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FCPA in India 2016: Compliance Strategies for India's Unique Cultural and Governmental Intricacies

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, JANUARY 12, 2016

Jay Holtmeier, Partner, Wilmer Cutler Pickering Hale and Dorr, New York Elizabeth D. Keating, Vice President, Global Investigations Counsel, Johnson Controls, Milwaukee, Wis. Michael Stavridis, Partner, Ernst & Young, Chicago

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FCPA Compliance in India: Compliance Strategies Given India’s Unique Cultural and Governmental Intricacies

Strafford Publications Teleconference January 12, 2016

Jay Holtmeier Wilmer Cutler Pickering Hale and Dorr LLP jay.holtmeier@wilmerhale.com Elizabeth D. Keating Johnson Controls, Inc. elizabeth.d.keating@jci.com Michael Stavridis Ernst & Young LLP Michael.Stavridis@ey.com

OVERALL FCPA ENFORCEMENT TRENDS

• Large pipeline of cases under investigation
• Large FCPA Penalties Continue:

– Alstom ($774M), 2014

• Largest ever criminal foreign bribery fine

– Total ($398M), 2013 – Alcoa ($384M), 2014 – Weatherford ($153M), 2013 – HP ($108M), 2014

• Prosecution of Individuals Is Continued Priority and Explicit DOJ Policy

as of September 2015

• Dodd-Frank Whistleblower Rewards Incentivize Increased Reporting
• Emphasis on Diligence and Third-Party Risks
• Travel and Entertainment in High-Risk Markets
• Industry-Specific Risks (e.g., probe of banks’ Asian hiring practices)
• Increasing Cooperation with and Enforcement by Non-US Authorities
• Collateral Civil Litigation

6

Enforcement by Indian Authorities

 Lokpal Act of 2013 created a new agency to investigate and

prosecute civil servants accused of corruption.

 Black Money Act came into effect in July 2015 and aims to

curb “black money,” i.e., undisclosed foreign assets and income, and it imposes tax and penalty on such income.

 Pending amendments to the Prevention of Corruption Act of

1988 include tougher prison terms for individuals convicted under the Act; liability for commercial entities that induce public servants; an expansion of the types of corruption covered under the Act; and a “speedy trial” provision aimed at reducing the trial period for cases brought under the Act from an average of eight years to two years.

7

Enforcement by Indian Authorities (cont.)

 Recent Supreme Court ruling expands power of Comptroller & Auditor

General to audit transactions with government.

 Parliament recently passed a whistleblower protection bill.  High-profile investigations reported publicly:

– National Herald graft case continues against Sonia Gandhi, head of

India’s main opposition Congress Party, and her son Rahul, for misappropriating $300M through the purchase of a non-profit newspaper company.

– Bribery in helicopter procurement led to India’s suspension of $750M

contract with AgustaWestland and criminal charges against former Indian Air Force Chief.

– India’s Defense Ministry has suspended all contracts with Rolls-

Royce pending inquiry of bribery allegations by India’s Central Bureau of Investigation.

– In July 2015, the Supreme Court of India transferred the ongoing

Vyapam case involving widespread corruption in a state government examination board to the Central Bureau of Investigation. By July 2015, more than 2,000 individuals had been charged in the case.

8

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

 Louis Berger International, Inc. (2015) – Payments to

Government Officials Through Third-Party Vendors

– LBI is a New Jersey-based construction management

company.

– The DOJ alleged that between 1998 and 2010 LBI paid $3.9M

in bribes to officials in India, Indonesia, Vietnam, and Kuwait to secure construction management contracts in those countries.

• LBI concealed the payments by characterizing them as

“commitment fees,” “counterpart per diems,” “marketing fees,” and “field operation expenses.”

• Third-party vendors submitted false invoices to generate

payments from LBI; payments tracked on a spreadsheet.

– James McClung, Senior Vice-President in charge of LBI’s

India operations, pleaded guilty to violating the FCPA by participating in the scheme.

