Anti-corruption legislation hitting investment in India

By Nusrat Hassan, DH Law Associates
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Corruption has been and will continue to be a matter of debate from drawing rooms to the parliament of India, with promises of eradication. Indian companies have lost the luxury of being mere spectators since developed countries have not only legislated or strengthened their anti-corruption laws but also are increasingly aggressive in implementing them.

Today’s anti-corruption laws are extra-territorial in their jurisdiction. Companies face heavy penalties and criminal prosecution for bribing foreign officials outside their home country, with many laws extending to private individuals. This has had a grave impact on foreign investment in India, which in turn is hurting economic growth. Any growth rate below 8% will limit the fight against poverty.

Laws not working?

A question often raised is whether the anti-corruption laws in India are adequate. Several laws target corruption – e.g. the Indian Penal Code, 1860, Prevention of Corruption Act, 1988, and Prevention of Money Laundering Act, 2002 – and more legislation is at the bill stage. India also has several authorities to ensure that anti-corruption laws are respected, the most prominent being the Central Vigilance Commission and the Central Bureau of Investigation, as well as special courts to try corruption cases. Despite this, India scores 3.4 on Transparency International’s scale, which ranks countries from non-corrupt (10) to highly corrupt (0), making India a high-risk investment jurisdiction.

Nusrat Hassan
Nusrat Hassan

Why should Indian companies be concerned? Substantial business opportunities and investments into India come from developed countries which have put in place sophisticated anti-corruption legislation and have escalated their scrutiny and enforcement. As a result of the Foreign Corrupt Practices Act (FCPA), US entities doing business with India not only insist on contractual covenants but also expect procedures and systems to be in place to ensure that all transactions are FCPA compliant.

The FCPA’s anti-bribery provisions prohibit corrupt payments to foreign officials, foreign political parties or party officials, or candidates for political office, to influence them in the exercise of their official duties to assist in obtaining or retaining business or securing any improper advantage. The provisions cover: (i) issuers, meaning any company which has securities registered in the US or is required to file periodic reports with the Securities and Exchange Commission; (ii) domestic concerns, meaning private companies incorporated or organized in US or whose principal place of business is US, their officers, directors, employees or agents who may not be US citizens but may become subject to FCPA jurisdiction due to their relationship with the domestic concerns, and citizens and residents of the US; and (iii) companies which are neither issuers nor domestic concerns and would include any conduct which was done in furtherance of a violation that took place in US territory.

The FCPA also has record keeping and internal provisions, which apply only to issuers, requiring them to maintain internal controls, accounting accuracy and transparency.

Penalties harsh

Violation of the FCPA leads to harsh criminal and civil penalties. In the past few years over US$100 million in fines has been collected annually and several people have faced imprisonment. Criminal penalties for wilful violations of the FCPA’s anti-bribery provisions include a fine of up to US$100,000 and/or imprisonment for five years for an individual and a fine of up to US$2 million for a corporation. Violation of the accounting provisions may lead to a fine of up to US$5 million and imprisonment for up to 20 years for an individual and a fine of up to US$25 million for a corporation. Civil penalties can reach US$500,000, along with disgorgement of profits and pre-judgment interest.

Violations can also lead to suspensions and blacklisting by US agencies, which have a worldwide impact on corporations, e.g. a company convicted of bribery will be excluded from participating in public contracts in the EU.

Such legislation is redefining how companies do business abroad. Indian companies must become more mindful of anti-corruption laws or face the harsh reality of international companies shying away from doing business with them.

When it comes to penalties, regulators have looked favourably on companies which have a strong anti-corruption policy in place with at least one senior official responsible for implementation. Companies are expected to implement internal reporting systems, hold training sessions for employees, communicate their expectations to third parties, have contractual anti-corruption provisions and accounting standards and processes, conduct annual reviews, and enforce appropriate entertainment and gift policies.

Only time will tell whether the anti-corruption laws of foreign countries redefine how Indian companies do business. However, in the meantime it may be in the interest of the Indian companies exposed or contemplating exposure to international business to put in place an anti-corruption policy in line with international expectations.

Nusrat Hassan is the managing partner at DH Law Associates.

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