For any compliance practitioner it is a welcome addition to country specific literature on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other anti-corruption legislation and includes a section on India's anti-corruption laws and regulations.
FCPA Enforcement Actions for Conduct Centered in India
Under the FCPA, several notable US companies have been through enforcement actions related to conduct in India. Although not monikered as a 'Box Score' the authors do provide a handy chart which lists the companies involved, a description of the conduct and fine/penalty involved.
Company Description Disposition (in USD)
Pride International Payment made for favorable
administrative judicial decision
regarding customs issues $ 56.1 million
Tyco International German subsidiary paid third
parties to secure contracts;
payments recorded as commissions $ 26 million
Diageo Subsidiary made payments to
government official responsible for
purchase/authorization of Diageo's
products in India $ 16.4 million
Textron Subsidiaries paid foreign officials to
secure contracts; characterized as
commission and consulting fees $ 5.05 million
Oracle Corporation Oracle distributor allegedly created
"slush" fund to pay third parties $ 2 million
Dow Chemical
Company Payments made to India Central
Insecticides Board to expedite
registration of products $ 325,000
India Anti-Bribery/Anti-Corruption Laws
The authors identify the principal anti-corruption legislation in India as the Prevention of Corruption Act, 1988 (PCA), which focuses on bribery of public servants. They go on to state, "Bribery under the PCA includes any "gratification" that a public servant receives other than his/her legal remuneration. Gratification constituting a bribe would include anything intended to motivate, influence, or reward a public servant for performing (or forbearing performance of) an official act, or for showing "favour or disfavour" to any person, or for rendering any service or disservice to a public servant." However, there are other laws, in addition to the PCA, which govern such issues. These include "specific public servants' Conduct Rules, which set specific guidelines on the value of gifts that may be accepted in furtherance of local or religious customs (where no reciprocal action is expected and where the public servant has no current or expected future official dealings with the gift giver). The guidelines for permissible gifts are based on the public servant's rank and service classification and broadly range between 500 - 7,500 Rupees (approximately $8 - $120 U.S. dollars)."
Corruption Risks in India
Corruption risks in India are generally perceived to be high due to its "complex administrative and bureaucratic environment". Similarly the FCPA Professor would say there are a high number of barriers to trade. Coming at it from a different direction, the Department of Justice (DOJ) would say the risk is high because of the number of licenses and permits required. More pruriently, I would say this leads to more folks having their collective hand out looking to speed things up. Indeed, in the recently released TRACE Matrix India comes in at 185th out of 197 countries listed, with a corruption score of 80, based largely on its score of 92 in the highest weighted category of "Interactions with Governments".
a. Licenses and Permits
The authors identify that "a host of regulatory hurdles exists in India, including the need to obtain permits, licenses, and other regulatory approvals and to pay various application and registration fees. These types of low-level transactions provide opportunities for bribery. Payments made in such transactions - whether in cash or gifts - may appear minimal (by U.S. standards) and may seem harmless, but they can nonetheless result in violations of U.S. and/or India law." They go on to list some "Examples of Problematic Conduct" around this issue they identify the following:
- Paying (or providing some other benefit to) a customs official to bypass inspection or overlook incorrect or incomplete paperwork;
- Paying a local tax regulator to overlook errors or inconsistencies in filings;
- Paying an official to expedite the processing of a permit or license;
- Paying a utilities provider to reduce billings; and
- Paying a local health and safety regulator to overlook code violations.
b. Gifts, Travel and Entertainment
In the area of gifts, travel and entertainment, the authors state that "companies run the risk of triggering the FCPA and other anti-corruption laws if their marketing and entertainment expenditures cross a line into conduct that could be characterized as bribery or lends to the appearance of attempting to induce a breach of trust or impartiality on the part of the recipient.the various conduct rules for public servants in India establish specific guidelines for accepting gifts and hospitality, and, for some public servants, the maximum permissible gift value may be as low as 500 rupees ($8 U.S. dollars). Companies operating in India should thus familiarize themselves with these guidelines before providing even what may seem to be a modest gift or hospitality." Some examples of problematic conduct identified is these areas are as follows:
- Paying for extravagant meals, drinks, and entertainment in connection with a visit by a foreign official;
- Paying for "side trips" so that foreign officials can visit tourist attractions (e.g., Walt Disney World, Las Vegas) while in the United States;
- Providing per-diems or "pocket money" for foreign officials to use during a visit;
- Paying for a foreign official's spouse or family to accompany the foreign official on a trip; and
- Providing foreign officials with excessive gifts for birthdays, weddings, holidays, or other events.
c. Third Parties
This is always recognized as the highest FCPA risk and in India it is no different. More importantly, it may be even greater in this country because "Navigating India's extensive regulations and bureaucracy often requires U.S. companies to rely on third parties, such as agents, brokers, consultants, sales representatives, distributors, and other business partners.The PCA similarly criminalizes bribery through third parties as a direct violation by the third party and as an abetment violation by the company on whose behalf the bribe is being made." The key is subject any third party to rigorous due diligence and closely manage the relationship after the contract is signed. If a Red Flag appears at any point in the third party lifecycle it should be evaluated and cleared. The authors provide a handy list of some examples of Red Flags regarding third parties when doing business in India. They include:
- A third party is listed in databases reporting known corruption risks (e.g., World Bank List of Debarred Firms) or has been previously investigated for, charged with, or convicted of corruption or other ethics violations;
- A foreign official has specifically requested that a certain third party be involved in the company's transaction or business;
- An agent or consultant holds himself out as someone with close connections to an important minister or minister's aide;
- A third party does not appear to have sufficient resources, real estate/infrastructure, or experience to perform the requested tasks;
- A third party asks the company to provide it with unreasonably large discounts, excessive commissions, reimbursements, or contingency fees; and
- A third party requests payment in an irregular or convoluted manner (e.g., cash, offshore bank account, payments to another company, over/under invoicing).
Managing Corruption Risk in India
In their concluding section, the authors relate solid risk management tools tailored to the Indian market. It all starts with robust standards and procedures. From there you should train not only your employees on what may be illegal conduct and how to resist requests for bribes but also your third parties. Annual certifications are an important tool for not only risk management but also communication about anti-corruption expectations. Your compliance program should devote the appropriate level of personnel and resources for your operations in India. Finally, a robust reporting mechanism is key but equally critical is your response after any information comes to light. It must be thoroughly investigated, quickly remedied and reported as appropriate.
The Foley & Lardner/MZM Legal white paper is a welcome addition to literature about country specific risks, remedies and responses. A copy of the full white paper can be obtained by clicking here.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2014
