Indian bribery & corruption exposed

Author: | Published: 24 Apr 2013
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As its economy grows and protectionist barriers steadily erode, India is becoming an attractive venue for foreign companies. Indeed, India is projected to outpace China's foreign direct investment figures in this decade. An all-too-familiar hazard, however, lurks in the shadows: the perception and reality of corruption.


"It’s amazing. The moment you show cash, everyone knows your language Aravind Adiga, The White Tiger"


In 2012, India was ranked 94th out of 176 countries in Transparency International's Corruption Perceptions Index. Noted Indian economists Bibek Debroy and Laveesh Bhandari estimate that Indian officials earn as much as 1.26% of the country's GDP through corruption. Concrete examples of corruption abound. In 2013, India's Central Bureau of Investigation (CBI) registered corruption cases against the Italian defence company Finmeccanica and its top executives for allegedly bribing officials to facilitate the sale of helicopters to the Indian government. Likewise, government-owned Air India is reportedly losing millions of dollars due to corruption and mismanagement in the outsourcing of aircraft repairs. In 2012, an audit report revealed losses of $194 billion in the government's sale of coalfields to companies without competitive bidding. On March 13 2013, India's Supreme Court indicated that it would likely cancel all improper awards stemming from this scandal. And in another highly-publicised scandal, the Supreme Court invalidated 122 2G licences in 2012, after a government minister was arrested for awarding them at throwaway prices. This decision affected several foreign companies, and caused some to withdraw from India completely. In light of these very real corruption risks, diligent compliance with the US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, and India's anti-corruption laws are critical to successfully navigating the minefield of corruption in India.

Three key anti-corruption laws

FCPA

The FCPA prohibits bribery of foreign officials by corporations or individuals subject to US law. Its anti-bribery provisions make it 'unlawful for a US person, and certain foreign issuers of securities, to make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person'. The books and records provisions require publicly traded companies that report to the Securities and Exchange Commission (SEC) to maintain records that accurately and fairly reflect their transactions, and to have adequate internal accounting controls. A company or person may be held liable for violating the FCPA if: there is a corrupt offer or payment of 'anything of value' to a 'foreign government official', either directly or indirectly with knowledge or presumed knowledge (for example willful blindness or conscious disregard), for the purpose of obtaining or retaining business or securing an improper business advantage. Recognising the practical reality of many markets, including India's, the FCPA carves out certain exceptions:

(i) facilitation or 'grease' payments to expedite or secure the performance of routine government actions (typically small in amount and for services already due);

(ii) payments lawful under the local country's written laws and regulations; and

(iii) payments to cover foreign officials' reasonable travel and entertainment expenses for the purpose of promoting or explaining a company's products and services.

Penalties include imprisonment, monetary fines, and other penalties (including disgorgement or debarment).

UK Bribery Act

The UK Bribery Act 2010 prohibits payments or the promising or giving of a financial or other advantage to foreign public officials, with the intention of obtaining or retaining some business advantage, as well as the receipt of any such payments. The Bribery Act also governs such payments made in the purely commercial, or private, context. Offences penalised under this statute may be acts or omissions committed in the UK or by an offender having a 'close connection' to the UK, irrespective of the place of the offence. Therefore, apart from British companies, any company that 'carries on' a business or part of a business in the UK may be held liable under the Bribery Act.

This law makes no explicit exceptions for acts of hospitality performed in connection with a company's marketing efforts. But the Ministry of Justice has issued guidance indicating that 'reasonable and proportionate hospitality and promotional or other similar business expenditure' are not prohibited, unless the expenditure is intended to secure business or obtain a business advantage. By contrast, facilitation payments are prohibited.

The Bribery Act does not contain any accounting provisions. The former UK Financial Services Authority (FSA), however, imposed organisational requirements on FSA-regulated companies that can also apply to their foreign activities. For example, the FSA has fined companies for failing to maintain effective controls to prevent against the risks of foreign bribery and corruption. The FSA can refer evidence of any criminal activity to the Serious Fraud Office, which may then initiate an enforcement action under the Bribery Act. Sanctions include fines for companies and imprisonment for individuals.

