Doing Business In India:
Anti-Corruption Best Practices
Momentum Webinar
May 29, 2014
Agenda
• Introduction
• Overview of FCPA
• Corruption Challenges /
Enforcement in India
• Compliance Best Practices
• Questions
2
India’s Business Potential …
• Growing economy
• Barriers to entry eroding
• Cost-competitiveness
• Talent pool
• Emerging middle class
• Outpacing China in Foreign
Direct Investment
3
… and Business Challenges
• Corruption cited as second
most problematic factor by
World Economic Forum
• Lack of infrastructure is
ranked first
• Others:
•
•
•
•
bureaucracy
tax regulations
restrictive labor regulations
administrative delays
4
Overview of the FCPA
Foreign Corrupt Practices Act (FCPA)
• Prohibits bribery of non-U.S. government officials
• Requires companies to maintain accurate records
and robust internal controls
• Regulators
– Department of Justice (DOJ)
– Securities and Exchange Commission (SEC)
6
Anti-Bribery Provisions
• No covered person may make, offer, promise, or
authorize,
• A payment or anything of value,
• With corrupt intent,
• To a government official,
• To obtain or retain business or an unfair advantage.
7
Payment
• Can be an actual payment or gift
• Can also be an offer or promise to pay
• May be in response to request from official
• It is enough to authorize a payment
** Includes direct and indirect payments**
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Thing of Value
• Anything of value to the recipient
– Money
– Gift
– Hospitality
– Loan/favorable financing
– Discounted/free maintenance
– Donation
– A job for official’s son / daughter
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Foreign Official
• An officer, employee, or
agent of any
– Indian government, whether national,
state, local, etc.
– Department or agency of the Indian
government
– Company, entity, or other
instrumentality owned/controlled
by the Indian government
– Public international organization (e.g.,
the UN, the WTO)
– Indian political party
10
Foreign Official (cont.)
• Candidate for Indian political
office
• Anyone acting on behalf of a
Foreign Official
• Person holding ceremonial title
(e.g., royal family member with no
government position)
• Rank or title is irrelevant
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Obtain Business / Advantage
• Obtain contract from government agency
• Achieve regulatory change that benefits business
• Direct award of business opportunity to family member
• Receive favorable ruling on applicable customs duties
12
Permissible Payments
• When permitted under written laws of country
• Mere custom is not adequate
OR
• Reasonable and bona fide expense directly related
to:
• Execution or performance of a contract with government
party, or
• Demonstration, promotion, or explanation of a product or
service
13
Facilitating Payments
• Payments to expedite non-discretionary “routine
governmental actions” such as:
• Loading / unloading cargo
• Award of a visa
• Many companies prohibit facilitation payments entirely
14
Third Party Risks
Any party acting on your behalf, e.g., a
• Subsidiary or other affiliate
• Agent, sponsor, representative, distributor, consultant
• Joint venture party
Examples:
• Your Customs broker in Mumbai
• The lobbying firm you engage in Delhi
• A marketing agent in Hyderabad
15
Recordkeeping and Internal Controls
• Keep detailed and accurate transactional records
• Maintain system of internal controls to ensure management
has oversight over and control of transactions
− Obtain authorizations prior to transactions
− Collect necessary approvals before reimbursement
− Record transactions fully and accurately
− Take steps so partners do the same
16
Enforcement Related to India
• Oracle (2012): Indian subsidiary involved in alleged
bribery; $2 million fine to SEC
• Diageo (2011): Subsidiaries in India (and elsewhere)
alleged to have paid $2.7 million in bribes for sales
and tax benefits; $16.4 million in penalties to SEC
• Pride International (2010): Company apparently
made $500,000 in improper payments to judges on
India’s Customs, Excise, and Gold Appellate Tribunal;
$32.6 million to DOJ and $19.3 million to SEC
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Enforcement (cont.)
• Control Components Inc. (CCI) (2009): Allegedly made $4.9
million in illicit payments to officials in various countries,
including Maharashtra State Electricity Board in India; $18.2
million in fines
• Wabtec (2008): Subsidiary said to have made over $170,000 in
payments to Indian Railway Board employees, inspectors, and
customs personnel to obtain railway contracts; $300,000 to
DOJ and $87,000 to SEC
• Electronic Data Systems (EDS) and Srinivasan (2007):
Former president of AT Kearney India caused ATKI to make
over $720,000 in payments to employees of state-owned
companies to retain contracts worth $7.5 million; Srinivasan
paid $70,000 fine; EDS paid $490,902 in penalties
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FCPA Enforcement (cont.)