– LBI entered into a deferred prosecution agreement and paid a

$17.1 million criminal penalty; a compliance monitor was imposed for three years.

9

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Diageo (2011) – Payments by Distributors to Secure

Business and Ease Regulatory Burden

– Diageo is one of the world’s largest producers of alcoholic

beverages, such as Johnnie Walker.

– SEC settlement papers alleged that from 2003 to mid-2009,

Diageo’s Indian subsidiary’s promoters and distributors made hundreds of illicit payments to government officials responsible for purchasing or authorizing the sale of its beverages in India.

• Payments made by distributors to employees of

government-owned liquor stores to increase purchases of Diageo beverages.

• Payments made by distributors to regional and state
• fficials to secure label registrations for products.

– For this and other conduct, Diageo settled SEC books and

records and internal controls charges for $16M.

10

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Baker Hughes (2001) – Payments by Agent to Ease

Regulatory Burden

– Baker Hughes’ former subsidiary Western Geophysical (WG)

provided geophysical exploration services.

– In order to provide these services in the Bay of Canby, India,

WG needed authorization from the Director General of Shipping to use a foreign-flagged vessel.

– According to the SEC’s papers, WG’s agent told a WG

manager that permits could be issued for $15k. WG manager told the agent to “take care of it.”

– WG later authorized a $15k reimbursement for the agent

without adequate inquiry to ensure that the payment did not violate the FCPA.

– WG accounting staff improperly described the payment as

“Shipping Permit.”

– SEC issued cease and desist order.

11

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Oracle (2012) – Side Funds Maintained by Distributors

– Oracle is a California-based computer technology company. – Oracle’s Indian subsidiary sells its products through

distributors that retain the margin between the amount paid by the customer and the amount paid to the subsidiary.

– According to the government, the subsidiary structured

transactions to create extra margins for distributors in certain instances, essentially creating off-the-books side funds.

– Subsidiary employees then directed distributors to make

payments from the side funds to sham entities.

– No allegation of bribery. – Oracle settled SEC books and records and internal controls

charges for $2 million.

12

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Dow Chemical (2007) – Payments Through Side Funds and

Petty Cash to Ease Regulatory Burden

– Dow’s Indian majority-owned, fifth-tier subsidiary DE-Nocil

manufactures pesticides and other products.

– SEC alleged that DE-Nocil structured transactions such that

• ff-the-books funds were held by the company’s contractors.

As directed by DE-Nocil, the contractors disbursed funds directly to DE- Nocil or to a third party that would bribe a Central Insecticides Board official.

– Bribes resulted in expedited regulatory registration for DE–

Nocil’s products.

– DE-Nocil also used petty cash to make improper payments to

• ther officials, such as state inspectors.

– Dow settled SEC books and records and internal controls

charges and agreed to pay a $325K civil penalty.

13

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Pride Int’l (2010) – Payments to Judicial Officer Through

Third-Party Bank Account

– Pride International is an oil and gas services company. – Government settlement papers alleged that managers at

Pride’s French subsidiary (including the legal director) authorized payment of $500K to a judge of the Indian Customs, Excise, and Gold Appellate Tribunal to secure a favorable determination in a customs duties and penalties dispute.

– Payments were made through a third-party company’s bank

accounts in Dubai.

– The estimated value of the favorable decision was $10M. – Pride’s French subsidiary pleaded guilty; Pride International

entered into a DPA with DOJ.

• For this and other conduct, Pride entities paid DOJ/SEC

$56.2M.

14

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Westinghouse Air Brake Technologies (2008) – Payments to

Secure Business and Ease Regulatory Burden

– WABTEC manufactures brake subsystems for locomotives,

freight cars, and passenger transit vehicles.

