This article originally appeared in the May 23, 2011 Westlaw Journal Medical Devices. © 2011 Thomson Reuters. It is reprinted here with permission.
In 2007 Dow Chemical Co., one of the world’s largest chemical manufacturers, was fined for violating the Foreign Corrupt Practices Act. Dow was found to have made improper payments of about $200,000 through its Indian subsidiary to an official in India’s Central Insecticides Board to expedite the registration of its products.
Dow was also found to have made improper payments to Indian government officials for gifts, travel, entertainment and other items. None of these payments was reflected accurately in Dow’s books and records, and its system of internal accounting controls was found to have failed to prevent the payments. Dow paid a civil penalty of $325,000.1
In 2008 Westinghouse Air Brake Technologies Corp., a New York Stock Exchange-listed U.S. manufacturer of brake systems for transit vehicles, was charged by the Department of Justice and the Securities and Exchange Commission for violating the FCPA.
Wabtec Corp. agreed to pay a $300,000 fine, disgorge about $288,000 in profits, pay about $89,000 in civil penalties, continue to cooperate with U.S. authorities and adopt rigorous internal controls.
Its crime? Employees and agents of its Indian subsidiary made various payments to officials of the Indian Railway Board, a government agency of India’s Ministry of Railroads. The payments were made to obtain and retain business with the IRB, schedule pre-shipping product inspections, obtain issuance of product-delivery certificates and curb excessive tax audits.2
More recently, Kraft Foods, a NYSE-listed company, reported in its public filings that following its acquisition of Cadbury in 2010, it engaged in a review of Cadbury’s compliance programs, including its FCPA practices, and determined that in India there appeared to be facts and circumstances warranting further investigation.
Kraft also disclosed that Feb. 1 this year it received a subpoena from the SEC issued in connection with an investigation under the FCPA, primarily relating to dealings with Indian governmental agencies and officials to obtain approvals related to the operation of a Cadbury facility in India.
These cases and several recent others involving well-known U.S. multinationals, including Electronic Data Systems Corp., Control Components Inc., Pride International Inc., and Textron Inc., illustrate a growing trend of U.S. companies getting caught in the FCPA net while doing business in India.
Why Are More U.S. Companies that Do Business in India Being Tripped Up by the FCPA?
One reason is the general increase in enforcement cases involving the FCPA over the past few years. In 2010 alone a record number of cases (more than 30) were brought under the FCPA. A growing number of these cases now focus on activities taking place in India, with one of the largest FCPA awards involving bribery actions that took place in India.3
Another reason is the rising numbers of investments by U.S. companies in India, and a growth of investments by Indian companies in the United States. Following China, India is generally considered the second most important market for foreign direct investment. The cumulative FDI equity inflows into India from April 2000 to December 2010 were about $186.8 billion, according to the Indian Department of Industrial Policy and Promotion.
Also, international cooperation of regulatory and enforcement authorities across mul-tiple jurisdictions is improving, which makes FCPA investigation increasingly effective when it comes to India.
Endemic corruption in India carries much of the blame. India ranked 87 out of 178 countries in the global Corruption Perceptions Index of 2010, with a corruption index of 3.3 on a scale of 0 (highly corrupt) to 10 (highly clean), indicating that corruption is perceived to be a serious challenge.4
Of those Indian companies surveyed, 38 percent said bribery was an integral feature of their industry practices.5 Requests for bribes are frequent and for small amounts (About 84 percent of bribes are reportedly for less than $5,000), and they are often for services already due, like customs, taxation, water and land records, etc.6 For example, bribes paid in the Dow Chemical and Westinghouse cases generally were for services due, and in amounts of $100 or less.
Today, the FCPA has become a growing risk that U.S. companies must manage effectively when doing business in India.
What Does the FCPA Prohibit?
Initially promulgated in 1977, the FCPA is designed to prohibit bribery around the world so long as it has a U.S. nexus, be it a U.S. incorporation, place of business, citizenship, residence, or an action on U.S. territory or other nexus.