India's Prevention of Corruption Act

Public servants in India can be penalised for corruption under the Indian Penal Code 1860 and the Prevention of Corruption Act 1988 (PCA). India's PCA specifically targets corruption in government agencies and public sector enterprises. A person or company may be held liable for violating the PCA in two ways. First, by providing or offering any gratification (for example payment, gift, or other benefit, including non-pecuniary benefits) to a public servant, or to any person for inducing any public servant by corrupt or illegal means or personal influence, to do or refrain from doing any official act or to favor or disfavour any person. Second, the PCA is violated by providing or offering to provide anything of value, without adequate payment for it, to a public servant by a person who has or is likely to have official dealings with that public servant. The PCA makes no exception for facilitation payments. Criminal sanctions include imprisonment and monetary penalties.

Like the Bribery Act, the PCA does not include books and records provisions. However, the Indian Companies Act mandates that companies' books and records provide 'a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions'. The company's officers may be held personally criminally liable for improper accounting. Moreover, under the Indian Tax Act, a company that records any payments made for an illegal purpose as legitimate business expenses could be prosecuted for tax evasion.

Recently, there has been vigorous debate in India about enacting a Jan Lokpal Bill, which would empower an ombudsman to register and investigate corruption complaints against politicians and bureaucrats without prior government approval. The latest version of the bill was approved by the federal Cabinet in January 2013, and is now awaiting parliamentary approval.

India-related FCPA cases

Recent Department of Justice (DoJ) and SEC enforcement actions against well-known multinationals and individual defendants illustrate a growing trend of international companies becoming ensnared in the FCPA net while doing business in India.

Recent cases

Oracle Corporation: The SEC filed suit last year against Oracle, alleging that it had failed to prevent its wholly-owned Indian subsidiary from secreting sales proceeds for potential future use as bribe money. Without admitting any allegations, Oracle Corporation paid a $2 million fine to the SEC in August 2012 and was enjoined from violating sections 13 and 21 of the Securities Exchange Act, 1934 (1934 Act).

Diageo: From 2003 to 2009, subsidiaries of the UK-headquartered global alcoholic beverages company allegedly paid over $2.7 million in illicit payments to government officials to obtain sales and tax benefits in India, Thailand, and South Korea. Without admitting any allegations, Diageo agreed to cease and desist from committing or causing any violations of the 1934 Act, disgorgement of $11.3 million, prejudgment interest of $2.1 million, and a civil penalty of $3 million.

Pride International: In 2010, Pride International voluntarily disclosed to the DoJ and SEC that its French subsidiary created false invoices, paid by Pride International, to cover $500,000 directed through third parties to pay judges sitting on India's Customs, Excise, and Gold Appellate Tribunal. The payment led to a favourable ruling in a matter before the Tribunal, earning the company $10 million. Pride International entered into a deferred prosecution agreement with US enforcement authorities in connection with this and other allegedly improper conduct, and paid penalties of $32.6 million to the DoJ and $19.3 million to the SEC.

Wabtec: From 2001 to 2005, a wholly-owned subsidiary of Wabtec allegedly used so-called marketing agents to make $170,542 in payments to employees of the Indian Railway Board, government inspectors, and customs personnel to obtain railway contracts. In 2008, Wabtec entered into a non-prosecution agreement with the DoJ under which it agreed to pay $300,000 in fines and adopt internal controls. Wabtec also settled with the SEC without admitting or denying the SEC's allegations and consented to the entry of a final judgment, paying an $87,000 civil penalty.

Control Components (CCI): Between 2003 and 2007, CCI allegedly paid at least $4.9 million to employees of state-owned companies in several countries, including the Maharashtra State Electricity Board in India. CCI pled guilty to criminal charges and paid an $18.2 million fine. It was ordered to implement a compliance programme and retain an independent compliance monitor for three years.