– Government’s papers state that WABTEC’s Indian

subsidiary’s employees and agents made payments to Indian Railway Board and other government officials to:

• Obtain business during the IRB tender process;
• Schedule pre-shipping product inspections;
• Have certificates of product delivery issued; and
• Curb tax audits.

– To generate cash for these payments, the subsidiary engaged

third-party “marketing agents” to create false invoices. When the subsidiary paid the invoices, the “marketing agents” returned the cash to the subsidiary.

– Payment of $677K to DOJ/SEC.

15

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Textron, Inc. (2007) – Payment to Secure Business with a

Commercial Customer

– Textron is a conglomerate in the aircraft, defense,

manufacturing, and financial industries.

– According to the government’s papers, a subsidiary paid

approximately $52K to an employee of a non-government customer to secure business in India.

– The payment was described as a “commission” in the

subsidiary’s records.

– Identified by an internal investigation in response to

allegations of kickbacks related to the UN’s Oil for Food Program.

– For this and other conduct, Textron entered into a NPA with

DOJ and agreed to pay a total of $4.7M to DOJ/SEC.

16

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Electronic Data Systems (2007) – Payments to Secure

Business

– EDS is one of the world’s largest technology companies. – SEC’s papers allege that between 2001 and 2003, EDS’

Indian subsidiary had difficulty performing its contractual

• bligations for two Indian government-owned clients.

– The subsidiary’s president authorized payments and gifts of

• ver $720K to employees of the Indian government-owned

clients.

– The payments resulted in the subsidiary retaining the

business of the two clients.

– For this and other conduct, EDS settled with the SEC for

$491K. The subsidiary’s president also settled with the SEC and paid a $70K penalty.

17

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Control Components, Inc. (2009) – Payments to Secure

Business

– CCI designs and manufactures valves used in the power, oil

and gas, and nuclear industries.

– CCI made payments of at least $4.9M from 2003 – 2007 to

employees of private companies and state-owned companies in several countries, including in India to the Maharashtra State Electricity Board.

– For this and other conduct, CCI pleaded guilty to criminal anti-

bribery and Travel Act charges and paid an $18.2M fine.

18

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

Indictment

• Six Foreign Nationals (2013)

– USAO in N.D. Ill. alleged that six foreign nationals engaged in

international racketeering conspiracy involving bribes of Indian government officials in exchange for titanium mining licenses and approvals.

– Defendants allegedly authorized bribes exceeding $18.5M. – Conspiracy included sale of titanium products to unnamed “Company

A” headquartered in Chicago.

– Defendants include two Ukrainians, a Hungarian, a Sri Lankan, and

two Indians (one of whom is a US Green Card holder and the other is an Indian MP).

– 5 out of 6 defendants remain at large; an Indian court stayed the

arrest of one of the Indian nationals, and an Austrian court refused to extradite one of the Ukrainian defendants to the U.S., calling the request “politically motivated.”

19

PUBLICLY REPORTED FCPA INVESTIGATIONS IN INDIA

• Rolls Royce

– DOJ is investigating Rolls Royce for bribes in connection with

contracts in Indonesia, China, and India. The UK SFO and India’s CBI are also investigating the allegations. In September 2014, India lifted its military procurement ban on the company.

• Anheuser-Busch InBev

– Both DOJ and SEC are investigating the brewing company in

connection with its Indian joint venture, InBev Indian Int’l Private Ltd. In February 2015, AB InBev ended ties with the joint venture in India that is the subject of the investigation.

• Wal-Mart

– Continuing global FCPA investigation, including of Wal-Mart’s

Indian joint venture with Bharti Enterprises. In late 2013, the companies announced the breakup of the joint venture.

20

OTHER PUBLICLY REPORTED DEVELOPMENTS

• Alstom Network UK

– In July 2014, the UK Serious Fraud Office brought criminal

charges against the British subsidiary of the company, as well as two British nationals, for corrupt practices involving transport projects in India, Poland, and Tunisia. The company allegedly paid €3.3M in bribes disguised as consultancy fees to secure infrastructure contracts relating to Delhi Metro construction.

