Foreign Corrupt Practices Act, 1977 (US) and India

Introduction

The Foreign Corrupt Practices Act (FCPA) is a federal law, enforced by the U.S. Department of Justice, which prohibits payments, gifts, or even offers of “anything of value” to a “foreign official” for the purpose of influencing the official or otherwise “securing any improper advantage” in obtaining, retaining or directing business.

Background

The idea of Foreign Corrupt Practices Act (FCPA) is to make it illegal for companies and their supervisors to influence foreign officials with any personal payments or rewards. The FCPA applies to any person who has a certain degree of connection to the United States and engages in foreign corrupt practices. The Act also applies to any act by U.S. businesses, foreign corporations trading securities in the U.S., American nationals, citizens, and residents acting in furtherance of a foreign corrupt practice whether or not they are physically present in the U.S. This is considered the nationality principle of the act. Any individuals that are involved in those activities may face prison time.

This act was passed to make it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. In the case of foreign natural and legal persons, the Act covers their deeds if they are in the U.S. at the time of the corrupt conduct. This is considered the protective principle of the act. Further, the Act governs not only payments to foreign officials, candidates, and parties, but any other recipient if part of the bribe is ultimately attributable to a foreign official, candidate, or party. These payments are not restricted to monetary forms and may include anything of value. This is considered the territoriality principle of the act.

In simple words, The Foreign Corrupt Practices Act (FCPA), enacted in 1977, generally prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business. The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and agents. Agents can include third party agents, consultants, distributors, joint-venture partners, and others.

The Act concerns the intent of the bribery rather than the amount, there is no requirement of materiality. Offering anything of value as a bribe, whether cash or non-cash items, is prohibited.

The FCPA also requires companies whose securities are listed in the U.S. to meet its accounting provisions. These accounting provisions operate in tandem with the anti-bribery provisions of the FCPA, and require respective corporations to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. An increasing number of corporations are taking additional steps to protect their reputation and reduce their exposure by employing the services of due diligence companies tasked with vetting third party intermediaries and identifying easily overlooked government officials embedded in otherwise privately held foreign firms. This strategy is one element of an effective FCPA Compliance Program, as it shows a sincere attempt to avoid business situations where high risk (prior history or proximity to unethical behavior) individuals are concerned.

What is a Corrupt Purpose

One is acting with a corrupt purpose if he/she offers, promises, or provides something of value to a foreign official — either directly or through a third party — to improperly influence the foreign official in order to obtain, retain, or direct business or to secure any improper business advantage.

Intent of Payments Covered under the Act

Regarding payments to foreign officials, the act draws a distinction between bribery and facilitation or “grease payments”, which may be permissible under the FCPA, but may still violate local laws. The primary distinction is that grease payments or facilitation payments are made to an official to expedite his performance of the routine duties he is already bound to perform. The exception focuses on the purpose of the payment rather than on its value. Payments to foreign officials may be legal under the FCPA if the payments are permitted under the written laws of the host country. Certain payments or reimbursements relating to product promotion may also be permitted under the FCPA.

Exceptions

Generally, there are three situations in which payments to foreign officials would not result in liability

under the FCPA. One approach is to show that the challenged conduct falls within the so-called “routine

governmental action” exception to the FCPA. The other two situations involve invoking what are known as “affirmative defenses.” An affirmative defense generally is an assertion of facts and arguments that, if true, will defeat the prosecution’s claim, even if all the allegations made by the prosecution are true. There are two affirmative defenses under the FCPA. The exception and the two affirmative defenses are as follows:

Exception: Routine Governmental Action

The FCPA does not apply to any “facilitating or expediting payment,” the purpose of which is to expedite or secure the performance of a “routine governmental action.” Routine governmental action encompasses those actions which ordinarily and commonly are performed by a foreign official in:

1. Obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country.

2. Processing governmental papers, such as visas and work orders.

3. Providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country.

4. Providing telephone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or

5. Actions of a similar nature.

Routine governmental action does not include, among other actions, any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a company, or any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to, or continue business with, a company.

