Mohit Saraf Senior Partner Luthra & Luthra Law Offices

AMERICAN CONFERENCE INSTITUTEFCPA Compliance in Emerging MarketsEffective Country-Specific Strategies to Detect and Mitigate FCPA RisksChallenges and Compliance under Indian Anti-corruption Laws Mohit Saraf Senior Partner Luthra & Luthra Law Offices

Importance of Cross Border Compliance • As nations and regional groupings seek to implement stricter laws with respect to bribery and corrupt practices, the legal risks faced by trans-national corporations are becoming more complex. • Scope and operation of anti-corruption laws such as the US FCPA and the new UK Bribery Act is not restricted to territorial boundaries. • Anti-corruption compliance is a hot-button issue in countries such as India, where trans-national corporations are increasing presence. Challenges and Compliance under Indian Anti-corruption Laws

Importance of Cross Border Compliance (contd.) • Anti-corruption is also gaining more relevance as, simultaneous with increasing enforcement of anti-corruption laws, nations have started to focus on individual and corporate liability in cases of violation of anti-corruption laws. • In the context of these far-reaching developments, it appears unlikely that India can act very differently and buck this trend, in the current context. Moreover, India has entered into mutual obligations with several countries including the US, to extend cooperation in respect of investigations and legal proceedings. Challenges and Compliance under Indian Anti-corruption Laws

Perception of Corruption Levels in India • India was ranked 84th out of 280 countries in Transparency International’s 2009 Corruption Perceptions Index. • Both Brazil and China were ranked better in the Corruption Perceptions Index . • Further, a series of recent reports by consultancies including KPMG, E&Y and Deloitte have highlighted the fact that there are many systemic and cultural challenges facing anti-corruption compliance in India. Challenges and Compliance under Indian Anti-corruption Laws

PCA Enforcement: Statistics and Trends • While the perception might be that enforcement of anti-corruption laws in India is poor, recent statistics suggest otherwise. • Data regarding cases under the PCA, recently presented in Parliament, stated that: • The Central Bureau of Investigation has registered 2,439 cases of corruption against public servants in the last three years, including 78 against senior officers. • 795 cases were registered under the PCA in 2009, as against 744 in 2008 and 688 in 2007, presenting a clear upward trend. Challenges and Compliance under Indian Anti-corruption Laws

PCA: Enforcement Risks • The public reporting of details of FCPA prosecutions, has resulted in the issue being raised in the Indian Parliament many times. • In the recent past, a number of sensational cases have grabbed media headlines, including those involving the President of the Medical Council of India, the temporary Chairman of the Company Law Board, and the Chief General Manager of the National Highways Authority of India, all of whom have either been arrested or are under investigation on charges of bribery. • Practically, prosecutions against companies, officials on the rise. • This can result in continuing legal risks and adverse publicity for the corporations involved. Challenges and Compliance under Indian Anti-corruption Laws

History of Indian Anti-corruption Laws • The present anti-corruption laws in India are based upon colonial laws enacted while India was under British control. • Some of the important landmarks include: • In 1860, the Indian Penal Code was enacted, and incorporated corruption-related offences. The provisions under the Indian Penal Code made it an offence for a public servant to accept a bribe, as well as to offer a public servant a bribe. Challenges and Compliance under Indian Anti-corruption Laws

History of Indian Anti-corruption Laws (contd.) • In 1947, to supplement the provisions under the Indian Penal Code, the Prevention of Corruption Act was passed in order to tackle corruption in the post-war scenario. Corruption had increased during the war years due to scarcities and strict controls. The new offence of criminal misconduct was introduced. Later amendments introduced the offence of possession of assets beyond known sources of income. • In 1988, the present Prevention of Corruption Act was passed, replacing the earlier statute, subsequent amendments, as well as the sections of the Indian Penal Code which dealt with corruption. This brought the anti-corruption laws within one statute, and provided for increased penalties, and also broadened the definition of ‘public servant’. Challenges and Compliance under Indian Anti-corruption Laws

Scope of the PCA and Penalties • Under the PCA, there are broadly three sets of offenders who are covered: • A bribe taker who is a public servant. • The giver of a bribe. • Any middlemen who influences a public servant (either by a payment or personal influence). • The definition of ‘public servant’ under the PCA is wide, and includes employees of government-owned and statutory corporations. • Punishment ranges between 6 months and 5 years along with a fine. In certain cases of habitual offenders imprisonment could be 7 years. There is no limit on the maximum fine payable. Liability could be attributed to a company, if an employee/agent acted within the scope of employment, to obtain benefit for the company. Challenges and Compliance under Indian Anti-corruption Laws

