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November 01, 2018

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Bribery, Anti-Money Laundering And Corruption Risks For The New Breeds Of Multi-National Companies In India


- Vasu B. Muthyala, Partner [ Kobre & Kim - Disputes and Investigations ]
- Nathaniel P. Barber, Lawyer [ Kobre & Kim - Disputes and Investigations ]

vasubmuthyala_nathanielpbarber

For both MNCs looking to invest in India and Indian companies looking beyond borders, compliance with extra-territorial bribery and anti-money laundering requirements will be crucial in protecting both reputation and balance sheets...

Economic conditions have improved rapidly in India, bringing with it a host of risks and rewards. An unwilling member of the “Fragile Five” in 2013,1 the Indian government has worked hard to develop and refocus its economy. Merely five years later, India has the fastest-growing large economy in the world – attracting $40 billion of foreign direct investment in 2017 – and has a new focus on modern industries, such as technology and financial services. These developments have attracted two types of companies: multinational companies looking to invest in India, attracted by the booming population and wealthy middle-class; and Indian companies looking to expand their customer bases and develop into new markets beyond Indian borders. But for both these types of companies, compliance with extraterritorial bribery and anti-money laundering requirements will be crucial in protecting both reputation and balance sheets.

 

How did India’s PM Narendra Modi do it?

PM Modi’s government has adopted several new strategies to promote the Indian economy to the international stage and revolutionize it into the 21st century. Several of these strategies included: the 2016 demonetization policy, which invalidated billions of 500 and 1,000 rupee banknotes in a crackdown on tax dodging and funding of terrorist activities; the ‘Goods and Services Tax’ regime, intending to reduce the burden of taxes; and the Insolvency and Bankruptcy Code, 2016, which speeds up the time taken to turnaround bankrupt firms.

This economic prosperity has meant that Indian companies have thrived and are now looking to extend their growth beyond Indian borders. As the amount of inward and outward investment has increased, so too have the regulatory risks from overseas regulators. U.S government agencies, including the U.S. Department of Justice (“DoJ”) and Securities and Exchange Commission (“SEC”), and their UK equivalents, such as the UK’s Serious Fraud Office (“SFO”), continue to actively police anti-bribery and anticorruption laws which are applicable in foreign jurisdictions.

 

The risk to companies investing in India

Although there has been a move towards more formal business expectations, there have still been some pockets where the old expectations remain. For example, there still persist instances of government officials expecting payments to fulfill their duties or provide the necessary authorizations; of middlemen serving as fixers; and facilitators who raise concerns for the most seasoned compliance officers in India. The new world order has not quite permeated throughout the economy.

The government has attempted to curb the likelihood of this misconduct occurring with the passing of the Prevention of Corruption (Amendment) Act, 2018. The Act brings Indian legislation in line with the United Nations Convention Against Corruption, and involves several key changes. However, the Act is still in its early stages of implementation, and corresponding investigations, let alone charges, are still very far off in the distance.

Currently, incoming investors into India need to be certain that their Indian-based businesses are not going to fall foul of overseas regulations, such as the Foreign Corrupt Practices Act (“FCPA”) and UK Bribery Act (“UKBA”).

 

The FCPA

The FCPA likely needs no introduction – it is a key component of the US law enforcement’s arsenal, prohibiting U.S. persons, entities, or any issuers of U.S. securities from making and offering to make payments to foreign government officials, in the hope that they would obtain or retain a business or business advantage.

Yet, despite the heightened awareness about the FCPA, companies are still getting caught up in FCPA investigations. In only July of this year, a Chicago-based spirits-maker – famous for brands such as Jim Beam bourbon, Sipsmiths gin, and Maker’s Mark whisky – paid $8 million to resolve an SEC investigation into its Indian subsidiary. According to the SEC’s administrative order, from 2006 to 2012, this Indian subsidiary “used third-party sales promoters and distributors to make illicit payments to government employees” in order to increase sales orders and generally “facilitate the distribution of Beam’s distilled spirit products.”

 

UKBA

Although it has yet to garner the same notability as the FCPA, the UKBA increasingly needs to be a key consideration for multi-national companies. If a company carries on a business, or part of their business, in the UK, then there is potential exposure to the UKBA, regardless of where the bribe takes place. While a multi-national company may be confident that they adhere to the requirements of the FCPA, there are still several differences between the two acts, including the UKBA’s covering of both the giving and taking of bribes, whereas FCPA only addresses the giving of bribes. Also, unlike the FCPA, there is no exemption in the UKBA for facilitation payments.

Broadly speaking, companies prioritized FCPA compliance because of a perception that the U.S. authorities were more likely than their UK counterparts to enforce bribery statutes overseas. However, the sanctions against Rolls-Royce and recent decisions such as that in KBR v SFO2 - where an English Court found that the SFO has the power to compel the U.S. parent of a UK company under investigation to produce documents located overseas – demonstrate that these assumptions may no longer be accurate.

