foreign corrupt practices act in india in...

Foreign Corrupt Practices Act in India in 2013 Compliance Strategies for India's Unique Cultural and Governmental Intricacies

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TUESDAY, MAY 14, 2013

Presenting a live 90-minute webinar with interactive Q&A

Elizabeth D. Keating, Global Compliance Counsel - Investigations, Johnson Controls, Milwaukee, Wis.

Jay Holtmeier, Partner, Wilmer Cutler Pickering Hale and Dorr, New York

Michael Stavridis, Partner, Ernst & Young, Chicago

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FCPA Compliance in India: Compliance Strategies Given India’s Unique Cultural and Governmental

Intricacies

Strafford Publications Teleconference May 14, 2013

Jay Holtmeier

Wilmer Cutler Pickering Hale and Dorr LLP

Elizabeth D. Keating

Johnson Controls, Inc.

Michael Stavridis

Ernst & Young LLP

OVERALL FCPA ENFORCEMENT TRENDS

US authorities continue strong enforcement efforts

– FCPA Investigations declined in 2012

– Activity peaked in 2010, but still very active

– Over 90 publicly disclosed pending enforcement matters

– Continued coordination between DOJ/SEC

– Dedicated units at DOJ, SEC, and FBI

6

DOJ and SEC Enforcement Actions

2004-2012

OVERALL FCPA ENFORCEMENT TRENDS

Large FCPA Sanctions Continue; Recent Settlements:

– JGC (Japan; $219M), 2011

– Magyar Telekom/Deutsche Telekom (Hungary/Germany; $95M), 2011

– Pfizer (US; $60M), 2012

Prosecution of Individuals Is Continued Priority

Third-Party Risks (e.g., sales agents, intermediaries, consultants)

Travel and Entertainment in High-Risk Markets

Industry-Specific Risks (e.g., SEC probe of banks’ business with sovereign

wealth funds)

New Tools at the SEC – Deferred Prosecution Agreements and Non-

Prosecution Agreements

Shift Away from Compliance Monitors; Increased Use of Alternatives

New Development – A Resource Guide to the U.S. FCPA

7

8

A Resource Guide to the U.S. FCPA

In November 2012, the SEC and DOJ jointly issued long-promised

guidance on the FCPA.

The Guide provides unprecedented, detailed information on federal law

enforcement approach and priorities but does not pronounce revamped

enforcement priorities or alter previously stated positions.

Guide reinforces DOJ/SEC interpretations of the FCPA found in prior

settlements and cases.

Although it failed to clarify some of the more controversial aspects of the

government’s enforcement approach, the Guide is a helpful document,

and will likely be much-cited resource for years to come.

8

A Resource Guide to the U.S. FCPA

Key topics addressed in the Guide:

Jurisdiction under the FCPA

Corrupt Intent, Knowledge, and Willfulness

Business Purpose

Gifts, Travel, and Entertainment Expenses

Charitable Contributions

Definitions of Foreign Officials and Instrumentalities

Use of Third Parties

Facilitating Payments

Successor Liability

The FCPA’s Accounting Provisions

Compliance Programs

9

Enforcement by Indian Authorities

India saw more high-profile scandals and anti-corruption protests led by popular activists in 2012.

India's Central Bureau of Investigation filed corruption charges against 5 companies and 17 individuals in connection with the "Coalgate" scandal.

Prime Minister Singh has stated that his government is seeking to amend the Prevention of Corruption Act to make failure to prevent bribery by a corporation an offense.

10

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

Oracle (2012)

– Oracle, a California-based computer technology company, was charged with failing to prevent a subsidiary from secretly setting aside money off the company’s books, monies which were eventually used to make unauthorized payments to phony vendors in India. The SEC alleged that on more than a dozen occasions Oracle and its India subsidiary held over $2.2 million in unauthorized “side funds.”

– Oracle settled SEC books and records and internal controls charges for $2 million.

– No anti-bribery or DOJ case.

11


Diageo (2011)

– Diageo is one of the world’s largest producers of alcoholic

beverages, such as Johnnie Walker and Windsor Scotch

whiskeys. From 2003 to mid-2009, Diageo’s Indian subsidiary

made hundreds of illicit payments to government officials

responsible for purchasing or authorizing the sale of its

beverages in India and disguised those payments in Diageo’s

records. The payments, routinely made through third parties,

totaled an estimated $1.7M.