Electronic Data Systems (EDS) and Srinivasan: From 2001 to 2003, Chandramowli Srinivasan, the former president of AT Kearney India (ATKI), allegedly caused ATKI to make at least $720,000 in payments to senior employees of two companies partially owned by the Indian government, after they threatened to cancel their companies' contracts with ATKI. As a result of these payments, EDS, ATKI's former parent, generated $7.5 million in revenues. Without any admission or denial, Mr Srinivasan settled the action in 2007 and paid a $70,000 fine. EDS separately paid $490,902 in disgorgement and prejudgment interest.

Continuing investigations

Several multinationals are conducting internal investigations, or are being investigated by the SEC and DoJ, due to allegedly improper conduct in their India operations.

  • Beam, an American liquor producer and distributor, is conducting an internal investigation of its internal accounting controls.
  • Wal-Mart is conducting a wide-reaching investigation into its FCPA policies, practices and internal controls in India, Mexico, Brazil and China, among other countries. Walmart is also the subject of DOJ and SEC investigations into possible FCPA violations. Its latest SEC filing shows $157 million in professional fees and expenses related to the ongoing FCPA probe, and an estimated $40 million for 'FCPA and compliance matters' in the first quarter of 2014. Its Indian joint venture, Bharti Walmart, has suspended its CFO and five legal staff in connection with the investigation.
  • The SEC has issued a 'formal order of investigation' into possible FCPA violations by Avon, focused on, inter alia, expenses and accounting for travel, entertainment and gifts, and use of third party vendors and consultants in India and other countries.
  • The SEC is investigating Anheuser-Busch InBev's Indian affiliates, including its non-consolidated Indian joint venture, to determine whether 'certain relationships of agents and employees' violated the FCPA.

Other companies that discovered alleged FCPA violations in their India operations and voluntarily disclosed this information to the DoJ and SEC were not, for various reasons, subject to an enforcement action or investigation.

  • Tata Communications voluntarily disclosed that evidence found in an internal investigation revealed that a reseller for one of its subsidiaries may have made 'improper payments' to government officials in Southeast Asia.
  • STR Holdings, a US solar-tech corporation, discovered questionable payments and expenses for entertainment of government officials in India between 2006 and 2008.
  • Millipore Corporation, a US biopharmaceutical corporation, uncovered unspecified payment and commission practices at a 40%-owned Indian joint venture that may have raised FCPA concerns.

Investigations by the Indian government

In recent years, prosecutions of major corruption scandals under Indian law have intensified in the face of increasing public outrage. The 2010 Commonwealth Games in New Delhi, plagued by construction delays, use of substandard materials, dubious contracts, and filthy conditions at the athletes' village, prompted a high-level investigation. In 2011, the CBI arrested the chief of the Commonwealth Games' Organising Committee, Suresh Kalmadi, and his aides for awarding illegal contracts to a Swiss equipment manufacturer, causing a loss of approximately $31.7 million. Mr Kalmadi and nine others are being tried in a special CBI court for offences under the PCA and various criminal laws, with a maximum sentence of life imprisonment. On April 17 2013, Mr Kalmadi was also indicted in another case concerning financial irregularities in organising the 2008 Commonwealth Youth Games in India. In one of the world's biggest corruption scandals, the improper allocation of 2G telecom licences allegedly resulted in revenue losses of about $40 billion. Several government officials – including India's former telecom minister, Andimuthu Raja – and executives of major telecom companies are being tried for alleged illegalities and underpayments in the issuance of frequency allocation licenses.

Corruption risks associated with doing business in India

The World Economic Forum ranks corruption as the second most problematic factor of doing business in India. Particularly high-risk business practices include: sales to government customers; obtaining licences, permits, and registrations; clearing customs, paying duties and taxes; and logistics, especially when using freight-forwarders. High-risk industries include manufacturing, energy, infrastructure, construction, finance, and healthcare.


