Following the Walmart bribery case and other high-profile prosecutions against foreign corporations, foreign investors in Indian companies have become aware of the risks of corruption when doing business here. Foreign investors now require transaction documents to contain specific conditions, warranties and covenants to guard against non-compliance with foreign anti-bribery and anti-corruption legislation.Companies receiving foreign venture capital funding may therefore find references to foreign legislation in their shareholder agreements that appear to be of little relevance to their businesses and day-to-day operations.
The foreign anti-corruption and anti-bribery laws that apply most frequently are the US’s Foreign Corrupt Practices Act, 1977 (FCPA), and the UK’s Bribery Act, 2011 (UKBA). While both the FCPA and UKBA have extra territorial application and may be used against persons in India, they are also relevant to Indian companies that do not ostensibly fall under their statutory reach, but that have contractually agreed to comply with them at the time of receiving foreign investments.
Both the FCPA and the UKBA cover broader ranges of conduct than the Prevention of Corruption Act, 1988 (PCA), making it difficult for companies to identify possible breaches in the ordinary course of business. Such unintentional breaches may come to light during external audits conducted by investors to mitigate risks of corruption in the investors’ portfolio companies.
One reason for inadvertent lapses by companies is the failure to understand key terms in foreign legislations. For example, the FCPA prohibits corrupt payments to foreign officials in exchange for obtaining or retaining business. The definition of foreign official is wide and covers employees of an instrumentality of a foreign government, which includes state-owned or controlled enterprises. The meaning of instrumentality is evolving, and courts in the United States have held that there is no single test to determine whether an entity can be classified as such. Due to this fluid interpretation, even innocuous payments made by companies complying with the PCA could fall foul of the FCPA. This is particularly so for companies that regularly deal with state-owned or affiliated enterprises in the normal course of business.
Expense reimbursement and hospitality provided to foreign officials as part of business activities is another challenging area. The FCPA permits companies to incur reasonable and genuine travel and lodging expenses on behalf of foreign officials where those expenses are directly related to the promotion of a company’s products or services, or to a company’s execution or performance of a contract with a foreign government or agency. For such expenses to be allowed, a company must demonstrate that they are genuine and not intended wrongfully to enrich a foreign official.
While tracking evolving foreign anti-corruption jurisprudence and legislation can be challenging, the following best practices can reduce the risk of non-compliance and create a culture of robust corporate governance.
Companies should implement robust internal controls to monitor and prevent breaches of anti-corruption legislation. Personnel should be educated about anti-corruption compliance, as even acts done without a wrongful intent can breach the legislation. Spreading awareness, installing strong whistleblower mechanisms and administering top-down zero tolerance policies are crucial elements of effective internal controls.
When responding to audit queries or defending an enforcement action, it is vital that the payments in question and their purpose are clearly documented and are in accordance with the company’s policies. Companies, particularly those that regularly incur hospitality expenses should formulate policies for gifts, and travel and expense reimbursement, and closely monitor compliance.
A number of FCPA prosecutions involving India relate to payments made by third party agents or contractors on the company’s behalf. Such agents should undergo thorough background checks and their contracts should contain robust anti-bribery and anti-corruption clauses.
As breaches of anti-corruption legislation can occur without warning, companies should address these issues beforehand to ensure that they identify potential violations as early as possible.
Aparna Ravi is a partner and Srinivas Raman is an associate at Samvad Partners
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