• Yara International

– In January 2014, Norwegian authorities fined the fertilizer

company $48M for bribing officials in India and Libya and making corrupt payments to a supplier in Russia. Yara allegedly agreed to pay $3M in bribes to the relative of an Indian government official in connection with a joint venture with an Indian government controlled entity. Norwegian Authorities also indicted four Yara executives, who in July 2015 were sentenced to prison terms ranging from 2 to 3 years.

21

OTHER PUBLICLY REPORTED DEVELOPMENTS (CONT.)

• Cryptometrics Agent

– In August 2013, Nazir Karigar, a former agent of

Cryptometrics, became the first individual to be convicted of violating Canada’s Corruption of Foreign Public Officials Act. Authorities alleged that Karigar offered to bribe Indian officials to rig the bidding process for Air India contracts.

• Bunge

– In June 2013, five executives of the Indian unit of the

American food company Bunge resigned amid an internal audit related to the subsidiary’s purchase of land in Kandla, India.

22

CONTACTS WITH GOVERNMENT OFFICIALS IN INDIA

• Public procurement/contracting with government agencies
• Customs clearance/importation of goods
• Immigration processes
• Real estate (both purchasing and leasing land)
• Tax administration (excise and sales taxes, audits)
• Obtaining certificates, registrations, permits, and licenses

(approval from multiple officials often required to obtain one permit/license)

• Gifts and entertainment (especially during religious festival,

Diwali)

• Scheduling/passing inspections (fire, environmental, building)
• Government officials solicit donations for charitable/religious
• rganizations
• Interactions with police/judiciary
• Third parties with ties to government departments/officials

(consultants, agents, distributors, interns, and trainees)

23

Johnson Controls, Inc. - Confidential

24

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Elizabeth Keating

Vice President, Global Investigations Counsel Johnson Controls, Inc. January 12, 2016

Navigating Corruption Risks in India

Johnson Controls, Inc. - Confidential

25

Corruption Risk Profile - India

 Transparency International (TI) Corruption Perceptions Index (CPI) 2014

• NGO which ranks countries based on how corrupt their public sector is perceived to be.
• India scored 38 on a scale of 0 – 100. (100 = very clean; 0= highly corrupt). Slight improvement

from 2012/2013 where it scored 36.

• India ranked 85th out of 175 countries. (Denmark and New Zealand ranked #1 and #2; United

States ranked 17th; Somalia and North Korea ranked 174th).

• India’s rank tied with Burkina Faso, Jamaica, Sri Lanka, Thailand, Zambia, Philippines and Peru.

 TI Global Corruption Barometer 2010/2011 - India

• 54% reported paying a bribe in 2010
• 74% of those surveyed in India believed that corruption in their country had worsened.
• Political parties, police, public officials, judiciary were all perceived to be affected by corruption.
• 44% believed that their government’s actions to fight corruption were ineffective.

Johnson Controls, Inc. - Confidential

26

Corruption Risk Profile - India

 World Bank Survey 2013 - India

• Ease of Doing Business – 132 out of 185 (1=best)
• Starting a Business – 173
• Dealing with Construction Permits – 182
• Getting Electricity – 105
• Paying Taxes – 152
• Enforcing Contracts – 184
• No significant improvement from 2012 rankings

 World Bank “Control of Corruption” Index

• Reflects perceptions of the extent to which public power is exercised for private gain. It is one of

the six dimensions of the Worldwide Governance Indicators

• India ranks in 36th percentile

Johnson Controls, Inc. - Confidential

27

Corruption Risk Profile - India

 Human Development Index

• UN Development Program which measures the average achievements in three basic dimensions:

a long and healthy life, access to knowledge and a decent standard of living.

• Index is classified into four quartiles: Very High; High; Medium; Low.
• India is ranked as “Medium”.

