We are happy to present this summary of some important Foreign Corrupt Practices Act (FCPA) enforcement actions involving India, as well as a discussion of some current trends in anti-corruption enforcement. Indeed, recent weeks have seen several developments in anti-corruption efforts in India. Following up on a report from the Indian ambassador to the United States on several FCPA cases involving Indian government officials (see Pepper Hamilton’s November 19, 2009 U.S.-India Update article, "Enhancing Anti-Corruption Efforts in India: Lessons from Recent FCPA Enforcement Actions," for details), Minister of State Prithviraj Chavan in early December 2009 asked India’s Central Bureau of Investigation to look into each of these instances of corruption. Chavan said he also has held meetings with each concerned department in the Indian government to urge expeditious action and reform. This issue thus appears to continue to have a political effect in India, and also has some interesting implications for the foreign policies of India and the United States.
Just more than a week after Chavan’s statements, U.S. officials brought charges against a former vice president of Pride International, Inc., in what may be a first step to addressing bribes allegedly paid in several markets, including India. The charges against the former Pride official are consistent with a stated priority of American FCPA prosecutors to focus on personal culpability so as to most effectively deter future violations. In fact, the lead U.S. FCPA prosecutor has said the U.S. will direct enforcement resources not at low-level employees, but rather at senior corporate executives, finance directors, country heads and heads of international sales.
Enforcement Often Focuses on Individual Liability
This enforcement strategy has been seen before in India, where U.S. officials brought a civil suit in 2007 against the former president of A.T. Kearney India for FCPA violations. A.T. Kearney made more than $700,000 in illicit payments to senior employees of Indian state-owned enterprises representing more than three-quarters of A.T. Kearney’s revenue. These senior employees threatened to cancel contracts with A.T. Kearney, and the former president feared the company would close if it lost this business. A.T. Kearney employees fabricated invoices to cover the improper payments, thus causing misleading entries to be made on corporate books. After U.S. officials brought an FCPA enforcement action, the former president agreed to pay a fine and A.T. Kearney’s American parent company paid $490,900 in disgorgement for improperly reporting the A.T. Kearney bribes on the corporate books and records. In another example of personal liability, a former executive of Control Components, Inc., a California-based manufacturer of industrial valves, pled guilty in 2009 to criminal FCPA charges for his role in paying bribes to government officials, including in India at the Maharashtra State Electricity Board.
Record Keeping and Internal Controls Are Critical Issues
The A.T. Kearney case raises another important FCPA enforcement point. While discussions and articles often focus on the FCPA’s anti-bribery provisions, an equally powerful portion of the FCPA imposes recordkeeping and internal control obligations on companies and their foreign subsidiaries that file reports with the U.S. Securities and Exchange Commission. The FCPA requires the corporate books of such organizations to accurately reflect the true nature of all corporate transactions. The FCPA also directs such companies to devise and maintain an adequate system of internal controls to deter misconduct. An alleged lack of materiality of a transaction improperly reflected on the corporate books is no defense to liability – all transactions must reasonably identify the true nature of company expenses.
The effect of these recordkeeping provisions can be seen in a 2008 settlement with Westinghouse Air Brake Technologies for FCPA violations through its Indian subsidiary, Pioneer Friction Limited. Pioneer provided brake systems for rail operations through the Indian Railway Board. To ensure that product inspections would run smoothly, Pioneer made payments, sometimes as little as $67, per inspection. Pioneer also paid $31.50 per month to Indian tax officials to avoid excise taxes. Pioneer generated false invoices to gather cash for these payments, and then reported the payments on records maintained separately from Pioneer’s audited books. The false invoices further concealed the true nature of the payments by identifying the payments as for "consulting" and "supplies."
Westinghouse promptly investigated and reported its own misconduct, which U.S. regulators took into account in fashioning an appropriate remedy. Nonetheless, the U.S. Justice Department imposed a $300,000 penalty, in addition to a $367,000 penalty and disgorgement with the U.S. Securities and Exchange Commission.
Similarly, when DE-Nocil Crop Protection sought to register insecticides made with ingredients widely registered in other countries, it discovered a roadblock in the Indian Central Insecticides Board (CIB) and state regulatory boards. DE Nocil, a subsidiary of Dow Chemical Company, 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. Many of these payments were made through contractors who added fictitious "incidental charges" on bills or issued fake invoices to cover the expenses. While a laudable voluntary inspection by Dow revealed these payments, which Dow promptly reported, the company nonetheless reached a 2007 agreement with the U.S. Securities and Exchange Commission requiring payment of a $325,000 fine.
The Pioneer and DE-Nocil cases indicate the importance of ensuring that international subsidiaries and business partners understand the importance of accurate corporate bookkeeping as key to avoiding FCPA liability.
Compliance Programs and Vigilance Are Key Factors
These enforcement actions demonstrate several important points for an effective FCPA compliance program. In this environment, companies risk significant liability for turning a blind eye to potential wrongdoing in their operations or by international business partners. To address these risks, Pepper Hamilton provides experienced guidance to ensure that clients’ compliance and risk management programs are deterring and detecting potential anti-corruption issues. We evaluate and design effective programs to meet specific risks of a client’s international operations. We conduct due diligence reviews of international business partners, and counsel steps to ensure maximum protection for our clients. We also conduct internal investigations of suspected corrupted payments, and design remedial strategies to best protect our clients.
Working with the experienced professionals at Pepper Hamilton to address FCPA risks and the wide range of other legal issues that may be encountered can help minimize the chances of liability for companies conducting international business. We look forward to working with you on these important issues.
Gregory A. Paw