Two Affirmative Defenses:

There are two circumstances under which a payment, gift, offer, or promise of anything of value to a foreign official may qualify as an “affirmative defense” under the FCPA:

1. The payment, gift, offer, or promise of anything of value is lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country; or

2. The payment, gift, offer, or promise of anything of value is a reasonable and bona fide expenditure, such as travel and lodging expenses, directly related to the promotion, demonstration, or explanation of products or services, or the execution or performance of a contract with a foreign government or agency thereof.

This means that, if you are accused of bribing a foreign official, you would have an affirmative defense if you could show that the payment, gift, offer, or promise of anything of value to the foreign official was lawful under the written laws and regulations of that foreign official’s country, or was related to a reasonable and bona fide expenditure as described above.

In relying on the local law of the foreign country as an affirmative defense for a payment, gift, offer, or promise of anything of value to a foreign official, the law or regulation being relied upon, at the time of the conduct, must be “written.” Local practice, custom, or other unwritten policies do not qualify as an affirmative defense.

In addition, recent FCPA enforcement actions have involved travel, lodging, and entertainment provided to foreign officials. As with the exception for facilitation payments, issuers that incur these types of expenses on behalf of foreign government officials must have the appropriate internal controls and compliance procedures in place to provide that these expenses satisfy the “reasonable” and “bona fide” criteria of this affirmative defense and are properly approved and documented in the issuer’s books and records.

Sanctions and Penalties

The sanctions for FCPA violations can be significant. Companies that have committed either civil or criminal FCPA violations may have to pay back profits obtained by making improper payments through disgorgement or restitution plus prejudgment interest, pay substantial criminal fines or civil penalties, and/or be subject to oversight by an independent compliance monitor, and for criminal violations they may also be subject to suspension and debarment actions limiting business opportunities with the U.S. government.

For individuals, conviction of a criminal FCPA violation may result in imprisonment and significant fines. The FCPA prohibits companies from paying fines incurred by individuals, either directly or indirectly. Individuals also are subject to significant civil penalties and disgorgement plus prejudgment interest.

A case, where ultimately an individual was booked under FCPA regulations is produced below for better understanding:

The Louis Berger Group, Inc. (“LBG”) filed a complaint in New Jersey state court on June 10, 2016 against a former Senior Vice President of the company, Richard Hirsch, alleging that Hirsch violated his fiduciary duties to the company by authorizing improper payments in violation of the Foreign Corrupt Practices Act (“FCPA”) in Vietnam and Indonesia from 1999-2004. At the time of the payments, Hirsch was the senior LBG employee in Indonesia, the Philippines and Vietnam. The payments were the subject of an FCPA investigation by the Department of Justice (“DOJ”) and resulted in, among other things, a July 2015 settlement in which LBG paid a $17.1 million monetary penalty and agreed to retain a compliance monitor for three years. LBG also was subject to a period of debarment by the World Bank.

LBG’s complaint alleges that Hirsch’s conduct violated both the FCPA and company policies. LBG seeks to recover the financial penalty paid by the company, the fees incurred in connection with investigating the improper payments and resolving the matter with the DOJ, damages relating to alleged harm to LBG’s reputation and business relationships, and payments that were advanced to Hirsch to cover his legal fees and expenses in connection with the DOJ investigation. According to the complaint, LBG terminated Hirsch’s employment in 2011, after he had declined to cooperate with the company’s internal investigation. Hirsch pleaded guilty to FCPA violations in July 2015, and is expected to be sentenced next month.

Recent pronouncements and policy initiatives by the DOJ emphasizing its efforts to hold individuals accountable for corporate misdeeds, including under the FCPA, have provided sobering reminders to business executives of the need for rigorous compliance and the consequences of missteps. Prior Alerts have addressed the implications of these policies and the prospects that individuals and employers could face not only potential claims or prosecution by governmental authorities, but also follow-on civil litigation, including shareholder class actions and derivative actions. The LBG complaint highlights yet another avenue of potential exposure for individuals involved in improper business activities. Given the high costs of many FCPA-related investigations and the large fines and potential collateral consequences imposed in many FCPA investigations, claims such as LBG’s could expose business executives to substantial liability.

