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Indian corporate governance master class with AZB in the age of Anna Hazare, UK Bribery Act, FCPA & anti-corruption movements

The Delhi and Mumbai seminars delving into bribery & corruption laws
The Delhi and Mumbai seminars delving into bribery & corruption laws
Although a plethora of Indian anti-corruption and bribery laws exist, many are not very effective and foreign rules such as the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) could have unpredictable consequences for Indian companies, said AZB & Partners, UK barrister’s chamber No5 and chartered accountancy BDO.

AZB & Partners Mumbai partner Vineetha MG, who is a specialist in corporate governance issues, gave the headline speech at the Legally India co-hosted seminar on bribery and corruption in Mumbai’s Indian Merchants’ Chamber on 21 October following the equally lively Delhi event three days earlier.

MG noted in her opening anecdote that India ranked 87th out of 178 countries in the Corruption Perception Index of non-governmental organisation (NGO) Transparency International. But with the recent scams in 2G spectrum allocation, the Commonwealth Games (CWG) and the mining sectors, this would “definitely” get worse.

Recent positives in India’s attempts to tackle corruption included the ratification of the UN Convention against Corruption in May 2011, the public debate linked to the Anna Hazare movement and judicial interventions in high profile cases, according to MG.

But India remained dogged by “several steps backwards”, she said, citing by way of example the exclusion of the Central Bureau of Investigations (CBI) from the Right to Information (RTI) Act, which promoted a culture of secrecy in the anti-graft watchdog.

Furthermore, the Whistleblower Bill in relation to public servants was yet to see the light of day, there was a systemic failure in that the judiciary itself was often seen to be failing and the adverse of the public outcry was that paralysed government decision making.

Smattering of domestic laws

The primary Indian legislation governing corruption are the Prevention of Corruption Act 1988 (PCA), as well as the following Service Rules, which even specify the value amounts of any gifts that a government servant can accept, including the values of lunches:

  • Central Civil Services (Conduct) Rules, 1964;
  • All India Services (Conduct) Rules 1968;
  • Indian Foreign Service (Conduct and Discipline) Rules, 1961.

A plethora of other domestic regulations are also relevant, such as the:

  • Civil Vigilance Commission Act, 2003
  • State LokAyuktas (Ombudsman)
  • Companies Act, 1956
  • Disclosure Requirements
  • Serious Fraud Investigation Office
  • Delhi Special Police Establishment Act of 1946
  • Anti Corruption Bureau
  • Prevention of Money Laundering Act, 2002
  • Right to Information Act, 2005

Furthermore, said MG, a number of other laws are in the pipeline in the field of corruption and bribery:

  • The Public Interest Disclosure (Protection of Informers) Bill 2010 (PID);
  • The Prevention of Bribery of Foreign Public Officials (FPO) and Officials of Public International Organisations (OPIO) Bill 2011;
  • Lokpal Bill 2010 (Citizen's ombudsman Bill) (Under draft stage); and
  • Proposed Amendment to the Indian Penal Code, 1860 to criminalise private sector bribery

The PID Bill is trying to protect people who can inform on corrupt activities, said MG but it “has been sitting in the parliament for quite some time”.

The FPO and OPIO Bill is also proposed to include a Whistleblower policy similar to the US’ FCPA, with the Indian government considering taking extra-territorial jurisdiction in the bribing of foreign officials, said MG.

The PCA

AZB's Vineetha MG explains the effect of domestic and international anti-corruption laws on Indian companies
AZB's Vineetha MG explains the effect of domestic and international anti-corruption laws on Indian companies

At the moment in India, not only “bribe taking” (sections 7, 8, 11 and 13 of the PCA) but also “bribe giving” (sections 12 and 14 of the PCA) are outlawed. But the PCA only captures “public servants” – including judges, court-appointed arbitrators, registered co-operative societies that have received financial aid from the government, as well as state-owned, -controlled or –aided corporations.

The PCA does not capture “corporate or private bribery” or a companies’ “failure to prevent corruption”, she explained, albeit protection existing for companies unwilling to bribe officials.

“There is no obligation to put adequate procedures in place but companies are putting in place adequate procedures,” said MG, commenting on corporate governance. “If the CBI walks into a company they look what sort of procedures you have in place.”

Domestic definitions

The actual law defines bribes as offerings by way of “motive” or “reward” for “doing or not doing any official act”, “showing or not showing, in exercise of official functions, favour or disfavour to any person”, or “rendering or attempting to render any service or disservice to any person”, MG explained.

And under section 21(2) of the PCA, there is a rebuttable presumption that a proved payment to a public official is by way of “motive” or “reward”.

Bribe givers can claim immunity under section 24 of the PCA in cases such as if they make a statement against public servants in proceedings or if the bribe giver can demonstrate that they were unwilling to provide the bribe, in limited circumstances.

So-called “speed money” or “facilitation payments” are not an exception.

There is no mandatory disclosure of bribes paid under Indian law but the Indian authorities can and do inintiate suo moto actions, particularly if an incidence of bribery hits the newspaper headlines. Also, the Companies Act 1956 carries implications if the accounts do not reflect a “true and fair view” of the company’s affairs, due to bribes not being recorded, explained MG.

Auditors are also on the hook and are under an active duty to disclose fraud in the books if bribes are hidden.

