The United Kingdom’s New Bribery Statute

By Poorvi Chothani

The United Kingdom’s Bribery Act, 2010 (“Act”), seeks to reform its existing criminal laws to ostensibly provide a new, modern and comprehensive scheme to prosecute bribery.  The Act is, among other things, expected to:

  • provide a more effective legal framework to combat bribery in the public and private sectors;
  • replace the fragmented and complex offences at common law and in anti-corruption statutes;
  • create two general offences – (a) offering, promising or providing an advantage, and (b) requesting, agreeing to receive, or accepting an advantage;
  • create a discrete offence of bribery of a foreign public official; and
  • create a new offence of failure by a commercial organization to prevent a bribe from being paid for or on its behalf.

An organization charged with failing to prevent a bribe may assert as a defense that it had implemented adequate procedures to prevent bribery.

The Act, which represents the culmination of several decades of reports and draft bills, received Royal assent on 8 April 2010.   It was originally set to become effective from April 2010, but that was postponed to April 2011, and then again to May 2011, as a result of concerted lobbying and criticism from business groups, including the Confederation for British Industry.

The legislation attracted a significant amount of controversy because the Act provided a defense for bribes paid by security and law enforcement agencies.   However, this defense now applies only to the intelligence services and armed forces.  Business groups in the U.K. also expressed concern that the new law would place them at a competitive disadvantage to U.S. companies because the ban on “facilitation payments” is more stringent than the provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”).  Political parties also objected that the bill was rushed through Parliament before the elections, preventing them from examining the practical aspects of the bill in detail.

Under the Act, an individual found guilty of a crime, tried as a summary offence may be imprisoned for up to 12 months and fined up to £5,000.  A person found guilty on indictment may be imprisoned for 10 years and subject to an unlimited fine.  If a commercial organization fails to prevent bribery it may be punished with an unlimited fine.  In addition, property may be confiscated under the Proceeds of Crime Act, 2002, in certain circumstances.  A director of a company found to have violated the Act may be disqualified under the Company Directors Disqualification Act, 1986.

One of the most significant features of this Act is that it has an almost universal jurisdiction, enabling enforcement authorities to prosecute any individual or company with links to the U.K., regardless of where the crime occurred.  A corporation is guilty of an offence where an act promising, offering, or giving an advantage to a foreign public official is committed anywhere in the world by someone performing services on the corporation’s behalf in any capacity intending to obtain business or a business advantage for the corporation.   Further, a corporation is guilty even if the offending activity is carried out through an intermediary.

Counsel advising Indian companies acquiring businesses overseas should take note – many Indian companies are familiar with the FCPA, but the U.K. law provides for more serious criminal penalties.  All Indian businesses that operate or otherwise conduct business in the U.K. need to comply with this new law because of its extraterritorial reach; indeed, its express purpose is to “deal effectively with bribery at home and abroad.”  Moreover, bribery need not have been approved or financed by a U.K. entity, or its branch or subsidiary.  The Act also applies to a non-U.K. company if it has an office or conducts business in the U.K. and mere presence in the U.K. will be sufficient to establish jurisdiction.  For example, if an Indian company has a U.K. branch or subsidiary, and the Indian company engages in bribery in any country, the Indian company’s U.K. branch or subsidiary can be prosecuted in the U.K.

The Act requires the Secretary of State to publish guidelines to help organizations establish adequate anti-bribery measures.  The government has published the guidelines on establishing “adequate procedures,”.

Poorvi Chothani is the founder and managing partner of LawQuest, a law firm in Mumbai, India, and a Vice Chair of the India Committee.  She is admitted to the New York State Bar and is a registered solicitor in England and Wales.  Poorvi has been practicing law in India since 1984 and is admitted to the Bar Council of Maharashtra and Goa.  She can be reached at info@lawquestinternational.com.

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Defence Procurement Policy 2011: A Work In Progress

Major (ret’d) Guneet Chaudhary

The Indian Armed Forces fought the 1962 Indo-China War with World War II era weapons systems while Chinese soldiers were equipped with the latest in automatic weaponry. Soon thereafter, India turned to the U.S.S.R. for modern weaponry. Western countries were not keen on selling weapons to India because of its close ties to the Eastern Bloc. In any event, India could not afford the more expensive western weapons.

Today, of course, India is not viewed suspiciously by the West. And as India experiences strong economic growth, its defence budget has also grown, enabling the Indian Armed Forces to procure advanced, reliable, and technologically sophisticated western weapons systems. The Government of India has increased its defence budget by 11 percent in 2011-12, to Rs 164,415 crore (nearly $36 billion), to fuel the rapid modernization of the Army, Navy, and Air Force. Last year, the defence budget increase was 4%. According to KPMG, deals worth US $24.66 billion have been signed recently by the Indian Ministry of Defence (“MoD”) with global integrators, such as Tata and the European Aeronautic Defence and Space Company (EADS), and other deals valued at US $41.99 billion are being negotiated.

There are a number of reasons why the Indian government has decided to modernize its defence capabilities. Mainly, Russia has failed to keep its promise to supply weapons systems and spare parts in a timely manner. Since the Kargil war, India has been in desperate need of a weapons system upgrade and the Indian government has decided to embark on a major defence acquisition program, aimed at adopting advanced technology. According to Retired Brigadier Gurmeet Kanwal who heads the government-funded Centre for Land Warfare Studies, “China is the real long-term challenge on the strategic horizon and India’s security planning is geared toward it.” Our oldest rival and neighbour Pakistan, which has nuclear weapons like India, is also a factor in strengthening defence planning.

The Indian Army will need to upgrade its artillery, tanks, missiles, ammunition, and other equipment. The Indian Air Force desperately needs to upgrade its ageing and obsolete fleet of MIG 21 fighter jets. It has also introduced plans to modernize its airfields with sophisticated radar and newer avionics. The Indian Navy seeks more stealth features, including an Air-Independent Propulsion (AIP) system, and land attack capabilities in new submarines. The Navy has approached French ship builders for sophisticated combat management systems for the Scorpene submarines being built in India.

The government has also moved ahead with a $10.5 billion fighter jet contract, one of the largest acquisitions in history. India aims to introduce surveillance helicopters, transport aircraft, and submarines to expand its defences in the air as well as in the Indian Ocean. India is set to place a follow-up order for three more Airborne Warning and Control Systems (“AWACS”), and is seriously considering American Gulfstream, Brazilian Embraer, and European Airbus. According to some sources, the Indian Air Force has selected the C-17 as the new heavy lift aircraft and will be placing an initial order of 10 aircraft through the US Government’s Foreign Military Sales (“FMS”) route. The MoD is considering the proposal and the first aircraft may be delivered three years after a contract is executed.

As China designs a stealth aircraft to rival the US F-22, India is gearing up to overhaul the Air Force of its Soviet era planes. The Saab JAS-39 Gripen was competing with the Boeing F/A-18 Super Hornet, Dassault Rafale, Eurofighter Typhoon, Lockheed F-16, and Russia’s MiG-35 to win a fighter jet contract, which officials say may eventually lead to the purchase of up to 200 aircraft. On 27th April 2011, the Eurofighter Typhoon and Dassault Rafale had been shortlisted for the contract. On the other hand, the Indian Navy has chosen to rely on indigenous products and has its own design bureau. India, which long focused its military planning on Pakistan, is also determined to modernize its Navy to counter China’s influence in the Indian Ocean through its “string of pearls strategy” of developing a network of friendly ports from Gwadar in Pakistan to Hambantota in Sri Lanka.

The MoD has implemented a policy aimed at reforming defense procurement in order to retool its military more effectively and efficiently. On January 6th, 2011, the MoD released the Defence Procurement Procedure (“DPP”), which supersedes DPP 2008 and DPP 2009. The objective behind continuously updating procurement procedure, as stated in DPP 2011, is to demonstrate “the highest degree of probity and public accountability, transparency in operations and impartiality as well as free competition.” The main aim of DPP 2011 is the ”expeditious procurement of the approved requirements of the armed forces in terms of capabilities sought and the time frame prescribed by optimally using the allocated budgetary resources.”

One of the major changes affects offsets, a special form of counter-trade in relation to the sale of defence equipment to the Government, where a foreign vender reinvests or undertakes specified programs with a view to compensate or assist the buyer to generate benefits to the buyer’s country’s economy. The offset obligation has been increased to 30%, making it more favourable to Indian stakeholders and industry. Under DPP 2011, internal security, civil aerospace, and training services, including flight simulators, are now included in the offset policy.

The offset policy will benefit the domestic manufacturing and aerospace sectors.

The revised pPolicy intends to expand India’s defence industrial base, encourage indigenous production and reduce imports enabled through the pPolicy’s simplified procedures. Ultimately, the offset policy aims to promote incremental changes in Indian defence manufacturing capabilities and investment in defence manufacturing, export of Indian defence equipment, and investment in defence research and development.MoD has taken into account the interests of stakeholders and has enabled Indian industry to take full benefit of the capital procurements in defence by exploitation of its offsets clause.

The government aims to set into motion a modernization program of its defence capabilities due to many reasons. Mainly, Russia has been failing in keeping its promises of timely supply of weapon systems and spare parts. Since the Kargil war, India is in desperate need for an upgrade. The Indian government needs to embark on a major defence acquisition program, aimed at adopting advanced technology. The Indian Navy and Coast Guard needs ramping up and therefore modernizing the country’s maritime forces should be primary. The Indian Army requires upgrades in its artillery, tanks, missiles, ammunitions and other such equipments. The IAF desperately needs to upgrade from the ageing and obsolete MIG 21 to introducing plans for modernized airfields with sophisticated Radars, DF and newer avionics. The Navy is looking for more stealth features, an Air-Independent Propulsion (AIP) system, and land attack capabilities in the new submarines. The AIP would help increase the submergence of submarines by 3-4 times thereby making them hidden and more lethal. The Indian Navy has approached French ship builders for such sophisticated combat management system for the Scorpene submarines being built in India.

KPMG research indicates that deals worth US$ 24.66 billion (approximately) have been signed by the Indian MoD with global integrators such as Tata and European Aeronautic Defence and Space Company (EADS) in the past number of months and another US$ 41.99 billion (approximately) deals are in the process of getting signed.

The objective behind the continuously updated procurement procedure as mentioned in the forewords of the DPP 2011 is to demonstrate “the highest degree of probity and public accountability, transparency in operations and impartiality as well as free competition.”

The scope of the defence procurement procedure has been enlarged since 1992 through amendments in 2003, 2005, 2006, 2008, 2009 and now 2011. The DPP 2011 was released in January 2011 and has been expanded to include “civil aerospace, internal security, training within the ambit of the eligible products and services for discharge of offsets obligations.” This policy is a stepping-stone for the manufacturing and the service industries as well as the IT sector. The main aim of this policy as mention in its forewords is the ”expeditious procurement of the approved requirements of the Armed Forces in terms of capabilities sought and the time frame prescribed by optimally using the allocated budgetary resources.”

The offset policy aims at promoting incremental changes in Indian defence manufacturing capabilities and investment in defence manufacturing, export of Indian defence equipment, and investment in defence research and development.

The DPP 2011 has been changed in many respects from the DPP 2008 and   has incorporated amendments from that recommended in 2009. Certain amendments issued to DPP 2008 in the year 2009 have been incorporated in DPP 2011.

One of the most significant changes introduced is with respect to Off Sets expanding its scope by permitting investment in “Civil aerospace”, “internal security” and “Training” within the ambit of eligible products and services for discharge of offset obligation.

There have also been additions in the Appendix and Annexure to DPP 2011, including amendments related to Request for Proposal (“RFP”), Transfer of Technology (“ToT”) for Maintenance Infrastructure, Technical Oversight Committee (“TOC”), Trial Evaluation, Exchange Rate Variation (“ERV”), Performance and Warranty Bond, and Fast Track Procedure, among others. The new procedure establishes a more formalized procurement process, particularly as to the contracting mechanism for the ship building industry

The introduction of a “‘Buy and Make (Indian)”’ category is a positive step to to encourage the participation of the Indian private industry in defence acquisitions. Under DPP 2011, As provided by the policy, the acquisitions fall under four categories: (i) are covered under the “‘Buy,”’ (ii)Decision, “‘Buy and Make,” (iii)’ decision, “‘Buy and Make (Indian),”’ decision and (iv) “‘Make.”’ decisions. The flow chart below describes the capital acquisition and the offset requirements:

“Buy” means an outright purchase of equipment. Based on the source of procurement, acquisition under this category is subclassified as “Buy (Indian)” or “Buy (Global).” “Indian” means Indian vendors only, and “Global” mean foreign as well as Indian vendors. “Buy Indian” must have at least 30% indigenous content if an Indian vendor is integrating the systems.

An acquisition under the “Buy & Make” category means a purchase from a foreign vendor followed by licensed production or indigenous manufacture in the country. An acquisition under the “Buy & Make (Indian)” category means a purchase from an Indian vendor, including an Indian company forming a joint venture or establishing a production arrangement with an original equipment manufacturer, followed by licensed production or indigenous manufacture in the country. “Buy & Make (Indian)” must have at least 50% indigenous content on a cost basis. An acquisition under the “Make” category includes high technology complex systems to be designed, developed, and produced indigenously.

The following flow chart describes the capital acquisition and offset requirements under each category:

Important commercial changes have also been made under DPP 2011. For instance, the Exchange Rate Variation clause has now been made applicable to all Indian vendors when they compete with their foreign counterparts under the “Bio- Global” category.

