In this article, we will discuss ongoing US Foreign Corrupt Practices Act enforcement involving India, new Indian anti-corruption legislation, and the greater role of the Central Bureau of Investigation (CBI) in anti-corruption investigations. We will also touch on the increased cooperation between US and Indian authorities. We will then discuss best practices for doing business in India: what companies should do to reduce those risks and instill compliant behaviors within their companies and extended network of third parties.
Recent US FCPA Enforcement
FCPA and general corruption risks are greater in India than elsewhere due to the multitude of government interaction touchpoints, cultural practices allowing for facilitation payments and providing gifts to government officials, and the widespread use of third-party intermediaries hired to assist with bureaucratic processes.
While early FCPA cases focused on India involved smaller bribes, like those associated with customs clearance, now the Securities and Exchange Commission and the Department of Justice—the main US government agencies in charge of enforcing the FCPA—have tackled a broad range of corruption risks that companies encounter in India. Most recently, the SEC and DOJ have focused on improper payments made in connection with sales-related activities. Specifically, these agencies have concentrated on payments to officials or representatives of Indian government customers to obtain orders or favorable treatment connected to the sale of products. US government authorities also developed deep institutional knowledge of how business works in certain industries in India, notably in consumer goods (as in the Beam, Mondelez, and Anheuser-Bush InBev cases), life sciences devices (the Stryker and Alere Inc. cases), and defense (Embraer). These companies were investigated and then entered into FCPA resolutions with the SEC and/or DOJ.
Since bribery is often difficult to prove, the lack of supporting documents to substantiate payments and poor record-keeping led the SEC to charge accounting violations (books and records and internal controls violations), with the DOJ generally conducting the investigation alongside with the SEC. In some cases, the DOJ led the charge, such as in the case of CDM Smith. CDM Smith received a declination from the DOJ after it voluntarily disclosed that its Indian subsidiary paid bribes to Indian government officials in exchange for highway construction supervision and design contracts and a water project contract. CDM Smith fully cooperated with the authorities, remediated improper conduct, and disgorged USD 4 million in ill-gotten gains.
India is a democracy with a market economy and an active media, important characteristics for exposing corruption. Indeed, these factors have contributed to the significant attention public corruption is receiving. Coupled with the increased whistleblower activity and growing regulatory scrutiny, this trend will likely continue. Global companies should carefully assess their risk profiles in India and take steps to address the risks effectively.
Indian Law and Enforcement Trends
Not only does FCPA enforcement remain strong, the Indian government has also become more aggressive in investigating and prosecuting corruption under the main Indian anti-corruption law, the Prevention of Corruption Act, 1988 (PoCA). The CBI registered approximately 2,000 corruption cases against public servants in the last three years, and this number is growing. Major corruption cases involving various industries are in the headlines—for example, the Rafale case in the defense sector, the Punjab National Bank and Nirav Modi cases in the financial sector, and the VK Sasikala disproportionate assets case in politics.
The successful prosecution of a growing number of companies is due in part to increasing cooperation between Indian and US authorities through a Mutual Legal Assistance Treaty and other mechanisms, such as issuing letters rogatory. In a related trend, the Indian authorities have opened investigations into matters that have been resolved in the United States, such as the CDM Smith and Embraer cases.
In addition to the already increasing enforcement, PoCA was amended in July 2018 to make future enforcement easier. The amended PoCA now explicitly provides for the offense of bribe-giving. It introduces a corporate bribery offense that applies to non-Indian commercial organizations doing business in India in any capacity—such as through a joint venture, consortium, distribution network, etc.—in addition to domestic companies, and makes the commercial organization liable if any person associated with it (including an employee, agent, or subsidiary) promises a bribe to a public official to obtain business or any business advantage. It also imposes liability on officers of the commercial organization separately in cases where it is proved that bribery was committed with the consent or connivance of such officers. Commercial organizations may assert the defense that they had put “adequate procedures” in place to prevent such corrupt conduct.
What Companies Should Do
In order to manage corruption risks in India, companies should begin with a thorough risk assessment that focuses on their personnel, business structure, government interactions, and in particular, their use of third parties. Of particular concern is the quality of their internal compliance controls, such as policies and protocols for conducting due diligence on third parties, training personnel and third parties, and overseeing compliance by such parties with applicable laws and company policies. Companies should scrutinize how payments for services, especially those involving government interactions, are substantiated, documented, and recorded on companies’ books. Petty cash accounts should be subject to rigorous controls.
Companies should also take time to understand the regulatory landscape. While bureaucracy in India can be quite time consuming and frustrating, with multiple central, state, and local regulations interposed, companies should not succumb to local practices but rather reserve sufficient time to make sure that all documentation has been prepared, all processes completed properly, and all regulatory requirements complied with. Companies should instruct their employees and third parties to resist bribe demands and let officials know that company policies do not permit facilitation or liaisoning payments of any kind.
With most FCPA cases involving misconduct by third parties, tiered due diligence based on the risk level of third parties is essential, along with conducting ongoing monitoring and addressing red flags as they are identified. The company should also have gift-giving policies setting the limits on the value of gifts to government and private customers, which should be enforced through reimbursement procedures and audited periodically.
Since local third parties often demonstrate a lack of familiarity or commitment to compliance, company requirements should be communicated to third parties, reinforced through regular training, and controlled through periodic exercise of audit rights. Provisions should be included in third-party contracts to provide for termination rights in cases of noncompliance with company policies or applicable anti-corruption laws.
Accounting controls are critical. Facilitation payments to local officials are often made out of petty cash, so petty cash should be strictly controlled, and payments should be made by other means whenever possible, with all supporting documentation retained.
Several recent corruption cases originated with a whistleblower complaint to government authorities. Thus, it is critical to set up a functioning reporting hotline to promote awareness and help the company learn of possible violations. This hotline should be available to both employees and third parties.
Despite all the challenges, with vigilance and clear goals to proceed in a compliant manner, reinforced with training and appropriate controls, companies can conduct business in India successfully and not run afoul of the FCPA or local anti-corruption laws.
About the Author:
Alina Arora is a Partner with L&L Partners. She has over 20 years of experience in the areas of anti-corruption and white-collar crimes, having assisted clients in Indian and multi-jurisdictional advisory and investigations (involving the US, the UK, and other countries). She has been consistently recommended by Chambers & Partners Asia-Pacific for white collar crimes from 2016 to 2019.
Richard Dean is a partner in Baker McKenzie’s Compliance & Investigations practice group in Washington, DC, specializing in the US Foreign Corrupt Practices Act and related legislation. In the last several years, Mr. Dean has conducted several investigations into alleged corrupt practices at Indian subsidiaries of global companies. He has led the defense of those companies before the US authorities and worked closely with Indian counsel in addressing the consequences of those cases in India.
Jerome Tomas is Chair of Baker McKenzie’s SEC and Financial Institutions Enforcement Group, and co-chair of the North America Government Enforcement practice group. He represents multinational companies faced with government investigations and conducts internal investigations to assess and remediate legal and compliance concerns in domestic and global operations.