Specifically, it is illegal under the FCPA for any U.S. business (whether or not traded publicly); any entity having its principal place of business in the United States; any officer, director, employee or agent of these business entities; any U.S. citizen; or any U.S. resident to pay, give, authorize the payment of or otherwise promise to pay anything of value to a foreign official or foreign political party anywhere in the world for the purpose of influencing or securing an improper advantage in order to obtain, retain or direct business.
The FCPA also prohibits any such actions by any person (including foreign nationals or foreign companies and their officers, directors, employees, agents or shareholders) so long as they are conducted while on U.S. territory.
Under the FCPA, what cannot be done directly should not be done indirectly through third parties. Payments, gifts, authorization of payment or promises of payment to other persons with "knowledge" that they would ultimately be given or offered to foreign officials or foreign political parties to influence or secure an improper advantage for business are prohibited.
"Knowledge" is broadly defined by reference to the person’s state of mind and awareness or firm belief that the circumstances exist or that such result is substantially certain to occur.
In addition, under the FCPA, every publicly traded company in the United States (and every company that has securities registered under U.S. securities laws) must keep books, records and accounts that reflect accurately and fairly the transactions and dispositions of its assets in reasonable detail. It also must maintain a system of internal accounting controls sufficient to provide assurances as to the transactions effected by the company.
The FCPA prohibits any person from knowingly circumventing or failing to implement a system of internal accounting controls or knowingly falsifying any books, records or accounts of a publicly traded company. This "books and records" provision of the FCPA effectively applies FCPA liability to a U.S. publicly traded company for improper payments made entirely outside the United States by the foreign employees of a foreign subsidiary, even without knowledge or involvement of the U.S. company.
Liability of the U.S. parent becomes almost inevitable because these payments are generally not properly accounted for or recorded in the accounts of the foreign subsidiary or in the consolidated accounts of the U.S. parent.
The FCPA, however, limits liability to actions committed by majority-owned subsidiaries. Where the subsidiary is 50 percent or less owned, the standard for liability of the U.S. parent is that of good-faith use of its influence to the extent reasonable under the circumstances to cause the foreign entity to devise and maintain an effective system of internal accounting controls.
What Is at Risk?
The sizes of the monetary and other penalties administered under FCPA prosecutions are growing steadily: Eight of the top 10 FCPA penalty awards were imposed in cases concluded in 2010.7
In addition to prosecution of the companies, prosecution is also increasingly launched against top executives and other agents of the companies’ concerns, who are finding themselves subject to fines, prison terms and other penalties.8
The SEC’s proceedings against A.T. Kearney India, its parent company Electronic Data Systems Corp. and the former president of ATKI, Chandramowli Srinivasan, is a recent example of prosecution of the most senior executives of businesses involved in illegal payments.
ATKI had made at least $720,000 in illicit payments to senior employees of Indian state-owned enterprises to retain its business with those enterprises. Those payments were made at the direction of Srinivasan after the senior employees threatened to cancel the contracts with ATKI, which Srinivasan feared would result in the company’s closing.
To fund the bribes, Srinivasan and an ATKI contract accountant fabricated invoices that Srinivasan signed subsequently to authorize payment. This caused EDS to record the payments incorrectly in its accounting books and records. EDS reportedly recognized more than $7.5 million in revenues from the contracts after ATKI began paying the bribes.
Administrative proceedings were brought against EDS for various violations of the FCPA’s books-and-records provisions, and EDS agreed to disgorge about $490,000 in profits. Proceedings were also brought against ATKI based both on the illegal payments as well as fabrication of its books. Finally, charges were brought against Srinivasan, who agreed to pay a $70,000 fine.9
In 2010 proceedings against Pride International Inc., brought the largest monetary penalties to date under the FCPA for actions involving India. Pride, one of the world’s largest offshore drilling companies, was charged with paying more than $2 million in bribes to foreign officials in eight countries, including India.
The bribery schemes allowed Pride to extend drilling contracts, obtain the release of equipment from customs, reduce customs duties and lower tax assessments. A French subsidiary of Pride had paid bribes totaling about $500,000, intending the funds to be given to an Indian judge to influence customs litigation relating to equipment imports.
