Watch your step in India

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

Recent international efforts to combat corruption, be it the Foreign Corrupt Practices Act (FCPA) in the US, or the UK Bribery Act 2010, have had a global impact. Companies doing business in India should comply strictly with the extensive anti-bribery regime.

There is a history of corruption at all levels of the Indian government as excessive bureaucracy has resulted in complicated and opaque procedures. Underpaid civil servants have broad discretionary powers, and some deliberately stall administrative procedures to induce improper payment.

It is also customary to give gifts to business contacts and government officials during religious festivals. In addition, officials often solicit donations from businesses for charitable organizations. These practices need to be scrutinized carefully in light of FCPA guidelines.

Shardul Thacker Partner Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Mulla & Mulla & Craigie Blunt & Caroe

Acting against corruption

India currently awaits the creation of a new robust anti-corruption law. However, public servants in India can be penalized for corruption under the Indian Penal Code, 1860, and the Prevention of Corruption Act (PCA), 1988. The Benami Transactions (Prohibition) Act, 1988, prohibits benami (someone else or fictitious name) transactions. The Prevention of Money Laundering Act, 2002 penalizes public servants for money laundering.

India is a signatory to the United Nations Convention Against Corruption, which it ratified earlier this year.

Authorities involved

The main authorities involved in inquiring into, investigating and prosecuting corruption cases are the Central Vigilance Commission (CVC), the Central Bureau of Investigation (CBI) and at the state level, the Anti-Corruption Bureau (ACB). The Directorate of Enforcement and the Financial Intelligence Unit, which are both under the Ministry of Finance, handle cases related to money laundering.

The CVC is a statutory body that supervises corruption cases in government departments, including the CBI. The CVC refers cases either to the central vigilance officer (CVO) of the department in question or to the CBI. The CVC or the CVO advises on the action to be taken against a public servant, but decisions on action rest with the departmental authority.

An investigating agency can initiate prosecution only after the government sanctions it. Government appointed prosecutors act in the courts. All cases under the PCA are tried by special judges.

Spillover from India

Many FCPA actions have involved payments to officials in India. They include:

• In 2007, Dow Chemical was found to have made improper payments of about US$200,000 through an Indian subsidiary to an official in the Central Insecticides Board to expedite the registration of its products. Dow was also found to have made improper payments (gifts, travel, entertainment and other items) to Indian government officials. None of this was prevented by Dow’s system of internal accounting controls and it paid a civil penalty of US$325,000.

• In 2008, Westinghouse Air Brake Technologies was charged by the Department of Justice and the Securities and Exchange Commission (SEC) with violating the FCPA. The company agreed to pay a US$300,000 fine, disgorge about US$288,000 in profits, pay about US$89,000 in civil penalties, cooperate with US authorities and adopt rigorous internal controls. Employees and agents of its Indian subsidiary had made various payments to officials of the Indian Railway Board. This was done to obtain and retain business, schedule pre-shipping product inspections, obtain product-delivery certificates and curb excessive tax audits.

• Recently, Kraft Foods reported that after its acquisition of Cadbury in 2010, it had reviewed Cadbury’s compliance programmes, including its FCPA practices, and found that in India there appeared to be facts and circumstances warranting further investigation. Kraft also said that on 1 February it received a subpoena from the SEC in connection with an investigation under the FCPA, primarily relating to dealings with Indian officials to obtain approvals for a Cadbury facility in India.

These cases and several others involving well-known US multinationals, including Electronic Data Systems, Control Components, Pride International, and Textron, illustrate a growing trend of US companies getting caught in the FCPA net while doing business in India.

Getting it right

Having said that, many others – including General Electric, PepsiCo and General Motors – have successfully invested in India without violating the FCPA. What they all seem to have in common are robust compliance and oversight protocols as well as strong internal controls.

Careful due-diligence investigation (including forensic accounting review) and thorough background checks of potential Indian partners are vital before entering India. This plus a well-designed compliance programme, strong internal controls and the right organizational culture, can ensure successful expansion by US companies in India.

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.


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