– Diageo settled SEC books and records and internal controls

charges for $16M, including $11.3M in disgorgement,

prejudgment interest of $2.1M, and a further civil penalty of

$3M.

– No DOJ case. 12


Pride International (2010)

– Pride International is an oil and gas services company.

Pride’s Indian subsidiary paid $500K to judges of the Indian

Customs, Excise, and Gold Appellate Tribunal for a favorable

determination in a customs duties and penalties dispute. The

estimated value of the favorable decision was approximately

$10M.

– Pride’s Indian subsidiary pleaded guilty to criminal charges for

conspiring to violate and violating the anti-bribery and books

and records provisions of the FCPA and paid a $32M criminal

penalty. Pride International entered into a Deferred

Prosecution Agreement. Pride International settled similar

civil charges with the SEC and agreed to pay disgorgement of

$19.3M plus pre-judgment interest of $4.2M.

13


Control Components, Inc. (2009)

– CCI designs and manufactures valves used in the power, oil

and gas, and nuclear industries. CCI made payments of at

least $4.9M from 2003 – 2007 to employees of state-owned

companies in several countries, including in India to the

Maharashtra State Electricity Board.

– CCI pleaded guilty to criminal anti-bribery and Travel Act

charges and paid an $18.2M fine. Additionally, the company

was placed on organizational probation for three years and

ordered to create and implement a compliance program and

retain an independent compliance monitor for three years.

– No SEC case.

14


Westinghouse Air Brake Technologies (2008)

– WABTEC manufactures brake subsystems and related

products for locomotives, freight cars, and passenger transit

vehicles. From 2001 through 2005, WABTEC’s subsidiary

paid approximately $137K in cash to Indian Railway Board

officials to obtain contracts, schedule inspections, obtain

certificates, and avoid tax audits.

– WABTEC and its subsidiary entered into a non-prosecution

agreement with the DOJ and a civil settlement with the SEC.

WABTEC paid a $300K criminal penalty, $288K in

disgorgement of profits including pre-judgment interest, and

$89K in civil penalties (a total of approximately $677K) for

violating the anti-bribery, books and records, and internal

controls provisions of the FCPA. 15


Dow Chemical (2007)

– Dow Chemical is one of the world’s largest chemical

manufacturers; its fifth-tier Indian subsidiary manufactured

and marketed pesticides and other products. The subsidiary

paid an estimated $200K in payments and gifts to Indian

government officials. Payments were made to a Central

Insecticides Board official, state inspectors, and other officials.

The subsidiary also made improper payments for gifts, travel,

and entertainment to Indian government officials.

– Dow settled SEC books and records and internal controls

charges and agreed to pay a $325K civil penalty.

– No allegation that Dow itself was aware of the illegal conduct.

– No DOJ case.

16


Electronic Data Systems (2007)

– EDS is one of the world’s largest technology companies; the

company provides electronic data processing management

and computer equipment. EDS’ subsidiary paid $720K to

Indian government-owned companies between 2001 and

2003. The subsidiary had been struggling to perform its

obligations with the Indian companies and the payments were

made so the subsidiary would not lose contracts.

– EDS settled SEC books and records charges and paid $491K

in disgorgement and prejudgment interest. The subsidiary’s

president also settled with the SEC and paid a $70K penalty.

– No DOJ case.

17


Textron Inc. (2007)

– Textron is a global, multi-industry company which does work in

aircraft, defense and intelligence, industrial, and finance businesses.

As part of an investigation into $700K in kickback payments related

to its sale of humanitarian goods to Iraq under the UN’s oil for food

program, Textron identified an illicit payment by an Indian subsidiary

of approximately $52K to a non-government customer to obtain

business.

– As part of a settlement, Textron agreed to disgorge $2.3M in profits,

plus $450K in pre-judgment interest, and to pay a civil penalty of

$800K. Textron was also ordered to comply with an FCPA

compliance program. Textron was further ordered to pay a $1.15M

fine pursuant to a non-prosecution agreement with the DOJ.

