alina arora partner an introduction to the (united states) foreign corrupt practices act, 1977 and...

ALINA ARORA

Partner

An Introduction to the (United States) Foreign Corrupt Practices Act, 1977 and

the Role of Indian Lawyers

© Luthra & Luthra Law Offices www.luthra.com

STEP 1: UNDERSTANDING THE INDIAN AND GLOBAL ENVIRONMENT ON CORRUPTION


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Bribery & Corruption: Ground Reality in India

India ranked 85 out of 175 countries by Transparency International on Corruption Perceptions Index, 2014

2nd most corrupt amongst the BRICS

70% of Indian respondents think that corruption is widespread in the country. (Ernst and Young’s 12th global fraud survey)

54% people say they paid bribe when accessing public services and institutions in the year in India, which is double of the global prevalence. (Transparency International’s Global Corruption Barometer 2013)

Contributing factors include:Lax Enforcement;Judicial stagnation;Political apathy.


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As per the Global Corruption Barometer – 2013, the following percentage of respondents for a survey felt that certain key institutions in India were corrupt:

Political Parties – 86%Police – 75%Parliament/Legislature – 65%Public Officials and Civil Servants – 65%Education Systems – 61%Medical and Health Services – 56%Business – 50%Judiciary – 45%Religious Bodies – 44%Media – 41%NGOs- 30%Military – 20%



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Most corrupt sectors as per the EY Bribery & Corruption Survey

Metals & Mining Infrastructure & Real Estate Aerospace & DefencePower & Utilities



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http://www.google.co.in/url?sa=i&rct=j&q=coal+block+allocation&source=images&cd=&cad=rja&docid=UIW6GEPJOoSS0M&tbnid=RFxM2vLDzR02WM:&ved=0CAUQjRw&url=http://www.hindustantimes.com/India-news/NewDelhi/Loss-misleading-coal-blocks-allocation-transparent-PM/Article1-917773.aspx&ei=1JQlUp69OI-GrAfPioCgBw&bvm=bv.51495398,d.bmk&psig=AFQjCNFN4xFJQ1zlRUd3K-cse8-gmEa1ag&ust=1378280817467880

Corruption Scandals in India: Old Wine in New Bottles


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http://www.google.co.in/url?sa=i&source=images&cd=&cad=rja&docid=e6HYf04Di2VnuM&tbnid=9kDr4N8syrMJPM:&ved=0CAgQjRwwADg-&url=http://indiatoday.intoday.in/story/coal-scam-naveen-jindal-dasari-narayan-rao-cbi-ranjit-singh/1/279806.html&ei=LpQlUsOfDMOPrQedyoCgCg&psig=AFQjCNGdIGgzVN7JKMm9RtDwlWAigDW0QA&ust=1378280878312646

Anti-corruption laws in India primarily geared to curb the ‘demand’ side of corruption i.e. bribe takers (unlike other jurisdictions such as USA, UK, Russia, China).

Increasing recognition among legislators and law enforcement agencies in India that it is critical to target the ‘supply side’ as well (i.e. bribe givers).

Draft amendment to the PoCA provides imposition of liability upon companies and senior management for bribe giving by their employees, third parties etc. in relation to business of the organization.

Provision similar to disgorgement of profits under the (US) FCPA introduced in the recently enacted Lokpal & Lokayuktas Act.

Draft amendment to the IPC Amendment seeks to make bribery in the private sector (both giving and receiving), i.e. commercial bribery, a criminal offence.

Corruption in India: Increasing Focus on Companies

© Luthra & Luthra Law Offices www.luthra.com7

Investigations against companies initiated by the SFIO has increased in recent times.

Investigations initiated against 93 companies in 2013-14 for alleged fraud as opposed to 43 firms in 2012-13 and 13 in 2010-11.

In July 2014, the Enforcement Directorate (ED) filed a money laundering case against 21 entities including UK-based AgustaWestland under the Prevention of Money Laundering Act.

In relation to the 2G spectrum scam, criminal proceedings carried out against various bureaucrats and corporates under the IPC and PoCA by the Central Bureau of Investigation (CBI).

In November 2013, the Himachal Pradesh vigilance and anti-corruption bureau registered a criminal case against Bemloe Development and Infrastructure Company Private Limited for suspected cheating and money laundering.

