The growing need for Criminal Compliance

 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 12^th 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

India's Anti-Corruption Law Must Take Cues From Its Foreign Counterparts

"Over the past year, there has been considerable debate over establishment of the Lokpal however very little has been discussed about our principal anti-corruption legislation and its inadequacies. Various facets of anti-corruption legislations in the UK and the US could be utilised to give more teeth to Indian laws dealing with corruption"

Over the past few years, India has been a host to a variety of scams and scandals, which collectively have not done much either for the country’s image or development. The Economic Times in September 2011 had put a figure of $ 462 Billion as the loss to the country/exchequer post Independence, as a result of tax evasion, crime and corruption. Even after publication of this report, we have witnessed the Coal Gate scam, the Reebok scam to name a few, that are further inflating this figure.

While, over the past year, there has been considerable debate and movement towards the establishment of the Lokpal, very little has been discussed about our Principal Anti Corruption Legislation – the Prevention of Corruption Act, 1988 (PCA) and its inadequacies. Irrespective, of whatever anti corruption enforcement mechanism we bring in, the fact remains that it all stems from absence of substantive legislation in India In the course of this article, we will examine how various facets of anti-corruption legislations in the UK & US could be utilised to make Indian Laws more effective.

The Prevention of Corruption Act, 1988 came as the successor to the colonial law dealing with corruption, which was in the form of the Prevention of Corruption Act, 1947 and the Indian Penal Code 1860. While most definitions under the PCA including those of a public servant and what may be construed as a valuable thing or illegal gratification, are extremely broad and encompassing we still find an extremely poor track record with respect to convictions under the Act. By virtue of this, the Act has failed to stimulate a culture of anti-corruption compliance at an individual as well as a corporate level.

This now brings us to where the PCA, individually, and anti-corruption enforcement, generally, are lacking. To put it simply, it is a blend of poor enforcement, lack of specificity of associated offences and a lack of coordination between all legislations and bodies dealing with anti-corruption, topped by nonexistent political will. Below are some areas where Indian Law ought to incorporate provisions of the US Foreign Corrupt Practices Act and the UK Bribery Act.

Mr Zulfiquar Memon

Managing Partner

MZM Legal

Mr Sherbir Panag

Junior Associate

MZM Legal

Failure to Prevent Bribery:

The UK Bribery Act brought in the offence of failure to prevent bribery and this has resulted in a sea change in attitude in the way corporate entities now view their anti-corruption policies. Companies will be forced to set up proportionate procedures, regularly monitor and review their policies, conduct due diligence and train their employees to ensure they are not in violation of the Act. This has single-handedly enforced a culture of compliance and set the tone right from the top, besides widening the ambit of corporate criminal liability.

Clarity on Associated Forms of Bribery:

Though the PCA makes no exceptions to concepts of facilitation payments or grease payments, as are allowed by the US Foreign Corrupt Practices Act, it does not cater specifically to aspects such as gifts, corporate hospitality and political contributions. All these have become extremely cardinal routes for corruption related activities. At present, policies on gifts and corporate hospitality are left to be determined by the respective conduct rules created by a department or service. This needs to be more centrally streamlined and conveyed.

Books and Accounting Provisions:

The FCPA, besides dealing with the offence of bribery, also lays down certain obligations for maintaining books and accounts. Although in India both the Companies Act as well as taxation laws deal with these elements, they further need to be meshed in and coordinated in a manner through which the corruption aspect can be dealt with more comprehensively.

Bribery of Foreign Public Officials:

The Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations Bill, 2011 has been brought in to fill this void, but then again, ideally speaking provisions to give effect to the same should be incorporated under the PCA rather than bringing in a separate legislation as conflicts will arise between the two on various counts including terms of punishment which differ under both acts. The UK Bribery Act has dealt with the issue in a similar manner of incorporating bribery of foreign officials under one legislation.

Private Sector Corruption:

The UK Bribery Act brings in the tenets of private sector corruption as well. India has been witness to such action in the form of the Satyam scam and now the Reebok scam. No longer can corruption be dealt with by attacking public officials alone. There has been a move to address private sector corruption by way of an amendment to the IPC. However, this would again need to be streamlined and, ideally, should be brought under the PCA as has been done in the UK Bribery Act, which caters to both active and passive elements of private corruption.

Whistle Blowers Protection:

A strong mechanism of providing protection to whistle blowers needs to be brought into place to complement the PCA. Both the UK and US have an elaborate mechanism for whistle blower protection. In India mere guidelines by the Central Vigilance Commission exist which are not conducive to create a culture wherein honest disclosure is supported. Public Interest Disclosure and Protection to persons making the Disclosure Bill, 2010, which was introduced in Parliament in August 2010 to deal with whistle blowing, is weak on several counts including penalising provisions for revealing the identity of a complainant. Further, the Bill does not even define victimisation or allow for admission of anonymous complaints, and to top it all the Central Vigilance Commission remains a recommendatory body while dealing with provisions of this Act.

Coordination Between Enforcement Agencies:

The enforcement agencies that deal with anti-corruption need to be given greater independence along the lines of what the Department of Justice and the Securities Exchange Commission receive in the US while dealing with the FCPA and the Serious Frauds Office receives in the UK while handling the Bribery Act. Enforcement and investigative agencies cannot function through elaborate sanction procedures, or merely have recommendatory value for their work. Further, these, agencies need to have better intra-agency liaison and coordination. Lastly, they have to be actively involved in communicating and spreading awareness about corruption. The last thing we need is a communication paralysis in anti-corruption policy areas, which are constantly evolving, as the first step to enforcement is awareness.

Disclaimer–The views expressed in this article are the personal views of the author and are purely informative in nature.

Authors: Sherbir Panag and Zulfiquar Memon

Source: Legal Era