 World Bank – Rule of Law

• Captures perceptions of the extent to which citizens have confidence in and abide by the rules of

society, and in particular the quality of contract enforcement, property rights, the police and the courts, as well as the likelihood of crime and violence.

• Scores range from -2.5 to 2.5. Higher values correspond to better governance outcomes.
• India is ranked in the 55th percentile and scores at -.0577

Johnson Controls, Inc. - Confidential

28

Corruption Risk Profile - India

 Judicial Independence

• World Economic Forum measures the perceived independence of the judiciary from influences

from government, citizens or business.

• Scores range from 1 (heavily influenced) to 7 (entirely independent).
• India is ranked 59th out of 142 countries.
• India’s score is 4.3 out of 7.

 World Bank - Voice & Accountability

• Captures perceptions of the extent to which a country’s citizens are able to participate in selecting

their government, as well as freedom of expression and association and a free media.

• Estimates range from -2.5 to 2.5. Higher values correspond to better governance outcomes.
• India is ranked in the 59th percentile
• India’s score is 0.424

Johnson Controls, Inc. - Confidential

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Corruption Risk Profile - India

 Corruption pervasive at every level of government  Bribes accepted as common practice  Paying bribes for the most basic services is routine  While petty bribery continues unabated – serious corruption has flourished and reached unprecedented proportions  Lack of enforcement of anti-corruption regulation  Over regulation of businesses and industries creates “opportunities” for corruption

• Vestige of License Raj

Johnson Controls, Inc. - Confidential

30

Risks in Dealing with India Bureaucracy

Challenges Presented by Regulatory and Business Environment

 Excessive bureaucracy and regulation

• Procedures are complicated and not transparent
• Several layers of approvals required to obtain licenses/permits
• Practice of using “agents” to interface with government agencies

 Civil servants grossly underpaid

• Accepted practice of “tips” or facilitation payments to civil servants in order to obtain routine

government services

• Seen as an accepted method of augmenting meager civil servant salaries

 India Prevention of Corruption Act

• Prohibits public servants from accepting bribe
• Prohibits giving of bribes to public servants
• No exception for facilitation payments
• Inconsistent enforcement

Johnson Controls, Inc. - Confidential

31

Interaction with India’s Bureaucracy

 Majority of corruption occurs at the lower levels of government

• More than half of the reported bribe demands were for less than $100
• 84% of the reported bribe demands were for $5000 or less
• 13% of the bribe demands originated from the Customs office
• 9% of the demands came from the national offices of Taxation
• Most bribes involved use of “agents” or “consultants” to conceal the true nature of the

payments

• Payments recorded as third party payments with general descriptions
• Often routine government services, eg., utility services, involve demand for a bribe

Johnson Controls, Inc. - Confidential

32

Interaction with India’s Bureaucracy

Government Touch Points:

 Taxing Authorities

• Variety of taxing regimes provide “opportunities” for bribery
• Income taxes – tax on profits earned by business
• Tax Deducted at Source (TDS) – tax deducted from certain vendors. Monthly returns and

payments to the exchequer

• Service taxes – central indirect tax on services rendered by company. Monthly filings and

payments to central treasury

• Octroi Tax – intra-country “customs” tax levied on products which are transported into municipal

jurisdictions, e.g., Mumbai and Pune.

• Octroi tax recently eliminated in many major cities.
• Replaced by Local Body Tax (LBT). Eliminates need for drivers to stop at toll booths
• Not yet eliminated in Mumbai.

