India Business Law Journal talks to Nick Panes and John Bray, directors of risk consultancy Control Risks, about managing compliance with Indian and international anti-corruption legislation

On 30 January, thousands of anti-corruption demonstrators took to India’s streets. Led by a group of non-governmental organizations under the banner “India Against Corruption”, they called for stronger anti-corruption laws following a spate of recent scandals, such as those that tainted the Commonwealth Games in Delhi and the country’s telecommunications sector.

“The rot is in the political structure,” said politician Rahul Gandhi just one day before the protests took place.

Earlier in the month, leading members of India’s business community, including Bimla Jalan, a former governor of the Reserve Bank of India; Azim Premji, the chairman of WIPRO; and Deepak Parekh, the chairman of Housing Development Finance Corporation, wrote an open letter to the Hindustan Times expressing their concerns over deteriorating values in the country. In the letter, the signatories highlighted corruption as “the biggest issue corroding the fabric of the nation”.

Widespread media coverage of recent corruption scandals, combined with the publication of India’s draft National Anti-Corruption Strategy, the planned implementation of an anti-bribery act in the UK and the increasingly aggressive enforcement of the US Foreign Corrupt Practices Act (FCPA) have brought the issue of corruption to the forefront of business and political agendas. As a result, a growing number of Indian and international companies are turning to business risk experts for advice on minimizing their exposure to the hazards associated with bribery and corruption.

Nick Panes and John Bray are directors at Control Risks, an international consultancy that specializes in the management and mitigation of strategic and operational risks. India Business Law Journal asked them what companies should be doing to ensure compliance with Indian and international anti-corruption legislation and foster corporate cultures that promote and sustain ethical business practises.

India Business Law Journal (IBLJ): The US Foreign Corrupt Practices Act is a cause of concern to many companies with operations in India. What are the most important provisions of this law and what jurisdiction does it have over companies’ India operations?

Panes: There has been widespread coverage of the United States’ aggressive enforcement of its extra-territorial FCPA. The US Department of Justice (DoJ) and the Securities Exchange Commission (SEC) have both committed significant resources, both in terms of finance and personnel, to investigate cases of foreign bribery.

The FCPA extends US jurisdiction to cover foreign companies that are listed in the US, or which use the instrumentalities of interstate commerce – for example, US banking facilities – to pay bribes. Companies that have fallen foul of the act include BAE Systems of the UK, Technip of France and Snamprogetti of Italy, which in 2010 paid financial penalties to the US authorities of US$400 million, US$338 million and US$365 million respectively to resolve international bribery cases.

German company Siemens holds the record for financial penalties. In 2007 and 2008, it paid fines totalling US$1.6 billion to German and US authorities. In addition, it is understood to have incurred professional fees from lawyers and accountants totalling a further US$1 billion.

IBLJ: As US authorities devote more resources to enforcing the FCPA, are they focusing their efforts on any particular industries or sectors?

Bray: Risks vary from industry to industry; every sector has its own hazards. The US DoJ has indicated that it’s taking a particular interest in the pharmaceutical industry. This is because the industry is highly regulated and companies have to deal with government officials at nearly every stage of the approval, manufacture, pricing and marketing process during the development of new drugs.

Recently, there have been a series of FCPA cases involving US pharmaceutical companies that reportedly paid kickbacks, either directly or via their distributors, when marketing their products to government hospitals in China. If occasion demands, it is reasonable to suppose that the DoJ would take an equal interest in similar transactions in India.

International action

IBLJ: The international framework for combating corruption will be broadened when the UK Bribery Act takes effect. When is this legislation expected to come into force and how does it differ from the FCPA?

Bray: Recent developments in the UK are particularly significant, not just for British companies but for all companies with links to the UK. The UK Bribery Act is expected to come into force later this year and in some respects it is even tougher than the FCPA. It applies to companies and individuals with “close connections” to the UK, such as British and foreign companies that are incorporated there and British citizens and foreign nationals who are ordinarily resident in the country.

John Bray

The act differs from the FCPA in that it covers the bribery of private individuals and companies as well as foreign officials. Furthermore, it does not exclude “facilitation payments” from its definition of the offence of foreign bribery. The potential penalties for offenders include fines and imprisonment for individuals and unlimited fines for companies.

One of the Bribery Act’s most significant innovations is the introduction of a new offence of “failure of commercial organizations to prevent bribery”. This means that a company is guilty of an offence if someone associated with it – such as an employee or a commercial agent – pays a bribe. However, it can defend itself if it can show that it has “adequate procedures” in place to prevent such behaviour. The act itself does not define these procedures, but instead requires the Secretary of State for Justice to issue suitable guidelines.

In late January, the Ministry of Justice announced a delay in the publication of the final version of these guidelines. It did not set a new date and the act will not come into force until three months after the guidelines are published.

IBLJ: What extra-territorial steps have been taken by other countries to combat bribery and corruption beyond their borders?

