Foreign Corrupt Practices Act in India in 2013 Compliance Strategies - - PowerPoint PPT Presentation

Foreign Corrupt Practices Act in India in 2013

Compliance Strategies for India's Unique Cultural and Governmental Intricacies

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TUESDAY, MAY 14, 2013

Presenting a live 90-minute webinar with interactive Q&A

Elizabeth D. Keating, Global Compliance Counsel - Investigations, Johnson Controls, Milwaukee, Wis. Jay Holtmeier, Partner, Wilmer Cutler Pickering Hale and Dorr, New York 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 May 14, 2013

Jay Holtmeier Wilmer Cutler Pickering Hale and Dorr LLP Elizabeth D. Keating Johnson Controls, Inc. Michael Stavridis Ernst & Young LLP

OVERALL FCPA ENFORCEMENT TRENDS

• US authorities continue

strong enforcement efforts

– FCPA Investigations

declined in 2012

– Activity peaked in 2010,

but still very active

– Over 90 publicly

disclosed pending enforcement matters

– Continued coordination

between DOJ/SEC

– Dedicated units at DOJ,

SEC, and FBI

6

DOJ and SEC Enforcement Actions 2004-2012

OVERALL FCPA ENFORCEMENT TRENDS

• Large FCPA Sanctions Continue; Recent Settlements:

– JGC (Japan; $219M), 2011 – Magyar Telekom/Deutsche Telekom (Hungary/Germany; $95M), 2011 – Pfizer (US; $60M), 2012

• Prosecution of Individuals Is Continued Priority
• Third-Party Risks (e.g., sales agents, intermediaries, consultants)
• Travel and Entertainment in High-Risk Markets
• Industry-Specific Risks (e.g., SEC probe of banks’ business with sovereign

wealth funds)

• New Tools at the SEC – Deferred Prosecution Agreements and Non-

Prosecution Agreements

• Shift Away from Compliance Monitors; Increased Use of Alternatives
• New Development – A Resource Guide to the U.S. FCPA

7

8

A Resource Guide to the U.S. FCPA

• In November 2012, the SEC and DOJ jointly issued long-promised

guidance on the FCPA.

• The Guide provides unprecedented, detailed information on federal law

enforcement approach and priorities but does not pronounce revamped enforcement priorities or alter previously stated positions.

• Guide reinforces DOJ/SEC interpretations of the FCPA found in prior

settlements and cases.

• Although it failed to clarify some of the more controversial aspects of the

government’s enforcement approach, the Guide is a helpful document, and will likely be much-cited resource for years to come.

8

A Resource Guide to the U.S. FCPA

Key topics addressed in the Guide:

• Jurisdiction under the FCPA
• Corrupt Intent, Knowledge, and Willfulness
• Business Purpose
• Gifts, Travel, and Entertainment Expenses
• Charitable Contributions
• Definitions of Foreign Officials and Instrumentalities
• Use of Third Parties
• Facilitating Payments
• Successor Liability
• The FCPA’s Accounting Provisions
• Compliance Programs

9

Enforcement by Indian Authorities

• India saw more high-profile scandals and anti-

corruption protests led by popular activists in 2012.

• India's Central Bureau of Investigation filed

corruption charges against 5 companies and 17 individuals in connection with the "Coalgate" scandal.

• Prime Minister Singh has stated that his

government is seeking to amend the Prevention

• f Corruption Act to make failure to prevent

bribery by a corporation an offense.

10

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Oracle (2012)

– Oracle, a California-based computer technology company,

was charged with failing to prevent a subsidiary from secretly setting aside money off the company’s books, monies which were eventually used to make unauthorized payments to phony vendors in India. The SEC alleged that on more than a dozen occasions Oracle and its India subsidiary held over $2.2 million in unauthorized “side funds.”

– Oracle settled SEC books and records and internal controls

charges for $2 million.

– No anti-bribery or DOJ case.

11

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Diageo (2011)

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

beverages, such as Johnnie Walker and Windsor Scotch

• whiskeys. From 2003 to mid-2009, Diageo’s Indian subsidiary

made hundreds of illicit payments to government officials responsible for purchasing or authorizing the sale of its beverages in India and disguised those payments in Diageo’s

• records. The payments, routinely made through third parties,

totaled an estimated $1.7M.

– Diageo settled SEC books and records and internal controls

charges for $16M, including $11.3M in disgorgement, prejudgment interest of $2.1M, and a further civil penalty of $3M.

– No DOJ case.

12

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Pride International (2010)

– Pride International is an oil and gas services company.

Pride’s Indian subsidiary paid $500K to judges of the Indian Customs, Excise, and Gold Appellate Tribunal for a favorable determination in a customs duties and penalties dispute. The estimated value of the favorable decision was approximately $10M.

– Pride’s Indian subsidiary pleaded guilty to criminal charges for

conspiring to violate and violating the anti-bribery and books and records provisions of the FCPA and paid a $32M criminal

• penalty. Pride International entered into a Deferred

Prosecution Agreement. Pride International settled similar civil charges with the SEC and agreed to pay disgorgement of $19.3M plus pre-judgment interest of $4.2M.

13

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Control Components, Inc. (2009)

– 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 state-owned companies in several countries, including in India to the Maharashtra State Electricity Board.

