The India growth story is here to stay and
so the presence of foreign companies will only grow with each passing year.
Besides, most companies see India as a long-term investment option and are
flocking to reap the benefits of a stable and vibrant democracy, favourable
demographics viz a young population and a ballooning middle-class, and most
importantly, the vast internal consumption demand that India throws up.
This is
coupled with the ‘development quotient’ that India offers as a developing
country, requiring heightened public-private partnership keeping India
lucrative for business cycles to come. The attractiveness of the Indian market
with the Euro crisis in play was evident with March 2012 seeing the highest
ever monthly inflow of foreign direct investment of US $ 8.1 billion. With the
Government’s decision to open foreign direct investment in retail as well as
increase the cap in the insurance and pension sector, we see this trend only
positively contributing to keep India more and more attractive as ‘the go to’
emerging market.
While India remains a market that cannot
be ignored, it does not come without its bane. India is red-flagged as a high
risk market, from a bribery, corruption and fraud perspective – shooting up the
costs for the non-compliant, and considerably affecting its viability in these
cases. This sentiment was reflected in the 12th Global Fraud Survey,
which was conducted by Ernst & Young showing that 70% of Indian respondents
to the survey felt that bribery and corruption were widespread in the country
and 72% believed that the management was likely to cut corners to meet targets.
The KPMG India Fraud Survey further complemented this assertion with results
showing that nearly 61% of the Respondents believed their organisations to have
a risk of fraud and more than half of them had been victimised by fraud.
With the advent of legislations in their
home countries banning the bribery of foreign public officials coupled with
hyperactive enforcement agencies, foreign companies doing business in India
must navigate a culture in which bribery is rife, without running afoul of
local or home-country laws. Besides the obvious social argument for ethical
business, the economic argument is equally persuasive. The last decade has seen
foreign corporations being crippled by the astronomical fines they have had to
pay for acts of bribery in foreign countries, courtesy their domestic laws. The
initial advantage that an act of bribery may give thus becomes a speed ticket
in the larger scheme of things once the enforcement clampdown begins; case in
point is the Siemens Scandal.
This warrants the need for comprehensive
and pro-active criminal compliance programmes – to deal with these risks, so that
the business potential that a country like India offers may be realised. While,
there is a growing compliance trend in larger corporations – the small and
medium foreign companies, operating in India still seem to take criminal
compliance lightly. A compliance programme, serves a twofold purpose – besides
mitigating the risks as they arise, in the eventuality that the risk isn’t
avoided, it may still help absolve the corporation of penalties, if the
enforcement agencies can determine that the compliance programme was effective
and the action of the individual does not correspond as the company’s action.
The most recent case in this regard is how Morgan Stanley was absolved of any
liability during a recently concluded US Foreign Corrupt Practices Act (FCPA)
investigation by the Department of Justice, owing to their robust compliance
programme; however the individual in question Mr Garth Peterson individually
faced the flak. Further, the Compliance Program is a preventive mechanism and
not a reactionary step to a situation that arises – clearly establishing the
company’s ideology with respect to compliance. The reaction always costs more,
as was evident when Wal-Mart reviewed its compliance programmes in India and
China, post the Mexico scandal.
Let’s now look at some of the enforcement
risks that emerge from the lack of a comprehensive and robust compliance
programme:
US FCPA, UK Bribery Act and other
trends: The US FCPA is the first national
legislation that banned the bribery of foreign public officials and included
associated forms of bribery such as gifts, corporate hospitality, political and
charitable contributions. The FCPA till date remains the most dreaded
anti-corruption legislation affecting all corporations that have a business
presence in the United States, and the increasingly aggressive jurisdiction
being asserted by the US Department of Justice reflects how eight of the top 10
FCPA settlements (monetarily) have involved non-US-headquartered firms. Fifteen
companies settled FCPA enforcement actions in 2011 by paying a total of US
$508.6 million, and in the year 2012 alone tracking the leading India cases, we
have settlements made by Oracle and the Huntsman Corporation viz bribes paid in
India, while Krafts Foods is facing an investigation, courtesy its Indian
subsidiary Cadbury.