"Noted Indian economists estimate that Indian officials earn as much as 1.26% of the country’s GDP through corruption "


A review of FCPA prosecutions in the last decade involving India reveal certain recurring corruption schemes. Bribes, like those alleged in the Wabtec case, typically involved relatively small sums of money (85% involved less than $5000, and more than half involved less than $100) and were often for services already due, like customs clearance, taxation, and water and land records issuance. Most violations involved the use of agents or consultants. In the Diageo case, for instance, agents were allegedly used to make payments to employees of state liquor stores, and in Pride International, a customs 'consultant' was used to make payments to members of the Customs, Excise, and Gold Appellate Tribunal. Slush funds, or petty cash, and doctored paperwork such as fictitious invoices, were commonly used to disguise improper payments, as in the Oracle case. In Srinivasan, the improper payments were effectuated through fabricated invoices.

Other common corruption schemes include: indirect benefits to public officials, such as retaining third parties upon recommendation of public officials; awarding licences or contracts to relatives of public officials; providing lavish gifts and entertainment to public officials; and making charitable contributions to organisations owned by, or on the recommendation of, public officials.

How to minimise corruption risks

Despite the manifold risks of doing business, many multinational companies and private equity firms are presently investing in India without running afoul of anti-corruption laws. These companies benefit from a robust compliance culture, stringent oversight protocols, and resilient internal controls. These controls include, at a minimum, continuing risk assessment, adequate due diligence (including forensic accounting review) and thorough background checks of potential business partners and third party intermediaries, and regular compliance monitoring. Certain risk-mitigation measures have proven particularly helpful. For instance, small payments of less than $50 are frequently required to facilitate routine government services in India. While the FCPA generally permits these, they are prohibited under the UK Bribery Act and Indian law. They may also violate the FCPA's anti-bribery and books and records provisions if they are not properly controlled and recorded. Companies must develop a clear corporate policy on facilitation payments, and to the extent such payments are allowed, ensure they are accurately recorded. To detect corruption disguised as facilitation payments, companies should train local sales and finance personnel, addressing the specific corruption risks such employees might actually face and equipping them to respond appropriately. For example, sales personnel should receive training on legitimate sales tactics to be used when a customer asks for, or a competitor pays, a bribe.

Third parties working on behalf of companies are frequently involved in corruption schemes and their conduct could subject the company to liability. Companies should therefore conduct risk-based due diligence on third parties and train relevant personnel on identifying so-called red flags indicating risks relating to specific types of third parties. A third party due diligence protocol may include: a red flag checklist or assessment to be completed by the local employee responsible for engaging the third party; requirements for external verification; a written business case for the third party; periodic audits and site visits to the third party; and a requirement that third-party invoices adequately describe the services provided and are subject to approval prior to payment.

Additionally, robust internal controls are necessary to prevent the use of false invoices, slush funds or petty cash to generate funds to pay bribes. Such controls include adequate supporting documentation for expenses (for example, invoices that sufficiently describe the services rendered, expense reports that identify the business purpose of travel and entertainment, and evidence of appropriate approvals), and routine monitoring to identify vulnerabilities in the compliance framework. Training for accounting and finance personnel should emphasise critically reviewing third party invoices and supporting documentation (particularly for high-risk transactions), identification of any red flags, and the proper recording of such transactions in the company's books and records. Similarly, personnel responsible for approving travel and entertainment expenses should be trained to recognise red flags when reviewing expense reports.

At the same time, compliance and internal control policies should provide sufficient flexibility to account for local market conditions. For instance, absolute restrictions on the use of petty cash funds could lead to work-arounds in a predominantly cash-based economy like India, and result in non-compliant practices being employed. Therefore, companies operating within India must conduct comprehensive risk assessments to determine where their exposure lies, and then formulate policies and procedures that are specifically tailored to address the risks identified. This analysis must necessarily take into account the actions of their Indian subsidiaries, third party representatives and joint venture partners. Moreover, any procedures adopted must ensure sufficient visibility at the corporate level into the operations of these various entities in India. Critical to this overall effort are a well-designed compliance programme, robust and effective internal controls, and a strong culture of compliance that transcends throughout the organisation and is regularly reinforced through training and companywide compliance messaging. With such measures in place, companies can effectively mitigate the corruption risks associated with doing business in India.

By Shearman & Sterling partner Paula Anderson in New York. The author wishes to thank associates Andrei Vrabie and Sushila Rao for their contributions to the article.