– The charges relating to the Indian non-government customer were

brought under the books and records and internal controls

provisions. 18

CURRENT FCPA INVESTIGATIONS RELATED TO INDIA

Anheuser-Busch

– American brewing company, Anheuser-Busch, disclosed in March 2013 that it is currently being investigated by the SEC in connection with its non-consolidated Indian joint venture, InBev Indian Int’l Private Ltd. The SEC is conducting an investigation into whether certain agents and employees engaged in conduct that violated the FCPA.

Kraft Foods

– Kraft Foods, a food and beverage company, has disclosed that it is currently being investigated by the SEC in connection with a facility in India that was part of its $19B acquisition of Cadbury in 2010. In its 2012 filings the company stated that it was continuing to cooperate with authorities, and noted that the SEC’s subpoena focused on its dealing with Indian governmental agencies and officials to obtain approvals related to the operation of its facility.

19

CURRENT FCPA INVESTIGATIONS RELATED TO INDIA

Avon Products

– Avon Products, a cosmetics, perfume, and toy seller, has

disclosed that the SEC has issued a formal order of

investigation into possible violations of the FCPA. According

to Avon, the investigation is focused on expenses and

accounting for travel, entertainment, gifts, use of third-party

vendors and consultants, and related due diligence, joint

ventures, and acquisitions, and payments to third-party agents

and others.

– Reports indicate that the payments under investigation

occurred in numerous countries, including India.

20

CONTACTS WITH GOVERNMENT OFFICIALS IN INDIA

Public procurement/contracting with government agencies

Customs clearance/importation of goods

Immigration processes

Real estate (both purchasing and leasing land)

Tax administration (excise and sales taxes, audits)

Obtaining certificates, registrations, permits, and licenses (approval from

multiple officials often required to obtain one permit/license)

Gifts and entertainment (especially during religious festival, Diwali)

Scheduling/passing inspections (fire, environmental, building)

Government officials solicit donations for charitable/religious organizations

Interactions with police/judiciary

Third parties with ties to government departments/officials (consultants,

agents, distributors, interns, and trainees)

21

FCPA Compliance Risks in India

May 14, 2013

Elizabeth Keating, Global Compliance

Counsel – Investigations

Integrity

Johnson Controls Confidential

Corruption Risk Profile - India

Transparency International – Corruption Perceptions Index (CPI) 2012

Ranks countries based on how corrupt their public sector is perceived to be.

India scored 36 on a scale of 0 – 100. (100 = means country perceived as very

clean; 0=means country is perceived as highly corrupt).

India ranked 94th out of 174 countries. (Denmark ranked highest; Somalia

ranked 174th).

India tied with Colombia, Benin, Djibouti, Greece, Moldova, Mongolia and

Senegal.

Transparency International - CPI 2011

India ranked 95th out of 183 (tied with Albania, Swaziland and Tonga)

Down from 87th in 2010

TI Global Corruption Barometer 2010/2011

74% of those surveyed in India believed that corruption in their country had

worsened.

Political parties, police, public officials, judiciary were all perceived to be affected

by corruption.

44% believed that their government’s actions to fight corruption were ineffective.

23



TI Bribe Payers Index

84% of Indian companies believe bribes or facilitation payments are

being paid to do business

30% of Indian companies reported paying bribes to government

officials to expedite government services

54% of individuals surveyed reported paying a bribe to obtain

government services

World Bank Survey 2013 - India

Ease of Doing Business – 132 out of 185 (1=best)

Starting a Business – 173

Dealing with Construction Permits – 182

Getting Electricity – 105

Paying Taxes – 152

Enforcing Contracts – 184

No significant improvement from 2012 rankings

24



Corruption pervasive at every level of government

Bribes accepted as common practice

Paying bribes for the most basic services is routine

While petty bribery continues unabated – serious corruption has

flourished and reached unprecedented proportions

Lack of enforcement of anti-corruption regulation

Anti-corruption legislation (Jan Lokpal) remains stalled in

Parliament

Grassroot anti-corruption campaigns still engaged – if ineffective:

2012 Hunger strike by Kisan “Anna” Hazare – anti-corruption

campaigner

“I Paid A Bribe” Initiative posts citizens reports of corruption online

“I paid a bribe” reports outnumber “I met an honest officer”