Accounting Provisions

The FCPA has two related accounting requirements:

1. Books and records

2. Internal controls

The “books and records” provisions require a company 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 company.

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

1. Transactions are executed in accordance with management’s authorization.

2. Transactions are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets.

3. Access to assets is limited to management’s authorization.

4. The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Historical instances of non-compliance of FCPA

1. In 2008, Siemens AG paid a $450 million fine for violating the FCPA. This is one of the largest penalties ever collected by the DOJ (Department of Justice) for an FCPA case. The Siemens bribery scandal in Greece, is a corruption and bribery scandal in Greece over deals between Siemens AG and Greek government officials during the 2004 Summer Olympic Games in Athens, Greece regarding security systems and purchases by OTE (OTE is a Greek telecommunication provider) in the 1990s.

2. In 2012, Japanese firm Marubeni Corporation paid a criminal penalty of US$54.6 million for FCPA violations when acting as an agent of the TKSJ joint venture, which comprised Technip, Snamprogetti Netherlands B.V., Kellogg Brown & Root Inc., and JGC Corporation. Between 1995 and 2004, the joint venture won four contracts in Nigeria worth more than US$6 billion, as a direct result of having paid US$51 million to Marubeni to be used to bribe Nigerian government officials.

3. In 2012 Smith & Nephew paid US$22.2 million to the DOJ and SEC, and Bizjet International Sales and Support Inc. paid US$11.8 million to the DOJ for bribery of foreign government officials. Both companies entered into a deferred prosecution agreement.

4. In March 2012, Biomet Inc. paid a criminal fine of US$17.3 million to resolve charges of FCPA violations and US$5.5 million in disgorgement of profits and pre-judgment interest to the SEC.

5. In January 2014, ALCOA paid $175 million in disgorgement of revenues and a fine of $209 million to settle charges that its Australian bauxite mining subsidiary retained an agent that made bribes to government officials in Bahrain and to officers of Aluminum Bahrain B.S.C. to secure long-term contracts to supply the company with bauxite ore.

6. In March 2014, Marubeni Corporation agreed with the DOJ to pay a US$88 million fine after pleading guilty to taking part in a scheme to pay bribes to high ranking Indonesian officials in order to secure a lucrative power project.

7. On February 24, 2015, the Goodyear Tire and Rubber Company “Goodyear” agreed to pay more than $16 million to settle FCPA charges that two of its African subsidiaries allegedly paid $3.2 million in bribes that generated $14,122,535 in illicit profits. The SEC FCPA charges involved Goodyear subsidiaries in Kenya and Angola for allegedly paying bribes to government and private-sector workers in exchange for sales in each country. According to the SEC because “Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries” and, for the Kenyan subsidiary, “because it failed to conduct adequate due diligence” prior to its acquisition. It was not alleged that Goodyear had any involvement with or knowledge of its subsidiaries’ improper conduct.

How businesses are tackling post FCPA environment

Businesses increasingly focus on their core competencies, and as a result engage more third parties to provide critical business functions. Companies do not have direct control over their third-party providers, which expose them to regulatory and reputational risk of FCPA violations by those third parties. Under the FCPA, businesses are accountable for activities involving both their internal and external relationships. Companies that operate internationally, or that engage third parties in countries with a high Corruption Perceptions Index, are especially at risk. Many companies have now adopted “anti-bribery/anti-corruption” (ABAC) solutions to combat this risk and help protect themselves from fines and reputational damage.

ABAC compliance solutions are a subset of third party management. These systems can automatically manage third party information and monitor their ongoing activities in compliance with FCPA regulation. Most of the companies have started adopting ABAC policies as a standard measure to avoid non-compliance of FCPA.