DPP 2011 may be faulted for its failure to more effectively address institutional and human resources, which are crucial for an efficient acquisition process. An acquisition department has been set up to specifically handle capital procurements and has vital acquisition functions, such as the formulation of qualitative requirements and post-contract monitoring. The Comptroller and Auditor General of India (CAG), in a 2007 report pointed out systemic weaknesses in Army acquisitions, including inter alia, “delays” in acquisition; lack of effective coordination among the services in procurement of common items/capabilities; “major drawbacks” in the formulation of QRs; and, deficiencies in the process of technical and trial evaluations. Reiterating the Group of Minister’s (GoM’s) recommendation, the Comptroller and Auditor General of India (CAG) has suggested, “an integrated defence acquisition organization . . . incorporating all the functional elements and specialisation involved in defence acquisition under one head.” Nearly a decade has passed since the GoM made its recommendation and a few years since the CAG made its observations, yet the successive DPPs, including the 2011 version, have not adopted these recommendations. The MoD procurement budget is Rs. 43,800 Crores for 2010-2011. This is a huge amount of money requiring cautious expenditure and it is therefore important that a strong acquisition department is formed with an adequate number of professionals with the requisite knowledge in their respective fields. This issue has been ignored by the MoD. Currently, MoD is controlling every stage of the procurement procedure as can be seen in the diagram given below:

The increased categorization of procurement has led to more confusion and difficulties in evaluating a category. Also the offset guidelines in DPP-2011 do not allow the provisions of multiplier and technology transfer through the offset route. There is a probable fear of being dumped with redundant technologies because of the lack of a strong monitoring system. These shortcomings need to be overcome soon in order for the offset route to become useful.

The FDI policy also needs to be reviewed so that the “Buy and Make (Indian)” and offset policy is successfully implemented, but a change in foreign direct investment policy is outside the purview of the DPP. Also, there is clear discrimination between the public and private sectors. Therefore, it was important that DPP enunciate uniform set of guidelines for both.

There is no doubt that DPP 2011 has improved on the shortcomings of DPP 2008. Notwithstanding the positive changes, DPP 2011 falls short on several above stated accounts. Nevertheless, the new DPP enhances national procurement competence. India is currently the 10th largest defence spender in the world, with an estimated 2 percent share of global defence expenditure. Defence will remain a spending priority sector by the Indian Government because of past conflicts and continuing terrorism threats and hostile neighbouring countries.

Guneet Chaudhary is a senior partner at Jurisconsultus, and a retired Major of the Cavalry Regiment of the Indian Army.

Developing an Anti-Corruption Compliance Program Suitable for India and the FCPA

Aaron Schildhaus

India’s companies are increasingly global.  With their international growth, they are coming into frequent contact with the anti-corruption legislation of other countries, and particularly the Foreign Corrupt Practices Act (“FCPA”) of the United States.   Because U.S. companies must comply with the FCPA in their dealings outside the U.S., they are insisting that their Indian subsidiaries, affiliates, agents and partners provide them with assurances that they do not and will not run afoul of the FCPA provisions in their own operations.

Many countries have anti-corruption legislation on their books, and new legislation is being implemented in the U.K. and in other Indian trading partner countries.  However, the FCPA has emerged as the “gold standard” for anti-corruption laws, not only in terms of enforcement, but also in the amount of “gold” it is generating for the U.S. Treasury in terms of fines.

The accelerating number of investigations, prosecutions, settlements and convictions in the U.S. has created a sense of urgency in corporate boardrooms and officers’ suites in the U.S., and in countries where business relationships with U.S. entities are important.  Moreover, with the entry of the U.K. anti-bribery law, a bandwagon effect may cause many other countries to reevaluate the costs to them of permissive attitudes towards corruption.  These costs are measured in two ways: (1) lost opportunities for their companies that may not pass the anti-corruption litmus tests and that contribute to their countries’ reputations as “at risk” for investment; and (2) lost revenues from guilty corporate entities and their officers, who could be a source for large fines.

It is helpful to review the background of the FCPA, which was enacted into law in the United States in 1977 and criminalizes “corrupt payments” by U.S. persons to foreign government officials.   Aimed at modifying the behavior of U.S. businesses outside the United States, the FCPA recognized that corruption is a major impediment to economic growth, particularly in developing countries, where bribery and “kickbacks” often are sewn into the fabric of everyday life.  In those countries, which critically need economic development, corruption diverts scarce financial resources into the pockets of corrupt government officials and their cronies.  And eventually, investment flows into those countries are seriously reduced – foreign investors find more secure environments in which to invest.

Although the FCPA was not welcomed in its early years by many U.S. businesses trying to compete in international markets, the criminalization of such behavior and the rapidly increasing enforcement thereof, has forced corporations and their management to take the matter very seriously – to the point where today any company that is not taking active steps to comply with this legislation is at risk.   In the years since passage of the FCPA, the U.S. Government has worked successfully to assist in the drafting and ratification of international anti-corruption conventions by the Organization of American States, the Organization for Economic Cooperation and Development, the Council of Europe, and ultimately the United Nations.

Since 1977, a number of criminal actions have been taken by the Securities and Exchange Commission (“SEC”) and by the U.S. Justice Department (“Justice”) against companies and individuals violating various provisions of the Act.   In the past decade particularly, investigations and prosecutions have increased significantly.  Various factors underlie this acceleration, including the growing use of electronic communications and the availability, easy transfer, and duplication of data across the internet; thus providing more opportunities to secure evidence.  Scandals such as Enron and Worldcom, and the passage of Sarbanes-Oxley forced additional transparency and accountability on the acts of corporate officials and helped change how corporations fulfilled their ethical responsibilities.  More internal due diligence became the rule, and more cooperation, not only among U.S. Government agencies, but with foreign prosecutors, as well, were additional factors leading to what is now a virtual explosion in the number of FCPA investigations taking place.  Another effect of this is that many regulators in many countries are beginning to take note of the successes of U.S. prosecutors and the ramifications thereof.

In 2005, there were five FCPA assessments of fines and penalties, totalling approximately $15 million; in 2009, 52 companies were found liable and were penalized well over $1 billion.   The latest case, U.S. v. Panalpina, Inc., No. 4:10-cr-765 (S. D. Tex. 2010), prosecuted seven corporate entities, only one of which was a U.S. entity, and assessed $257 million in fines.  Investigation into Panalpina started in 2006.  Investigations are generally lengthy, serious and comprehensive, and more activity in this area can be expected.

Indian law firms have an increasing interest and active involvement in FCPA matters in a number of ways:

  • In some cases, Indian law firms are being asked to conduct, or assist in the conduct of due diligence investigations initiated by U.S. corporations and their lawyers relative to the existing (and past) practices of Indian subsidiaries and affiliates that might violate FCPA provisions.
  • Indian law firms are being asked by their Indian clients to assist them with their responses to existing and proposed contractual provisions of agreements between U.S. and Indian entities that require compliance with the FCPA, and/or to advise them relative to due diligence investigations, the outcomes of which will affect whether a deal will go through, and whether the terms of the transaction may be drastically affected.
  • Indian law firms are being asked by S. law firms and corporations to assist them with compliance with Indian anti-corruption legislation.

A major concern on the part of Indian law firms is how to counsel their clients in light of the exponential increase in U.S. prosecutions and the fact that today, in the board-rooms of most U.S. companies, there is a real fear that any FCPA transgression will result in substantial and possibly crippling fines for their companies coupled with fines and imprisonment for the officers and employees who actively or tacitly may have participated in making prohibited payments. Another factor to consider is the extent to which adverse publicity in the U.S., or inquiries by U.S. regulators to their Indian counterparts, may put Indian companies at risk.

The reality today is that U.S. businesses overwhelmingly are unlikely to go forward on any deal with an Indian partner that cannot or will not certify that it is now or will be FCPA compliant.  The situation is worse if the U.S. party uncovers hard evidence that corrupt acts have occurred and which might represent a pattern of corruption, actionable under the statute.  In addition to the FCPA, other federal laws relating to conspiracy, record-keeping, money-laundering, etc., may be applicable, and all are used by federal prosecutors to pursue violators of the FCPA.  Clearly, prosecutors have a broad and deep set of tools, all of which they are using.    They are using those tools, avidly pursuing all leads, and benefitting from their close relationships with prosecutors in other countries with whom they share a lot of information and close cooperation.  FCPA investigations may be initiated by the U.S. Government whenever it feels there is likelihood of corruption.  They obtain their information through a variety of means; whistleblowers, competitors, news reports, or otherwise; however, an increasing number of investigations grow out of information directly obtained from violators who self-report in the hope of minimizing their penalties and damages.

Fear in the corporate boardroom is leading many U.S. companies to cooperate fully with investigations by the SEC and Justice in order to earn “credits” against the consequences if corruption is uncovered.   One of the concerns expressed in India is the extent to which Indian law firms need to be concerned about the erosion or waiver of privileged communications between themselves and their clients.  A U.S. party’s fear of punishment may lead it to decide to provide everything – all documentation, data, results of internal investigations and communications, etc. – to U.S. prosecutors in order to minimize their own criminal consequences, including reduction of fines, deferred prosecutions, and other attempts at plea-bargaining.  U.S. prosecutors are avidly and successfully pursuing violators, but have shown a willingness to show some leniency where the U.S. violator self-reports and particularly where it shows complete cooperation, not hiding anything.

Should a potential deal come under suspicion, or should a due diligence investigation disclose suspicious circumstances, the U.S. party is required to resolve it if it wishes to avoid liability for criminal violations.

It is not easy for U.S. enforcement officials to travel to India to launch investigations or to pursue evidence collection outside the U.S.; nonetheless, it is possible, and it is done.  Therefore, in assisting a U.S. law firm with the gathering of evidence and testimony locally in India, the Indian law firm needs to be very clear with, and on behalf of, whom it is gathering evidence.  Its client will almost always be the U.S. entity initiating the request for assistance, and not any of its officers or employees.  To that extent, it is essential that Indian counsel advise its interviewees that it is acting on behalf of the corporate client and that disclosures will be shared with the lawyers of the corporation.  It might be advisable for the individual being interviewed to seek his/her own independent counsel.

Suspicions of FCPA violations need to be followed through by counsel.  In looking at proposed transactions, counsel must deepen its due diligence and get all the facts possible wherever there are any “red flags.”  Red flags include any of the following:

  • request for payment in cash;
  • request for payments in a third country, or to a third party;
  • history of having requested payment be made to a third, unrelated party;
  • direct/indirect family relationship with a government official;
  • history of asking for false invoices or other false documentation;
  • refusal of person in question to agree in writing to comply with FCPA or other laws;
  • prospective activities in country with reputation for corruption and bribery
  • previous convictions or charges against a payee for violation of local or foreign laws or regulations relating to the award of government contracts;
  • inadequately explained breakup of association with one or more foreign companies;
  • relationship problems with other foreign companies;
  • heavy reliance on political/government contacts rather than focusing on the time and effort required to win the contract;
  • expressed preference to keeping representation secret;
  • other suspicious conduct on the part of the representative that would raise questions in the eyes of a prudent person.

Whenever there is a red flag, a deep and detailed investigation, and complete resolution of all concerns/questions, is required; otherwise, the company should refuse to enter into any agreement with the representative.  Detailed investigation may include retention of an outside investigative firm or counsel, interviewing the principals of the foreign representative, and other independent research and discussions in-country.

Contractual Provisions for FCPA Compliance

Viewed from the perspective of compliant U.S. companies, all agreements with international distributors or representatives must highlight the importance of FCPA compliance.  Every potential representative should be advised that there can be no agreement, and that no payments or advances can be made or given for any services rendered, until an agreement containing sufficient contractual provisions is completed and executed by both sides.  Ideally, the client company should discuss the FCPA (and other laws and company’s policies) as early as possible in the evaluation and negotiation process.  In any event, no payment should be made to the representative until preliminary due diligence has been satisfactory, no red flags exist, and the representative has warranted its compliance and commitment to continue compliance.

Each representative/distributor/joint venture party must agree to abide by the provisions of the FCPA.   Compliance provisions should be explicitly set forth in the Agency/Representative/Joint Venture/other relevant agreement.  Because company agents have implicit authority to bind the company legally, the contractual provisions for agents and representatives must be more comprehensive and stringent than in agreements with distributors.

The following requirements are recommended:

  • Agreement that company will be given reasonable access to books and records;
  • Periodic audit rights;
  • Provision that any information relating to a suspected violation may be disclosed to government agencies, g., the Justice, or to other entities that may have a legitimate need to know;
  • Rights to immediate termination of the agreement upon a good faith belief that the agent/representative/partner has violated the FCPA or caused client risk of an FCPA violation;
  • Agent/representative/partner warranty that it/they have obtained an opinion letter from local counsel acknowledging that the terms of the agreement do not violate any local laws; and
  • Payment of travel, entertainment, and other expenses, including charitable contributions or payments to third persons of any type require advance written approval by management or in-house counsel;
  • Certification by agents/distributors/partners that they are not official representatives of the government of the country in which the transaction is to take place, and that no payments to them will be transferred to a foreign official, political party or official thereof, or a political candidate;
  • Obligation to notify as soon as possible if there is any material change in their ownership structure;
  • Certification that they understand and agree to comply with the terms of the FCPA and other applicable laws as specified in client’s written compliance procedures;
  • Obligation to report immediately any information received that may indicate that an FCPA violation or an improper payment has been made;
  • Requirement to certify on an annual basis that party has no knowledge of any FCPA violations;
  • No assignment or subcontracting of rights or obligations to third parties; and
  • Right to terminate immediately upon any breach of such provisions.