India-related anti-bribery actions since 2010
Company Industry Year Amount paid (US$)
Stryker Corp. Medical devices 2018 7.8 million
Beam Suntory Distilled beverages 2018 8 million
Rolls-Royce Engineering 2017 800 million3
Alere Healthcare diagnostics 2017 13 million
Mondeléz International Food processing 2017 13 million
CDM Smith Engineering and construction 2017 4 million4
Embraer Aircraft manufacturing 2016 205 million
Anheuser-Busch InBev Beer brewing & sales 2016 6 million
Louis Berger International Construction management consulting 2015 17.1 million
Tyco International Industrial component sales 2012 26.8 million
Oracle IT services 2012 2 million
Diageo Liquor sales 2011 16.3 million
Pride International Oil & gas services 2010 56.1 million

 

The risk for Indian companies investing elsewhere

It’s not just investors in India who may be suffering a lawenforcement- induced hangover, but Indian companies must also be careful.

Investing in overseas jurisdictions will bring Indian companies under the purview of U.S. and UK law enforcement, and therefore, Indian companies must take care that their operations do not leave them exposed. Investigators have been proactive in monitoring Indian companies for compliance. Demonstrating this point, in the UK, the Financial Conduct Authority sent a warning to Indian banks that their anti-money laundering policies and procedures must be sufficient, fining Indian Governmentowned Canara Bank’s UK operations £896,100 for failing to respond to several warnings from the FCA that it needed to improve its anti-money laundering policies. Clearly, the interest from foreign authorities – as well as the risks to companies doing business in India – is on the rise.

Recent changes to policing

The way in which law enforcement is policing international criminal law is also changing. In the US, the focus has been to motivate companies to come forward and voluntarily disclose violations that they uncover. In July 2018, the DoJ confirmed that it was expanding its FCPA Corporate Enforcement Policy to companies that uncover wrongdoing as part of a merger and acquisition process who would be able to take advantage of the policy that rewards selfdisclosure. If a successor company – at either the time of due diligence or which learn of misconduct subsequent to an acquisition – voluntarily discloses, cooperates with the investigation, and enacts measures to remedy the misconduct, then it will qualify for such reductions. Extending this policy to mergers and acquisitions will give some comfort to those companies investing in India.

As the amount of inward and outward investment has increased, so too have the regulatory risks from overseas regulators

Responding to these changes

There are several key ways that companies investing in India, as well as Indian companies investing in the US and the UK, can minimize the risks involved in this new environment:

1. Implementing a robust and strong compliance program to prevent bribery. In several cases, law enforcement has identified that companies maintaining a series of trainings for staff and implementing anticorruption policies, among other factors, was the reason why fines had not been imposed. On the converse, the SEC in the Beam Suntory order highlighted that Beam India failed to move sufficiently quickly when weaknesses and red flags were identified.

2. Conducting due diligence when acquiring subsidiaries. A cautionary tale highlighting this point involves the chocolatiers Cadbury Limited and Mondeléz International, and Cadbury’s Indian subsidiary. To obtain the necessary licenses in India, Cadbury India engaged a local agent to carry out the application, but it failed to impose adequate control to prevent payments to the agent being used for improper or unauthorized purposes. When Mondeléz International acquired Cadbury – including its Indian subsidiary – it was unable to complete pre-acquisition due diligence and thus did not identify these failings until the postacquisition stage. The SEC fined Mondeléz International and Cadbury $13 million for these failings.

3. Developing an investigation strategy at an early stage. If, despite a company’s best efforts, allegations of corruption are uncovered or a whistleblower escalates complaints, companies need to develop a clear and coherent strategy for taking the next steps. Key to preparing this strategy will be obtaining advise from those who can identify the scope of the investigation, who are familiar with the expectations and workings of law enforcement, and who are equally familiar with the local landscape and environment.

1. Membership of the Fragile Five – a term coined by analysts at Morgan Stanley – included India; Turkey; Brazil; South Africa; and Indonesia, and was used to describe emerging market economies that had become too dependent on inward foreign investment to finance their growth ambitions.
2. R (on the application of KBR Inc.) v Director of the Serious Fraud Office [2018] EWHC 238 (Admin).
3. This was global settlement with authorities in the U.S., the UK and Brazil, see https://www.justice.gov/opa/pr/rolls-royce-plc-agrees-pay-170-million-criminal-penaltyresolve- foreign-corrupt-practices-act.
4. However, the $4 million was disgorged profits, and the DoJ pursuant to its FCPA Pilot Program declined to pursue further action because, among other factors, CDM Smith had voluntarily self-disclosed to the DoJ in a timely manner, conducted a thorough and comprehensive investigations, and fully cooperated with the DoJ.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.

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