Johnson Controls, Inc. - Confidential

33

Interaction with India’s Bureaucracy

Government Touch Points:

 Taxing Authorities

• Value Added Tax (VAT) – state tax on sale of certain goods
• Works Contract Tax – part of VAT Tax law and applicable to specific portion of contract
• Central Sales Tax – tax on sale of goods from one state to another
• Central Excise – tax on manufactured goods
• Service Tax – tax on services provided to customer
• Use of Consultants to prepare and file tax reports
• Lack of transparency in invoice description of services provided by consultants
• Opportunity for improper payments particularly in connection with tax appeals and tax audits

Johnson Controls, Inc. - Confidential

34

Interaction with India’s Bureaucracy

Government Touch Points:

 Licenses, Permits and Inspections

• Licensing and permitting regulations are duplicated by national, state and local agencies
• Many licenses and permits require several visits to government offices
• Frequent requests for bribes from government employees to render routine government services
• Refusal to pay will often result in prolonged application process
• Many company employees do not distinguish between facilitation payments and payments made

to impact outcome of inspection report

• Government employees will often require that you make payment to a “trusted” third party who will,

in turn, funnel the money to the government employee

• “Government liaison” services offered by certain vendors
• Vendors will even provide a schedule of rates for amount of facilitation payments required by

the various agencies

Johnson Controls, Inc. - Confidential

35

Interaction with India’s Bureaucracy

Government Touch Points:

 Licenses, Permits and Inspections:

• Electrical Safety inspections
• Mechanical Equipment inspections
• Labor Department inspections
• Lift/Elevator Licenses and inspections
• Pollution Control Board inspections and Consents to Establish/Operate
• Factory License Renewals
• Fire Safety inspections
• Police inspections – labor issues and workplace accidents
• Health Department inspections
• Diesel storage inspections
• High Rise Building inspections
• Sanitation Department plumbing inspections
• Energy Meter Testing reports

Johnson Controls, Inc. - Confidential

36

Interaction with India’s Bureaucracy

Government Touch Points:

 Licenses, Permits and Inspections:

• Environmental licenses
• CEIG Licenses for electrical systems
• Fire licenses
• Explosive licenses
• Commercial use clearances
• Air Consent (Operation & Establishment)
• Occupation certificate from local authority
• Annual Operations renewal
• Structural certificate for floor load density
• Water Consent
• Hazardous Waste Handling and Disposal
• Consent to Establish and Consent to Operate

Johnson Controls, Inc. - Confidential

37

India – Winds of Change?

 Grassroot Anti-Corruption Campaigns

• Still engaged – if not totally effective.
• Hunger strike by Kisan “Anna” Hazare – anti-corruption campaigner.
• “I Paid A Bribe” Initiative posts citizens reports of corruption online.
• “I paid a bribe” reports outnumber “I met an honest officer”.
• 5th Pillar – Zero Rupees Anti-Corruption Campaign.
• Zero denomination notes handed to government officials who ask for bribes

 However, growing awareness with rising pubic support

• Several investigations concerning private and public corruption being reported in the media.
• Rise in whistleblower complaints.
• Tremendous increase in online social groups which highlight corruption.
• Corporations giving more focus to internal audits and investigations to identify fraud and

corruption.

Johnson Controls, Inc. - Confidential

38

India – Winds of Change?

Johnson Controls, Inc. - Confidential

39

Navigating the Risks

 Vendor/Supplier Management and Due Diligence

• Vendor Maintenance File accuracy
• Correctly categorize vendor as high or low risk, i.e., are there any government facing services

being provided?

• Due diligence of High Risk Vendors
• Undertake appropriate level of due diligence on all high risk vendors who interface with

government agencies

• Often these vendors will not be found using standard desktop tools
• Consider in-person meetings with high risk vendors for DD
• Centralized procurement function for vendor selection process
• Provides transparency over selection process
• Establish DNU/DNP list for any vendors who have been found to use unethical business practices

Johnson Controls, Inc. - Confidential

40

Navigating the Risks

 Contract Review

• Evaluate all contracts to ensure that the scope of services does not provide inappropriate

payments to government employees, e.g., “Liaison services”

• “Outsourcing bribery”
• Do not undertake any government facing services on behalf of customers not specifically

provided for by contract

• Supplier Anti-Bribery/Anti-Corruption certification
• Communicate expectations to vendors re ethics and anti-bribery/anti-corruption training for all high

risk vendors

• Training to include discussion of India Prevention of Corruption Act
• Copy of Code of Conduct