Corporate Policy

The first step in the design is the company’s adoption of a publically stated, and very clear corporate policy that it will conduct its business honestly and without making any corrupt payments.  The company should cite the existing law in India, and also make reference to laws in other countries, stating that it will adopt the highest standard of conduct prescribed by the laws in the countries of actual or prospective operation.  Where the company has relationships with foreign agents, representatives, consultants and other business partners, the policy should state how such relationships will be structured and implemented.   The policy must be enunciated and publically supported by its management, starting with the CEO on down.

Officers, Directors, Managers

The corporate policy must be effectively communicated and updated on a regular basis to all employees and business partners.   The CEO must make it clear to all that s/he endorses the policy completely and that any discovered violation will result in the dismissal of employees or the termination of any business relationships where the related party has been found to have engaged in corruption.

Certification and Education

Business partners and existing and prospective employees at all levels must be willing to certify that they will not engage in any corrupt conduct and that they accept the consequences if they transgress this commitment.  One of the key elements to an effective compliance program is education.  To that end, updated materials must be generated and presented to employees in a live and effective manner on a regular basis.  The educational process must require all persons to attend and to provide adequate proof that they understand that which is being taught to them.

The manner of presentation should include relevant documents, including a copy of the FCPA and recent decisions/opinions that may have particular resonance for the industry or the structure of the corporate client.  Included should be lectures and workshops, documentation, videos, on-line materials and live, interactive discussions (Q&A’s).  Potential scenarios should be explored and discussed and questions and active discussion should be encouraged.  The provisions of the applicable laws and fact patterns of recent cases should be included.  “Red flags” should be described, and all should be encouraged to consult a corporate checklist of questions and concerns that apply to their own company and its operations.  In the event of any questions, employees should be taught to discuss with their supervisors and/or with specially designated anti-corruption management personnel, as well as with specialized counsel, where appropriate.  The in-house procedures for investigations and for dealing with possible violations of policy should be thoroughly discussed, and the types of detailed reports that will be required must also be reviewed.

Due Diligence for Past Activities

Difficult issues arise in the implementation of compliance programs where there is a history of corrupt payments and the employees and/or managers or others are asked to disclose them.   In order to protect their jobs or contracts, non-disclosure is often the approach they take.  Whistleblowing protections and actual corporate history must be openly discussed with special counsel in order to best deal with such compromising situations.  Anonymous means, such as telephone hotlines and suggestion boxes, should be in place, so that employees or others (whistleblowers) may inform top management of violations without fear of retribution.

Due Diligence for Future Activities

Due diligence for prospective activities presents less of a problem if those in the corporate hierarchy are prepared to deal with red flag situations and work with counsel to avoid transgressing any of the laws with which they must comply.

Conclusion

The on-going enforcement success of the FCPA vis-à-vis U.S. companies is expected to be followed by the U.K. in very short order.  Its financial success may cause other countries to substantially increase their own prosecutorial activities against corruption.  Indian counsel have interest in understanding the FCPA and in counseling their clients about FCPA enforcement, which includes the design and implementation of dynamic (and individually tailored) compliance programs for Indian clients that have existing or potential U.S. or U.K. business links.

Anti-corruption is here to stay, and for clients operating in India, their lawyers should initiate discussions with them “the sooner the better.”  Their lawyers should urge them to examine closely their Indian and global operations in the light of FCPA, and should propose the design and implementation of proper compliance programs in order to satisfy the U.S. and U.K. entities with which they are, or may be linked.

 

Aaron Schildhaus is an international corporate and business lawyer representing entities world-wide, specializing in FCPA and anti-corruption compliance globally.  He was Chair of the Section of International Law of the American Bar from 2008-2009, and currently is Senior Advisor, to the ABA International Anti-Corruption Committee and to the India Committee.  More information can be found on his webpage: http://www.schildhaus.com.

The Prevention of Corruption Act: Closing the Structural Gaps that Hinder Its Enforcement

By Anand S. Dayal

The centerpiece domestic legislation for curbing corruption in India is the Prevention of Corruption Act, 1988 (“PC Act”). It has been hailed as being among the most comprehensive anti-corruption statutes in the world, and is in many respects significantly broader in scope than the Foreign Corrupt Practices Act of the United States. However, as India’s lead anti-corruption enforcement agency, the Central Vigilance Commission, noted in its proposed National Anti Corruption Strategy: “gaps remain between the statutes, policies and their actual implementation, which has led to limited success…”

This article describes key features of the PC Act and allied anti-corruption legislation, and explores gaps and inadequacies in the legal framework that hinder effective anti-corruption enforcement in India. We begin with an overview of the legal regime addressing corruption in India.

ANTI-CORRUPTION STATUTES AND ENFORCEMENT AGENCIES

The anti-corruption offenses and related enforcement regime in India is comprised of the following enactments:

• Prevention of Corruption Act, 1988 applicable throughout India;

• Lokayukta Acts passed by various states and applicable within such states;

• Central Vigilance Commission Act, 2003 establishing the Central Vigilance Commission (“CVC”) to inquire into offenses alleged under the PC Act;

• Delhi Special Police Establishment Act, 1946 (“DSPE Act”) governing the Investigation and Anti-Corruption Division of the Central Bureau of Investigation (“CBI/DSPE”).

In addition, the “Whistleblower Resolution” of the Government of India, which protects against retaliation any person who brings to the attention of the CVC allegations of corruption or misuse of office and the “Integrity Pacts,” which are required in connection with public procurement, have an anti-corruption focus. The Integrity Pact is an agreement between the procuring government agency and each bidder that neither side will pay, offer, demand or accept bribes, or collude with competitors to obtain the contract, that bidders will disclose all commissions paid in connection with the contract, and that sanctions will apply if violations occur. The CVC has urged all government organizations and public sector undertakings to adopt the Integrity Pact. The vast majority of central government undertakings have done so.

Prevention of Corruption Act, 1988

The PC Act prohibits the (a) the acceptance of a bribe or any other gratification by a “public servant” and (b) possession by a public servant of assets “disproportion to his known sources of income.” The term “public servant” is extraordinately broad in scope and brings within its sweep any person who holds an office by virtue of which such person is required to perform any public duty. It is significantly broader in scope that the concept of a “foreign official” in the US Foreign Corrupt Practices Act; “public duty” is expansively defined and there is no requirement that the person performing the public duty be acting on behalf of the government.

The anti-bribery provisions are contained in Section 7 and 11 of the PC Act. They prohibit a public servant from accepting gratification other than legal remuneration in respect of an official act (Section 7); and accepting any valuable thing without consideration from persons concerned in proceedings or business transacted by such public servant (Section 11). There is no de minimis or other exception (such as for facilitating payments) in the PC Act. Regardless of amount or circumstances, all bribery is prohibited.

In addition to the anti-bribery provisions, Section 13 of the PC Act defines the offence of “criminal misconduct”, which includes, inter alia, the abuse of office by a public servant and the possession by a public servant of assets disproportionate to his known sources of income. Prosecutions of criminal misconduct under Section 13 of the PC Act are commonly referred to as “disproportionate assets” cases.

The PC Act does not expressly punish an offer or payment of a bribe, except to a limited extent. Section 12 of the PC Act deals with abetment, and could be used to punish the bribe giver. In addition, Sections 8 and 9 of the PC Act prohibit the acceptance of any gratification by corrupt or illegal means to influence a public servant.

The PC Act, which has an entirely domestic focus, does not prohibit the bribery of foreign public officials, although the PC Act does extend to and applies “to all citizens of India outside India.” Its extra-territoriality is therefore limited to non-resident citizens of India who engage in conduct prohibited under the PC Act.

With respect to the trial of accused persons, Section 3 of the PC Act authorizes the government to appoint special judges as may be required to try offenses punishable under the PC Act. It is contemplated that special judges would specialize in and be dedicated to trying anti-corruption cases, with the object of disposing of such cases within one year.

Lokayukta Acts and Rules

The Lokayukta Acts are anti-corruption laws enacted by individual states. These laws supplement the PC Act, and typically provide for the appointment and functions of a lokayukta (ombudsman) for the investigation of administrative actions taken by or on behalf of the state governments in certain cases. The lokayukta is appointed by the governor of the state to investigate allegations that a public servant:

(i) has abused his position to obtain any gain or favour to himself or to any other person, or to cause undue harm or hardship to any other person;
(ii) was actuated in the discharge of his functions by improper or corrupt motive and thereby caused loss to the state or any member or section of the public; or,
(iii) is guilty of corruption, or lack of integrity in his capacity as such public servant.

See section 2(b), Andhra Pradesh Lokayukta And Upa-Lokayukta Act, 1983.

Central Vigilance Commission

The Central Vigilance Commission was established for the purpose of inquiring into and investigating offenses alleged to have been committed under the PC Act by certain categories of public servants of the central government, corporations established by or under any central act, government companies, and societies and local authorities owned or controlled by the central government.

The CVC was established in 1964 by an administrative order of the government pursuant to the recommendation of the Santhanam Committee on the prevention of corruption. Being an administrative agency of the government, the CVC as initially constituted was largely ineffective in curbing corruption, particularly at higher levels of government. The CVC was upgraded and accorded statutory status in accordance with directions given by the Supreme Court of India in the landmark case of Vineet Narain v. Union of India, S. Ct. (1997), initially by an ordinance (executive order) in 1998, and then by enactment of the Central Vigilance Commission Act, 2003.

Central Bureau of Investigation

The Central Bureau of Investigation (“CBI”) is the lead criminal investigative and prosecutorial agency of the Government of India. It was established in 1963. The CBI is the successor organization to the Delhi Special Police Establishment (“DSPE”), but with an enlarged charter of functions. Bribery and similar offenses, previously contained in the Indian Penal Code, were earlier investigated and prosecuted by the DSPE. Later, the DSPE was made one of the six divisions of the CBI, namely the Investigation and Anti-Corruption Division (“CBI/DSPE”).

The CVC has a quasi gate-keeper and supervisory role vis-à-vis the investigation and prosecution by the CBI/DSPE of offenses alleged under the PC Act. Superintendence of the CBI/DSPE vests with the CVC insofar as it relates to the investigation of offenses alleged to have been committed under the PC Act. The CVC can give directions to the CBI/DSPE in discharging this responsibility. See section 4 of the DSPE Act and section 8 of the CVC Act, in relation to investigations under the PC Act.

The CVC, however, has very limited influence over how the investigation and prosecution is conducted by the CBI, and whether charges are ultimately brought against the accused. Although the CVC may give directions to the CBI/DSPE for purposes of discharging the responsibilities provided in the DSPE Act, the CVC cannot require the CBI/DSPE to investigate or dispose of any case in any particular manner. The CVC may only review the progress of an investigation conducted by the CBI/DSPE into offenses alleged to have been committed under the PC Act, and it may review application pending with the competent authorities for sanction of prosecution under the said Act. See Central Bureau of Investigation, CBI (Crime) Manual, Chapter 2 (2005). The requirement for a sanction for prosecution is explained later in this article.

GAPS IN LEGAL FRAMEWORK AND ENFORCEMENT

The anti-corruption legal regime in India suffers from structural gaps and flaws that hinder its enforcement. Some of the more significant ones are described below.

Limited CVC Jurisdiction
Although CVC is the main anti-corruption agency, its jurisdiction is narrowly limited in two ways. First, the CVC has jurisdiction only over employees of the central government or entities established, owned, or controlled by it. It has no jurisdiction over employees of the state government or its entities or, perhaps more importantly, those holding elective office or contesting elections or political parties and their office bearers, in each case, whether at the central or state level. Second, even within its limited jurisdiction, the CVC can investigate only those persons holding a rank below a Joint Secretary in the Government of India. The DSPE Act, as amended, prohibits the CBI/DSPE from conducting any inquiry or investigation into any offense alleged under the PC Act except with the prior approval of the Central Government, where such allegation relates to a person of the rank of Joint Secretary and above. This effectively excludes from investigation all high level bureaucrats in government ministries and departments and the top management of public sector enterprises. In effect, the CVC has jurisdiction only of central government employees below the Joint Secretary level; it cannot act upon allegations of political corruption or corruption at the state level.

At the state level, there is no uniformity in the organization structures of the state anti-corruption agencies. Although some states, particularly Karnataka and Orissa (where the state agencies have been given absolute (independent) powers of inquiry) have fared better, most state agencies lack independence and are susceptible to executive and political influence. In general most state agencies are plagued with operational difficulties, such as shortage of staff, excessive turn-over, lack of proper incentives and inadequate budgets. See Central Vigilance Commission, National Anti-Corruption Strategy (Final draft circulated for comment September 2010) (“Draft NACS”).

Requirement of Prior Sanction

In order to prosecute a public servant for alleged offenses under the PC Act, it is necessary to obtain the prior sanction (approval) of the central government or state government in the case of central and state government employees (as applicable) and, in the case of any other person, the authority competent to remove the accused from office. Section 19(1), PC Act. In addition, as mentioned earlier, the CBI/DSPE can investigate a person at or above the rank of Joint Secretary only with the prior approval of the central government.

The prior sanction is meant as a safeguard against frivolous and vexatious prosecutions against innocent persons. “The object underlying Section 19 [of the PC Act] is to ensure that a public servant does not suffer harassment on false, frivolous, concocted or unsubstantiated allegations.” State of Himachal Pradesh v. Nishant Sareen, S. Ct. (2010). Similarly, in an earlier decision, the Supreme Court of India observed that “[s]anction is a weapon to ensure discouragement of frivolous and vexatious prosecution and is a safeguard for the innocent, but not a shield for the guilty.”