Implications of domestic regime

There is the potential for personal liability of the management and directors in control, under the Standard Chartered Bank and Iridium cases.

In the 2010 Iridium India Telecom Ltd v Motorola Inc case the Supreme Court held that whoever was in control of a company at the time of a fraud can be imprisoned, despite the PCA having no explicit provision to “imprison” a company, noted MG.

There may also be implications of being blacklisted in government tenders under the Integrity Pact Requirements of the Central Vigilance Commission.

And authorities are increasingly sharing information or evidence across border, so something that may have been an offence in India might attract the attentions of an overseas anti-corruption regulator.

Finally, lawyer-client privilege under section 126 of the Indian Evidence Act “in some instances has been really diluted”, said MG. In the US it has been argued, for example, that even if a lawyer describes hypothetical facts or scenarios of bribery in detail in their advice, the prosecution can later take this as evidence of admission of such facts by the client.

This could also be the legal view in India, according MG. “Today we instruct clients to be very careful what you put into email [to lawyers].”

What can a company do?

The implications for listed companies are that the CEO and CFO of a company should certify that “to the best of their knowledge and belief, no transactions have been entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct”, noted MG.

The officers would also be required to highlight cases of significant employee fraud that they become aware of to auditors and the audit committee. They should also state the involvement of any managers or employees who have a “significant role in the company’s system financial reporting”.

Suspected fraud should be reported by the audit committee to the company’s board of directors, she said.

Delhi seminar created more lively debate
Delhi seminar created more lively debate
Long overseas reach: The FCPA

The US FCPA has been one of the most important extra-territorial anti-corruption laws until the advent of the UK Bribery Act.

The main limbs relevant in the Indian context for issuers, US persons and companies are unlawful payments of bribes to foreign officials and accounting violations, including false books and records or inadequate internal controls.

Defenses under the FCPA include “facilitation payments”, “payments permitted under local law” and “reasonable and bona fide business expenditures”, according to MG.

In the past years, she said, the US Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) have clamped down in enforcement actions against Diageo in 2011, Pride International in 2010, Wabtec in 2008 and Dow Chemicals in 2007 and in each case Indian subsidiaries were also involved.

UK Bribery Act

The UK Bribery Act, which came into force on 1 July 2011 deals with “active bribery” (section 1), “passive bribery” (section 2), “bribery of foreign officials” (section 6) and “failure of commercial organisations to prevent bribery” (section 7), said MG.

The Act’s central definition of active or passive bribery translates to promising to give, giving or agreeing to receive “a financial or other advantage” for “improper performance” of a relevant function, explained No5 Chambers criminal fraud and proceeds of crime barrister Ekwall Singh Tiwana.

Tiwana added that cultural norms and commonly accepted standards of corporate hospitality will be taken into account in evaluating what counts as a financial advantage.

But BDO partner Sat Plaha, who specialises in forensic accounting, noted that really the “biggest risk to companies” in the UK was actually the “reputation risk”. “You get splashed on the frontpage of the Sunday Times or The Sun newspaper now if you carry out an offence and a drop in share price flows on from that.”

“It is a defence for commercial organisations that it has in place adequate procedures, and that is a simple quote from the Act,” added Plaha.

According to very helpful guidance by the UK’s Ministry of Justice [download here], this constitutes “proportionality” (large organisations operating in corrupt markets may need stronger policies), “top level commitment” (training of key people in bribery awareness), “risk assessment”, “due diligence” of suppliers or representatives, “communication” of policies to staff, and “monitoring and review” that keeps the internal policies and measures up-to-date.

“It does say that UK authorities do not expect to be able to eradicate corruption from whole world,” said Plaha. “But really the way around it is, if you are confronted by a demand for a payment, make it as difficult as possible for an official to take the payment from you.”

Transparency is vital, however, and bribes that are paid because there was no way around it should be reported to the British Embassy. “If you hide it that’s the worst thing then you are compliant with paying the bribe,” said Plaha. “The key message is: avoid paying the bribe but a defence will be that you had adequate procedures in place to protect that company or the head office in the UK from that risk of a corporate fine.”

What does this mean for India?

AZB partner and CEO Abhijit Joshi argued in the audience Q&A session that the UK Bribery Act was significant but much would only become clear in its application. “I think the Act has extraterritorial jurisdiction. The question is, there are so many companies out here which are connected or subsidiaries of UK companies and so many Indian companies that have set up shop in the UK.

“Therefore the applicability of the UK Act around the world or even India is actually imposing a level of threshold and also a level of prosecution in the UK which the Indian companies may not be used to.”

Responding to an audience question at the seminar, MG agreed. “I think the UK Bribery Act goes beyond what the Prevention of Corruption Act has.”

“Proper performances are not restricted only to public officials – for example, if somebody gives me more fees to make a flexible [legal] opinion. The implication like Abhijit pointed out is that a lot of Indian companies entering into transactions with suppliers, even that could create some substance.”

Joshi added that there was also a larger cultural shift taking place.

“If you see five years, seven years back, it was the British companies coming to India. The world has changed, it’s a reversal and something the Indian companies are not very used to,” noted Joshi. “Western companies are used to global footprints; Indian companies getting used to global footprints is an evolution.”

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