Enforcements against Companies in India


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Bribery: Local Commission with Global Implication

Corrupt activities in India by subsidiaries (and third party associates) of foreign entities exposes foreign entities to the risk of criminal and civil liability in other jurisdictions and in India.

There has been a significant increase in enforcement of the (US) Foreign Corrupt Practices Act, 1977 in recent times. Recent trends indicate the imposition of heavy financial penalties upon companies for corrupt acts committed in other countries, including India.

The US Justice Department has indicted a sitting Rajya Sabha MP from Andhra Pradesh in a bribery and corruption case that took place in India, on the fact that US financial institutions were used in the transactions.

Other Countries like the U.K. (UK Bribery Act), Canada (Corruption of Foreign Public Officials Act) and Germany (Act of Combating International Bribery) are following the US trends.

High risks of corruption in India can deter investment by increasing costs for potential investors such as costs of conducting internal investigations, potential civil and criminal liability etc.


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STEP 2: GETTING ACQUAINTED WITH THE INDIAN LAWS


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Penalises various corrupt acts by ‘public servants’ including:

acceptance of or an agreement to accept an illegal gratification for the purpose of showing an official favour (Section 7); or

acceptance of or an agreement to accept an illegal gratification from a person who is concerned in a proceeding or business being transacted by such public servant (Section 11)

Habitual offender (Section 13).

Public servant defined broadly to include any person in the service or pay of the government or remunerated by the government for the performance of any public duty or any person who holds an office by virtue of which he is authorized or required to perform a public duty as well as any person in the service or pay of a local authority or a corporation established by or under a central, provincial or state act, or an authority or a body owned, controlled or aided by the government or a government company (Section 2(c)).


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Prevention of Corruption Act, 1988 – Applicability to ‘Public Servants’

The Lokpal and Lokayuktas Act, 2013 modifies the definition of ‘public servant’ under the PoCA. As per the explanation to Section 14(1) of the Lokpal Act, “…any person referred to in this clause shall be deemed to be a public servant under clause (c) of section 2 of the Prevention of Corruption Act, 1988 and the provisions of that Act shall apply accordingly.”

While most of the categories of public servants as provided in Section 14(1) of the Lokpal can be read into the existing definition of ‘Public Servant’ under POCA, a new category that seems to have been included is “…any person who is or has been a director, manager, secretary or other officer of every other society or association of persons or trust (whether registered under any law for the time being in force or not) in receipt of any donation from any foreign source under the Foreign Contribution (Regulation) Act, 2010 in excess of ten lakh rupees in a year or such higher amount as the Central Government may, by notification, specify.”


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Prevention of Corruption Act, 1988 – Applicability to ‘Public Servants’

Abetment of Actions under Sections 7 and 11 (Section 12).

What is abetment? (Section 107 of IPC) instigates any person to do that thing, engages with one of more other person or persons in any

conspiracy for the doing of that thing (Section 120 A and B of IPC)

intentionally aids, by any act or illegal omission, the doing of that things.

Actions of intermediaries are punishable for (Sections 8 and 9): acceptance/ attempt/ agreement for acceptance of gratification by

any person; as a motive or reward for inducing any public servant through

corrupt or illegal means (Section 8), or through the use of personal influence (Section 9);

to do or forbear to do an official act or to show favour or disfavour to someone in the exercise of his official functions.


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Prevention of Corruption Act, 1988 – Applicability to private Individuals

PoCA punishes both bribe taker and bribe giver.

PoCA punishes the act of providing a bribe directly and indirectly, i.e., payment through intermediaries and other third party service providers.


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Take-away No. 1

Imprisonment for a term which shall be not less than three years but which may extend to seven years and shall also be liable to fine. (Section 12)

imprisonment for a term which shall be not less than four years but which may extend to ten years and shall also be liable to fine. (Section 13)

Prosecution usually applies Section 120 B of IPC read with Section 13 of PoCA.

What about Companies? – Concept of corporate Criminal Liability No concept of corporate liability under IPC or PoCA. Vicarious liability to be specifically prescribed under law – such as in Negotiable

instruments Act, Customs Act and IT Act. Judge-made law on Corporate criminal Liability.

