April 05, 2013

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Combating The C Word

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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 global impact. Companies doing business in India should strictly comply 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.

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 the 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.

Acting Against Corruption

India currently awaits the creation of a new robust anti-corruption law. However, a public servant in India can be penalized for corruption under the Indian Penal Code (IPC), 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 in the previous 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 advices on the action to be taken against a public servant, but the decision to do so rests 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.

Faith in the System

One of the keys to success in dealing with issues of fraud, bribery and cor-ruption is the quality of the system a company uses for reporting and inves-tigating 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. They are certain messages, in which indirect consent of the customer is implicit in what might otherwise be classified as UCC. The 2010 Regulations (read along with the amendments) have classified such messages as Transactional Messages and have defined it to inter alia include an SMS containing only:

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 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 programs, including its FCPA practices, and found that in India there appeared to be facts and circumstances warranting further investigation. Kraft also said that on February 1, it got a subpoena from the SEC in connection with an investigation under the FCPA, primarily relating to dealings with Indian bureaucracy to obtain approvals for a Cadbury facility in India.

These cases and several recent 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. Having said that, many others including General Electric, PepsiCo and General Motors have very 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.

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 Computers, India's 4th 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 three IT companies, Satyam Computer for eight years and 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 offering (IPO) of shares, whereby some large companies and brokers maintained fake bank accounts and applied for shares meant for small investors, have also been found.

State initiatives to Curb Corruption

E-governance: A wide range of public services, such as obtaining licenses, permits, official documents, paying taxes and clearing goods, have been digitized. This has increased the speed with which government services are delivered and 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.

Tax information exchange agreements (TIEAs): At least 22 tax havens have been identified and while India has signed TIEAs with six of them (Bahamas, Bermuda, British Virgin Island, Cayman Island and Isle of Man) others are being negotiated.

Amendments to the double taxation avoidance agreements (DTAAs): In May 2011 the Swiss parliament approved amendments to the DTAAs with countries that had recently revised their tax treaties with Switzerland. India was one of the beneficiaries. The two countries signed a revised DTAA in 2010 and amendments to it will help the Indian government get account details of Indians.

More than a dozen existing DTAAs are up for revision. In addition, the Indian government is negotiating 18 DTAAs with countries with which it has no such treaties. At least 22 tax havens have been identified and while India has signed TIEAs with six of them (Bahamas, Bermuda, British Virgin Island, Cayman Island and Isle of Man) others are being negotiated.


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 their legal counsel and internal com-pliance teams. 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 performed by an independent team, which includes a law firm and a professional advisory firm.

Careful due-diligence investigation (including forensic accounting review) and thorough background checks of potential Indian partners are necessary before entering India. This, combined with a well-designed compliance program, strong internal controls and the right organizational culture, can ensure US companies grow their businesses successfully in India.


Disclaimer - Views of the author are personal and do not reflect the views of the firm.

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