Johnson Controls, Inc. - Confidential

41

Navigating the Risks

 Financial Controls

• Establish monitoring process to ensure vendor transactions are for legitimate services
• Red flag/warning sign training for AP function
• Stringent controls around employee advances and petty cash
• Evaluate use of “miscellaneous vendor codes”
• Red Flag training for all finance personnel

 Government Interfacing Activities

• Establish “Compliance Task Force” to handle all licensing, permitting and inspection requirements
• Only “Task Force’ will interface with government agencies
• Administers, manages and enforces all statutory compliance activities

 Communication to Customers

• Need to communicate to customers that the refusal to make improper payments may slow the

process of obtaining government approvals necessary to operate

 Monitor all Licensing/Permitting Activities

• Review all licenses and permits necessary to conduct business

 Monitoring and Auditing

• Regular and periodic forensic reviews of business practices and control environment

Johnson Controls, Inc. - Confidential

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Navigating the Risks – Monitoring/Auditing

RED FLAGS

• Rumors regarding unethical or suspicious conduct by an employee, marketing representative,

consultant or other business partner, or a government official

• Unnecessary third-parties or multiple intermediaries
• Requests for payments to a third-party rather than the consultant
• Requests for payments in a third country
• Business in a country with bribery problems
• Requests for payment in cash
• Requests for unusually large commissions or other payments, or payments that appear

excessive for the service rendered

• Non-government organizations, lobbying costs, public relations expenditure, political

contributions etc.

• Requests for reimbursement of expenses that are poorly documented
• Incomplete or inaccurate information in required disclosures
• Refusal to certify compliance
• Government end-users
• Government touch points such as customs, taxes, licenses, etc.
• Previous issues, incidents

Monitoring FCPA risks in India

January 2016 Michael Stavridis

44

Perceived as most corrupt sectors

Presentation title Infrastructure and real estate Metals and mining “According to 73% of the respondents from PE firms, a company operating in a sector that is perceived as highly corrupt, may lose ground when it comes to a fair valuation of its business, as it bargains hard and factors in the cost of corruption in the sector during a transaction.” Aerospace and defense Power and utilities

45

What at is ma making ng br bribe bery ry and d co corru ruption ption ramp mpant ant in the co coun untry try? ? (sur

urve vey y finding ndings) s)

Top five factors facilitating bribery and corruption

1

Weak law enforcement

2

Numerous government “touch points”

3

Complicated taxes and licensing system

4

Lack of will for making an effort in getting permissions the right way

5

To get unfair advantage in business

“Automation of all procedures or processes involving interface with the Government is the ideal it needs to focus on. Doing away with person-to-person interface (to the extent feasible), especially for approvals, services, licenses, etc., would greatly reduce the scope for corruption.”

• Respondent from an Indian MNC

Source: Survey report - Bribery and corruption: ground reality in India

46

Production Sourcing Logistics Customs CHA Police Labour law

• fficials

FDA Municipal dept. Octroi Excise W&M Labour law Shops & Establishment Fire department Sales tax Income tax Service tax Road permits Companies Act Electricity board Pollution Control Board DGFT Local + imports Imports

Lift license

Tax compliance Manufacturing

a a a a a a a a a a a a a a a a a a a a

Indian company

Government interaction at a glance

47

Step 1 Step 2 Step 3 Step 4

Step 5

Conversion of land and change of land use Pre-approval NOCs and clearance from agencies Plan sanction Occupancy certificate

Some of the permits required

Conversion of land use  Sanction of development plan  NOC from electricity board  NOC from fire service department  NOC from Airport Authority of India  NOC from Ministry of Environment and Forest Clearance 

57 172 40 Number of approvals a builder needs to construct a property Number of documents a builder has to produce Number of departments