Other methods adopted:

1. Adopt a Code of Ethics Policy to demonstrate “zero tolerance” toward bribery, corruption and non-compliance of FCPA.

2. Conduct regular trainings for employees to apprise them on the Code of Ethics policy, anti-bribery and FCPA provisions

3. Undertake robust, thorough due diligence of third parties before appointing them

4. Set up an effective Internal control mechanism

5. Set up hotline for employees to report on red flags and other issues pertaining to Anti-Bribery, Anti-Corruption

Significance and Applicability from Indian Perspective

India has been ranked 81 among 180 countries on Corruption Perceptions Index, 2017 which makes it moderately prone to corrupt practices being prevalent for businesses.

US is the second largest source of FDI in India and also the second largest trade partner after EU. Not only that, US is the largest services export destination for India as well. In fact, American companies in India form the major part of the foreign companies operating in this country. According to the American Chamber of Commerce in India, their membership base has soared up from zero in 1992 to more than 300 till date.Out of the top 20 IT companies operating in India, 9 are from the U.S. These American companies in India account for about 37% of the turnover of the top 20 firms operating in India.

The above paras, if read in harmony, clearly states the need to understand the applicability and compliance of FCPA in India by certain entities. Its applicability in Indian sphere can be better understood by following examples:

1. In March 2011, Wal-Mart, the US-based company had started a worldwide review of its policies, practices and internal controls for Foreign Corrupt Practices Act (FCPA) compliance. Since the implementation of the global review and the enhanced anti-corruption compliance programme, the company has identified additional allegations regarding potential violations of the FCPA.

According to news reports, Bharti Wal-Mart, Wal-Mart’s joint venture with India’s Bharti Enterprises suspended a few associates and committed to conduct a complete and thorough investigation as a part of abovementioned review.

2. Recently, The Central Vigilance Commission (CVC) has unearthed a corruption network that allegedly operated at the highest levels of the National Highway Authority of India (NHAI) and Directorate General of Central Excise Intelligence (DGCEI). The watchdog said US infrastructure contractor CDM Smith paid bribes of about $1.18 million (Rs 7.5 crore) to the officials to win contracts and avoid service tax payments.

3. In another case last year, it was reported in the news that Global confectioner and food major Mondelez International will pay USD 13 million penalty to the US government for its subsidiary, erstwhile Cadbury India, violating anti-corruption law while getting regulatory approvals for the expansion of a unit in Himachal Pradesh. The matter relates to the violation of Foreign Corrupt Practices Act (FCPA) in India by Cadbury India, which had in 2009, took the help of an agent to obtain “outside assistance” in securing various licenses and approvals to increase production capacity of one of its unit at Baddi, Himachal Pradesh.

Example of Risky Area

CSR activities under Indian Companies Act

India’s Companies Act of 2013 requires that certain companies must spend, on CSR activities, at least two percent (2 percent) of their average net profits made during the three immediately preceding financial years. The act further requires companies to publish a clearly articulated CSR policy and to establish a CSR committee of the board of directors to oversee all CSR spending.

Charitable contributions present a known opportunity for bribery. In the context of CSR activities, bribe requests typically arise in two circumstances

1. In selecting which charitable or nongovernmental organizations to which the company should allocate its CSR spending; and

2. If a company decides to undertake CSR activities directly (as opposed to making charitable contributions) in obtaining the necessary permissions, approvals, and licenses to engage in/conduct/execute the CSR activities.

Although the U.S. Securities and Exchange Commission and the U.S. Department of Justice acknowledge that legitimate corporate charitable giving does not violate the FCPA (and, indeed, encourages corporate social responsibility), the agencies have warned against using the charitable contributions as a way to bribe foreign officials.