Ingredients of Corruption under the PCA • Any gratification to a public servant for doing or forbearing to do an official act or favour/ disfavour to any person. • Any gratification to any person for inducing any public servant by corrupt/ illegal or personal influence to do/ forbear from doing an official act or to show favour/ disfavour to any person. • Any valuable thing, without adequate payment for the same, to a public servant by a person who has or is likely to have official dealings with the public servant. Challenges and Compliance under Indian Anti-corruption Laws

PCA compared with the FCPA • Facilitation payments are illegal under the PCA, while the FCPA has a specific exemption for them. • Definition of “foreign official” is broader than “public servant”, foreign official includes officers of public international organisations. • The FCPA applies to payments made to political parties and candidates, while the PCA does not. Challenges and Compliance under Indian Anti-corruption Laws

Common Issues • Does anti-corruption law apply only to payments or also to gifts/ other forms of benefit? • Indian law is extremely broad in scope. It covers any payment/ gift/ other benefit. • Is it okay to make a payment/ gift/ other benefit for something which a public servant is supposed to do? • No, Indian law prohibits a payment/ gift/ other benefit even if it is for a lawful object. • The concept of “speed money” for routine governmental action does not exist under Indian law. Challenges and Compliance under Indian Anti-corruption Laws

Common Issues (contd.) • For an offence, is it necessary that a payment/ gift/ other benefit is actually given? • No, mere offer of payment/ gift/ other benefit for a favour would also constitute an offence. • For an offence, is it necessary that a favour should have actually been granted? • No, if a payment/ gift/ other benefit is given or offered for any favour, and such favour is not eventually granted, an offence may still be constituted. • Grant of any valuable thing to a public servant with whom one has official dealings also qualifies as an offence. Challenges and Compliance under Indian Anti-corruption Laws

Common Issues (contd.) • Is any value of payment/ gift permissible? • There is no prescribed value up to which a payment/ gift is permissible under Indian law. Hence, any payment/ gift provided for obtaining any favour/ action by the public servant is prohibited. • Hospitality (not frequent or lavish) or gift items of nominal value, not intended to influence a public servant, may be permissible. • Gifts up to certain value are permissible under conduct rules of public officials. Conduct rules for civil servants govern their conduct as employees and are not directly related to the offences under PCA. Challenges and Compliance under Indian Anti-corruption Laws

Practical Situations • Certain situations that a company might face are: • Routine requests for payments by government officials (including officials of police, utility, railway, post office and customs departments). • Demands for payment to undertake routine action. • Rendering of hospitality to business contacts who are public servants, at promotional events and in the course of official visits/ inspections. • Gifts on marriages/ festivals/ new year. Challenges and Compliance under Indian Anti-corruption Laws

Accounting and Other Issues • The FCPA, apart from making bribery an offence, also casts certain obligations upon corporations under the ‘books and accounts’ provisions. • The following issues are commonly observed with respect to accounting treatment of improper payments: • Incorrect invoicing of sales. • Creation of fictitious expenses/ incorrect booking of expenditure/ routing of payments through agents/consultants. Challenges and Compliance under Indian Anti-corruption Laws

Accounting and Other Issues (contd.) • Improper accounting has a host of implications under Indian law, including: • There is an obligation under the Companies Act to state ‘true and fair accounts’, which could be violated in these cases, entailing personal criminal liability for officers of the company. • Payments with an illegal purpose cannot be deducted as expenses under Indian tax laws. Therefore, recording such payments as expenses, and recording fictitious expenses, could be construed as tax evasion. Challenges and Compliance under Indian Anti-corruption Laws

Steps Towards Compliance • Lay out a comprehensive compliance policy with respect to all dealings with public servants, including guidelines for giving gifts and offering hospitality. • Set up an effective internal monitoring mechanism to check illegal acts by employees, and also ensure that incentives do not exist to engage in such illegal acts. • Conduct regular compliance training for employees of all levels, to sensitise them to anti-corruption laws and their consequences. Challenges and Compliance under Indian Anti-corruption Laws

Steps Towards Compliance (contd.) • Establish and publicise a whistleblower policy to encourage reporting of illegal activities. • Conduct due-diligence on prospective business partners. • Ensure that a comprehensive business plan is put in place at the start, to ensure that unanticipated regulatory hurdles do not result in incentive to engage in illegal activities. Challenges and Compliance under Indian Anti-corruption Laws

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Mohit Saraf Senior Partner Luthra & Luthra Law Offices