 Wal-Mart: Company investigating wide-ranging
bribery allegations
 Company’s agents in India allegedly procured
numerous licenses required for setting up stores
 Partnered with Indian company to expand India
operations; ended partnership amidst FCPA
probe
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Corruption Challenges /
Enforcement in India
Corruption in India
• Ranked 94 of 177 countries in TI’s 2013
Corruption Perceptions Index
• Indian economists estimate government
officials earn as much as 1.26% of GDP
through corruption
• Evidence of some companies halting business
in India because of corruption
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Factors Contributing to Corruption
• Government officials are poorly paid
• General attitude toward bribery more relaxed
• Bribery viewed as an accepted part of doing
business
• Cumbersome procedures/red tape
• Officials have substantial discretion
22
Highest Corruption Risks
• Sales to government customers
• Obtaining licenses, permits, and registrations
• Clearing customs – paying duties and taxes;
logistics (using freight-forwarders)
• Navigating bureaucracy / complex laws
23
Where Corruption is Pervasive
• Vulnerable sectors
– metals & mining
• $194 billion lost in government sale of coalfields to
companies without competitive bidding
– aviation
• Air India reportedly losing millions due to corruption and
mismanagement of aircraft repairs
–
–
–
–
power & utilities
aerospace & defense
infrastructure & construction
telecoms
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Common Schemes and Themes
• Small sums
• Services already due: customs clearance, taxation,
water and land records issuance
• Use of agents and/or consultants
• Slush funds or petty cash funds
• Fictitious invoices
• Indirect benefits – hiring third parties at official
suggestion
• Lavish gifts and entertainment
• Donations to organizations owned/recommended by
officials
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Potential Compliance Gaps
 Improper gift-giving (cash, computers, large dollar
travel)
• “Check the box due” diligence – consider specific
local factors to take risk-based approach
 Improper use/oversight of third parties
 Customer relationships built on trust – resistance
to memorializing business agreements in formal
contracts
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Indian Anti-Corruption Law
• Limited in scope and enforcement
• Prevention of Corruption Act (PCA) 1988
• India ratified United Nations Convention Against
Corruption (UNCAC) in 2011
• Lokpal Bill passed in December 2013; new
agency established to investigate and prosecute
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Recent Events
• In recent years, public has taken to streets to voice
outrage after corruption scandals
• January 2014 - $670 million helicopter deal with BritishItalian company terminated due to corruption allegations
• April 2014 – DOJ asked India to arrest member of Indian
parliament who granted mining rights for $18 million in
bribes
• Modi’s election and pro-business platform
28
Indian Government Investigations
• 2010: Investigation of Commonwealth games in New
Delhi
• 2011: CBI arrested Chief and aides of organizing
committee for awarding illegal contracts to Swiss
manufacturer
• Officials being tried for illegalities in issuing 2G telecom
licenses – revenue losses reportedly $40 billion
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Compliance Best Practices
Compliance Best Practices
• Establish transparent tone at top
• Prioritize / address risks
• Tailor policies and procedures to risks
• Keep good records
31
Tone at the Top
• Establish top-down culture of compliance
– Regularly assert importance of compliance
– Commit resources to compliance infrastructure
• Dedicated compliance personnel
• Regular training
• Helpline / reporting mechanism
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Prioritize Risk
• Expressly contemplated by DOJ and SEC Guidelines
• Focus compliance resources on most significant risk
areas such as:
• Industry
• Use / non-use of agents
• Amount of interaction with government
• Past compliance issues
• Importance of cash to operation
• Other factors
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Policies and Procedures
• Establish processes for:
• Vetting business partners
• Providing hospitality and gifts
• Monitoring and auditing compliance
• Internal reporting mechanisms
• Opportunity for anonymous reporting
• Prompt review and investigation as needed
• Protect personnel from retaliation when report is in
good faith
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Questions?
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THANK YOU!
Jennifer Gorman
AECOM
Jennifer.Gorman@aecom.com
Thad McBride
Sheppard Mullin
tmcbride@smrh.com
Fatema Merchant
Sheppard Mullin
fmerchant@smrh.com