Bray: Since signing the Organization for Economic Co-operation and Development’s (OECD) 1997 Anti-Bribery Convention, all major industrialized nations have introduced similar extra-territorial legislation to the FCPA. The pattern of enforcement is uneven, but a recent report by the international anti-corruption non-governmental organization Transparency International cited Denmark, Germany, Italy, Norway, Switzerland, the UK and the US as the most “active enforcers”.

The first UK conviction for a foreign bribery offence came only in 2008. But since then, there has been a series of high-profile cases, of which the best known involved BAE Systems. In the last month, two former directors of the engineering company Mabey & Johnson have been sentenced to prison terms of 21 months and eight months for paying bribes in an Iraq oil-for-food case. Even before the Bribery Act comes into force, the UK Serious Fraud Office has made it clear that it is prepared to prosecute individuals as well as companies for international bribery offences.

Germany is an even more significant example. According to Transparency International, it had dealt with more than 117 cases by the end of 2009. In addition to Siemens, MAN, a manufacturer of trucks and turbines, has fallen foul of the country’s extra-territorial legislation. In December 2009 it was fined 150.6 million (US$222 million) following internal investigations that uncovered 80 “suspicious payments” amounting to a total of 51.6 million.

In recent years one of the most significant “game changers” has been the Swiss authorities’ greater willingness to cooperate with international investigators seeking information on Swiss bank accounts. And Switzerland has itself initiated 30 international bribery cases or investigations.

In Italy there has been a steady trickle of cases, 18 in total according to Transparency International. Fourteen Danish companies have been charged in Iraq oil-for-food cases. Norway has clocked up at least five cases, notably a 20 million kroner (US$3.5 million) fine imposed on the country’s leading oil company, Statoil, relating to improper payments in Iran.

India’s new strategy

IBLJ: India’s Central Vigilance Commission (CVC) recently published a draft National Anti-Corruption Strategy which proposes a “systematic and conscious reshaping of the country’s national integrity system”. Is this a serious attempt by the Indian government to bring corruption under control?

Panes: The strategy reflects a growing public consciousness around the issue of corruption. The CVC’s ability to push for the adoption and implementation of this strategy, in part or as a whole, will be determined to a large extent by the level of political will to support its initiative. Significantly, in late February India’s president, Pratibha Patil, announced that parliament will ratify the UN Convention Against Corruption in addition to considering other anti-corruption measures. The extent to which these measures will complement and reinforce the CVC’s National Anti-Corruption Strategy remains to be seen.

IBLJ: India already has anti-corruption apparatus in the form of the Prevention of Corruption Act, 1998, and state lokayukta acts. Furthermore the CVC, the Central Bureau of Investigation and the Enforcement Directorate are all empowered to investigate corruption allegations. How does the new anti-corruption strategy differ from existing measures and what value will it add?

Panes: The National Anti-Corruption Strategy addresses the requirement for a more coordinated approach to anti-corruption efforts. It recognizes that effective communication between stakeholders is an essential requirement for lasting change. Importantly, the anti-corruption strategy emphasizes the pivotal role of the private sector in combating corruption, underlining the importance of robust corporate governance and the need for companies to have strong, properly implemented codes of ethics.

Some observers feel that things are already improving: there have been efforts to achieve greater transparency through initiatives such as the Right to Information Act; the country is benefiting from an increasingly active cadre of investigative journalists; technological advances, including e-governance and e-tenders, are curtailing the opportunities for individual officials to influence decisions in return for bribes; and there is a steadily evolving commercial culture of compliance.

Managing corporate compliance

IBLJ: What kind of controls should companies implement to ensure robust internal compliance and mitigate the risks of corruption?

Panes: In the current environment, there are two requirements for success. The first is defensive: a robust internal compliance programme. The second is active: companies need to develop effective engagement strategies to win business without paying bribes.

Perhaps the single most important requirement is the personal commitment of the CEO and his or her senior management team to high standards of integrity. They may express this commitment through public statements to internal and external audiences. More practically, they will need to appoint specific individuals, for example in the finance, auditing and legal teams, with defined objectives to manage their company’s integrity programmes. These measures must be backed up by actual commercial practice, including a willingness to support frontline management who fail to win business because of their commitment to the company code.

IBLJ: How can companies empower their employees to take an active role in fighting corruption?

Panes: Many international companies now require employees to complete some form of online anti-corruption training. This is a useful starting point for companies that have thousands of employees.

Particular attention should be paid to training those staff members who deal with government departments and those who handle high-value contracts with customers and suppliers.

Nick Panes

Whistle-blowing lines are an effective mechanism for identifying incidents of fraud or corruption, as long as employees are aware of their existence, and are confident that their complaints will be dealt with confidentially. In India, managers frequently express the view that discontented employees will use whistleblowing lines as the modern equivalent of “poison-pen letters”, denouncing colleagues and managers against whom they have a personal grievance. This does happen, but it is usually not difficult to identify the reports that are malicious or time-wasting, and it only takes a small number of genuine cases for company hotlines to prove their worth.

IBLJ: What factors should companies bear in mind when designing and implementing effective anti-corruption procedures and training programmes?

