Over-reaching impact of the Foreign Corrupt Practices Act, 1977 and the UK Bribery Act, 2010 on the Indian Companies
With slowing economy and skewing market shares, the corporates across the world are trying hard to run their business and keeping their market share intact. In the past, it has been alleged that the corporates while entering into newer markets resorts to corrupt practices. Governmental authorities across the globe are increasingly becoming active in preventing corrupt practices and punishing those that commit or aid acts of corruption. Two very important legislations that have acquired dominance due to their over-reaching extra territorial nature are the Foreign Corrupt Practices Act, 1977 (“FCPA”) of the United States (“US”) and the Bribery Act, 2010 of the United Kingdom (“UK”) (the “Bribery Act”).
Regulators in the US and UK have extended the provisions of these two laws on foreign companies having connections to the US and the UK. The growing cross-border trade transactions call for an increased awareness of the impact of the FCPA and the Bribery Act on the Indian companies. The present article discusses the same and provides measures that the Indian companies can undertake to prevent falling on the wrong side of the said two laws.
Key provisions of the FCPA
Enacted in 1977, the FCPA applied to all US persons and certain foreign issuers of securities. The increasing cross-dimensional operations of corporations and the applicability of complex legal and regulatory systems, has also had a bearing on the corrupt practices in the past few decades, which has relatively increased. In 1998, the law was amended extending the applicability and including within its scope greater offences and penalties.
Key offenses under the FCPA
The prime responsibility for enforcement of the anti- bribery provisions of the FCPA vests with the Department of Justice and the Securities and Exchange Commission (“SEC”). In terms of the FCPA, a bribe need not actually be paid but even an offer, authorization, or promise to make a payment in addition to the actual payment is considered to be in violation of the FCPA. Acts by any person or companies towards bribing or providing anything of value to foreign public officials, parties or candidates, to assist in obtaining or retaining business or to secure an improper business advantage are unlawful under the FCPA. The FCPA prohibits the following acts:
- Bribery of “foreign” (non-US) government officials for influencing act or decision in his official capacity
- Inducing foreign official to do or omit to do any act in violation of the lawful duty
- Securing any improper advantage in order to obtain or keep business for or with, or directing business to, any person
By virtue of the amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the US. The companies based in the US and US nationals can be held liable for bribes paid to foreign officials even if an action has taken outside the US.
Penalties under the FCPA
The penalties imposed under the FCPA can be in the nature of imprisonment, heavy penalty; confiscation of property or disqualification of directors. For corporate entities, penalty of up to USD 2 million in criminal fines or USD 25 million in books and records violations, or a fine of double the gross loss or gain, per violation. For individuals, the penalty may range from up to five years imprisonment or up to twenty years for willful default in complying with the maintenance of books and records, per violation. Further, fine up to USD 100,000 may be imposed in criminal fines per violation.
Key provisions of the Bribery Act
The Bribery Act has wider application than the FCPA and came into effect in 2011. The FCPA covers bribery in the public sector; however, the Bribery Act extends to private sector as well. It is a strict legislation and unlike the FCPA it contains no exemption for facilitation payments or for corporate promotional expenditure. The Act applies not only to those paying bribes, but also those receiving them. Further, the Bribery Act also contains a provision, which makes it an offence for “commercial organisations” who fail to prevent bribery.
Key offenses under the Bribery Act
It is important to note that the Bribery Act extends its jurisdiction to offences committed in the UK as well as to outside UK by those having a ‘close connection’ to the UK, which means that even if the conduct occurs entirely outside the UK, the Bribery Act may apply. There are four main offences that are punishable under the Bribery Act:
- The act of offering bribes: where a person offers, promises or gives a financial or other advantage to a recipient in exchange for the recipient’s improper performance of a public or business activity is punishable
- The act of accepting bribes: where a person requests, agrees or accepts a financial or other advantage in exchange for the recipient to perform a public or business activity improperly
- Both the above offenses apply to the government sector, the public sector and the private sector
- The act of bribing a foreign public official: where a person ‘attempts’ to influence a foreign public official, including an official of public international organization, in an official capacity to obtain business or a business advantage. This offense is not dependent on improper performance by the foreign public official
- Failure by a ‘commercial organisation’ to prevent the act of bribery
The Bribery Act penalizes persons who offer or accept bribes, and also persons who facilitate such offers and acceptances. Individuals or senior officers of a corporate entity may be punished if the offense was committed with their ‘consent’ (including active or passive consent and the failure to take action for any likely acts of bribery or not being diligent in preventing such acts) or ‘connivance’.
Penalties under the Bribery Act
Individuals violating the provisions of the Bribery Act are liable for an imprisonment of up to 10 years and/or unlimited fine. There is no limit on the fine that can be imposed upon corporate entities for violation of the law and it is set at the court’s discretion. Directors may be subject to disqualification proceedings, which may lead to disqualification to act as director for up to 15 years. Public contractors, if found guilty of violation of the law, may be debarred from entering into public contracts.
