Partner David Simon and Of Counsel John Turlais co-wrote a Law360 article with New Delhi, India-based attorney Sherbir Panag, which discusses how certain companies in India need to align with the Indian law and Foreign Corrupt Practices Act when making corporate social responsibility contributions. Read the full article below.

Under Indian law, companies that meet certain size or financial activity thresholds are required to set aside a fixed percentage of their net profits toward corporate social responsibility (CSR) spending. While making CSR contributions, companies may find themselves exposed to bribery risks which, in turn, presents significant risk under the Foreign Corrupt Practices Act and Indian anti-bribery laws. To avoid running afoul of the FCPA and Indian law, companies required to make CSR contributions should adhere to anti-corruption and anti-bribery best practices applicable to charitable contributions more generally; that is, they should conduct appropriate due diligence on the charitable organizations, ensure proper transfer of CSR-designated funds, monitor use of charitable funds, and maintain complete and accurate documentation.

CSR Requirements Under India’s Companies Act of 2013

India’s Companies Act of 2013 requires that all companies with an annual turnover of approximately $150 million (INR 10 billion) or more, or a net worth of approximately $75 million (INR 5 billion) or more, or a net profit of approximately $750,000 (INR 0.05 billion) or more during any fiscal year must spend, on CSR activities, at least two percent (2 percent) of their average net profits made during the three immediately preceding financial years.

CSR activities are defined in Schedule VII of the act and include nearly anything philanthropic in nature. Among other things, CSR spending can be allocated to eradicating extreme hunger and poverty; promoting education; promoting gender equality; reducing child mortality and improving maternal health; combating HIV/AIDS, malaria and other diseases; ensuring environmental sustainability; enhancing employment and vocational skills; and funding social, welfare, or emergency relief projects. A company may undertake its CSR activities either directly or by making contributions to existing charitable organizations.

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 Activities and the Opportunity for Bribery

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.

Safeguarding Against FCPA Violations When Engaging in CSR Activities in India

Companies doing business in India and subject to the CSR regulations can take several steps to help mitigate risk under the FCPA:

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.

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. Transparency International’s Corruption Perception Index (CPI) ranked India at 79 (out of 176 countries) in 2016, with a CPI Index of 40, based on an overall potential score of 100 (100 being the least corrupt).

Companies should select a trusted, established, or (at the very least) verifiable charity to fulfill their CSR spending obligations. The organization should be duly incorporated under the laws of India and have all applicable registrations and permissions, including the appropriate tax exemptions and the ability to accept foreign contributions. Companies should consider choosing recognized nongovernmental organizations, trusts or foundations that have proven track records, with good reputations for integrity and fund management, that have operated for at least three years in the proposed program or project.

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.

Once a charity has been selected, companies should determine whether the charity has any affiliation or connection with foreign officials (i.e., individuals who qualify as public servants under India law) with whom the company either conducts business or interacts with on regulatory matters. Even indirect connections to government officials, such as connections to family members, close advisors, or entities in which the foreign official has a financial interest, should be evaluated to ensure that the donation does not appear to have been directed to a particular charity as a benefit to a particular foreign official.

Finally, care should be taken to confirm that the contribution is not (and does give the appearance of being) conditioned on the retention of business, the receipt of future business, or the receipt of some other benefit.

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.

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.

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.

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.

Conclusion

The India Companies Act effectively mandates that companies of a prescribed size must engage in acts of corporate social responsibility in order to operate in India. In fulfilling their CSR obligations, however, companies must ensure that their charitable contributions are being used for the philanthropic purposes for which they were intended. Following the safeguards outlined above, as well as obtaining guidance from attorneys with FCPA experience, can mitigate the bribery risks posed by charitable contributions in India.