Furthermore, the courts have not intervened in reviewing whether a sanction should or should not have been granted, except if it is manifest that the sanctioning authority has not applied its mind. It is “well settled that the Superior Courts cannot direct the sanctioning authority either to grant sanction or not to do so,” but can only remand for reconsideration. State of Punjab vs. Bhatti, S.Ct. (2009).

The requirement of obtaining prior sanction has been a serious impediment to prosecute offences under the PC Act. The CVC has observed that past experience has shown that these provisions have often resulted in long delays due to: (a) inordinate delays in according sanction; (b) the provision being used to shield public servants though a wrong has been committed (usually to protect colleagues since the sanctioning authority is normally a senior officer of the accused officer); and (c) the sanction accorded being challenged at the trial stage and cases being discharged on the basis that the sanctioning authority had not applied its mind while according sanction.

No Whistleblower Statute

Throughout the world, anti-fraud and corruption efforts have relied heavily on insiders to provide information on wrong doing. To encourage such disclosure, the protection of insiders who come forward is essential. Accordingly, both the United States and England have enacted specific legislation providing comprehensive protection and other incentives to such persons.

In India, however, there is no statutory protection given to persons who come forward with information. Under the PC Act, whistleblowers and witnesses have only very limited protection. Sections 5 and 24 of the PC Act provide limited protection to whistleblowers, but only against prosecution under the PC Act. They do not protect the whistleblowers against other consequences, such as retaliation by the wrongdoer or their associates.

The need for special legislation protecting whistleblowers has been recognized by the Law Commission of India, which in its 179th Report in 2001 recommended the enactment of a bill titled “The Public Interest Disclosure (Protection of Informers) Bill.” However no such legislation has been passed, although a bill was introduced in the Lok Sabha (Lower House of Parliament) in September 2010. At the present time, limited protection is available by way of an administrative notification. See Central Vigilance Commission, Government of India Resolution on Public Interest Disclosure and Protection of Informer, Office Order No. 33/5/2004 dated 17 May 2004. However, on many occasions, this protection is rejected on technical grounds, as pointed out in the Draft NACS. Also, the CVC order cited above applies only to person within the CVC’s jurisdiction, and is therefore limited to central government actors and does not extend to state governments or politicians.

Asset Recovery Largely Ignored

Anti-corruption enforcement in India has focused primarily on the crime, the criminal, and the conviction, thus relegating asset recovery to a secondary or minor role. Asset recovery is the process used to recover property acquired through corrupt means by the state, victims of corruption, or duly designated third parties. It comprises a mechanism for criminal forfeiture as well as non-conviction based forfeiture and civil proceedings. Non-conviction based forfeiture, referred to as “civil forfeiture” or “in rem forfeiture” in some jurisdictions, is a legal proceeding against the asset itself and not against a person.

The PC Act provides for confiscation and forfeiture of the assets of a public servant or the proceeds of corruption only after the public servant is convicted of the relevant offense under the PC Act. It lacks provisions allowing for non-conviction based forfeiture and for civil forfeiture, the need for which was articulated by the Supreme Court in Delhi Development Authority vs. Skipper Construction Co., AIR 1996 SC 2005:

[A] law providing for forfeiture of properties acquired by holders of public office (including the office/posts in the public sector corporations) by indulging in corrupt and illegal acts and deals, is a crying necessity in the present state of our society. The law must extend not only to – as does SAFEMA [Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976] – properties acquired in the name of the holder of such office but also to properties held in the names of his spouse, children or other relatives and associates. Once it is proved that the holder of such office has indulged in corrupt acts, all such properties should be attached forthwith. The law should place the burden of proving that the attached properties were not acquired with the aid of monies/properties received in the course of corrupt deals upon the holder of that property as does SAFEMA whose validity has already been upheld by this Court in the aforesaid decision of the larger Constitution Bench. Such a law has become an absolute necessity, if the canker of corruption is not to prove the death-knell of this nation. According to several perceptive observers, indeed, it has already reached near-fatal dimensions. It is for the Parliament to act in this matter, if they really mean business.

Taking a cue from the Supreme Court’s impassioned plea, the Law Commission in its 166th Report (February 4, 1999) recommended passage of the Corrupt Public Servants (Forfeiture of Property) Bill. No meaningful steps have been taken towards passage of this legislation, primarily due to a lack of political leadership and the influence of vested interests.

Delays in Prosecution

The time taken for prosecution of corruption cases is a major bane of the Indian system, according to the CVC. The CVC has noted “that past experience has shown that in many cases, there are inordinate delays in prosecution of public servants against whom complaints have been made.” Delays in the preliminary stages of an investigation can lead to difficulties in gathering evidence, which ultimately hamper efforts to obtain a conviction. Also delays can increase the possibility of reprisals, as pointed out by the Law Commission in its 166th Report.

Besides delays in conducting the investigation, the trial and disposal of corruption cases often takes years, during which time the accused and key witnesses often have retired from service and some have died. Despite provision in the PC Act for special judges, there is a substantial backlog of cases due to the non-establishment of special courts in some states and special judges being entrusted with general cases other than of corruption.

No Supply Side Culpability

As previously noted, the PC Act does not expressly seek to punish the paying of a bribe, except to a limited extent. Traditionally, the payer of a bribe has been viewed in India as a victim, and therefore not culpable or criminally liable. This is of course plausible where a bribe is paid to meet an extortionist demand by a public official to provide something to which the payer is otherwise entitled. This is less plausible in the case of “grand corruption,” where the payer seeks to influence government decisions in its favor.

Given the lack of meaningful supplier-side culpability, purely domestic actors face little exposure to criminal liability if they pay bribes or use undue influence. By contrast, companies that operate on a global level and are subject to transnational anti-corruption enforcement regimes face severe sanctions for such conduct.

STRENGTHENING THE RULE OF LAW

Closing the gaps in the anti-corruption legal regime and stepping up enforcement are the obvious first steps in any roadmap for combating corruption. The functioning of anti-corruption laws is however dependent upon a larger more expansive framework of laws and the institutions that interpret and apply them. It presupposes adherence to the rule of law. Time and again, this supposition has not been borne out by experience, and even the best laid plans have been thwarted and subverted often from within the governing establishment itself. Ultimately, if meaningful progress is to be made for curbing completion, particularly in high places, it cannot be achieved without strengthening the rule of law.
Anand S. Dayal is a partner with Koura & Company, Advocates and Barrister, based in New Delhi, India. Anand is admitted to the bar both in India and the US (NY and DC). He is chairman of the Anti-Corruption Committee of the American Chamber of Commerce in India. Anand can be contacted at dayala@vsnl.com or adayal@kouraco.com.

Case Notes – Spring 2011

By Sean Kulkarni and Rina Shah

Supreme Court of India Recognizes Permissibility of “Passive Euthanasia” in Landmark Right to Die Case

On March 7, 2011, the Supreme Court of India dismissed a “right to die” petition brought by a surrogate of Aruna Shanbaug, whose tragic confrontation with an attacker in 1973 left the petitioner in a persistent vegetative state (“PVS”) in a Mumbai hospital where she continues to remain on life support.  Aruna Ramchandra Shanbaug v. Union of India & Ors., (2011) INSC 222.  Under limited circumstances, however, the Court acknowledged that Indian law may permit the withdrawal of life-sustaining care and treatment from a patient that is unable to consent to such a withdrawal.

The petition before the Court, raised on behalf of Shanbaug by the Indian writer and public interest advocate Pinky Virani, alleged that Shanbaug’s right to live under Article 21 of the Constitution included a corollary right to die.  The Court disagreed, stating that the right to live necessarily includes a fundamental right to live with human dignity, but the contours of Article 21 fall short of encompassing a right to die.  As a result, the Court acknowledged that the petition could have been dismissed summarily on the basis that the petitioner failed to demonstrate a violation of a fundamental right, as required by Article 32 of the Constitution.  “In view of the importance of the issues involved,” however, the Court chose to examine and opine on the merits of the case.

Following an emotional and harrowing description of the circumstances of the 1973 attack and a detailed medical summary regarding Shanbaug’s condition, the Court certified the following principal legal issues for review:

  • Whether the withholding or withdrawal of life-sustaining therapies from a PVS-afflicted patient would be “permissible or ‘not unlawful;’”
  • Whether a patient’s conscious and voluntary wish to reject life-sustaining treatments in the event of a future PVS affliction should be respected;
  • In the event a patient has not previously expressed such a wish, whether the request of a family member or next of kin to withhold or withdraw life-sustaining treatments from a PVS-afflicted patient should be respected; and
  • Whether the KEM Hospital staff in Mumbai (respondents in the case and petitioner’s principal caretakers), a third party advocate such as Ms. Virani, or some other party possessed the requisite authority to determine Shanbaug’s best wishes, where Shanbaug’s parents were deceased and she had been abandoned by her extended family following the 1973 assault.

Addressing the issues in turn, the Court first recognized that a competent adult may indeed choose not to consent to life-saving treatment, either through the form of a living will or through an appointed surrogate.  In the present case, however, the Court had no record of Shanbaug’s particular wishes with respect to life-sustaining treatment.

To address the permissibility of withdrawing life-sustaining medical care, the Court consulted an extensive range of decisions from other countries, including the United States, the United Kingdom, Belgium, Switzerland, the Netherlands, Austria, Italy, Germany and Canada.  Drawing from euthanasia-related laws and practices in these jurisdictions, the Court distinguished “active” euthanasia, such as the administration of a lethal injection or physician-assisted suicide, from “passive” euthanasia, in which proactive, life-sustaining treatments are withdrawn, thereby rendering a PVS-afflicted patient unable to survive in circumstances where an otherwise able individual could do so.

In Shanbaug, the Court broke significant ground by recognizing a family member or next of kin’s ability to choose passive euthanasia for a PVS-afflicted patient, subject in all cases to the Supreme Court’s approval in accordance with Article 226 of the Constitution.  The Court acknowledged Parliament’s proper role in crafting or amending India’s euthanasia law, but until such time as Parliament chooses to act, Shanbaug will serve as binding law.

Having recognized Shanbaug’s right to receive passive euthanasia at the request of an appropriate surrogate, the Court proceeded to deny the specific petition filed by Ms.Virani and decree that Shanbaug would continue to receive life-sustaining treatment at KEM Hospital.  The Court reached its conclusion after determining that the KEM Hospital staff had demonstrated sufficient devotion and care to the sustainment of Shanbaug’s livelihood over the course of her ailment, such that the hospital staff, rather than the petitioner’s surrogate, had effectively become Shanbaug’s next of kin for purposes of determining her options for end of life care.  As the KEM medical staff expressed a wish for Shanbaug to remain in their company and care, Ms. Virani’s petition was dismissed.

http://www.supremecourtofindia.nic.in/outtoday/wr1152009.pdf

State Bank of India Immune from Fraud Claim Under Foreign Sovereign Immunities Act (“FSIA”)

On April 21, 2009, Rajiv Gosain filed a fraud claim against the New York and Mumbai branches of State Bank of India (“SBI”) in connection with a series of commercial and contractual disputes with SBI and the liquidation by SBI in India of TechInvest India Private Ltd. (“TechInvest”), Gosain’s majority-owned industrial laminates company.  The U.S. District Court for the Southern District of New York dismissed the fraud claim on FSIA grounds, and the United States Court of Appeals for the Second Circuit affirmed.  Gosain v. State Bank of India, New York Branch, et al., 2011 U.S. App. LEXIS 1641 (2d Cir. 2011).

Gosain alleged that SBI and its officers engaged in a multiyear scheme of misrepresentation that substantially harmed Gosain’s business activities in both India and the United States.  According to Gosain, in 1991, SBI reneged on its contractual obligation to release him from a personal guaranty he provided in connection with an SBI loan to a New Jersey corporation from which Gosain had resigned as an officer and director.  When SBI sought to obtain a default judgment against Gosain in a New York State Court, Gosain claimed that SBI used a false address to effectuate service on him.  When SBI sought to have its New York State default judgment recognized by an Indian court in 1997, Gosain claimed that SBI allegedly misinformed the Indian court that he was an Indian citizen residing in India rather than a U.S. citizen residing in the United States.

By 1999, Gosain had inherited a 74% common stock interest in TechInvest from his father in India.  In connection with the share transfer, Gosain offered to replace his father’s personal guaranty on SBI’s existing loan to the company with his own personal guaranty.  Rather than accept his guaranty, Gosain alleged that SBI withdrew its financial support for TechInvest, froze the company’s bank accounts, and refused to allow TechInvest to seek alternative financing, thereby forcing the company into involuntary restructuring.  After valuing TechInvest’s assets at approximately US$ 1.6 million, SBI and the restructuring trustee auctioned off the company’s assets for the equivalent of US$ 90,000 (a 95% discount from valuation price).  Gosain alleged that a co-defendant had bribed a local SBI branch manager prior to the auction and obtained title to TechInvest’s land holdings shortly after conspiring with SBI to rig the auction to generate the low sale price.

SBI moved to dismiss Gosain’s complaint, asserting immunity as an agency or instrumentality of a foreign sovereign.  Conceding that SBI is eligible for FSIA protection as a majority-owned entity of the Indian Government, Gosain pursued his fraud claim under an exception to the FSIA’s immunity protection for actions based upon an act outside the United States in connection with commercial activity of the foreign state that causes a direct effect inside the United States.