A Pride employee in the United States had knowledge of the payments when they were made. Pride disgorged about $19.3 million in profits and paid prejudgment interest of about $4.2 million in the civil action brought by the SEC. Pride also paid an additional $32 million to resolve related criminal proceedings brought by the Justice Department.
The SEC also charged two former Pride employees for their roles in the scheme. Each consented to a permanent injunction prohibiting future FCPA violations and paid civil penalties of $40,000 and $25,000, respectively.10
Can the FCPA Be Reconciled with the Business Environment in India?
With so much at stake, prosecution under the FCPA is putting U.S. companies on a collision course with the realities of doing business in India.
Recognizing these economic realities, the FCPA generally permits "facilitating or expediting payments" to foreign officials or foreign political parties to expedite or secure the performance of routine government actions. These so-called "grease payments" are meant to be small in amount and paid for services already due.
Similarly, the FCPA permits payments that are lawful under the laws of the foreign officials’ or parties’ country.
Finally, the FCPA allows reasonable and bona fide travel, lodging and other similar expenses incurred on behalf of foreign officials and related to the promotion, demonstration or explanation of products or services, or the execution or performance of a contract.
These expenditures need to be limited strictly to those described above and would not, for example, be deemed legitimate if they included expenditures for foreign officials’ relatives on extended trips and entertainment.
These limited exceptions, however, can only be of little relief to companies doing business in India and are not long-term answers to what are becoming growing problems. The only long-term solution to these issues is for India to amend its business practices.
India Is Turning the Page on the Old Ways of Business
Several events have taken place in India over the past 18 months that indicate its growing recognition that continued high growth based on a corrupt society is unsustainable. The jury is still out on whether these events will usher in a serious attempt at shaking up the old ways.
In a 2009 letter from Meera Shankar, India’s ambassador to the United States, to India Prime Minister Manmohan, Shankar reported on several FCPA investigations in the United States of companies doing business in India and asked that appropriate action be taken in India to address the same violations. The correspondence shined a spotlight on the highest levels of government on the issue of lax enforcement of India’s own anti-corruption laws.
The public embarrassment caused by the delays in venue construction, use of substandard materials, dubious contracts and filthy conditions at the athletes’ village in the run-up to the Commonwealth Games in New Delhi prompted Prime Minister Singh to launch a high-level investigation into allegations of corruption and mismanagement of at least 20 officials.
More recently, the public outcry over the process for allocation of India’s 2G telecommunications licenses, which allegedly resulted in the loss of about $40 billion in revenue for the Indian government, was another public embarrassment for the government, and prompted further investigation and the resignation of India’s former telecom minister, who is charged along with eight others in the scandal.
A special court has been set up to speed up hearings in the case, in which prosecutors plan to call 125 witnesses, including the attorney general, 49 other senior government officials and a host of top telecom executives.
Today, the Indian public and several high-profile entrepreneurs such as Ratan Tata, the iconic chair of the Tata Group, are calling openly for change from the old ways of doing business in India.11
The Gandhi-style hunger strike conducted by Anna Hazare, a veteran social activist in New Delhi, drew thousands of supporters and led to open demonstrations against corruption. Those movements have spurred the Indian government to agree to various demands to resolve the country’s corruption issues.
As public and business pressures continue to bear on India and its public officials, there is hope that business practices will evolve into a more transparent business environment that will help propel India’s growth. In the meantime, the FCPA will continue to be a challenge for companies doing business in India.
With that said, many iconic U.S. companies (including General Electric, PepsiCo and General Motors) as well as U.S. private equity firms have been very successful in penetrating the Indian market and investing in the Indian economy without violating the FCPA.
What they all seem to have in common are robust compliance and oversight protocols as well as strong internal controls. Careful due-diligence investigation prior to any acquisition in India (including forensic accounting review) and thorough background checks of potential Indian partners are necessary for foreign investors entering the Indian market.
With careful risk assessment, thorough due diligence investigation, a well-designed compliance program, strong internal controls, continued focus on effective compliance and the right culture in the organization, U.S. companies can grow their businesses successfully in India.