Earlier stance – If mandatory imprisonment prescribed – not applicable to Companies Standard Chartered Bank v. Directorate of Enforcement (2005) – Companies can be

held liable even for offences prescribing mandatory imprisonment – subject to fines. Iridium India Telecom Ltd. v. Motorola Incorporated - Mens Rea attributable to

companies – Principle of ‘alter ego’ . Prevention of Corruption (Amendment) Bill, 2013 (which has not translated into

law yet) incorporates express provisions pertaining to corporate criminal liability.


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Prevention of Corruption Act, 1988 – Punishments

Companies can be held liable under IPC and PoCA.

Individuals abetting the crime for the benefit of the Company may be liable to imprisonment and/or fine.


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Take-away No. 2

Apart from issues in payment of bribe which by itself is punishable – hiding such payments leads to issues under other laws such as: Companies Act Income Tax Act Foreign Contribution (Regulation) Act FEMA Prevention of Money Laundering Act Indian Penal Code


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Other issues under Indian laws

Accountants mandated under law to fully and fairly disclose payments by the Company in statutory filings under Companies Act and IT Act.

The new Companies Act imposes an obligation on an auditor of a company to report to the Central Government any act of fraud being committed against the company by the company’s officers/employees.

Communications to accountants are not Privileged.

Communications to lawyers protected by Client – Attorney Privilege under the Evidence Act.

No privilege in communications with in-house counsels.

For accounting purposes, hire third parties through lawyers


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TELL YOUR DOCTOR AND YOUR LAWYER – NOT THE ACCOUNTANT!

Do not disclose to the accountants. Hire third party forensic advisors

through lawyers PoCA only one amongst the many

issues in India if a bribe has been paid; hence, a holistic assessment keeping in view the different applicable laws is required.


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Take-away No. 3

STEP 3: GETTING ACQUAINTED WITH THE LAWS OUTSIDE INDIA


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(United States) Foreign Corrupt Practices Act, 1977

The (United States) Foreign Corrupt Practices Act, 1977 (“FCPA”) contains two main types of provisions:

Anti-Bribery provisions- Provisions pertaining to the prohibition of payment of bribes to foreign officials, political parties and political candidates in order to secure or retain business. These provisions are enforced by the Department of Justice.

Books and Records provisions- Provisions requiring the maintenance of accurate books and records of all publicly-traded companies. Such provision are enforced by the Securities and Exchange Commission.


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FCPA: Anti-Bribery Provisions

Ingredients of an offence under the FCPA: Corrupt payment or offer to pay (to constitute a corrupt offer or

payment, it must be established that something was obtained in exchange for the offer or payment);

A thing of value; To a ‘foreign government official’ (This covers foreign officials as

well as political parties, officials of political parties and candidates for political office);

Directly, or indirectly, with knowledge (any payment made not directly by the company but through a third party vendor, consultant etc. would also be prohibited under the FCPA);

For the purpose of influencing an official act or omission, or securing an improper advantage to ‘obtain or retain business’ (This implies that there must be an element of quid pro quo between the offer or payment and an official favour relating to the business operations of the company).


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FCPA: Affirmative Defences

If the payment, offer or gift was lawful under the written laws and regulation of the concerned country.

If the payment, offer, gift or promise of anything of value was a reasonable and bona fide expenditure directly related to either (a) the promotion, demonstration or explanation of products or services or (b) the execution or performance of a contract with a foreign government or agency.


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Take-away No. 4

If an act is lawful under Indian laws, then no penalty can be levied for it under the FCPA.

Hence, in the event of an alleged improper payment in India, the determination of whether the same is legal / illegal under Indian laws is crucial to the assessment of its legality under the FCPA as well.


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FCPA: Books and Records Provisions

Applicable only to companies whose stock is listed in the United States Such companies are mandated to maintain accurate books and records.

It is required that books, records and accounts depict transactions fairly and depict the use of assets in ‘reasonable detail’.

In addition, companies are required to adhere to provisions relating to the establishment of internal control mechanisms. According to these provisions, companies are mandated to implement accounting procedures and controls to provide reasonable assurance that company procedure is followed, transactions are recorded, and access to and accountability of assets is controlled and regularly monitored.

Hence, if payments made as bribes are incorrectly recorded as ‘miscellaneous expenses’ etc., it would constitute a violation of the accounting provisions of FCPA.


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Take-away No. 5

From the perspective of FCPA, it is important not just to refrain from paying a bribe but also to have robust accounting standards in place.


