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Enhancing Anti-Corruption Efforts in India: Lessons from Recent FCPA Enforcement Actions

U.S.-India Update

Author: Gregory A. Paw

11/19/2009

In recent days, newspapers in India have featured stories about reports by the Indian ambassador to the United States, drawing the Indian government’s attention to several recent U.S. Foreign Corrupt Practices Act (FCPA) cases involving "illegal payments having been made to officials in India." The ambassador recommended that the Indian government "may like to take appropriate action" against those accepting bribes, and voices across India echoed this call for accountability. A government spokesperson assured that "[w]hat is important is that the government will take action." Along with other anti-corruption efforts, including creation of new trial courts and a recent statement by India’s chief justice condemning the "pervasive culture of graft [that] provokes pessimism about the quality of governance," there seems to be a new push for anti-corruption enforcement in India.

The backdrop for this push comes from several recent corruption enforcements against U.S. companies operating in the lucrative and fast-paced Indian economy. For example, Pioneer Friction, with corporate roots tracing back to the first air brakes used by the Pennsylvania Railroad in the 1870s, most recently grew through sales of train braking devices to the state-owned railway system in India. But Pioneer, a subsidiary of a U.S. company traded on the New York Stock Exchange, also discovered the high price of operating in a business environment challenged by corruption issues. To ensure that product acceptance tests would be scheduled and performed by staff of the state-run railroad, Pioneer made payments to officials, sometimes as little as $67. More bribes had to be paid to receive documents proving delivery of goods. Even more bribes followed to cut the frequency of excise tax audits.

Upon discovering these payments, Pioneer’s parent company conducted an investigation for violations of the FCPA, which criminalizes payments to foreign officials to obtain business or gain some improper advantage. The FCPA and other similar international anti-corruption laws also have important provisions intended to deter companies from hiding corrupt payments on company books.

Pioneer’s parent company voluntarily disclosed its findings to the U.S. Justice Department, and instituted remedial measures. The Justice Department credited these efforts and agreed not to prosecute provided that the parent company agreed to substantially improve its compliance efforts and pay a fine. These events make clear that understanding international anti-corruption laws is critical for companies doing business in India. Other cases, such as the civil enforcement against the former president of A.T. Kearney India, teach that anti-corruption laws can result in fines and, in some cases, even a prison term for individuals. In India, multinational companies must run a compliance program designed to deter and detect improper payments. Companies also must take necessary steps to ensure they have formed business relationships with reputable and qualified business agents and partners, and that they review business practices of potential merger partners before entering a transaction. These protections will help to reduce the risks of operating in India, drawing on the following important lessons from recent cases and business surveys:

Bribes in India Often Are to Obtain a Service Due. When DE-Nocil Crop Protection sought to register insecticides made with ingredients widely used and registered in other countries, it discovered a roadblock in the Central Insecticides Board (CIB) and the state regulatory boards. DE Nocil, a subsidiary of Dow Chemical Company, then made more than $32,000 in payments to an influential CIB official, and made petty cash payments – well under $100 per payment – to state inspectors. While a laudable voluntary inspection by Dow revealed these payments, which Dow promptly reported, the company nonetheless paid a civil FCPA fine. The frustration leading to these payments is not an isolated story, as one survey said that bribes in India most frequently relate to obtaining a service already due, rather than obtaining new business. Indeed, India is distinctive among other top emerging economic powers, where bribes to obtain business can be four times more likely than in India.

Bribes in India Often Are Low-Value/High-Frequency. A commercial trucker survey in India found drivers face a daily labyrinth of bribe requests at toll plazas, check points, state borders and other stops. The bribery is highly institutionalized, and drivers even get "receipts" for bribes paid. Stoppages add up to 40 percent to shipping times, delaying goods by as much as three days between Delhi to Mumbai. Another survey similarly found that corruption caused the typical taxpayer in India to make four trips to a tax office each year, with more than 20 percent of people paying bribes averaging about $50 to expedite their cases. More troubling, more than a third of those paying bribes did so through professionals, like a charted accountant.

Cumbersome Bureaucracy in India Fosters an Atmosphere of Bribes. Several scholars have stated that the complex Indian bureaucracy gives rise to a frustrating system in which corruption can thrive. For example, one recent study found that enforcing a commercial contract through Indian courts requires a company to go through an average of 46 administrative procedures, takes an average of 1,420 days and costs more than 39 percent of the claim. The effect of this bureaucracy is evident in cases like Pioneer’s, in which the company bribed inspectors at the Ministry of Railroads’ Research Designs and Standards Organization and at the Rail India Technical and Economic Services, all to ensure that Pioneer’s products would be accepted. Further, in the DE-Nocil case, licensing officials in each state had to give necessary approvals for producing, storing and selling products. Up to 40,000 inspectors could prevent the sale of product. Rather than face a sales suspension and a long court fight, the company made petty cash payments to some of these state inspectors.

Control Systems Are Crucial. The FCPA cases from India demonstrate a host of ways that improper payments can be concealed on company books: accumulating off-book funds, adding fictitious "incidental charges" to bills, and fabricating invoices for "consulting expenses" and "supplies." The Pioneer case revealed that the company generated fictitious invoices for a marketing agent, who received checks for the bogus invoices and then returned cash to Pioneer, less a service commission. Pioneer maintained the cash in a locked metal box, and documented each improper payment on a voucher. Pioneer kept track of the improper payments on a spreadsheet, all of which were kept off Pioneer’s official books and records. The result under the FCPA’s books and records requirements is clear.

Understanding these risks and designing effective compliance measures are critical steps to protecting a company seeking to thrive in the Indian marketplace. The experienced professionals at Pepper Hamilton, working closely with the Freeh Group International, can provide invaluable guidance on these issues. Our staffs include people experienced and seasoned from years of running law enforcement agencies and prosecutor offices. Our teams also include former federal judicial officials with years of problem-solving experience. We have guided companies through a host of issues, providing expertise, reputation and judgment to our clients.

Gregory A. Paw

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Pepper Hamilton LLP is not admitted to practice law in India. You should contact your Indian law advisor to address any specific Indian law questions you may have.

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