Doing Business In India: Anti-Corruption Best Practices

Momentum Webinar

May 29, 2014

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Agenda

• Introduction

• Overview of FCPA

• Corruption Challenges / Enforcement in India

• Compliance Best Practices

• Questions

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India’s Business Potential …

• Growing economy

• Barriers to entry eroding

• Cost-competitiveness

• Talent pool

• Emerging middle class

• Outpacing China in Foreign Direct Investment

… 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

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Overview of the FCPA

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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)

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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 businessbusiness or an unfair advantageunfair advantage.

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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

1111

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

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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

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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

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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

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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

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 discretion22

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

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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 British-Italian 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

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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

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Tone at the Top

• Establish top-down culture of compliance

– Regularly assert importance of compliance

– Commit resources to compliance infrastructurecompliance 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 GormanAECOM

Jennifer.Gorman@aecom.com

Thad McBride

Sheppard Mullin

tmcbride@smrh.com

Fatema Merchant

Sheppard Mullin

fmerchant@smrh.com