The District Court found that SBI’s role as a secured creditor for TechInvest was sufficient to satisfy the commercial activity exception for FSIA purposes.  However, the District Court dismissed Gosain’s claim on the basis that SBI’s allegedly tortious commercial activity in India did not have a legally sufficient “direct” or “immediate” consequence or effect inside the United States.  While the alleged auction-rigging scheme caused a substantial devaluation of Gosain’s interest in TechInvest, the potential proceeds of the auction had in fact been deemed ineligible for repatriation to the United States pursuant to Indian regulatory requirements.  The Second Circuit stated that even if SBI had been specifically obligated to remit any surplus funds to Gosain inside the United States, the fact that the auction failed to yield any such proceeds signified that SBI had not necessarily breached an agreement to pay particular funds into a U.S. account.  As a result, although each legally significant act alleged in Gosain’s complaint occurred outside the United States, he did not allege that such acts had a direct or immediate effect on SBI’s actions inside the United States for purposes of invoking the FSIA exception.

Supreme Court of India Grants Injunction in Favor of Publisher of “Eenadu” Newspaper on its Trademark Infringement Claim Against Manufacturer of “Eenadu” Branded Incense Sticks

On appeal from the High Court of Andhra Pradesh, the Supreme Court of India has reinstated a trial court’s injunction against the manufacture and sale of incense sticks (agarbathis) bearing a proprietor’s “Eenadu” brand label.  T.V. Venogopal v. Ushodaya Enterprises Ltd. & Anr. (2011 INSC 211).  The case represented a partial victory for Eenadu Margadarshi Group (“EMG”), a well-known Andhra Pradesh media and publishing company, because EMG had sought to enjoin distribution of the incense sticks throughout India, not just within Andhra Pradesh as ordered by the Hyderabad City Judge and affirmed by the Supreme Court.  EMG had filed its trademark infringement claim under the Trade & Merchandise Marks Act, 1958, later superseded by the Trade Marks Act, 1999.

The Court found the label Eenadu — which means “today” or “daily” in Telegu — had become synonymous in Andhra Pradesh with the daily “Eenadu” newspaper and “Eenadu” television channel (popularly known as “ETV”), each published or broadcast, respectively, by EMG.  As a result, the Court determined that appellant, a Bangalore-based sole proprietor who had registered an “Eenadu” trademark for his incense business in 1993, impermissibly used the profitable brand name that EMG had carefully built amongst television and media consumers in Andhra Pradesh.

Writing for the Court, Justice Dalveer Bhandari provided a lengthy and detailed overview of influential trademark infringement decisions in India, the United Kingdom and the United States involving a range of multinational automotive and household consumer brands.  The case featured a broad discussion of the concepts of consumer “confusion” and brand “dilution” that might result from a business owner’s efforts to adapt or replicate a well-established global or regional brand for purposes of promoting his or her own products in a distinctive line of business (e.g.. “Honda” pressure cookers or “Benz” undergarments).

The Court recognized that “eenadu’s” generic, everyday meaning (“today” in Telegu, or “this land” in Kannada, Malayalam and Tamil) could serve to distinguish the brand name from corporate labels such as “Volvo” or “Harrod’s” that tend to occupy a single, unambiguous meaning in the minds of consumers.  Indeed, the Court acknowledged that “eenadu” was a plausible descriptive label for appellant’s product because the incense sticks were designed for use by devotees performing daily puja offerings.  “Eenadu” had in fact been used in the marketplace to describe everyday products such as “eenadu turmeric” or “eenadu tobacco”, or popular culture staples such as the “Eenadu Feature Film” or the well-known Kannada song of “Eenadu Kannada, Eeneeru Kannada” (This Day is Kannada; This Water is Kannada).

EMG, however, introduced evidence that appellant had attempted to register the name “Eenadu” for additional classes of goods which the appellant had no apparent capability of producing, and had adopted the very same artistic script and font for the “Eenadu” label as used by EMG in its brand logo.  The Court also noted as indicative the 90% decrease in profits suffered by appellant following imposition of the trial court’s injunction.  On review of such evidence, the Court determined that appellant’s marketing scheme “was calculated to lead purchasers to believe that its agarbathies are in fact products of the newspaper company…[i]n such a situation, it is the bounden duty of the court not only to protect the goodwill and reputation of the Andhra company but also to protect the interest of the consumers.  The consumers have to be saved from such fraudulent and deceitful conduct.”

http://judis.nic.in/supremecourt/imgs.aspx

An Update on 2G Spectrum Licensing Proceedings before the Supreme Court of India

Justices G.S. Singhvi and A.K. Ganguly of the Supreme Court of India have been closely monitoring developments in the central government’s ongoing investigation into the 2G spectrum licensing scandal that continue to roil India’s political system since reports of the telecommunications scandal surfaced last November.

Upon reviewing a status report from the Central Bureau of Investigation (CBI) and the Enforcement Directive (ED), Justices Singhvi and Ganguly confirmed that there “seem[ed] to be a violation of several laws”, including documentary and procedural violations in the public tender process for the licenses, apparently conducted primarily by Andimuthu Raja, former cabinet minister for communication and information technology.

A report submitted by the Comptroller and Auditor General (CAG) estimated the Indian government lost Rs. 176,379 crore (approximately US$ 40 billion) in 2008 when the government issued the 2G licenses on a “first come, first served” basis to national telecom firms at substantially undervalued rates.  The CBI is investigating whether some or all of the 122 licenses issued on January 11, 2008 were distributed to select firms that had been tipped off as to a series of unexpected and last-minute changes to the licensing tender process rules that resulted in the exclusion of a number of competitive, high-value bids.  Firms which successfully received licenses are alleged to have immediately resold the licenses at substantially higher rates to foreign telecom firms that desired to expand their respective market shares in the world’s second largest market for mobile subscribers.

The scandal came before the Supreme Court by a private complaint for prosecution of Raja filed by Janata Party head Subramanian Swamy under § 190 of the Criminal Procedure Code.  In his March 17, 2011 testimony, ED Senior Counsel K.K. Venugopal reported to the Supreme Court that large-scale violations of the Foreign Exchange Management Act and the Prevention of Money Laundering Act had taken place during the license allocation process.  The recent joint CBI/ED status report is believed to have suggested that the scheme involved illegal money transfers spread over a number of foreign jurisdictions with cooperation by several foreign-owned banks.

The Central Bureau of Investigation (CBI) has told the Supreme Court that it will file chargesheets against former cabinet minister Raja and what it described as two unnamed “beneficiary” companies.  The Supreme Court has indicated that a Special Court should be set up in order to try the various parties accused of taking part in the 2G licensing scheme. (Sources: United News of India; Legal India; Deccan Chronicle).

Case notes written by Sean G. Kulkarni, except for the Aruna Ramchandra Shanbaug euthanasia case, which was written by Rina Shah.  Sean may be reached at sean.g.kulkarni@gmail.com, and Rina may be reached at rinashah85@gmail.com.

 

Case Notes – Summer 2011

Sean G. Kulkarni

Chicago-Area Businessman Found Guilty of Providing Material Support to Pakistani Terror Organization; Acquitted of Conspiracy Charges Relating to November 2008 Terrorist Attacks in Mumbai

On June 9, 2011, an Illinois federal jury convicted Chicago-area businessman and Pakistani native Tahawwur Rana of one count of conspiracy involving a terrorism plot against a Danish newspaper and one count of providing material support to Pakistan’s Lashkar e Tayyba (“Army of the Good”), a U.S.-designated foreign terrorist organization. Rana’s conviction on the two counts proved to be a mixed result for U.S. prosecutors, as jurors seemed to doubt testimony provided by the government’s key witness and ultimately acquitted Rana on charges of providing material support to Lashkar in connection with the 2008 terrorist attacks in Mumbai, India, that killed more than 160 people, including six Americans. Judge Harry D. Leinenweber presided over the case, U.S. v. Kashmiri, et. al., in the U.S. District Court for the Northern District of Illinois.

U.S. prosecutors focused their case around Rana’s association with his childhood friend and fellow Pakistani native David C. Headley (a.k.a. Daood Gilani), a U.S. citizen who performed espionage work for Lashkar and surveyed potential attack sites in Mumbai. As owner of First World Immigration Services (“First World”) in Chicago, Rana was alleged to have prepared false immigration documents to facilitate Headley’s travels. Jurors also heard testimony that Rana had approved the opening of a First World branch in Mumbai to provide cover for Headley’s espionage and surveillance activity. During his five-day testimony, Headley recounted to jurors a meeting in Chicago with Rana in which Headley disclosed his surveillance work for Lashkar and certain espionage instructions he claims to have received from Pakistan’s Inter-Services Intelligence Agency (the “ISI”). Jurors found Headley’s testimony to be sufficiently credible to find Rana guilty of providing material support to Lashkar as a general matter, but otherwise insufficient to convict Rana of providing direct material support in the Mumbai attacks.

Headley pleaded guilty in 2010 to all twelve federal terrorism charges brought by the United States in connection with his role in the Mumbai attacks and the joint plot with Rana and others to attack the offices of Morgenavisen Jyllands-Posten, the Danish newspaper whose publication of cartoon depictions of the Prophet Muhammad in September 2005 sparked a wave of protests and threats of retaliation in and from the Islamic world.

In pre-trial proceedings earlier this year, Rana had notified the Court that any role he may have played in the Mumbai attacks was conducted with “public authority” on behalf of the government of Pakistan and the ISI. Rana told the Court that by acting under the authority of the Pakistani government and the ISI — rather than at the behest of Lashkar — the Court was obligated to grant Rana immunity from criminal prosecution in the United States under the U.S. Foreign Sovereign Immunities Act (the “FSIA”). As evidence for Islamabad’s role in the attacks, Rana cited portions of Headley’s earlier grand jury testimony concerning the espionage work that Headley suggested had been ordered and supervised by ISI.

Judge Leinenweber granted the government’s motion to exclude Rana’s public authority defense, holding that neither the FSIA nor any other law cited by Rana permitted a defendant to rely upon the authority of a foreign government agency or official to authorize the defendant’s violation of U.S. federal law. In fact, Rana proffered no evidence that he relied on representations from any U.S. federal official — or any party with apparent authority as a federal official — to engage in his alleged illegal activities. In rejecting Rana’s defense, the Court further noted as a jurisdictional matter that Rana held his meetings with Headley on U.S. territory in Chicago, rather than in Pakistan or India.

Rana faces up to 30 years in federal prison as a result of his conviction on the two terrorism-related charges.
United States Court of Appeals for the Fifth Circuit Affirms Conviction of H-2B Visa Fraud Perpetrator
On March 16, 2011, the U.S. Court of Appeals for the Fifth Circuit affirmed the conviction of Bernardo Pena for his role in a scheme to profit from inducing workers from India to illegally enter the United States through the use of non-immigrant H-2B work visas. U.S. v. Pena, 2011 U.S. App. LEXIS 5357 (5th Cir. 2011).

Pena had worked for AMEB Business Group (“AMEB”), a Brownsville, Texas-based company specializing in assisting U.S.-based employers to recruit foreign temporary workers by managing the workers’ H-2B visa application process. An H-2B visa permits an alien to enter the United States for up to one year to work in nonagricultural, labor-related jobs, with the possibility of an extension of up to three years.

In April 2005, Viscardi Industrial Services (“Viscardi) hired AMEB to prepare and submit H-2B visa applications for 400 Indian and Mexican workers at a charge of $1,000 per worker, as Viscardi needed staffing assistance on various construction projects in Louisiana and Texas. AMEB contacted Mahendrakumar Patel (“Mack”) to recruit workers in India, and Mack in turn arranged for his relative, Rakesh Patel, to contact Raskesh’s brother Naimesh in India to identify particular workers who might undertake such an overseas assignment. Pena traveled to India in late 2005 to assist a group of 300 workers with the application and interview process. While the laborers awaited consular interviews, Pena’s boss signed a written agreement with Keith Viscardi (owner of the industrial services firm) and Mack and Ramesh Patel to charge the Indian visa applicants $20,000 per visa, as opposed to the normal $500 to $1,000 cost for such services. Although Viscardi testified that Pena had not been a party to the agreement and that AMEB’s owner instructed Vicscardi not to discuss the agreement with Pena, the government showed jurors an e-mail message from Pena addressed to Mack in which Pena sought to enter a three-way side deal between Mack, Pena and Pena’s twin-brother and AMEB colleague, Alberto, to charge each worker only $15,000 and cut the others out of the deal.
The U.S. Consulate in Mumbai ultimately approved 88 visa applications before receiving an anonymous fax stating that the workers had paid large sums of money to enter the United States without the intention of returning. Following a State Department investigation, the Consulate denied all remaining pending applications.

A jury convicted Pena on all 18 counts including conspiracy charges, encouragement and inducement of illegal immigration for private financial gain, and aiding and abetting of money laundering. In upholding Pena’s conviction, the Fifth Circuit reasoned that the government had sufficiently met its evidentiary burdens during trial by showing Pena’s extensive involvement in the conspiracy through travel to India, signing of H-2B visa applications, and Pena’s e-mail correspondence with Mack acknowledging and seeking to manipulate the terms of the scheme.