5th Pillar – Zero Rupees Anti-Corruption Campaign

Zero denomination notes handed to government officials who ask for bribes

25



26


Risks in Dealing with India Bureaucracy

Challenges Presented by Regulatory and Business Environment

Excessive bureaucracy and regulation

Procedures are complicated and not transparent

Several layers of approvals required to obtain licenses/permits

Practice of using “agents” to interface with government agencies

Civil servants grossly underpaid

Accepted practice of “tips” or facilitation payments to civil servants in

order to obtain routine government services

Seen as an accepted method of augmenting meager salaries

Prevention of Corruption Act

Prohibits public servants from accepting bribe

Prohibits giving of bribes to public servants

No exception for facilitation payments

Inconsistent enforcement

27


Interaction with India’s Bureaucracy

Majority of corruption occurs at the lower levels of

government

More than half of the reported bribe demands were for less than

$100

84% of the reported bribe demands were for $5000 or less

13% of the bribe demands originated from the Customs office

9% of the demands came from the national offices of Taxation

Most bribes involved use of “agents” or “consultants” to conceal

the true nature of the payments

Payments recorded as third party payments

Often routine government services, eg., utility services, involved

demand for a bribe

28



Government Touch Points:

Taxing Authorities

Variety of taxing regimes provide “opportunities” for bribery

Income taxes – tax on profits earned by business

Tax Deducted at Source (TDS) – tax deducted from certain vendors.

Monthly returns and payments to the exchequer

Service taxes – central indirect tax on services rendered by company.

Monthly filings and payments to central treasury

Value Added Tax (VAT) – state tax on sale of certain goods

Works Contract Tax – part of VAT Tax law and applicable to specific

portion of contract

Central Sales Tax – tax on sale of goods from one state to another

Central Excise – tax on manufactured goods

Service Tax – tax on services provided to customer

Use of Consultants to prepare and file tax reports

29




Licenses, Permits and Inspections

Licensing and permitting regulations are duplicated by national, state

and local agencies

Many licenses and permits require several visits to government offices

Frequent requests for bribes from government employees to render

routine government services

Refusal to pay will often result in prolonged application process

Many company employees do not distinguish between facilitation

payments and payments made to impact outcome of inspection report

Government employees will often require that you make payment to a

“trusted” third party who will, in turn, funnel the money to the

government employee

“Government liaison” services offered by certain vendors

Vendors will even provide a schedule of rates for amount of facilitation

payments required by the various agencies

30




Government facing activities which are problematic in India

include:

Electrical Safety inspections

Mechanical Equipment inspections

Labor Department inspections

Lift/Elevator Licenses and inspections

Pollution Control Board inspections and Consents to Establish/Operate

Factory License Renewals

Fire Safety inspections

Police inspections – labor issues and workplace accidents

Health Department inspections

Diesel storage inspections

High Rise Building inspections

Sanitation Department plumbing inspections

Energy Meter Testing reports

31




Government facing activities which are problematic in India

include:

Environmental licenses

CEIG Licenses for electrical systems

Fire licenses

Explosive licenses

Commercial use clearances

Air Consent (Operation & Establishment)

Occupation certificate from local authority

Annual Operations renewal

Structural certificate for floor load density

Water Consent

Hazardous Waste Handling and Disposal

Consent to Establish and Consent to Operate

32


Navigating the Risks

Know Thy Vendors

Vendor Maintenance File accuracy

Correctly categorize vendor as high or low risk, i.e., are there any

government facing services being provided?

Undertake appropriate level of due diligence on all high risk vendors

who interface with government agencies

Often these vendors will not be found using standard desktop tools

Consider in-person meetings with high risk vendors for DD

Centralized procurement function for vendor selection process

Provides transparency over selection process

Communicate expectations to vendors re ethics and anti-bribery/anti-

corruption training for all high risk vendors

Training to include discussion of India Prevention of Corruption Act

Copy of Code of Conduct

Audit rights

Vendor Anti-Bribery/Anti-Corruption certification

33



Know Thy Vendors

Establish DNU/DNP list for any vendors who have been found to use

unethical business practices

Establish “Compliance Task Force” to handle all licensing, permitting

and inspection requirements Only “Task Force’ will interface with government agencies

Administers, manages and enforces all statutory compliance activities

Communication to Customers

Need to communicate to customers that the refusal to make improper

payments may slow the process of obtaining government approvals

necessary to operate

34



Contract Review

Evaluate all contracts to ensure that the scope of services does not

provide inappropriate payments to government employees

“Outsourcing bribery”

