The regulations that guide businesses are stringent, numerous and complex. Many companies have seen their reputations wane when regulatory authorities impose fines on them. In some cases executives have been sent to prison. Multiple regulatory authorities in various countries share information with each other more frequently than ever before. This is true in both developed countries and developing and emerging markets, as global money laundering norms become more stringent.
Companies encounter corruption in every sector of the Indian economy and their experience and perception differs depending on where they operate. India’s decentralized federal government system results in the regulation of corruption varying widely from area to area.
Faith in the system
One of the keys to success in dealing with issues of fraud, bribery and corruption is the quality of the system a company uses for reporting and investigating allegations of misconduct. If stakeholders view the investigation as biased or not competently managed, it will bring little good. Trust in senior management to do the right thing will be eroded and disillusioned employees will think twice about future cooperation.
Commitment from the top to do the right thing and act responsibly builds a culture in which employees with concerns will come forward, as they are confident they will be taken seriously and treated professionally.
E-governance: A wide range of public services, such as obtaining licences, permits, official documents, paying taxes and clearing goods, have been digitized. This has increased the speed with which government services are delivered and has also removed some of the direct contact points with public officials. The central government has created the National Portal of India, which lists all these services and serves as an ideal entry point for companies wishing to do business in India.
Tax disclosure: The Ministry of Finance is devising a voluntary tax disclosure scheme that will provide amnesty for people who have stashed away unaccounted money in tax havens and other jurisdictions abroad. It will allow companies and others who maintain secret accounts outside India to declare their unaccounted wealth and bring it back into the country after paying a levy.
Amendments to double taxation avoidance agreements (DTAAs): In May the Swiss parliament approved amendments to recently revised DTAAs with countries including India. Switzerland and India signed a revised DTAA in 2010 and the amendments will help the Indian government get account details of Indians. More than a dozen of India’s DTAAs are up for revision. In addition, the Indian government is negotiating 18 DTAAs with countries with which it has no such treaties.
Tax information exchange agreements (TIEAs): At least 22 tax havens have been identified. India has signed TIEAs with six of them (Bahamas, Bermuda, British Virgin Islands, Cayman Islands and Isle of Man) and others are being negotiated.
Private sector developments
Corruption in the form of bribery, kickbacks from procurement deals, and tax evasion is widespread in the private sector. The scandal that erupted in January 2009 at Satyam Computer Services, India’s fourth largest IT company, showed that the company had been “cooking its books” for US$1.5 billion highlighted serious flaws in the system. Following this disclosure, the World Bank banned Satyam for eight years and two other IT companies – Wipro Technologies and Megasoft Consultants – for four years from its corporate procurement programme.
Fraud also occurs in the stock market where brokers sometimes collude with companies to cheat investors and circumvent regulations. The Harshad Mehta securities fraud and the Ketan Mehta scam are two well known scams in this regard. In both instances, brokers raised the prices of selected shares through artificial trade to attract retail investors and then suddenly withdrew, causing huge losses to investors. Scams relating to initial public offerings of shares whereby some large companies and brokers maintained fake bank accounts and applied for shares meant for small investors have also been found.
Tackling the scourge
Companies should set up, implement and strengthen integrity systems and conduct extensive due diligence. They must also develop specific protocols to investigate issues of concern through the their legal counsel and internal compliance team. In addition, compliance teams should increase their knowledge of bribery and corruption issues inside companies and frame an anti-money laundering and corruption policy.
A robust compliance policy helps safeguard a company’s reputation. Many independent directors and boards of companies insist on a thorough compliance monitoring performed by an independent team, which includes a law firm and a professional advisory firm.
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