Written by: Richard N. Dean, Partner Baker & McKenzie LLP
Challenges and risks of doing business in India
Companies doing business in India should be aware of increased risks, including those related to corruption, particularly if they use third parties to promote their business, obtain licenses, permits and authorizations, and otherwise represent companies before government and state authorities (sometimes referred to as “liaisoning”), and the need to address these risks. In this article, we will discuss the ongoing US Foreign Corrupt Practices Act enforcement involving India, the new Indian anti-corruption legislation, the greater role of the Central Bureau of Investigation in anti-corruption investigations, as well as increased cooperation between US and Indian authorities. We will then discuss best practices of doing business in India, and what companies should do to reduce those risks and instill compliant behaviors within their companies and extended network of third parties.
Recent US FCPA enforcement
FCPA and general corruption risks are greater in India than elsewhere because of the multitude of government interaction touchpoints, cultural practices allowing for facilitation payments and gifting of government officials, and the widespread use of third parties hired to assist with bureaucratic processes. As a matter of fact, all FCPA cases in the last three years involved improper payments or conduct of third parties.
While early FCPA cases mainly focused on smaller payments, such as those associated with customs clearance, now the Securities and Exchange Commission and the Department of Justice — the main US government agencies in charge of enforcing the FCPA — had become very familiar with a variety of issues companies encounter in India. Most recently, the SEC and DOJ have become particularly focused on improper payments made in connection with sales-related activities, and specifically, payments to officials or representatives of Indian government customers in order to obtain orders or favorable treatment in connection with the sale of products. US government authorities also developed deep institutional knowledge of how business works in certain industries in India, notably in consumer goods (Beam, Mondelez, Anheuser-Bush InBev) and life sciences devices (Stryker, Alere Inc.), as these companies were being scrutinized, and then penalized, by the SEC.
Since bribery is often difficult to prove, the lack of supporting documents for payments and poor record-keeping resulted in FCPA charges of accounting violations by the SEC (books and records, and internal controls violations) in all of the above cases, with the DOJ generally conducting the investigation alongside with the SEC. In some cases, the DOJ led the charge but declined to prosecute for bribery while making the company disgorge ill-gotten gains, such as in the case of CDM Smith. CDM Smith voluntarily disclosed to the DOJ that its Indian subsidiary paid bribes to Indian government officials in exchange for highway construction supervision and design contracts and a water project contract. CDM Smith fully cooperated with the authorities, remediated improper conduct and disgorged USD 4 million in ill-gotten gains.
With US prosecutors now very familiar with ways business is done in India, and active social media and whistleblowers adding to the awareness of improprieties, we expect India-related FCPA enforcement to continue unabated in the upcoming years.
Indian law and enforcement trends
Not only the US FCPA enforcement remains strong; the Indian government has become more aggressive in investigating and prosecuting corruption under the main Indian anti-corruption law, the Prevention of Corruption Act (“PoCA”). The CBI opened 2,000 corruption cases against public servants in the last three years, and this number is growing. Major corruption cases involving various industries are in the headlines (e.g., the Rafale case in the defense sector, the Punjab National Bank and Nirav Modi cases in the financial sector, and the V K Sasikala disproportionate assets case in politics).
The successful prosecution of a growing number of companies is due in part to increasing cooperation between Indian and US authorities through MLAT and informally. There is also a related trend of the Indian authorities opening investigations into matters that have been resolved in the United States.
In addition to the already increasing enforcement, PoCA has been amended in July 2018 to make future enforcement easier. The amended PoCA now explicitly provides for an offense of bribe-giving, introduces a corporate bribery offense that applies to non-Indian companies doing business in India in any capacity (e.g., through a joint venture, consortium, distribution network, etc.), in addition to domestic companies, and includes a separate bribery offense for the board and management in cases when a corporation has been charged.
What companies should do
In order to be successful in India, companies should first assess the specific risks they face and take time to understand the regulatory landscape.
While bureaucracy in India can be quite time-consuming and frustrating at times, with multiple central, state and local regulations interposed, it goes without saying that companies should not succumb to local practices but rather reserve sufficient time to make sure that all documentation has been prepared and all processes completed properly, and all regulatory requirements have been complied with. Companies should instruct their employees and third parties to resist bribe demands and let the officials know that company policies do not allow facilitation of any kind.
With most FCPA cases involving conduct of third parties (90% by some accounts), tiered due diligence based on the risk level of third parties is essential, along with ongoing monitoring of third parties and addressing red flags as they are identified. The company should also have gift-giving policies setting the limits on the value of gifts to government and private customers, which should be enforced through reimbursement procedures and audited periodically.
Since local third parties often demonstrate lack of familiarity or commitment to compliance, company requirements should be communicated to third parties, and reinforced through periodic training, as well as controlled through an occasional exercise of audit rights. Provisions should be included in third-party contracts to provide for termination grounds in cases of noncompliance with company policies.
Facilitation payments to local officials are often made out of petty cash, so petty cash should be strictly controlled and payments should be made by other means whenever possible, with all supporting documentation maintained. Accounting controls are critical.
Several recent corruption cases originated with a whistleblower complaint to government authorities. Thus, it is critical to set up a whistleblower hotline to ensure that the company knows of the violations before the whistleblower turns to authorities, and has the opportunity to take corrective actions. This hotline should be available to both employees and third parties.
Despite all the challenges, with vigilance and clear goals to proceed in a compliant manner, reinforced with training and appropriate controls, companies can conduct business in India successfully and not run afoul of the FCPA or local anti-corruption laws.
About the Author
Richard Dean is a partner in the Firm’s Washington, DC office and focuses on the US Foreign Corrupt Practices Act (FCPA) and related legislation, including US money laundering laws and their application to the activities of global companies in emerging markets such as the former Soviet Union, China, Indonesia and Latin America. Prior to joining Baker McKenzie, Mr. Dean worked at Coudert Brothers’ New York, Sydney, Moscow and Washington, DC offices, and was head of that firm’s Russia and Central Asia Practice from 1988 to 2005. He has an in-depth understanding of the key political, economic and cultural issues facing organizations doing business in these challenging markets. Click here to learn more.