Misconceptions over the reach and application of the US Foreign Corrupt Practices Act leave many India-based businesses vulnerable
to the imposition of hefty fines
The US Foreign Corrupt Practices Act (FCPA) and India’s Prevention of Corruption Act (PCA) make it a criminal offence to bribe Indian government employees in order to obtain business or secure an improper advantage in the market. In the past these statutes were virtually unknown to many companies and their employees. However, a recent spate of high-profile cases has thrust them into the consciousness of all participants in the Indian economy.
In most jurisdictions, civil and criminal enforcement actions under anti-corruption statutes have risen dramatically in recent years. The penalties imposed for violations have also become more severe. Before 2008 the penalty of US$44 million imposed on oilfield services company Baker Hughes in early 2007 was the largest ordered under the FCPA. That penalty now seems lenient when compared to the US$579 million fine recently imposed on Halliburton and its former subsidiary Kellogg Brown & Root, and the nearly US$1.9 billion imposed on Siemens by enforcement authorities in the US and Germany.
It is important for domestic and international corporations with operations in India, as well as those in business anywhere else, to understand the anti-corruption laws that can affect them. There may be a tendency for those in India to look past the FCPA, assuming it to be a law that will not extend beyond US borders. However, it is crucial to recognize the implications of such laws for multinational companies: although Siemens is based in Germany, it recently paid a substantial fine to US authorities.
Closer to home, an Indian national who was the president of AT Kearney India, recently settled a case with US enforcement authorities concerning improper payments that took place within India. Many reports suggest that Indian enforcement authorities are also becoming more aggressive, particularly in cases involving Indian affiliates of US companies that are being investigated by US authorities under the FCPA.
Know the rules
The FCPA prohibits bribery of foreign officials. This includes making or even authorizing payments of any kind – including money, gifts or any other tangible or intangible benefit – to officials for the purpose of obtaining or retaining business, or securing an improper business advantage.
The definition of “foreign official” is very broad, including any and all employees of central, state or local governments, their various agencies and government-controlled commercial ventures. A person’s rank, level or position is not relevant to whether they fall within the statute’s definition.
The terms of India’s PCA are similar to those of the FCPA. It prohibits “public servants” from accepting or agreeing to accept a tangible or intangible benefit (or what the act calls “gratification”) as a motive or reward for performing an official act. Unlike the FCPA, which focuses on punishing the payer of the bribe, the PCA targets the public official receiving the bribe. However, a person paying or offering a bribe to a public servant will not go unpunished under the PCA; such a person can be prosecuted for abetment of a bribe regardless of whether any offence is committed by a public servant.
Generally speaking, any party operating within India’s borders is subject to prosecution under the PCA if it engages in conduct that contravenes the act’s provisions. When the party is related to a US entity – as its subsidiary, joint-venture partner or even as its local sales representative – there is also potential for implicating the FCPA. Given the potential exposure under both Indian and US law, it is crucial that companies doing business in India educate their employees about the provisions of these two laws and provide guidelines for safe and compliant business practices.
When advising clients in this area, three questions often arise. The first and most common question relates to the jurisdictional reach of the FCPA: when is a company or person doing business in India subject to US jurisdiction for an FCPA violation? The second question relates to “speed” payments, and whether making such payments will implicate the FCPA or PCA. The third question relates to the strategic use of third parties, specifically, will a company avoid liability if a payment that would otherwise implicate the FCPA is made by an independent third party?
Jurisdictional reach of the FCPA
The FCPA applies to all US citizens and companies – that is, companies organized under the laws of any US state or that have their principal place of business in the US. Indian nationals who are employees of a US company may also be subject to the FCPA for misconduct that takes place in India if they use a means or instrumentality of US interstate commerce to carry out a prohibited act. Indeed, in at least one case, US enforcement authorities have charged an Indian national who was not an employee of a US company for misconduct that took place within India’s borders. In the AT Kearney matter, the president of AT Kearney India (the Indian subsidiary of US-based Electronic Data Systems Corporation) was charged by the US Securities and Exchange Commission (SEC) for making corrupt payments of over US$700,000 in the form of cash transfers, gifts and services to employees of two Indian companies that were partly owned by the Indian government.
In cases where the provisions of the FCPA have not reached the Indian party, US enforcement authorities have sometimes charged the US parent company or other affiliated US entities for the misconduct of the Indian party, even when the two entities have only been loosely connected.
