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  • Elizabeth A. McMorrow

Roll the Dice v Corruption Risk Research

There are a number of factors to consider when selecting the site for a foreign office not least of which is researching the level of corruption. Corruption can be a significant impediment to a company in obtaining government contracts, product licenses, business visas, etc. The jurisdiction assessment process can be time consuming. However, there are some resources that you can use to increase your understanding of target jurisdictions.


PUBLIC PERCEPTION


Information from people on the ground can be a significant tool to understand the impact corruption has on daily life in a jurisdiction.


Transparency International's (TI) Corruption Perceptions Index (CPI)

TI issues an annual index which ranks 180 countries and territories by their perceived levels of public sector corruption. The CPI pulls from TI’s presence in 100 countries and experts from companies, universities and other NGOs to create tools applicable to a variety of circumstances across different levels within a jurisdiction. The index uses a scale of 0 to 100, where 0 is highly corrupt and 100 is “very clean.”

https://www.transparency.org/cpi2018.


MONEY LAUNDERING

A jurisdiction that tolerates money laundering is waving a flag that screams corruption.


FATF Jurisdictions with Strategic Deficiencies


As part of its efforts to combat money laundering and terrorist financing (AML/CFT), the Financial Action Task Force (FATF) identifies jurisdictions with significant weaknesses in their AML/CFT regimes. The FATF has named 2 “high risk” and 12 “other monitored jurisdictions”.

https://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/more/more-on-high-risk-and-non-cooperative-jurisdictions.html?hf=10&b=0&s=desc(fatf_releasedate).


TAX


The following resources base their corruption indices on tax compliance.


EU List of Non-cooperative Jurisdictions for Tax Purposes

The European (EU) created its list of non-cooperative jurisdictions (known as the grey and black lists) to maximize efforts against tax fraud, evasion and avoidance. The EU’s goal is to encourage transparency and fairer tax competition around the world through upholding international standards on information exchange, tackling harmful tax practices and dismantling artificial tax structures. The grey and black lists include non-EU countries or territories that failed to make sufficient commitments in response to EU concerns.

https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/#.


U.S. Dept. of the Treasury Resource Center - FATCA


The U.S. Foreign Account Tax Compliance Act (FATCA) requires that Financial Institutions (FIs) establish a compliance program consistent with the U.S. Internal Revenue Service’s (IRS) goal of detecting U.S. tax evaders who maintain certain financial accounts either directly in offshore accounts and investments or indirectly through ownership of foreign entities. Over 100 jurisdictions are participating in FATCA through intergovernmental agreements.

https://www.treasury.gov/resource-center/tax-policy/treaties/pages/fatca.aspx.


OECD Status of Commitments for Automatic Exchange of Information


To ensure the effective implementation of tax transparency standards worldwide, the Organization of Economic Cooperation and Development (OECD) developed the Standard for Automatic Exchange of Financial Account Information in Tax Matters (The Common Reporting Standard (CRS)). Over 150 jurisdictions have made some level of commitment toward implementing CRS.

http://www.oecd.org/tax/automatic-exchange/commitment-and-monitoring-process/.


Tax Justice Network Financial Secrecy Index


The Tax Justice Network’s index ranks jurisdictions according to their secrecy and the scale of their offshore financial activities. The purpose of the index is to provide an understanding of global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight which lead to fraud, tax cheating, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and more.

https://www.financialsecrecyindex.com/en/.


EMPLOYEE RISK


The impact of corruption on your local and ex-pat personnel should not be overlooked. Peers, former colleagues and industry associations can shed light on real life legal obstacles faced by personnel in a jurisdiction.


A useful source of information to assess employee safety is the U.S. Department of State Bureau of Consular Affairs’ alerts and warnings. This information provides, not just a short-term view of current travel conditions, but an indication of the longer term instability of a jurisdiction.

https://travel.state.gov/content/passports/en/alertswarnings.html.


Research regarding the risk to an ex-pat through the local judicial system cannot be understated. It is amazing what chaos a single person can create for a company:

  • An ex-pat driving home along a European country road hits a telephone pole. The power is knocked out to the adjacent farm disrupting the sleep of the farmer’s cows and resulting in the farmer threatening to sue the ex-pat for the cow’s sleep deprivation.

  • An ex-pat assigned to a Central American country discovers (just before fleeing out the bedroom window) that his paramour is the wife of the local police chief.

  • Spanning the globe to Asia, a regional judge in need of cash is paid to issue a warrant for the arrest of an innocent ex-pat.

The above anecdotes are all true. In each situation, the company protected the employee but not without cost to the business because the local judicial system could not be trusted.

The employee who disturbed the cow was promptly repatriated and the company paid the farmer a settlement to avoid the company losing any work visas. The passionate manager was hurriedly whisked away on a company plane as the local police department hunted for him. The regional manager was moved from hotel to hotel around the country until an order was obtained from a higher court nullifying the arrest warrant.


LOCAL ADVICE


It is critical to engage the services of a trusted local law firm prior to finalizing the choice of jurisdiction. Local counsel will advise on laws that may directly impact the business as well as personal legal risk to an employee in her role as managing director of a subsidiary, country manager, etc. Reliable counsel will also provide insight regarding the reliability of fair-handed treatment by the civil and criminal justice systems.


SIMPLY A START


The above resources can help you jump start your risk assessment but you must dig further to include a review of factors such as:

  • Trade embargoes / sanctions

  • Currency restrictions

  • Political instability

  • Enforcement of contracts

  • Restrictions on Ownership of Companies by Foreign Investors

The first round of research may be tedious but it is an interesting learning curve on which to build as you become an active participant in the sustainable growth of your international business.


For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.


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Disclaimer: The information on this website is for general informational purposes only. Nothing on this site should be taken as legal advice. The viewing of this website does not constitute an attorney-client relationship. 

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