The recent letter by India’s ambassador to the US, Meera Shankar, giving details of US companies that allegedly paid millions of dollars in kickbacks to Indian government officials, made headlines in the Indian media. As a fallout of this, five government ministries are investigating specific charges of bribery against their officials. The sources of these alleged bribes were publicly known investigations carried out in the US under the Foreign Corrupt Practices Act, 1977 (FCPA), and the letter drew attention to the US report on the anti-corruption enforcement for 2008-09. Today, there is a strong sentiment that government officials as well as companies should be investigated under the Prevention of Corruption Act, 1988.
Over the past decade, FCPA has earned a reputation as arguably one of the most stringent deterrents against bribery in the international corporate world. FCPA is applicable to all US residents, including companies listed in the US and their subsidiaries and partners. It prohibits bribery to foreign government officials for business advantage and requires adequate internal controls on recording of transactions in the books of accounts so as to reflect true and fair view of the activity. What makes FCPA stand out compared with other international anti-corruption initiatives, such as the Organisation for Economic Cooperation and Development anti-graft convention, the United Nations’ anti-corruption convention, or the European Group of States against Corruption (Greco) convention is the manner in which it has been enforced over the last decade by the US department of justice (DoJ) and the US Securities and Exchange Commission (SEC).
There have been at least 120 enforcement actions in the past six years and millions of penalties have been paid by companies for violations under FCPA. Apart from the unprecedented penalties that various companies have agreed to pay for reported violations coupled with high legal fees, and the loss of reputation and loss of government contracts, investigations under FCPA have also resulted in parallel corruption and corporate investigations being initiated by governments in the countries where the violations have been reported.
For Indian companies, this recent development has been a wake-up call at the right time. It has never been as important as it is today for us to recognize the importance of anti-corruption regulations—and especially FCPA, as violations under the Act could have legal implications in India also.
US companies are shying away from nations and firms where there appears to be a risk of potential FCPA violations. A lot of money and time is being invested to ensure that operations throughout the world are conducted so as to avoid any possibility of violations and investigations under FCPA. Apart from periodic FCPA compliance reviews, several companies are increasingly incorporating FCPA due diligence and background research as part of their merger and acquisition strategy. In some cases, issues identified under these turn out to be deal makers as well as deal-breakers.
A good start for Indian companies looking for partnership beyond our borders is to undertake a diagnostic FCPA compliance risk assessment exercise. Such an initiative will help the management identify key compliance or vulnerable areas that it should address.
The management should then follow this up by building a sustainable and comprehensive compliance mechanism. The key to an effective compliance programme involves two elements: clear guidelines and an effective training programme. This will assist the management in improving control mechanisms, as well as build in a process of continuous monitoring and auditing of vulnerable areas. These processes will go a long way in providing additional comfort to the international investment community seeking partners in India.
Navita Srikant is partner and national leader, fraud investigation and dispute services, Ernst & Young India. Comments are welcome at firstname.lastname@example.org