United States Court of Appeals for the Ninth Circuit Clarifies Scope of “Changed Circumstances” Exception to U.S. Asylum Application Deadline
On April 5, 2011, the U.S. Court of Appeals for the Ninth Circuit reversed an Immigration Judge’s denial of Ayubbhai Vahora’s asylum application on the basis that Vahora, a Sunni Muslim and native of a predominantly Hindu village in Gujurat, India, had demonstrated sufficiently “changed circumstances” so as to merit a congressionally-designed exception to the normal one-year filing application deadline for refugees seeking asylum inside the United States. Vahora v. Holder, 2011 U.S. App. LEXIS 6867 (9th Cir 2011).

Vahora’s religious affiliation in Gujurat and his leadership activities on behalf of the local Muslim community in the 1990s led Vahora’s Hindu neighbors to target him through frequent incidents of harassment and violence. After mobilizing fellow Muslims to rebuild a mosque destroyed by a Hindu mob in Vahora’s town in 1992, Vahora was detained for a series of five days by police and subject to 12-14 beatings per day lasting a debilitating 10-12 minutes each. In addition, Vahora was dismissed from his job by his Hindu employer and harassed and threatened by local supporters of the Hindu nationalist Bhartiya Janta Party (“BJP”).
Vahora ultimately fled to the United States on April 5, 2001, ostensibly for purposes of seeking temporary refuge and without the intent of seeking asylum (Vahora had previously travelled to London twice, only to be beaten or threatened by police upon returning home). In February 2002, a group of Hindu fundamentalists burned down Vahora’s family home and farmhouse amidst widespread Hindu rioting in the region. Upon filing a complaint with local authorities, police arrested Vahora’s brother, Karim, whose whereabouts continue to remain unknown despite repeated inquiries by Vahora and his family.

Eventually Vahora’s older brother, Husman, fled for his life and went into hiding following his own police detention, prompting Vahora to file an affirmative application for U.S. asylum on December 16, 2002. The Immigration Judge (“IJ”) rejected Vahora’s claim on the basis that Vahora had failed to file his application within his first year inside the United States following his arrival from India (see 8 C.F.R. § 208.4(a)(2)). Vahora appealed, contending that he was eligible for an exception to the one-year filing requirement on the basis that intervening events between February 2002 and the eventual filing date, including the intensified regional violence, direct attacks on Vahora’s family home and property, and confrontation of Vahora’s brothers by Indian police, constituted sufficiently “changed circumstances” so as to merit an exception to the one-year timeframe under 8 C.F.R. § 208.4(a)(5). The Board of Immigration Appeals (the “BIA”) upheld the IJ’s ruling, however, finding that uptick in violence and direct attacks on Vahora’s family and property were insufficient indicia of changed circumstances, particularly in light of the substantial civil unrest and familial violence to which Vahora was exposed prior to fleeing India for the United States in 2001.

In reversing the BIA’s ruling, the Ninth Circuit found compelling the evidentiary record surrounding the events of February 2002, which had been described by some accounts as “India’s worst religious violence in decades” and a material heightening of previous civil tension that had been brewing while Vahora was still in the region. The majority also found to be material in its analysis of Vahora’s “changed circumstances” petition the increasingly direct and expanded targeting of Vahora’s family by Gujurati rioters and police.

In a bristling dissent, Ninth Circuit Judge Alex Kozinski stated that the majority’s ruling made “mincemeat” of the one-year filing requirement, and accused the majority of partaking in a “tired game” of judicial usurpation and “creative interpretation.” In the dissent’s view, an asylum seeker may only rely upon the “changed circumstances” exception if the applicant had not previously “experienced circumstances that arguably would establish a colorable claim for asylum within the statutory time period for filing.” Reasoning that Vahora possessed an arguably meritorious case for asylum even prior to the February 2002 violence, and that denial of such an application within the one-year filing deadline would not have prejudiced Vahora from filing a subsequent application should circumstances have worsened in Gujurat, Judge Kozinski concluded that “there can be no changed circumstances, regardless of how much country conditions may have deteriorated.”

The Ninth Circuit majority responded by noting the somewhat misaligned incentive that Judge Kozinski’s interpretation would create for refugees such as Vahora that do not seek asylum initially, but rather seek to wait some period of time and evaluate whether tensions might subside in their home country such that return may be possible. In response to the dissent’s claim that “[i]llegal immigrants can now sit on their asylum claims indefinitely, assured that virtually any change in country conditions will excuse their lateness,” the majority found itself unable to “conceive of a reason why any immigrant who intends to seek asylum and has an asylum claim he believes to be meritorious would withhold filing and wait, in the perverse hope that conditions in his homeland might deteriorate, rather than file his application when he is eligible.”

United States Court of Appeals for the Eleventh Circuit Affirms Dismissal of Bollywood Copyright Infringement Claim Against U.S. Hip-Hop Producer
On March 25, 2011, the United States Court of Appeals for the Eleventh Circuit affirmed the dismissal of a copyright infringement suit brought by Bollywood music and distribution company Saregama Indian Ltd. (“Saregama”) against the popular U.S. hip-hop producer Timothy Mosley (a.k.a. “Timbaland”) and various recording companies involved in the production of the 2005 song “Put You on the Game” (“PYOG”) by Grammy-nominated rap artist Jaceon Taylor (a.k.a. “The Game”). Saregama India Ltd. v. Mosley, et al., 635 F. 3d 1284 (11th Cir. 2011).

As musical producer for the work, Timbaland had allegedly interspersed The Game’s choral interludes with an approximately one-second looped vocal snippet from “Baghor Mein Bahar Hai” (“BMBH”), a feature song from the 1969 Hindi cinematic classic “Aradhana.” Specifically, while The Game trumpets a certain mastery over the factional and flirtatious goings-on of his hometown of Compton, California, PYOG listeners hear a mellifluous descending G minor arpeggio chord delivered by a female vocalist. The chord bears similarity to the notes delivered by Aradhana’s female protagonist as she engages in a timeless Bollywood routine: fending off a bedazzled romantic suitor in bucolic pastures, only to find herself drawn ever closer as the song’s melody and rhythmic intricacies develop.
In a 2007 complaint filed with the U.S. District Court for the Southern District of New York, Saregama claimed to own a copyright in the BMBH sound recording pursuant to a 1967 agreement (the “Agreement”) between the Indian film producer, Shakti Films, and Saregama’s predecessor in interest, Gramophone Company of India, Ltd. A federal district court in Florida (to where the case had been transferred) granted summary judgment to the defendants on the basis that the Agreement conferred on Saregama only a two-year exclusive right to re-record any pre-recorded song covered by the Agreement, and that such right became non-exclusive — and ceased being a copyright — at the conclusion of the Agreement’s two-year term. As a result, the Court determined that Saregama did not currently own a copyright in the BMBH sound recording and granted summary judgment without having to address whether BMBH was actually covered by the Agreement, or whether the particular PYOG voiceover sample was sufficiently similar to the BMBH melody.

India Calls for EU Member State Action on Generic Drug Seizures as a Condition to Withdrawing WTO Case
Indian Commerce and Industry Minister Anand Sharma informed members of press on April 6, 2011 that India would withdraw a case filed with the WTO in 2010 on the issue of generic drug seizures by EU transit authorities only when all members of the 27-nation bloc amended their transit rules to prevent such incidents. Sharma reported that the EU had provided India with written confirmation that the seizure of generic drugs in transit was in fact wrong and that customs rules would be amended to stop the seizures. However, Sharma insisted that the case would remain with the WTO until appropriate legislative steps had been taken at the various EU member state levels.

India’s formal request for consultations in 2010 with the EU and Netherlands under WTO dispute settlement rules (European Union and a Member State — Seizure of Generic Drugs in Transit (WT/DS408/1)) cited at least sixteen instances of “seizures of consignments of generic drugs originating in India at ports and airports in the Netherlands on the ground of alleged infringement of patents subsisting in the Netherlands while these consignments were in transit to third country destinations.” India understood the seizures to have been made by Dutch authorities under the so-called “manufacturing fiction,” by which generic drugs actually manufactured in India and in transit to Nigeria, Peru, Brazil, and other destinations were treated as if they had been manufactured in the Netherlands. India alleges the generic drug seizures to constitute an unreasonable and discriminatory restriction on the freedom of transit, in contravention of GATT 1994, and also a violation of WTO rules established as part of the Doha Round to protect certain instances of compulsory licensing of pharmaceuticals for public health purposes.

Following India’s filing of the case in Geneva, a number of other WTO members submitted formal requests to join the consultations with the EU, including fellow manufacturers of generic drugs for international export such as Canada and China, traditional generics importers such as Ecuador, and countries such as Brazil, whose trade interests in generic drugs are driven by import and export considerations alike.

Sean G. Kulkarni is an international trade and economic affairs attorney based in Washington, D.C. Sean currently serves as an International Trade Policy Fellow at the Ways and Means Committee of the U.S. House of Representatives. Sean may be reached at sean.g.kulkarni@gmail.com.

Public Tender Process Protest in India and Defence Procurement

Anand S. Dayal

Defence procurement in India is subject to the legal and regulatory framework governing general public procurement. As a result, governmental procurement processes in India’s defence sector must conform to all applicable public procurement laws, in addition to the guidelines set forth in the Defence Procurement Procedure, 2011, issued by India’s Ministry of Defence. A key measure for ensuring transparency and accountability with respect to public procurement is an effective and independent administrative mechanism whereby participating vendors may challenge the lawfulness of the bid solicitation, review and/or award processes. For example, the UNCITRAL Model Law on Procurement of Goods, Construction and Services (1994) provides for such a review process, and has served as a guide to legislative enactments in other developing countries. Given the absence of this administrative mechanism under Indian law, the judicial system remains the only viable avenue for relief for vendors seeking to challenge the conduct or outcome of the Indian public procurement process.

This article describes the prevailing standards for judicial review of public procurement decisions. An analysis reveals that the available grounds for setting aside a procurement decision — as set out by the Supreme Court of India — are fairly narrow, thereby leaving disappointed bidders with little hope for mounting a successful challenge to a procurement award. However, bidders tend to view procurement litigation as an effective means of delaying a final award so as to allow the unsuccessful bidder to pursue a second chance at the tender process. Assuming bidders can make out a prima facie case of malfeasance with respect to the tender process, bid protest litigation can be effective because lower courts tend to grant a plaintiff-bidder’s request for an interim status quo order whilst the facts are established, even where allegations of process malfeasance or other misconduct are built upon scant or questionable evidence.

Importance of Public Procurement

The pace of global investment and trade with India is accelerating, particularly in the areas of defence and homeland security. An overall public procurement spend of USD [figure awaited] for [2010-2011] is expected. India is viewed as a particularly attractive market in the Obama administration’s National Export Initiative, which aims to double U.S. exports over the next five years. Since defence procurement almost exclusively involves purchases by state owned entities, such as public sector undertakings, ordinance factories and procurement wings of the armed services, businesses in the defence and homeland security sectors are, and will increasingly be, involved in the public procurement process.

Unique Challenges Posed By Defence Procurement

Defence procurement presents certain unique challenges when compared to other categories of public procurement. For example, technical specifications – particularly for weapon systems – often constitute the key determining factor in awarding a defence procurement contract. Conventional wisdom is that once the specifications are written, the “game” is almost over. As a result, bid protests in the defence procurement area tend to place greater emphasis on the early stages of the procurement process, rather than simply the final outcome. Claimants typically allege that the ground rules governing the tender process were somehow unfair to the complainant. A typical “pre-award” protest might involve a claim that some aspect of the solicitation process effectively disadvantaged the claimant in its ability to compete fairly for the contract. Technically, of course, such protests are almost always “post-award,” in the sense that claims tend to be filed only after the bidder is disqualified, or a competing firm is identified as the lowest bidder once the financial bids are made public.

 Rules Governing Public Procurement

Defense procurement in India is centralized and conducted exclusively by the Ministry of Defence. General public procurement, in contrast, is decentralized, and most state, central and public sector agencies have their own procurement departments. Different procurement practices are applied at the central level and at the state level, and by public sector agencies and enterprises wherein the government owns a majority interest.

Selling to the Indian governmental or public sector often proves to be a frustrating experience for foreign suppliers. Indian governmental procurement practices routinely lack transparency and standardization. Moreover, there is no comprehensive law exclusively addressing public procurement in India. However, public procurement processes are subject to, and required to comply with, a variety of individual rules and directives issued by the central government, including the following:

  • General Financial Rules, 2005 (GFR), which sets out general rules and procedures for financial management, procurement of goods and services, and contract management;
  • Delegation of Financial Powers Rules (DFPR);
  • Manual on Policies and Procedures for Purchase of Goods, issued under the GFR;
  • Guidelines on transparency and objectivity in public procurement issued by the Central Vigilance Commission (CVC); and
  • The Defence Procurement Procedure, 2011, and related manuals.

Public procurement bidding in India is generally divided into two stages, as bidders are invited to submit separate technical and financial-related bids (see GFR Rule 152). Technical bids are evaluated first, and are used solely to determine whether the bidder qualifies to continue the process. Once qualified bidders are short-listed, the financial bids are opened in the presence of all short-listed bidders, and the contract is awarded to the qualifying bidder with the lowest financial bid (see GFR Rule 160). The two-stage bid system is used even in more complex and less well-defined procurement processes, such as the award of concessions or the divestment of public sector undertakings.

Challenging the Procurement Award (Bid Protest)

India does not offer an established set of rules or a specialized tribunal for purposes of addressing protests and challenges to the procurement process. Due to the absence of an effective and independent administrative bid-protest process in India, bidder complaints are rarely addressed in a timely manner. A specialized administrative and/or judicial process – modeled along the lines of India’s income tax appeal process, for example – would likely offer timing efficiencies and increased consistency of adjudication with respect to similar claims.

