January 15, 2013

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The Growing Need For Criminal Compliance

- Zulfiquar Memon, Managing Partner [ MZM Legal ]
- Sherbir Panag, Junior Associate [ MZM Legal ]

The Growing Need For Criminal Compliance

The India growth story is here to stay and so the presence of foreign companies will only grow with each passing year. Besides, most companies see India as a long-term investment option and are flocking to reap the benefits of a stable and vibrant democracy, favourable demographics viz a young population and a ballooning middle-class, and most importantly, the vast internal consumption demand that India throws up. This is coupled with the 'development quotient' that India offers as a developing country, requiring heightened public-private partnership keeping India lucrative for business cycles to come.

The attractiveness of the Indian market with the Euro crisis in play was evident with March 2012 seeing the highest ever monthly inflow of foreign direct investment of US $ 8.1 billion. With the Government's decision to open foreign direct investment in retail as well as increase the cap in the insurance and pension sector, we see this trend only positively contributing to keep India more and more attractive as 'the go to' emerging market.

While India remains a market that cannot be ignored, it does not come without its bane. India is red-flagged as a high risk market, from a bribery, corruption and fraud perspective– shooting up the costs for the non-compliant, and considerably affecting its viability in these cases. This sentiment was reflected in the 12th Global Fraud Survey, which was conducted by Ernst & Young showing that 70% of Indian respondents to the survey felt that bribery and corruption were widespread in the country and 72% believed that the management was likely to cut corners to meet targets. The KPMG India Fraud Survey further complemented this assertion with results showing that nearly 61% of the Respondents believed their organisations to have a risk of fraud and more than half of them had been victimised by fraud.

With the advent of legislations in their home countries banning the bribery of foreign public officials coupled with hyperactive enforcement agencies, foreign companies doing business in India must navigate a culture in which bribery is rife, without running afoul of local or home-country laws. Besides the obvious social argument for ethical business, the economic argument is equally persuasive. The last decade has seen foreign corporations being crippled by the astronomical fines they have had to pay for acts of bribery in foreign countries, courtesy their domestic laws. The initial advantage that an act of bribery may give thus becomes a speed ticket in the larger scheme of things once the enforcement clamp down begins; case in point is the Siemens Scandal.

This warrants the need for comprehensive and pro-active criminal compliance programmes – to deal with these risks, so that the business potential that a country like India offers may be realised. While, there is a growing compliance trend in larger corporations – the small and medium foreign companies, operating in India still seem to take criminal compliance lightly. A compliance programme, serves a twofold purpose– besides mitigating the risks as they arise, in the eventuality that the risk isn't avoided, it may still help absolve the corporation of penalties, if the enforcement agencies can determine that the compliance programme was effective and the action of the individual does not correspond as the company's action.

The most recent case in this regard is how Morgan Stanley was absolved of any liability during a recently concluded US Foreign Corrupt Practices Act (FCPA) investigation by the Department of Justice, owing to their robust compliance programme; however the individual in question Mr Garth Peterson individually faced the flak. Further, the Compliance Program is a preventive mechanism and not a reactionary step to a situation that arises – clearly establishing the company's ideology with respect to compliance.

The reaction always costs more, as was evident when Wal-Mart reviewed its compliance programmes in India and China, post the Mexico scandal. Let's now look at some of the enforcement risks that emerge from the lack of a comprehensive and robust compliance programme:

US FCPA, UK Bribery Act and other trends

The US FCPA is the first national legislation that banned the bribery of foreign public officials and included associated forms of bribery such as gifts, corporate hospitality, political and charitable contributions. The FCPA till date remains the most dreaded anti-corruption legislation affecting all corporations that have a business presence in the United States, and the increasingly aggressive jurisdiction being asserted by the US Department of Justice reflects how eight of the top 10 FCPA settlements (monetarily) have involved non-US-headquartered firms. Fifteen companies settled FCPA enforcement actions in 2011 by paying a total of US $508.6 million, and in the year 2012 alone tracking the leading India cases, we have settlements made by Oracle and the Huntsman Corporation viz bribes paid in India, while Krafts Foods is facing an investigation, courtesy its Indian subsidiary Cadbury.