The SEC’s 2016 enforcement action against Nu Skin is illustrative of how charitable contributions, when given for improper reasons, can violate the FCPA. According to the SEC, Chinese officials uncovered evidence that Nu Skin’s subsidiary in China violated local rules regulating direct selling and, in turn, threatened to impose a fine of 2.8 million RMB ($431,088). Managers at Nu Skin China asked a high-ranking party official to intervene in the dispute, offering in return that Nu Skin China would make a donation to a charity of the party official’s choice. Nu Skin China subsequently made a 1 million RMB ($150,000) donation to a charity identified by the party official and, two days after the donation ceremony, Nu Skin China received notice that it would not be charged or fined for purportedly violating the direct-selling regulation.

According to the SEC, Nu Skin’s charitable donation “was inaccurately and/or unfairly described as a donation rather than a payment to influence the Party Official to favorably impact the outcome of the AIC investigation.” The SEC further noted that, “given the well-known corruption risks in China, Nu Skin U.S. did not ensure that adequate due diligence was conducted by Nu Skin China with respect to charitable donations to identify links to government or political party officials and to prevent payments intended to improperly influence such persons in violation of the company’s anti-corruption policy and the FCPA.” In settling the investigation with the SEC, Nu Skin paid over $750,000 in disgorgement, civil monetary penalties, and prejudgment interest.

Mitigations of such Risks

1. Policy Framework: Companies should have a clearly articulated CSR policy and establish a CSR committee of the board of directors to oversee all CSR spending, as is required under Indian law. The CSR policy should, in turn, reference and incorporate the company’s anti-bribery policies and must lay out the manner, form, and procedure for allocating CSR spending.

2. Due Diligence: Companies should conduct thorough due diligence on the charities to which they allocate CSR contributions. While India’s anti-corruption enforcement efforts have improved, India still remains a challenging business environment. In addition, companies have the ability under the act to pool charitable efforts with other companies. Pooling CSR spending is an attractive option for companies to consider, as it minimizes the possibility of one company directing CSR spending for the purpose of improperly influencing a public official to act on that company’s behalf.

3. Transfer of Funds: Companies should ensure that funds are deposited directly into an authorized account of the designated charitable organization or foundation, and not to an individual recipient. Payment should be made via a verifiable source, such as check or wire transfer. Contributions should never be made in cash.

4. Independent Projects: Companies that elect to fulfill CSR requirements through internal initiatives (as opposed to making external contributions) should apply the same FCPA controls and procedures that the company would use in other commercial business activities. By way of example, a company that uses CSR funds to build community bathrooms should ensure that it has obtained all necessary permissions and approvals in a timely manner. The lack of proper documentation, even for a charitable project, significantly raises the potential for bribe requests.

5. Monitoring: Companies should monitor donations and projects undertaken to confirm that their contributions are being used for the stated purpose. To this end, companies should consider implementing control measures such as auditing, compliance certifications, anti-corruption provisions, and staggered release of contributions.

6. Documentation: Importantly, companies should maintain a due diligence file documenting each step taken by the company in selecting the charity. In the event that U.S. regulators question the propriety of CSR spending, the company’s best defense will be complete and accurate documentation on how it allocated CSR funds.

Clearly, multinational companies preparing to do/ are doing business in India should be rigorous when it comes to fighting corruption. This can include instituting a culture of FCPA compliance across Indian subsidiaries, affiliates, and alliances by focusing on creating strong due diligence, internal audit departments, and training programs as well as clear policies and procedures.

Due diligence should be at the top of the list when looking to acquire a company or form an alliance in India and it should continue to be an ongoing part of doing business in the country once a deal is consummated. For any company that is doing business abroad, and in particular in India with partners, a company needs to have in place rigorous due diligence procedures both with respect to the entities in the contracts that they are entering into and have entered into as well as the executives and senior management of the companies they’re going to be doing business with.

Any FCPA violations and vulnerabilities should be identified. In very specific circumstances, the DOJ may allow extension of the due diligence period beyond a merger deadline to allow more thorough scrutiny by the acquiring entity. As part of a stringent due diligence process, companies should be familiar with their business counterparties’ qualifications, reputation, work scope, and whether any individual at the entity has government ties. The company needs to know who they are doing business with. If they are starting up an organization or replacing their senior leadership, they need to know what is the executive’s pattern (of conduct), past history, and reputation. Knowing that can help them be very successful in managing the culture and the tone of the local organization.