For example, in a recent matter involving Westinghouse Air Brake Technologies (Wabtec), the SEC charged Wabtec, a US entity with shares listed on the New York Stock Exchange, with violations of the FCPA’s anti-bribery provisions in connection with US$137,400 in improper payments made by Wabtec’s fourth-tier Indian subsidiary. Although none of the payments were made by Wabtec or explicitly authorized by it, the government was able to tie the US parent to the misconduct. The connection was made because the subsidiary’s chairman, who allegedly knew about the payments but did nothing to prevent them, was also a vice-president of Wabtec.
As a result, Wabtec was required to pay approximately US$675,000 to resolve FCPA actions pursued by the SEC and the US Department of Justice.
‘Speed’ payments may spell trouble
In certain cases “speed” or “facilitation” payments – payments to a government employee for the purpose of expediting or securing the performance of a “routine governmental action” – are permissible, being provided for as an exception under the FCPA.
However, the term “routine governmental action” refers only to those actions that are an ordinary and commonly performed part of the government employee’s duties, such as processing documents, scheduling inspections and loading or unloading cargo. The FCPA makes it clear that the term does not include any decision by the government employee about whether, or on what terms, to conduct business with a party.
Legal practitioners generally take the view that to constitute a valid facilitation payment under the FCPA, the payment must be made to secure a right to which the payer was already legally entitled. If a modest payment is made to a government employee to speed the completion of a common or ordinary task that the employee is lawfully required to perform, it will frequently fall within the exception. On the other hand, if a payment is made to encourage a government employee to deviate from his or her common duties, or to exercise discretion that would result in advantage to the payer, it will not fall within the statutory exception.
Enforcement authorities have so far failed to provide a clear set of guidelines clarifying when the exception will and will not apply. Accordingly, parties that attempt to rely on the FCPA’s exception for facilitation payments do so at considerable risk.
Indeed, in most enforcement proceedings to date, the exception has been interpreted narrowly. In some cases fines have been imposed for payments that appear to fall within its parameters. Moreover, the PCA does not have a similar exception for facilitation payments, and while the act has not been strictly enforced in the past with respect to such payments, there are indications that this may be changing.
Deliberate ignorance is no defence
In the past, some companies have attempted to limit their exposure to the FCPA and the PCA by interposing an independent third party, such as a sales agent or joint-venture partner, to act as an intermediary. The rationale is that the company will not be held responsible if a third party, rather than the company itself, makes an improper payment. However, this rationale is false. In fact, such a strategy will increase, rather than reduce, the risk of regulatory action against the company.
The FCPA imposes liability on the company if it authorizes a third party to make a payment to a foreign official, regardless of whether the authorization is expressed or implied. Furthermore, the FCPA prohibits any payments to third parties that are made in the knowledge that all or part of the money will ultimately be offered to a government official. Importantly, the level of knowledge necessary for a violation to be found is not limited to actual knowledge. It also includes situations where a person is aware that an unlawful payment is likely to occur. Deliberate ignorance is no defence. A company cannot avoid liability by retaining a third party and then burying its head in the sand.
Identifying the red flags
The FCPA’s provision regarding third-party payments imposes a duty on companies to exercise due diligence in ensuring that their partners will not offer any portion of consideration they receive from the company to a government official. Accordingly, it is necessary for companies to conduct background checks on potential joint-venture partners and sales agents to establish their bona fide credentials and determine whether they have any ties to the government that could give rise to legal questions under the FCPA.
“Red flags”, or warning signs to look out for, may include the refusal by a third party partner to include FCPA representations or warranties in its agreement with the company, or the fact that the third party has been recommended to the company by a government official. Similarly, requests for unusual payments or methods of payment should raise questions about a third party’s legitimacy. Any requests for payments in cash, payments to an account in an unrelated third country, unusually high commissions to a sales agent or unusually high cash contributions to a joint-venture partner need to be carefully investigated. The specific prohibitions of broad anti-corruption statutes such as the FCPA and PCA, as well as a generally heightened enforcement environment, make it imperative that companies and their employees understand corruption-related issues and implement programmes designed to ensure compliance with anti-corruption statutes. While no compliance measures can be perfect, a programme designed to prevent and detect misconduct, educate employees, and ensure effective due diligence will go a long way toward reducing the risk of statutory violations.
Kyle Wombolt is a partner at Goodwin Procter in Hong Kong.