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.

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