Any suspicion of FCPA violations should trigger an investigation by a team from compliance, legal or internal audit departments of accounting documents and significant correspondences for signs of any wrongdoing, such as false documentation, which can be a big problem in India. It is recommended that longer term organizations set up an internal audit group that goes throughout the organization globally and spends some time in the local subsidiaries evaluating the fraud risk, the red flags and doing some interviews, talking to employees and looking at transactions.

Electronic-search techniques using key words or data-anomaly tests and data mining through the accounting system can help expedite the investigation if circumstances allow such access. Follow-up with interviews of employees, vendors, customers, distributors and suppliers can also help reveal violations.

Remedial action should be taken to correct any problems, even renegotiating contract terms to what they might have been without the illegal payment. Before closing a deal, opinions can be obtained from the DOJ about the set of facts and whether they will violate the FCPA. It would be prudent for companies to highly consider the DOJ’s opinion. Training and education can also be crucial in combating bribery and corruption. Employees must understand what is and is not allowed in clear communications from the top of the company. One of the leading practices in this arena is to have an FCPA specialist in-country to carry on an open dialogue along with the company’s local leaders on the FCPA and anti-corruption. It is also important to have someone who is highly respected within the organization leading the training, making himself or herself available for casual questions or consultations. It has to be interactive. It has to be responsive, because there are a lot of situations where someone may perceive that it is a problem when in fact it is not and of course the reverse occurs.

Online and in person training focused on practical issues and real-life case studies should be provided, since they are critical to underscoring what constitutes violations and how to avoid them. Having a whistleblower hotline to encourage employees — as well as vendors and customers, to report violations not only helps combat corruption but also makes it clear that the company values compliance. A whistleblower hotline can help the company determine whether they are doing the right thing and if their ethics and compliance policy is being followed.

Strong internal audit programs can also help drive effective firm-wide FCPA compliance as internal auditors can test and confirm that FCPA controls are working as intended. Internal auditors can help identify areas at high risk for corruption and investigate any red flags through interviews with employees and by testing transactions.

Another essential component in the fight against FCPA violations is the dissemination of clear and concise policies across a firm, including Indian subsidiaries — outlining what is allowed and the procedures to be followed. This is especially important where there are grey areas such as facilitation payments, while such payments are done to speed up routine government functions are allowed, they can be hard to distinguish from bribes and can be viewed quite narrowly by regulators.

For example, Westinghouse Air Brake Technologies Corporation discovered this when the SEC recently concluded that payments by their Indian subsidiary to try to stop frequent tax audits, among other things, were made to influence the outcome and as such were bribes. To avoid any confusion, many companies, simply do not permit facilitation payments.

Summary

While avoiding FCPA violations can be difficult, for companies doing business in India it can be even more challenging. To be successful in steering clear of potential FCPA violations, companies should implement a firm-wide culture of compliance with effective due diligence, internal audit practices, training and education, and clear policies and procedures. One of the key points is the setting of the right culture and tone from the top.

Highly-effective companies share their code of conduct and compliance policy broadly with vendors and customers. It’s important that companies take steps to ensure that their (business) partners are operating in a clean fashion. Moreover, certifications from all counterparties that they will abide by FCPA requirements must be taken. These are all things that companies can and should do, and if they receive pushback from the third party, that should be an enormous red flag about going forward with the relationship. Along similar lines, Transparency International India is encouraging corporations in the public sector to sign an integrity pact before bidding on government contracts in which all participants — including the government, agree not to take or offer bribes or suffer penalties if they do.

When a company suspects or uncovers an FCPA violation, its response can be crucial in preventing repeat offenses. Leadership should carefully consider each situation, including asking people to leave the organization or terminating certain relationships with vendors. These are the type of actions that make employees, vendors, and customers understand that you are serious about compliance with the organization’s policies and procedures and that you do live by its code of conduct.

CA Anurag Gupta