Do not undertake any government facing services on behalf of customers not

specifically provided for by contract

Financial Controls

Establish monitoring process to ensure vendor transactions are for

legitimate services

Red flag/warning sign training for AP function

Stringent controls around employee advances and petty cash

Evaluate use of “miscellaneous vendor codes”

Red Flag training for all finance personnel

35



Monitor all Licensing/Permitting Activities

Review all licenses and permits necessary to conduct business

Monitoring and Auditing

Regular and periodic forensic reviews of business practices

36

Monitoring FCPA risks in India May 2013

Michael Stavridis

FCPA in India

Proactive

Sample FCPA compliance program framework

Reactive

Proactive

Setting the Proper Tone

Code of Ethics

FCPA Prevention Policies

FCPA Risk Assessment

FCPA Controls Monitoring

FCPA Awareness Training

Response Plan

Conduct FCPA Risk Assessment

FCPA Monitoring

Program assessment

Implementation review

Substantive review

Results drive

monitoring

FCPA in India

How to monitor for corruption risks?

► What kind of testing should be conducted?

► Controls testing versus substantive testing

► Controls alone may not prevent irregularities; control testing alone may not

detect irregularities

► The DOJ/SEC guidance to the FCPA states that a compliance program that is

“followed in practice will inevitably uncover compliance weaknesses and require

enhancements” and that programs that employ a “check-the-box” approach may be

inefficient and, more importantly, ineffective”

► “DOJ and SEC evaluate whether companies regularly review and improve their

compliance programs and not allow them to become stale.”

► The UK MOJ guidance to the UK Bribery Bill requires organizations to “monitor the

ethical quality of transactions”.

FCPA in India

How to monitor for corruption risks? continued

► How to choose a sampling methodology? Where and how are potential

problem payments recorded?

► Understand the business? Where are the customers? Where are the

government touch points?

► Choose accounts that could have risk – Commissions, permits, licenses,

consultants, freight forwarding, customs clearance, etc. as well as major

Government or SOE contracts/projects

► Choose T&E reports from individuals who direct or touch the risk? Who manages imports/exports?

Who entertains our big Government clients?

► Controls over cash?

FCPA in India

How to monitor for corruption risks? continued

► How can we leverage technology to find higher risk transactions?

► Advanced analytics

► Key word searches on text fields in GL or T&E systems

► Who should conduct these audits?

► Experience (how many of the auditors have ever seen a bribe?)

► Local expertise (how many have ever seen a bribe in India?)

► Training

► Who should be interviewed?

► Employees

► Vendors?

FCPA in India

FCPA compliance program Risk assessment criteria

Government end-users;

sales intermediaries/

direct sales

High risk geographic

markets

Significant movement of

goods/ imports/ exports/

certifications Government touch points –

VAT/ taxes/ licenses/ etc.

Travel, entertainment

and gifts, customer travel,

petty cash

FCPA in India

Higher risk ledger accounts and expenses

► Obtain listing of major customers and identify potentially high risk customer

contracts

► From the chart of accounts and trial balance, select higher risk accounts for

testing, examples would include:

► Travel and Lodging

► Gifts and entertainment

► Marketing and consulting fees

► Customs and duties; freight forwarding charges

► Visas, permits and licenses

► Audit and tax consulting fees; legal fees

► Sales commissions

► Donations, charities, sponsorships, community/social responsibility payments,

political contributions

► Security

► Facilitation payments (if any)

► Client travel and production facility visits

► Capital expenditure; facilities

FCPA in India

Example of a trial balance with higher risk ledger accounts

FCPA in India

Example of a listing of higher risk ledger accounts

FCPA in India

Example of higher risk transaction descriptions for India

Keywords

FCPA in India

Example of higher risk transaction selections

Results

FCPA in India

Example of a higher risk transaction supporting documentation

49

Jay Holtmeier

Wilmer Cutler Pickering Hale and Dorr LLP

(212) 295-6413

[email protected]

Elizabeth D. Keating

Johnson Controls, Inc.

(414) 426-9506

[email protected]

Michael Stavridis

Ernst & Young LLP

(312) 879-2048

[email protected]

CONCLUSION

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