Bray: If training programmes are to be effective, they need to be designed with the needs of each particular group of participants in mind. As Nick [Panes] has pointed out, we see online training as a valuable means of raising awareness within large companies with thousands of employees. At the same time, interactive face-to-face training – which should include discussion of real-life case studies – works better for senior executives.

Anti-corruption training should not be seen as a “one-off”. Senior management needs to find creative ways of reinforcing the message, for example in internal newsletters, in “away-days” for senior management and in regular refresher courses. One way of testing how far the message is getting across is to conduct an internal survey to test awareness.

The cost of going straight

IBLJ: What impact will the introduction of anti-corruption systems, procedures and training programmes have on companies’ bottom lines?

Bray: As with many other aspects of risk management, it is all too easy to see anti-corruption compliance programmes simply as a cost. The temptation is therefore to go for token solutions such as publishing a company ethics code without making any effort to integrate the code’s principles into day-to-day business. However, major corruption cases, such as the case against Siemens, have forcefully demonstrated how costly this approach can be.

The avoidance of fines, prison sentences and sleepless nights is therefore one important gain. However, this is by no means the only cost argument. Bribe payments are neither a secure nor an efficient means of winning business. When conducting an informal survey of international companies operating in China, I was once pointed in the direction of a leading US retailer with the comment: “They are simply too niggardly to pay bribes!” The point of this back-handed praise was that resisting bribery was not just about ethics but also about cost-effectiveness.

IBLJ: What have been your experiences of advising companies on tackling corruption in India?

Panes: We were asked to undertake an anti-corruption audit for an international company that had set up a computer support operation in India. The overall findings were positive: all the employees that we interviewed were well aware of the company’s integrity policies and knew how to apply them. However, the audit did identify weaknesses in the internal controls of the department that handled procurement from external suppliers.

In another project, we discovered corrupt activities after surveying price points for fashion products on behalf of a retail company. It emerged that the company’s local buyer was taking kickbacks from the manufacturers.

What is interesting is that the majority of the recent high-profile corruption cases have involved the payment of bribes through intermediaries.

IBLJ: Can you give some examples of these cases?

Bray: In a recent complaint against Siemens, it was alleged that bribes had been paid by local “consultants” in order to help the company secure engineering contracts. The complaint by the US SEC stated that Siemens had made at least 4,283 payments totalling approximately US$1.4 billion to bribe government officials in return for business. The examples it cited included bribes amounting to US$5.3 million to promote the sales of mobile phone equipment in Bangladesh. Other examples included illicit payments in relation to telecommunications projects in Nigeria; national identity cards in Argentina; medical devices in Vietnam, China and Russia; traffic control systems in Russia; refineries in Mexico; and mobile communications networks in Vietnam.

BAE Systems, meanwhile, is alleged to have retained “marketing advisers” to assist in its international sales of defence equipment. In its formal complaint in early 2010, the US DoJ said that BAE Systems made substantial payments to these advisers that were not subject to adequate internal scrutiny, as required by an FCPA compliance programme.

Similarly, Technip and Snamprogetti, which were part of an international joint venture led by US company KBR to construct a gas plant in Nigeria, reportedly made use of a British lawyer to pass bribes to Nigerian government officials.

In the past, conventional business wisdom was that companies bore no legal responsibility if agents removed from them paid bribes on their behalf. This myth has been comprehensively exploded.

Local knowledge; global solutions

IBLJ: Are there any specific tips that you would offer to Indian companies and foreign companies with extensive operations in the country?

Bray: Corruption is a hazard that plagues most emerging markets, so India is not alone in the challenges it faces to battle this problem. Many of the anti-corruption programmes and strategies we design are applicable across industry and geography.

It is important to plan ahead and to look out for stages in the business cycle when a company may be particularly vulnerable to demands for bribes (for example, when applying for planning permission or importing vital equipment). Once the risks are identified, it should be possible to develop counter-strategies. Often this involves a degree of lateral thinking.

In one recent example, Control Risks was working with a well-known international company that wanted to import luxury consumer goods into a country notorious for its corrupt customs service. One suggestion that emerged was that the company should import the ingredients rather than the highly desirable finished product. As this example shows, anti-corruption principles are universal, but the application of these principles often requires ingenuity as well as local expertise.

IBLJ: What is the greatest challenge that India faces in its battle against corruption?

Bray: The greatest challenge is taking anti-corruption out of the domain of risk management and making it mainstream – not just an added extra, but an integral part of the way that the company does business. For this to happen, companies of course need lawyers and other specialists. But they also need the active engagement of their senior and middle managers.

John Bray 2

It’s easy to be cynical about corruption: there is no shortage of “bad news stories” in India and elsewhere. However, the fact that these stories are now coming into the public domain, and that they are being debated on blogs and chat sites as well as in newspapers, is itself a sign of change.

There are compelling legal reasons why companies should not descend into bribery. Just as importantly, lawyers need to make the business case for high standards of integrity. The companies that maintain public trust are the ones that will survive and flourish.

Nick Panes is the director of corporate investigations for India at Control Risks. John Bray is the director of analysis at the company and the lead specialist on anti-corruption policy issues.