For vendors seeking to challenge a procurement decision, the only meaningful avenue for redress is to petition a court for judicial review of the procurement decision on grounds that the procurement process was not conducted lawfully. Generally such claims may be filed only after specific action is taken by the procuring agency, such as announcing the short-list of qualified bidders, or opening the financial bids and identifying the lowest bid. A court will require as a threshold matter that there be such a specific administrative action giving rise to an actual (not hypothetical) case or controversy. The option of approaching the court prior to short-listing the qualified bidders or revealing the financial bids is generally not available. The inability to file such “pre-award” relief claims — for example, on grounds that the rules of procurement are unfair to the complainant — can prove particularly frustrating in defence procurement, where challenging the specifications used for the procurement is often a key ground of the bid protest.

Besides approaching the court, disappointed bidders can, of course, seek to resolve their concerns with key officials of the procuring agency and seek their intervention. Such attempts at privately negotiated relief rarely lead to a satisfactory resolution. Top officials of the relevant agencies typically prefer not to involve themselves in a procurement dispute out of fear of allegations of favoritism toward a particular bidder. Their inclination is to allow the dispute to be settled in a judicial forum, as the judicial process insulates officials from allegations of misconduct if their award decision is later questioned. On occasion, for less critical matters, the procurement agency may rely on a formal legal opinion of outside counsel certifying, for example, the validity of a decision to disqualify a particular bidder, or some other procurement-related action.

Judicial Review Of Procurement Decisions

Given the lack of an administrative review mechanism, challenges to a procurement decision are brought by filing a petition in the jurisdictional state high court. The legal basis for such petitions lies in Article 14 of the Constitution of India, which prohibits the state from denying to any person equality before law and equal protection of the laws. The relief sought by the challenging bidder is typically an interim order staying the award of the contract or continuation of the project and, ultimately, a plea to set aside the award (if made) and require a re-tender. Often bidders who have been disqualified in the qualification (first) round will challenge their disqualification on the grounds that it was improper.

Judicial review of administrative action generally

There is no statute governing the judicial review of administrative action, including, for example, defense procurement decisions. India lacks a specific legislative enactment that sets forth the grounds, scope and standards of judicial review of administrative action, such as the United States Administrative Procedure Act. Accordingly, the law governing the judicial review of administrative actions has evolved through judicial pronouncements on constitutional doctrine, such as equality before law, protection of fundamental rights and separation of powers. The foundational pronouncement on the appropriate level of judicial review of the government’s exercise of contractual powers is the Supreme Court’s decision in Tata Cellular v. Union of India, AIR 1996 SC 11. In Tata Cellular, the court held that “shortly put the grounds upon which an administrative action is subject to control by judicial review can be classified as under:

  • Illegality: This means the decision maker must understand correctly the law that regulates his decision-making power and must give effect to it.
  • Irrationality — i.e., the so-called Wednesbury principle of unreasonableness (akin to inquiring whether the administrative action has some arguably rational basis; if so, it is acceptable).
  • Procedural impropriety (or, as described by the court in Siemens Public Communications Networks v. Union of India, aninfirmity in the decision making process.”

The court went on to clarify that “[t]he above are only the broad grounds but does not rule out addition of further grounds in course of time.” Later decisions have largely followed the Tata Cellular decision, and have declined to expand the scope of judicial review.

Principles of judicial review of procurement decisions

Applying the foregoing principles of judicial review of administrative action in the context of a challenge to public procurement decisions, the court in Tata Cellular set forth the following six principles:

  • The modern trend points to judicial restraint in administrative action;
  • The court does not sit as a court of appeal but merely reviews the manner in which the decision was made;
  • The court does not have the expertise to correct the administrative decision. If a review of the administrative decision is permitted it will be substituting its own decision, without the necessary expertise which itself may be fallible;
  • The terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract.   More often than not, such decisions are made qualitatively by experts;
  • The Government must have freedom of contract. In other words, a fairplay in the joints is a necessary concomitant for an administrative body functioning in an administrative sphere or quasi-administrative sphere. However, the decision must not only be tested by the application of Wednesbury principle of reasonableness (including its other facts pointed out above) but must be free from arbitrariness not affected by bias or actuated by mala fides; and

(6) Quashing decisions may impose heavy administrative burden on the administration and lead to increased and unbudgeted expenditure.

Later decisions of the Supreme Court have consistently applied the above principles in reviewing procurement decisions. See, e.g., Siemens Public Communication Networks v. Union of India, AIR 2009 SC 1204. Also the court has affirmed that the same principles apply where the grant of a licence is challenged (rather than the award of a tender). Raunaq Int’l Ltd. v. IVR Construction Ltd., AIR 1999 SC 393.

No relief without a showing of mala fide and safeguarding public interest

As the foregoing principles have been applied over time, what has crystallized is that two elements must be satisfied in order for a court to intervene in a public procurement decision:

  • there must be a showing of mala fide, ulterior motive, or favoritism (“when there has been no allegation of malice or ulterior motive and particularly where the court has not found any mala fides or favoritism in the grant of contract,” it is not permissible for the court to intervene. Asia Foundation & Construction Ltd. v. Trafalgar House Construction (I) Ltd. (1997) 1 SCC 738); and
  • there must be a substantial public interest to justify intervention by the court in the interim. Setting aside the award of a contract simply because there would be a saving of public money, for example, is not justified. Sorath Builders v. Shreejikrupa Buildcon Limited, Civil Appeal No. 1127 of 2009, SCT (2009).

With respect to the grant of interim relief, which is also governed by the Specific Relief Act, 1963 and the Code of Civil Procedure, 1908, the court will weigh the balance of convenience, public interest and the financial import of the transaction. Furthermore the party seeking interim relief will be required to provide security for any increase in costs as a result of the ensuing delay and any damages suffered by the opposite party in consequence of an interim order. The Supreme Court has required that “[i]n granting an injunction or stay against the award of a contract by the government, the court has to satisfy itself that the public interest in holding up the project far outweighs the public interest in carrying it out within a reasonable time. Furthermore, “any interim order which stops the project from proceeding further must provide for reimbursement of costs to the public in case the litigation fails. The public must be compensated both for the delay in implementation of the project and the cost escalation resulting from such delay. Unless an adequate provision is made in the interim order, the interim order may prove counter-productive.” Raunaq Int’l Ltd. v. IVR Construction Ltd, AIR 1999 SC 393.

Lower courts more willing to intervene

Challenges to public procurement awards and the grant of some form of interim relief by the courts are common. Although the law as laid down by the Supreme Court permits judicial intervention in public procurement decisions only in relatively narrow circumstances, lower courts have been less restrained in granting interim status quo orders, which are known to be disruptive and costly for defendants. Also challengers at the pleading stage frequently file claims alleging willful misconduct and unlawful influence in the procurement process, despite the absence of credible evidence to substantiate the claims. In such situations, it is not uncommon for a lower court to issue a status quo order pending a limited hearing on the merits, which hearing can take weeks or months to occur. The Supreme Court noted that “it is unfortunate that despite repeated observations of this court in a number of cases such petitions are being readily entertained by the High Court without weighing the consequences.” Ranuaq Int’l cited above. As a guiding principle, the Supreme Court suggested the following maxim “if the government acts fairly, though falters in wisdom, the court should not intervene.”

Anand S. Dayal is a partner with Koura & Company, Advocates and Barrister, based in New Delhi, India. Anand advises US and other multinational companies on their activities in India, including on public procurement. He can be contacted at dayala@vsnl.com or adayal@kouraco.com.

 

The U.S. Foreign Corrupt Practices Act and Doing Business in India

By Rina Pal and James Parkinson

 

Why are American companies in India?  The biggest reason is the high potential of the Indian market and economy. Although the gross domestic product of the U.S. is expected to grow 2.9% for 2011, the economy of India is expected to grow at 8.4%, according to the International Monetary Fund.  While the Indian economy offers immense promise for American companies, there are also particular risk factors associated with doing business in India, and extra caution must be taken to not fall afoul of the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits bribery of non-U.S. officials.

There is a history of corruption in all levels of government in India, and excessive bureaucracy and regulation, left from the days of the so-called License Raj, has left procedures that are complicated and lack transparency.  It is often necessary to obtain approvals from several government officials to obtain one required permit or license. Underpaid civil servants yield broad discretionary power, and some deliberately stall administrative procedures to induce improper payment.  It is also customary in India to give gifts to business contacts and government officials during Diwali and other religious festivals and Indian government officials often solicit donations from businesses for charitable organizations. These need to be scrutinized carefully in light of FCPA guidelines.  In this article, we describe the elements of the FCPA, with a particular focus on doing business in India.

I. Overview of FCPA Enforcement Activity in India

Passed in 1977, the FCPA made the United States the first country to prohibit transnational bribery.  At the time, most countries criminalized bribery of their own domestic officials, but until the FCPA was passed, no country barred bribery of another country’s officials.  Since 1977, dozens of other countries have joined the effort to limit public corruption by passing transnational anti-bribery statutes and by increasing enforcement of domestic anti-bribery laws.

In recent years, the number of FCPA enforcement actions pursued by U.S. authorities has increased dramatically, along with a corresponding rise in monetary penalties and the number of individuals going to prison for FCPA violations.  In 2010, the average corporate fine associated with an FCPA enforcement action exceeded $100 million.  In 2009, four individuals were tried and convicted on FCPA-related charges, and dozens more currently await trial.  These trends reflect the increasing focus of U.S. enforcement agencies on corrupt business practices by companies operating outside the U.S.

Many of these FCPA enforcement actions have involved government officials in India.  For example, the former director of sales for a U.S. industrial valve manufacturing company pleaded guilty to a criminal charge in the U.S. for, among other conduct, paying bribes to an employee of the Maharashtra State Electricity Board in 2008.  Additional enforcement actions include:

  • In 2010, a U.S. offshore drilling company settled an enforcement action with both the Department of Justice and the Securities and Exchange Commission, according to a Complaint filed by the SEC, relating in part to payments made through a third party to customs officials in India.
  • In 2008, a U.S. rail brake manufacturing company settled an enforcement action with both the Justice Department and the SEC, according to a Complaint filed by the SEC, relating to payments made by its Indian subsidiary to officials of the Indian Railway Board.
  • In 2007, a U.S. supplier of heating and cooling equipment settled an enforcement action, according to the SEC Complaint, relating to improper payments to officials of the Indian Navy to obtain orders for service on equipment the company sold to the Indian Navy.
  • In 2007, a U.S. information technology firm settled an enforcement action, according to an SEC Cease and Desist Order, relating to improper payments made by its management consulting subsidiary to officials at two unidentified state-owned enterprises.
  • In 2007, a U.S. chemical manufacturer settled an enforcement action, according to the SEC Complaint, relating to payments made by an Indian subsidiary to officials in the registration function of the Indian government.
  • In 2007, a U.S. manufacturing conglomerate settled enforcement actions with both the Justice Department and the SEC, according to a Complaint filed by the SEC, relating to payments made to an un-named Indian government customer for the sale of gears and parts.
  • In 2001, a U.S. oilfield services company settled an enforcement action related, according to the SEC Complaint, relating in part to payments made to the Indian Director General of Shipping.

Beyond these settled enforcement actions, a number of companies have publicly announced investigations involving improper payments in India obtained during an acquisition.  For instance, in February 2011, Kraft Foods disclosed that it is investigating potential FCPA violations relating to a facility in India.  Given these trends, multinational companies cannot afford to ignore the FCPA in their India operations.

II. Anti-Bribery Provisions of the Foreign Corrupt Practices Act

The FCPA contains two components – the anti-bribery provisions and the accounting provisions – each with different legal elements, different jurisdictional reach, and different facets to the enforcement program. The anti-bribery provisions of the FCPA are codified at 15 U.S.C. §§ 78dd-1, 78dd-2, and 78dd-3.  The accounting provisions are codified at 15 U.S.C § 78(m)(b). In this section, we describe the anti-bribery provisions of the FCPA.

  1. Elements of a Violation

The anti-bribery provisions prohibit any offer, payment, promise, or authorization to pay money or anything of value to any foreign official, political party, or candidates for public office, intended to influence any act or decision in order to assist in obtaining or retaining business. “Anything of value” may include cash, gifts, travel, meals, and entertainment.

In addition, the FCPA proscribes payments made to third parties while “knowing” that a portion or all of the payments will be used by the third party as bribes to foreign officials.  As described in greater detail below, the FCPA defines “knowledge” broadly, intending to capture instances where a person deliberately avoids knowledge of a third party’s bribe payment.

  1. Jurisdiction of the Anti-Bribery Provisions

The anti-bribery provisions of the FCPA are broken into three separate sections, each containing different jurisdictional elements.  First, the statute applies to “[e]very issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title.”  Officers, directors, employees, or agents of issuers may also be subject to jurisdiction under the FCPA by virtue of their relationship with the issuer.

This applies both to issuers based inside and outside the U.S., including the many Indian companies listing shares on U.S. exchanges through the vehicle of American Depository Receipts.  At the moment, over a dozen Indian companies list shares on U.S. exchanges, and are therefore subject to jurisdiction under the FCPA.  Many of the major recent FCPA enforcement actions have involved non-U.S. companies, confirming that this basis for jurisdiction is not theoretical.  Importantly for U.S.-based issuers, the FCPA applies to any conduct, anywhere in the world: there does not need to be a U.S. territorial nexus.