• f central and state

governments and municipal corporations a builder engages

Example of licenses and permits challenges

48

Proactive

Sample FCPA compliance program framework

Reactive Proactive Setting the Proper Tone Code of Ethics FCPA Prevention Policies FCPA Risk Assessment FCPA Controls Monitoring FCPA Awareness Training Response Plan Conduct FCPA Risk Assessment FCPA Monitoring

Program assessment Implementation review Substantive review

Results drive monitoring

49

FCPA compliance program Risk assessment criteria

Government end-users; sales intermediaries/ direct sales High risk geographic markets Significant movement of goods/ imports/ exports/ certifications Government touch points – VAT/ taxes/ licenses/ etc. Travel, entertainment and gifts, customer travel, petty cash

50

How to monitor for corruption risks?

►

What kind of testing should be conducted?

►

Controls testing versus substantive testing

►

Controls alone may not prevent irregularities; control testing alone may not detect irregularities

►

The DOJ/SEC guidance to the FCPA states that a compliance program that is “followed in practice will inevitably uncover compliance weaknesses and require enhancements” and that programs that employ a “check-the-box” approach may be inefficient and, more importantly, ineffective”

►

“DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.”

►

The UK MOJ guidance to the UK Bribery Bill requires organizations to “monitor the ethical quality of transactions”.

51

How to monitor for corruption risks? continued

►

How to choose a sampling methodology? Where and how are potential problem payments recorded?

►

Understand the business? Where are the customers? Where are the government touch points?

►

Choose accounts that could have risk – Commissions, permits, licenses, consultants, freight forwarding, customs clearance, etc. as well as major Government or SOE contracts/projects

►

Choose T&E reports from individuals who direct or touch the risk

• Who manages imports/exports?
• Who entertains our big Government clients?

►

Controls over cash?

52

How to monitor for corruption risks? continued

►

How can we leverage technology to find higher risk transactions?

►

Analytics

►

Key word searches on text fields in GL or T&E systems

►

Who should conduct these audits?

►

Experience (how many of the auditors have ever seen a bribe?)

►

Local expertise (how many have ever seen a bribe in India?)

►

Training

►

Who should be interviewed?

►

Employees

►

Vendors?

53

Higher risk ledger accounts and expenses

►

Obtain listing of major customers and identify potentially high risk customer contracts

►

From the chart of accounts and trial balance, select higher risk accounts for testing, examples would include:

►

Travel and Lodging

►

Gifts and entertainment

►

Marketing and consulting fees

►

Customs and duties; freight forwarding charges

►

Visas, permits and licenses

►

Audit and tax consulting fees; legal fees

►

Sales commissions

►

Donations, charities, sponsorships, community/social responsibility payments, political contributions

►

Security

►

Client travel and production facility visits

►

Capital expenditure; facilities

54

• ‘follow up charges’
• ‘redemption charges’
• ‘renewal charges’
• ‘consultancy charges’
• ‘securing consent’
• ‘for government liaisoning’
• ‘for obtaining license’

Some potential red flag narration in vouchers

• for miscellaneous work’
• ‘for facilitating permits’
• ‘for clearances’
• ‘for obtaining approvals’
• ‘for government entertainment’
• ‘gifts for government officials’
• ‘meals with government officials’
• ‘for processing’
• ‘other charges’
• ‘documentation charges’
• ‘to expedite approval’
• ‘environment consultancy charges’
• ‘for getting NOC’
• ‘retainership for statutory compliance’
• ‘incidental expenses’
• ‘examination charges’

55

Example of a trial balance with higher risk ledger accounts

56

Example of a listing of higher risk ledger accounts

57

Example of higher risk transaction descriptions for India

Keywords

58

Example of higher risk transaction selections

Results

59

Example of a higher risk transaction supporting documentation

60

Example of a higher risk transaction supporting documentation

61

I paid a bribe (http://www.ipaidabribe.com/)