The UK Bribery Act took the FCPA
initiative further and banned facilitation payments as well as established the corporate
offence of failure to prevent bribery. The lack of a compliance programme would
fall under the ambit of this offence, and ten years imprisonment and an
unlimited fine is a significant price to pay for ignorance. With the recently launched investigation by
the UK Serious Frauds Office into British Petroleum under the Bribery Act for a
voluntary disclosure made by them – the tone from the SFO is clear.
Further, with respect to Transparency
International’s report on countries increasing prosecution of foreign bribery,
we find the list topped by the US, Germany, United Kingdom, Italy and France,
out of which four countries contribute the highest FDI into India. Italian
prosecutors as we speak are probing helicopter manufacturer Agusta Westland
over a 12-helicopter deal with India, clearly establishing the scrutiny - deals
with India attract.
The Indian Enforcement Trend Changing:
In March this year, the Ministry of Defence
blacklisted six Defence Companies, of which four were foreign companies, for
alleged involvement in the Ordnance Factory Board Scam. The trend of
blacklisting as an effective remedy is growing as the investigative burden on
the concerned Ministry is reduced and the only procedural requirement is a show-cause
notice in consonance with the Principles of Natural Justice. Such an action,
besides the obvious business loss, also renders tremendous loss of goodwill and
bad publicity.
With the Cabinet giving its nod to the
Companies Bill 2011, we will soon see the Serious Frauds Investigation Office
being given more teeth, including the reported power to investigate companies
for violations in India even if they aren’t registered here, along with a host
of other powers. This is coupled with the Economic Offences Wing’s that are
being set up in almost all States in the country. We find growing scrutiny into
all sectors having major license regulations post the 2G scam and now Coal
Gate, which is an important trend to note.
The Investigation trend into acts of bribery,
corruption and fraud – is further complemented by the heightened media interest
in such cases, which in turn pressurises the agencies and courts involved. We
also find the Higher Judiciary making strong recommendations in this regard as
was made by the Supreme Court in Subramaniam Swamy v. Dr. Manmohan Singh,
holding that delay in timely grant of sanction as required by the Prevention of
Corruption Act, 1988 amounted to a violation of the due process of law and the
Court suggested that a three-month period be considered, the non-compliance of
which would deem the sanction to have been granted.
New Legislations in the Pipeline: The Indian Parliament is today sitting over three legislations,
which will have a significant impact on the compliance requirements of
companies. These include, Prevention of Bribery of Foreign Public Officials
and Officials of Public International Organizations Bill, 2011; Public Interest
Disclosure and Protection to Persons Making the Disclosure Bill, 2010 and The
Prevention of Corruption (Amendment) Bill, 2008.
The above-mentioned trends clearly
indicate the need of the hour for Companies seeking to do business in India to
get their house in order, to insulate themselves from both the ensuing economic
loss and social damage. The Indian scenario definitely requires tailor made
criminal compliance programmes to best further business interests and mitigate
risks, with major reliance placed on third party management, business
establishment & procurement processes and the elimination of conflict of
interest positions. Considering the gold standard that the UK Bribery Act has
set for anti corruption compliance, the six key principles would be the ideal
ground to start with and develop a compliance program according to the
individual needs of the organisation and the environment it operates in. These
principles are:
• Proportionate
procedures
• Top-level
commitment
• Risk
assessment
• Due
diligence
• Communication
(including training)
• Monitoring
and review
This mandates that on a war footing companies adopt
the conduct of comprehensive due diligences, establishment of strong internal
audit functions, investment into training and the establishment of strong
policies and standard operating procedures, in addition to others to best
safeguard their interests from a criminal compliance perspective. Ultimately,
the preventive benefits accrue considerably higher than the reaction or cure
approach as by that time, there may not be much left to cure economically or
socially for the company.
Authors: Sherbir Panag and Zulfiquar Memon
As published by Legal Era in November 2012