The Indian perspective
FCPA and the Bribery Act are applicable on:
- US/ UK Companies planning to invest in or acquire Indian companies
- Indian subsidiaries of the US/UK Companies
- Indian companies listed on the US/UK Stock Exchanges
- Indian companies (including officers, employees, directors or agents of such companies) with principal place of business in the US/UK or business established in US/UK
- UK nationals employed in India and Indian nationals employed in the UK
In India, there are a host of anti-corruption laws such as the Indian Penal Code, 1860, Prevention of Corruption Act, 1988, Prevention of Money Laundering Act, 2002, Foreign Contribution Regulation Act, 2010, Right to Information Act, 2005, Central Vigilance Commission Act, 2003 and state enactments having in place Lok Ayuktas. The Prevention of Corruption Act, 1988 (a central statute) is the primary law relating to the prevention of corruption and matters connected therewith. The said Act criminalises the receipt of illegal gratification by ‘public servants’ and the payment of such gratification by other persons. The PCA addresses, inter alia, gratification received through intermediaries, gifts and other non-pecuniary gratifications, and certain conduct described as ‘criminal misconduct’ by public servants.
Presently, there is no statute in India that applies to bribery of foreign public officials, however, a bill, the Prevention of Bribery of Foreign Public Officials and Officials of Public Interest Organisations Bill 2011, is pending for debate and approval by Indian parliament.
In light of the extra-territorial reach of the FCPA and the Bribery Act, companies operating in other countries including India can be held liable for its violation as well. Numerous business dealings such as sale transactions involving government agencies or bodies in other countries, movement of goods across borders, necessary permits, licenses, clearances etc. that have to be obtained from authorities outside of the US or UK, gifts, expenses and travel expenses that may be incurred, use of intermediaries such as sales agents, distributors and other third parties in business, entering into joint ventures, mergers and acquisitions etc. may create risks for entities based in US or UK.
Applicability of the FCPA to the Indian companies
The US parent companies can and has been in the past held liable for the acts of their foreign subsidiaries (including the Indian companies) under the FCPA, with the enforcement authorities in the US imposing penalties on parent companies for the acts of its subsidiaries.
There have been a host of cases in the US recently, where companies which are neither incorporated nor doing any business in the US nor listed on US stock exchanges, have still been brought within the ambit of the FCPA and held unlawful such as willfully using e-mails, a transaction using US currency, or assisting a US business partner, communication through phone, fax or wire transfer to the
US in several cases, thereby, extending the applicability of the FCPA. US enforcement authorities have also charged and prosecuted many foreign companies for bribing officials outside the US.
The applicability of the accounting and record keeping provisions of the FCPA would be on the parent companies for maintaining records of their Indian subsidiaries as well as mostly, it is the parent entity that may control and direct the affairs of its subsidiary. In the US, parent companies can be held liable for false or fraudulent entries on any subsidiary’s books or records that are ultimately consolidated with its parent’s books and records. Thus, all Indian subsidiaries of parent companies based in the US must maintain proper records and comply with the FCPA. Also, companies must ensure that their Indian subsidiaries have in place adequate corporate compliance policies and procedures to prevent illegal activity.
Implication of the Bribery Act on the Indian companies
The provisions of the Bribery Act may, inter alia, apply to, UK based companies and even those companies having a ‘close connection’ with the UK. Under the Bribery Act, even the failure by a commercial organisation (including company) to prevent the act of bribery is an offense. UK based commercial organisations may include all any Indian partnership or Indian subsidiary company that carries on a business or a part of a business in the UK. Indian companies must be wary of the acts in India and also seek to prevent acts of bribery in India as it would have a bearing for parent entities in the UK. Individuals, employees, agents, third party service providers or vendors, joint venture partners in India, working for the Indian based entities may be involved in bribing another person to get business or obtain a business advantage in India and hence, become ‘associated’ persons under the Bribery act. Thus, any act towards the offer or acceptance of a bribe by an employee of an Indian subsidiary of a UK based company can attract liability and huge penalty as mentioned above, for the parent company under the Bribery Act. There may be collateral consequences as well, as reputational damage can cause the company from being blacklisted.
Conclusion - tools of ensuring corruption free environment
There are various tools that companies can adopt in order to prevent the violation of the two laws. The multinational companies intending to or doing business in India must have in place a structure for risk assessment, analysis and investigation of any probable acts of bribery by employees. The company’s system can be segregated to have a compliance team, legal team, internal audit team, finance team and HR team, where all roles and responsibilities are delineated to keep an eye on corrupt practices.
The companies must also focus on designing and formulating adequate policies with a mechanism to ensure compliance culture and ethics amongst all its employees, including a code of conduct of employees, policies on business ethics, policy on giving grants/ gifts to persons or bodies, anti-corruption and anti-bribery measures, security for voluntarily informing any corrupt practice to senior management, privacy, etc.
The company must support and encourage all its staff, employees, competitors, third parties, vendors and customers to come out and divulge information about any corrupt practice(s). A ‘no tolerance’ anti-bribery policy should be promoted and whistleblowers must be granted certain level of protection by the company. Employees must be educated about proper reporting procedures and must be reassured that blowing the whistle will not have an impact on their job.
In addition to the designing a policy, the company must thereafter focus on proper implementation of the same and alongside have a strong internal audit system in place. Proper education and training of the employees must also be taken up, with emphasis on the need for having full compliance with anti-bribery laws and corruption free environment.