In fact, over the past decade, the U.S. has fallen in the global rankings from 18th place in the 2008 Democracy Index, to 25th in the 2018 Democracy Index. The U.S. is now just behind Chile and Estonia in the rankings.

The EIU Democracy Index provides a snapshot of the state of world democracy for 165 independent states and two territories:

Democracy Index 2018 by Regime Type Number of Countries % of Countries % of World Population
Full democracies 20 12.0 4.5
Flawed democracies 55 32.9 43.2
Hybrid regimes 39 23.4 16.7
Authoritarian regimes 53 31.7 35.6

According to EIU, ”A rise of identity politics and of ‘strongman’ leaders who have harnessed disillusionment with democracy in their countries to gain power poses a strong risk that the institutions of representative democracy will be weakened further. Alternatively, a strengthening of political institutions and a tackling of the issues of transparency, accountability and corruption would go some way towards improving confidence in democracy and democratic values.”

Regarding North America in particular, the EIU offers this analysis, "North America’s score held steady despite a slight deterioration in the U.S.'s individual score, from 7.98 to 7.96. Canada performed better. Its score was unchanged in 2018, at 9.15. It remains in joint sixth place globally and is classified as a ‘full democracy.’ The U.S. fell below the threshold for a ‘full democracy’ in 2016, however, primarily owing to a serious decline in public trust in U.S. institutions that year. In 2018, the U.S. fell further in the global ranking, to 25th place, from 21st in 2017. As such, the U.S. continues to be rated a ‘flawed democracy’.”

North America 2018

Country Overall Score Overall Rank Regional Rank Electoral Process and Pluralism Functioning of Government Political Participation Political Culture Civil Liberties Regime Type
Canada 9.15 6= 1 9.58 9.64 7.78 8.75 10.00 Full Democracy
United States 7.96 25 2 9.17 7.14 7.78 7.5 8.24 Flawed Democracy

When combined with an unpredictable regulatory climate where there is little thought given to the impact on existing domestic businesses, supply chain, and business planning I have become convinced that what I am seeing has already had a broader impact, including with respect to foreign investment (or disinvestment) in the U.S. Examples of the unpredictable regulatory climate include dramatic and broad import tariff changes, sanctions announcements with little notice, a purported tariff exclusion request process where companies showing harm may become unviable before their request is even determined, and immigration policies do not favor the needs of a full employment economy.

One predictor of this was Adam Posen, the President of the Peterson Institute for International Economics, who wrote a piece for Foreign Affairs  in July of 2018 on how the U.S. is repelling foreign investment.

For U.S. clients, we are likely in for a bumpy ride. Instead of being in the driver’s seat drafting provisions to protect U.S. clients from an insecure world, we are already seeing increased demand from foreign business partners of our U.S. clients for enhanced contract provisions to protect them from the insecurity of conducting business here…and, we are adding similar protective provisions for our foreign clients doing business in the U.S.

The takeaway for U.S. clients is that if contracts with foreign partners are up for renewal, expect enhanced negotiations to reflect and reposition more of the regulatory, financial and other risk of doing business with U.S. partners.

Global opportunities are lucrative however they do require due diligence and proactive counsel. Questions? Contact Jean Schtokal at (517) 371-8276 or at jschtokal@fosterswift.com.