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

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.

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.

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.

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