How U.S. Companies Are Navigating The FCPA Risk In India
A 2005 agreement kept under lock and key in London between Brazilian aircraft maker Embraer, a U.K. entity and an Indian consultant made way for Embraer securing a $208-million contract for developing military aircraft for the Indian Air Force. But the commission to the Indian consultant through Embraer’s New York account resulted in the Securities Exchange Commission bringing an action under Foreign Corrupt Practices Act, with Embraer eventually settling the case by paying $205 million in penalty.
The four-decade-old FCPA regime in the U.S. has had over a dozen Indian casualties so far.
Applicable to the U.S. companies, their employees, officers, directors and agents, FCPA makes it a federal crime to promise, offer, or make a bribe, directly or indirectly, to a foreign official to retain business or secure an improper business advantage. It also requires publicly traded companies to make and keep accurate books and records, devise and maintain an adequate system of internal accounting controls.
Most of the FCPA cases emanate from self-disclosures by companies, David Simon, partner at Foley & Lardner, said, and it’s the fear of a whistle-blower that becomes an incentive for companies to come forward.
Under the Dodd Frank Act, a whistle-blower who comes to the SEC with actionable information that may result in enforcement action, is entitled to monetary awards. I’m surprised by how well-known this fact is to Indian employees of U.S. companies.David Simon, Partner, Foley & Lardner
The SEC also pays attention to other law enforcement agencies around the world — an arrest, a raid, etc. by Indian authorities may lead to the SEC starting its own investigation. And at other times, it could be that successful FCPA action against companies in a particular sector may prompt them to issue subpoenas to other companies in the same sector, Simon said.
Bribes are often concealed under the guise of legitimate payments, such as commissions or consulting fees. Enforcement of the accounting provision has typically involved misreporting of either large bribe payments or widespread inaccurate recording of smaller payments made as part of a systemic pattern of bribery, the SEC’s FCPA Resource Guide said.
Case in point – Oracle Corporation, which failed to prevent its Indian subsidiary from secretly setting aside money off the company’s books that was eventually used to make unauthorised payments to phony vendors in India. In 2012, the SEC concluded that Oracle India sold software licences and services to Indian government through local distributors, and then had the distributors “park” excess funds from the sales outside Oracle India’s books and records.
As an enforcement tool, the SEC generally finds it easier to capture an accounting or books and record violation rather than a bribery violation, Kunal Gupta, a partner in the white-collar crimes team at Cyril Amarchand Mangaldas, explained. It is difficult to find direct evidence demonstrating a payment of bribe since it’s never made in cheque or via a wire transfer, he said.
Accounting violations can come under regulatory scrutiny if unusually high amount is paid as consultant or agent fees, petty cash of the company is used to pay bribes and false vendor vouchers are generated for it.Kunal Gupta, Partner, Cyril Amarchand Mangaldas
If companies want to justify high fees to consultants on grounds of quality of service, they should maintain documentation for it – if a company has adequate internal controls, the finance department will ask questions as to why premium amount was paid for a service, were there any other quotes that were called for, Gupta said.
Business Without Bribes
Playing by the FCPA book can mean additional costs and delays, Simon said. Companies need to plan ahead for permit applications and invest resources beforehand to understand what’s required by a particular government department, even to the extent of what colour form needs to be filled, he said.
I don’t believe that it’s impossible to do business in India without paying bribes. It requires preparation, patience and resources but it can be done.David Simon, Partner, Foley & Lardner
Something that Cognizant’s former President Gordon Coburn and former Chief Legal Officer Steven E. Schwartz could’ve considered over their video call, back in 2014, with the real estate officer managing the construction of the company’s KITS Campus in Chennai, Tamil Nadu.
When the demand for a $2-million bribe by a senior government official for granting the building permit for the Chennai campus was communicated to Coburn and Schwartz, they authorised the payment via a contracting firm and concealed the payment using sham change order requests.
To conceal the payments—associated with the bribe—Coburn and Schwartz authorised creating of fraudulent change orders that would artificially inflate the amount due to the contracting firm for the construction of the KITS Campus, the SEC said.
There have been instances where the U.S. companies, when asked for a bribe, have escalated the issue, used writ procedures to take government departments to courts and after having exhausted all of these options, shifted their business plans out of a particular state since the investment climate was not right from an anti-corruption perspective, Gupta said.
The third-party risk is a tough one to crack, experts said, especially in industries tightly regulated by governments.
As Belgian brewer AB InBev and Chicago-based spirits maker Beam Suntory Inc. discovered for themselves in 2016 and 2018, respectively. In both these cases, the SEC said that from the point of import to retail stores, there are numerous interactions with the government—inspection of shipments, label registrations required to distribute each brand of liquor in different state, licensing of warehouses prior to retail distribution, and sales to retail stores that were operated by the Indian government.
To navigate all this, both AB InBev and Beam Suntory Inc. relied on third parties. And directed them to make improper payments to Indian government officials to obtain beer orders, increase brewery hours and sales orders, process licence and label registrations and facilitate distribution of their products, among others. The Indian subsidiary reimbursed third-parties for illicit payments through the use of fabricated or inflated invoices, and then falsely recorded the expenses at the subsidiary level, the SEC had found.
Multinational companies have become very selective with respect to third parties — they want to deal with credible names and not mom-and-pop shops for getting permits, licences, etc.
MNCs now ask for financials of third-parties they deal with, information on their beneficial owners, etc. Companies also make sure they get 3-4 quotes for a particular job and select the most competitive one. Once they do that, strict anti-bribery provisions are included in those contracts.Kunal Gupta, Partner, Cyril Amarchand Mangaldas
Of late, the rules of engagement around third-parties have become quite stringent, Simon said. For instance, the U.S. companies are asking for a right to audit these third-parties before they do business with them. Through these audits, MNCs identify issues like gaps in the compliance programme of these third-parties, payments made without contracts, inflated invoices or instances where no supply was made, etc.
Business Strategy Gone Wrong
Global mergers and acquisitions come with both risk and opportunities. This is especially true in the context of FCPA. Inadequate due diligence can allow a course of bribery to continue and bring with it harms to a business’ profitability and reputation, as well as potential civil and criminal liability. Equally, a rigorous diligence can allow the acquirer to negotiate for the costs of the bribery to be borne by the target, the SEC resource paper said.
Mondelēz International and Diageo, both failed to apply this rigour and their acquisitions in India resulted in FCPA liability.
The SEC’s investigation found that after Mondelēz’s 2010 acquisition of Cadbury, the Indian entity—Cadbury India—continued to make payments to an agent to obtain government licences.
In Diageo’s case, the SEC said the company’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programmes. And at the time of these acquisitions, Diageo recognised that its new subsidiaries had weak compliance policies, procedures, and controls. But for over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.
Besides financial and legal diligence, acquirers now do a reputational diligence of the target and their promoters as well, especially in a developing country like India, Gupta said. Heads of departments and management are interviewed to gauge their approach to anti-corruption practices, reps and warranties are built into the contracts to address any pre-M&A conduct, he said.
Doing business with the government, though lucrative, can end up being an FCPA nightmare, too. Massachusetts-based medical manufacturer Alere paid a price because of this in 2017. The company’s Indian subsidiary, in 2011, won a contract to provide malaria testing kits to a local governmental entity for a national disease control programme. But it came with an ask of 4 percent commission. Keen to get increased orders under the tender—from 200,000 to 1,000,000 testing kits—Alere India approved the commission, which led to an about $150,000 in profit for the parent. Consequently, Alere agreed to pay more than $13 million as settlement charges for accounting fraud and improper payments to government officials in several countries, including India.