"This mandates that on a war footing companies adopt the conduct of comprehensive due diligences, establishment of strong internal audit functions, investment into training and the establishment of strong policies and standard operating procedures, in addition to others to best safegruad their interests from a criminal compliance perspective."

The UK Bribery Act took the FCPA initiative further and banned facilitation payments as well as established the corporate offence of failure to prevent bribery. The lack of a compliance programme would fall under the ambit of this offence, and ten years imprisonment and an unlimited fine is a significant price to pay for ignorance. With the recently launched investigation by the UK Serious Frauds Office into British Petroleum under the Bribery Act for a voluntary disclosure made by them – the tone from the SFO is clear.

Further, with respect to Transparency International's report on countries increasing prosecution of foreign bribery, we find the list topped by the US, Germany, United Kingdom, Italy and France, out of which four countries contribute the highest FDI into India. Italian prosecutors as we speak are probing helicopter manufacturer Agusta Westland over a 12-helicopter deal with India, clearly establishing the scrutiny deals with India attract.

The Indian Enforcement Trend Changing

In March this year, the Ministry of Defence blacklisted six Defence Companies, of which four were foreign companies, for alleged involvement in the Ordnance Factory Board Scam. The trend of blacklisting as an effective remedy is growing as the investigative burden on the concerned Ministry is reduced and the only procedural requirement is a show-cause notice in consonance with the Principles of Natural Justice. Such an action, besides the obvious business loss, also renders tremendous loss of goodwill and bad publicity.

With the Cabinet giving its nod to the Companies Bill 2011, we will soon see the Serious Frauds Investigation Office being given more teeth, including the reported power to investigate companies for violations in India even if they aren't registered here, along with a host of other powers. This is coupled with the Economic Offences Wing's that are being set up in almost all States in the country. We find growing scrutiny into all sectors having major licence regulations post the 2G scam and now Coal Gate, which is an important trend to note.

The Investigation trend into acts of bribery, corruption and fraud– is further complemented by the heightened media interest in such cases, which in turn pressurises the agencies and courts involved. We also find the Higher Judiciary making strong recommendations in this regard as was made by the Supreme Court in Subramaniam Swamy v. Dr. Manmohan Singh, holding that delay in timely grant of sanction as required by the Prevention of Corruption Act, 1988 amounted to a violation of the due process of law and the Court suggested that a three-month period be considered, the non-compliance of which would deem the sanction to have been granted.

New Legislations in the Pipeline:

The Indian Parliament is today sitting over three legislations, which will have a significant impact on the compliance requirements of companies. These include, Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations Bill, 2011; Public Interest Disclosure and Protection to Persons Making the Disclosure Bill, 2010 and The Prevention of Corruption (Amendment) Bill, 2008.

The above-mentioned trends clearly indicate the need of the hour for Companies seeking to do business in India to get their house in order, to insulate themselves from both the ensuing economic loss and social damage. The Indian scenario definitely requires tailor made criminal compliance programmes to best further business interests and mitigate risks, with major reliance placed on third party management, business establishment & procurement processes and the elimination of conflict of interest positions.

Considering the gold standard that the UK Bribery Act has set for anti corruption compliance, the six key principles would be the ideal ground to start with and develop a compliance program according to the individual needs of the organisation and the environment it operates in. These principles are:

  • Proportionate procedures
  • Top-level commitment
  • Risk assessment
  • Due diligence
  • Communication (including training)
  • Monitoring and review

This mandates that on a war footing companies adopt the conduct of comprehensive due diligences, establishment of strong internal audit functions, investment into training and the establishment of strong policies and standard operating procedures, in addition to others to best safeguard their interests from a criminal compliance perspective. Ultimately, the preventive benefits accrue considerably higher than the reaction or cure approach as by that time, there may not be much left to cure economically or socially for the company.


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

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