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FCPA: Penalties

Criminal Penalties – Imprisonment, Fines Civil Penalties – Fines, disgorgement of

profits, etc; Other penalties– Suspension and / or

debarment from participating in US

government procurements.


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Ongoing Foreign Actions with Indian Connections

Walmart (US, November, 2011)

Beam Inc. (US, November, 2012)

Kraft Foods Inc. (UK, February, 2011)

Oracle (US, August, 2012)

Cryptometrics (Canada, August, 2013)

AgustaWestland (Italy, February, 2013)

Alstom (UK, Sept. 2014)


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STEP 4: UNDERSTANDING THE ROLE OF INDIAN LAWYERS


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In this global regulatory environment, multinational companies are increasingly turning to Indian lawyers for advice and assistance in relation to various aspects of compliance with the FCPA.The following may be said to be three stages of an effective compliance programme for a company and Indian lawyers have a significant role to play in each stage.

Role of Indian lawyers

PREVENTIVE

DETECTIVE

RESPONSIVE


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Emphasis shifting from a reactive approach to pre-emptive approach.

Prevention of Corruption Bill, 2013 provides for a separate provision for imposition of liability upon companies. It is a defence for companies to establish that they had in place adequate procedures to prevent the commission of the concerned offence.

No clear guidance so far on what would constitute ‘adequate procedures’ under Indian law. Guidance may be drawn from equivalent requirements under UK Bribery Act and lessons learnt from past and continuing government investigations in various jurisdictions.

Pre-emptive Approach by Companies


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I. PREVENTION AND RISK MITIGATION-Assisting companies with formulation of an effective compliance programme including with respect to:

Conduct of periodic risk assessment to identify riskHigh risk sectors (sectors with excessive government regulation such as Aerospace & Defence, Infrastructure & Real Estate, Power & Utilities, Metals & Mining, Liquor, Pharmaceuticals.)High risk business channels (eg. CSD, procurement by government departments etc.)

High risk functions (eg. obtaining government licenses, customs clearance, tax compliances etc.)

Formulation of anti-corruption policies. Ensuring enforceability of the relevant policies on employees by incorporation in employment contracts

Conduct of regular training and awareness sessions For employeesFor third parties

Role of Indian lawyers


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I. PREVENTION AND RISK MITIGATION

Implementation of safeguards with use of third partiesRelevant from the perspective of the proposed PoCA

amendment which clarifies that a company may be held liable for an act of bribe giving by its employees, agents or subsidiaries.

Identification of high risk vendors (such as those which have government interface)

Due diligence processes and procedures- conduct of background checks, verification on databases (OFAC / SDN etc.)

Contractual safeguards (inspection and audit rights, termination rights, indemnity rights, obtaining regular compliance undertakings etc.)

Role of Indian Companies


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II. DETECTION

Implementation of formal whistle blowing mechanism in the company (Mandatory for listed companies under clause 49 of the Listing Agreement)

For early detection of breaches.Protection of identity and measures for prevention of harassment of whistleblowers

Assistance with conduct of regular internal compliance audits to identify red flags.

Assistance with regular monitoring of activities of third parties through inspections, audits.

Role of Indian Lawyers


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III. RESPONSE

Formulation of a framework for immediate steps to be taken by a company in the event of detection of a red flagBenefit of client-attorney privilege under Indian law is not applicable to in-house counsels.Conduct of investigation / fact finding in response to a red flag or a whistleblower obligation

Engagement of forensics advisers for data review and analysisAdvice relating to data protection and privacy laws prior to collecting information/ data from laptops, computers used by employeesReview of relevant documentary evidence such as financial vouchers etc.Conduct of interviews with concerned employees and third partiesAppreciation of evidence under Indian laws (crucial for determination of legality under Indian laws as well as the FCPA)



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III. RESPONSE

Examining disclosure obligations (if any) under:Company lawIncome tax lawCriminal law

Suspension / termination actions against employees / third parties, if required

Important to bear in mind provisions of relevant contracts, employment laws, labour laws (if applicable)



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Thank You

Alina Arora ([email protected])Partner

NEW DELHI MUMBAI BANGALORE HYDERABAD


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alina arora partner an introduction to the (united states) foreign corrupt practices act, 1977 and...

Documents

india india

corruption scandals

corruption perceptions

anticorruption laws

law enforcement agencies

commercial bribery

ground reality

global environment