Second, the anti-bribery provisions of the FCPA apply to so-called “domestic concerns,” an unusual term that applies to two categories of persons.  The first category covers private companies organized under the laws of the U.S., or that have their principal place of business in the U.S.  Officers, directors, employees, or agents of private U.S. companies may also be subject to jurisdiction under the FCPA by virtue of their relationship with the domestic concern, even if they are not themselves U.S. citizens.  Natural persons who are citizens, nationals, or residents of the U.S. are also considered “domestic concerns.”  As with U.S.-based issuers, the FCPA applies to domestic concerns for any conduct, anywhere in the world: there does not need to be a U.S. territorial nexus, nor does there need to be any use of the means or instrumentalities of interstate commerce.

Finally, the anti-bribery provisions reach certain corporate and natural persons that do not qualify as either issuers or domestic concerns.  A key for this type of jurisdiction is whether conduct occurred “while in the territory of the United States.”  Indian companies may find themselves subject to an enforcement action if there was some act in furtherance of the violation that took place within the territory of the U.S.

  1. Definition of “Foreign Official” and Indian Government Involvement in the Economy

The FCPA defines a “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”  Under this definition, a “foreign official” would clearly include a very significant number of officials in India, such as military officers in charge of procurement contracts or ministry-level officials.

Furthermore, because the definition reaches to “employees… of a foreign government… instrumentality,” the FCPA may extend to people not intuitively identified as government officials.  Government-owned or government-controlled business or enterprises are an important and wide-spread feature of the Indian economy, and many FCPA enforcement actions involve state-owned enterprises.  For example, there have been FCPA enforcement actions involving doctors employed by state-owned hospitals; officials at government-controlled airports; employees at government-owned steel mills; employees of one country’s national oil company; and, employees of a state-owned telecommunications company.

This is an uncertain and therefore risky area of the FCPA.  The notion of who constitutes a government official should be carefully considered by companies doing business in India, and companies must focus on such factors as the level of share ownership, board composition, and other facts of the control exercised by the government over the company.

  1. Application of the FCPA’s “Facilitation Payments” Exception in India

An important challenge of doing business in India involves responding to solicitations of small-scale bribery for such basic government-provided services as telephone or power, medical services, or customs clearance.  These solicitations are often to obtain a service for which one is already entitled.  Indeed, a recent BribeLine report by the non-governmental organization Trace International observed that “[s]eventy-seven percent of reported bribe demands in India were related to the avoidance of harm, including securing the timely delivery of a service to which the reporter was already entitled (such as clearing customs or having a telephone line installed) and receiving payment for services already rendered…”

Bribes in India often are low value and high in frequency.  A 2007 report on corruption by Transparency International India related to the trucking industry observed that “[t]rucks plying on road pays anywhere between Rs 211 and Rs 266 as bribe money per day depending upon the route.”  The study observed:

[T]ruckers pay bribes at every stage of their operations, which starts with getting registration and fitness certificates, and for issuance and renewal of interstate and national permits.  The reason for paying bribe, while on road, include plying overloaded trucks, traffic violations, parking at no-parking places or entering no- entry zone, and in the payment of toll and other taxes like octroi, sales tax etc.

According to the BribeLine Report, “cases of bribery demands in India over a 16 month period reveals that more than half of the reported bribe demands were for $100 or less, and approximately 84% of the reported demands were for $5,000 or less.” The report states:

The greatest sources of bribe demands, in order of descending frequency, were from national level government officials (33%), the police (30%), state/provincial officials and employees (16%), and city officials (10%). A further analysis of the specific Indian ministries requesting bribes at the national level shows that 13% of those demands originated from the national office of Customs and 9% each were from the national offices of Taxation and Water. Bribe demands were also reported being made from individuals affiliated with the Justice System, Visas & Immigration, Mines & Minerals, Construction, Defense, Energy, Foreign Affairs, Forestry, Health Services, Information/Communication and Land.

The FCPA contains an exception for “any facilitating or expediting payment … the purpose of which is to expedite or to secure the performance of a routine governmental action.”  A “routine governmental action” is defined in the statute as “only an action which is ordinarily and commonly performed by a foreign official,” and a number of examples are offered, including:

obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country[.]

There is no monetary limit set in the statute, and U.S. enforcement authorities have made very clear that this exception will be narrowly construed when making an evaluation whether to institute an enforcement action.

Despite the superficial appeal of this exception, particularly in the context of frequent demands for small bribe payments for seemingly routine services, the line between “routine governmental action” and “assisting in obtaining or retaining business” can in practice be very difficult to define with certainty, creating real risks for those companies availing themselves of the statutory exception.  Moreover, as explained elsewhere in this issue of the India Law News, Indian law does not contain an analogous exception for facilitating payments.  Thus, what might be permitted under U.S. law could be barred under Indian law. Furthermore, under the soon-to-be-implemented UK Bribery Act, there is no analogous exception.  Of particular note, in November, 2009 the Organization for Economic Co-operation and Development (OECD) announced a new recommendation at the OECD’s celebration of “International Anti-Corruption Day” and the Tenth Anniversary of the “Entry into Force of the OECD Anti-Bribery Convention.”  In its recommendation, the OECD sought to do away with the FCPA’s exception for facilitating payments.

Finally, U.S. enforcement authorities have made very clear that, where a permissible “facilitating payment” has been made, it must be clearly and accurately documented.  Thus, for issuers, the books and records of the company must indicate how much was spent on facilitating payments, the name and position of the recipient, and there must be appropriate internal compliance controls to ensure that the payments indeed qualify for the exception.  These are very challenging policies to apply with consistent discipline.

  1. Affirmative Defenses

The FCPA contains affirmative defenses for two types of conduct.  First, if “the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s [ ] country,” the affirmative defence applies.  Importantly, the local law must be “written,” so that local practice, customary, or unwritten enforcement policies do not qualify.  In a recent FCPA prosecution against investor Frederic Bourke, a U.S. federal trial court sharply limited the availability of this defence, so this defence offers only very limited protection under the FCPA.

The second affirmative defense is much more commonly used.  Where “the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate,” the affirmative defense may apply.  Any such expense must, though, be “directly related” to either “the promotion, demonstration, or explanation of products or services; or… the execution or performance of a contract with a foreign government or agency thereof.”

For companies electing to incur expenses on behalf of government officials, it is very important to develop appropriate compliance controls to ensure that these expenses are properly approved and documented.  A number of FCPA enforcement action have focused on travel, lodging and entertainment provided by U.S. companies to foreign officials, confirming the U.S. enforcement policy that such expenses must be appropriately controlled.

III. Accounting Provisions of the Foreign Corrupt Practices Act

The FCPA’s accounting provisions – applicable only to issuers – compliment the anti-bribery provisions by requiring issuers to maintain accounting accuracy and transparency, and to strengthen internal controls.  As noted above, an “issuer” under the FCPA may be based in the U.S. or elsewhere, and over a dozen Indian companies list shares on U.S. exchanges.  The accounting provisions therefore apply to each of these India-based issuers, as do the anti-bribery provisions described above.

The accounting provisions contain two subsections, termed the “books and records” and “internal controls” provisions.  The “books and records” component of the FCPA requires all issuers to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”

The “internal controls” provisions of the FCPA require issuers to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:

  • transactions are executed in accordance with management’s general or specific authorization;
  • transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
  • access to assets is permitted only in accordance with management’s general or specific authorization; and
  • the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

IV. Penalties for Companies and Individuals

Corporations and individuals who violate the FCPA face significant sanctions.  The average corporate monetary sanction in 2010 exceeded $100 million, and many individuals are in prison right now as a result of FCPA convictions or guilty pleas.  Dozens more individuals await trial or sentencing.

For corporations, criminal penalties may reach up to $2 million for each violation of the anti-bribery provisions and criminal fines of up to $25 million for issuers that violate the accounting provision.  Corporations found liable for either criminal or civil FCPA violations may have to disgorge proceeds associated with improper payments; may be subject to suspension and debarment actions limiting business opportunities with the U.S. government; and, may be subject to oversight for a period of time by an independent compliance monitor, which reports to the DOJ.

For individuals, conviction of an anti-bribery violation may result in up to five years in prison and up to $250,000 in fines per violation.  For accounting violations, criminal penalties for individuals are up to $5 million and 20 years imprisonment.  The FCPA prohibits companies from paying any fines levied against individuals, either directly or indirectly. The government may also levy equitable remedies on individuals, such as an injunction that bars them from serving as a director or officer.

V. Managing the Risks of Liability for the Conduct of Others: Consultants, Agents and Other Third Party Intermediaries

Companies doing business in India frequently enlist third parties such as agents, distributors and consultants, to identify business opportunities, obtain market intelligence, and interact with government agencies for such routine matters as tax, customs and lobbying.

The FCPA risks associated with using these kinds of intermediaries are acute, as the FCPA prohibits doing indirectly that which would be prohibited if done directly.  The statute addresses this in two ways.  First, the anti-bribery provision prohibits payments to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official…”  This means that anyone subject to the FCPA is barred from using a third party intermediary, knowing that the third party will make an improper payment.

Second, the FCPA contains a definition of “knowledge” intended to address circumstances where a person might shield themselves from knowledge by quipping “I don’t want to know.” The FCPA provides, in part, that “[w]hen knowledge of a particular circumstance is required knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.”  Thus, payments to third parties made while “knowing” that all or part of the payment will be received either directly or indirectly by a foreign official, render such payments illegal.  When faced with the decision whether to obtain information confirming or refuting that a payment will be made, one takes a great risk in remaining “willfully blind” or “deliberately ignorant” to the information simply in order to circumvent FCPA liability.

Today, the majority of FCPA enforcement cases brought by the DOJ and the SEC involve the use of third party intermediaries.  To manage the risks that the conduct of another party will create FCPA liability, companies have become much more vigilant about the intermediaries they hire, and managing those intermediaries to eliminate corruption risks.  There are many helpful lists of “red flag” questions to ask before entering into an intermediary relationship, including:

  • Whether the agent is related to or has a close relationship with a public official.
  • Requests for false invoices or invoices with inadequate support for charges.
  • Fees exceeding normal market rates.
  • Whether the third party will sign an FCPA compliance certification.
  • Unusual methods of payment, such as outside of India or to another third party.
  • Lack of credentials or experience.

 VI. Mergers, Acquisitions and Joint Ventures

Mergers, acquisitions and joint ventures serve as important instruments for companies entering the Indian market, and these commercial activities are likely to continue or increase in frequency.  Under the FCPA, however, a merger or acquisition may not extinguish liability for past unlawful conduct by the acquired company, according to a DOJ Opinion Procedure Release, and joint ventures present significant compliance risks.

FCPA prosecutions stemming from mergers, acquisitions, and joint ventures are increasingly common, but there are ways to mitigate risks presented by M&A.  Companies contemplating mergers and acquisitions in India and elsewhere will be well-served to conduct FCPA-specific due diligence to evaluate and address any potential FCPA problems before the deal closes.  Basic strategies to finalize deals in order to minimize FCPA liability are essential, including a comprehensive, risk-based diligence process; reviewing relevant financial and accounting records and key employee emails; interviewing employees; assessing the corruption level in the Indian target’s industry; identifying the target’s business involving government officials and agencies; reviewing government contracts, licenses, registrations and other permissions to do business; reviewing the company’s use of third party intermediaries, including agents, representatives, distributors, consultants, lobbyists and others; reviewing relevant third party agreements for appropriate anti-corruption language; evaluating the target’s anti-corruption policies and procedures; requesting information concerning any prior anti-corruption problems and investigations; including FCPA compliance and resolution of FCPA issues as conditions to closing; where appropriate, voluntarily disclosing to the Justice Department and SEC any past illicit activities before closing; cooperating with any U.S. government investigation; and remediating illicit activities by terminating relationships with employees and third party intermediaries, entering into new contracts, and conducting effective compliance training.

 VII. Compliance Policies and Procedures

Compliance with U.S. and Indian anti-corruption laws poses crucial challenges for companies doing business in India, but companies can seek to minimize anti-corruption liability by creating, implementing, and enforcing a robust compliance program.  A structured compliance program acts both to educate employees about prohibited conduct and to deter misconduct at an early stage.  U.S. enforcement authorities have made clear that companies with effective corporate compliance policies will receive credit for those programs during settlement negotiations or charging decisions, and that those without effective policies may receive harsher punishments. The SEC and the Justice Department have each announced that the quality of a company’s compliance policies will be considered in determining penalties for businesses violating U.S. law.  In several cases, the penalties imposed by U.S. enforcement authorities reflected, in part, their view that the company’s compliance program was inadequate.

VIII.  Conclusions

Corruption presents serious legal and commercial risks in many countries, including India.  These corruption risks present daily challenges to companies and executives working in India, and to counsel advising clients on how to operate successfully in India.  Although India’s anti-corruption laws may have been under-enforced in the past, the Indian government has recently taken a strong public stand against corruption.  This has been more than rhetoric, as the number of high-profile corruption investigations has increased, and there are vigorous calls for additional investigations.  Companies operating in India cannot escape scrutiny given the breadth and reach of the U.S. FCPA, and the stringency of the Indian law.

 

Rina Pal is the Director of India Studies at The George Washington Law School.  She may be reached at rpal@law.gwu.edu. 

James Parkinson is a partner at BuckleySandler LLP, in the Washington, D.C. and Los Angeles offices.  He may be reached at jparkinson@buckleysandler.com.