– CCI pleaded guilty to criminal anti-bribery and Travel Act

charges and paid an $18.2M fine. Additionally, the company was placed on organizational probation for three years and

• rdered to create and implement a compliance program and

retain an independent compliance monitor for three years.

– No SEC case.

14

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Westinghouse Air Brake Technologies (2008)

– WABTEC manufactures brake subsystems and related

products for locomotives, freight cars, and passenger transit

• vehicles. From 2001 through 2005, WABTEC’s subsidiary

paid approximately $137K in cash to Indian Railway Board

• fficials to obtain contracts, schedule inspections, obtain

certificates, and avoid tax audits.

– WABTEC and its subsidiary entered into a non-prosecution

agreement with the DOJ and a civil settlement with the SEC. WABTEC paid a $300K criminal penalty, $288K in disgorgement of profits including pre-judgment interest, and $89K in civil penalties (a total of approximately $677K) for violating the anti-bribery, books and records, and internal controls provisions of the FCPA.

15

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Dow Chemical (2007)

– Dow Chemical is one of the world’s largest chemical

manufacturers; its fifth-tier Indian subsidiary manufactured and marketed pesticides and other products. The subsidiary paid an estimated $200K in payments and gifts to Indian government officials. Payments were made to a Central Insecticides Board official, state inspectors, and other officials. The subsidiary also made improper payments for gifts, travel, and entertainment to Indian government officials.

– Dow settled SEC books and records and internal controls

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

– No allegation that Dow itself was aware of the illegal conduct. – No DOJ case.

16

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Electronic Data Systems (2007)

– EDS is one of the world’s largest technology companies; the

company provides electronic data processing management and computer equipment. EDS’ subsidiary paid $720K to Indian government-owned companies between 2001 and

• 2003. The subsidiary had been struggling to perform its
• bligations with the Indian companies and the payments were

made so the subsidiary would not lose contracts.

– EDS settled SEC books and records charges and paid $491K

in disgorgement and prejudgment interest. The subsidiary’s president also settled with the SEC and paid a $70K penalty.

– No DOJ case.

17

FCPA ENFORCEMENT ACTIONS RELATED TO INDIA

• Textron Inc. (2007)

– Textron is a global, multi-industry company which does work in

aircraft, defense and intelligence, industrial, and finance businesses. As part of an investigation into $700K in kickback payments related to its sale of humanitarian goods to Iraq under the UN’s oil for food program, Textron identified an illicit payment by an Indian subsidiary

• f approximately $52K to a non-government customer to obtain

business.

– As part of a settlement, Textron agreed to disgorge $2.3M in profits,

plus $450K in pre-judgment interest, and to pay a civil penalty of $800K. Textron was also ordered to comply with an FCPA compliance program. Textron was further ordered to pay a $1.15M fine pursuant to a non-prosecution agreement with the DOJ.

– The charges relating to the Indian non-government customer were

brought under the books and records and internal controls provisions.

18

CURRENT FCPA INVESTIGATIONS RELATED TO INDIA

• Anheuser-Busch

– American brewing company, Anheuser-Busch, disclosed in

March 2013 that it is currently being investigated by the SEC in connection with its non-consolidated Indian joint venture, InBev Indian Int’l Private Ltd. The SEC is conducting an investigation into whether certain agents and employees engaged in conduct that violated the FCPA.

• Kraft Foods

– Kraft Foods, a food and beverage company, has disclosed

that it is currently being investigated by the SEC in connection with a facility in India that was part of its $19B acquisition of Cadbury in 2010. In its 2012 filings the company stated that it was continuing to cooperate with authorities, and noted that the SEC’s subpoena focused on its dealing with Indian governmental agencies and officials to obtain approvals related to the operation of its facility.

19

CURRENT FCPA INVESTIGATIONS RELATED TO INDIA

• Avon Products

– Avon Products, a cosmetics, perfume, and toy seller, has

disclosed that the SEC has issued a formal order of investigation into possible violations of the FCPA. According to Avon, the investigation is focused on expenses and accounting for travel, entertainment, gifts, use of third-party vendors and consultants, and related due diligence, joint ventures, and acquisitions, and payments to third-party agents and others.

– Reports indicate that the payments under investigation

• ccurred in numerous countries, including India.

20

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 organizations
• Interactions with police/judiciary
• Third parties with ties to government departments/officials (consultants,

agents, distributors, interns, and trainees)

21

FCPA Compliance Risks in India

May 14, 2013 Elizabeth Keating, Global Compliance Counsel – Investigations

Integrity

Johnson Controls Confidential

Corruption Risk Profile - India

 Transparency International – Corruption Perceptions Index (CPI) 2012

• Ranks countries based on how corrupt their public sector is perceived to be.
• India scored 36 on a scale of 0 – 100. (100 = means country perceived as very

clean; 0=means country is perceived as highly corrupt).

• India ranked 94th out of 174 countries. (Denmark ranked highest; Somalia

ranked 174th).

• India tied with Colombia, Benin, Djibouti, Greece, Moldova, Mongolia and

Senegal.  Transparency International - CPI 2011

• India ranked 95th out of 183 (tied with Albania, Swaziland and Tonga)
• Down from 87th in 2010

 TI Global Corruption Barometer 2010/2011

• 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.

23

Johnson Controls Confidential

Corruption Risk Profile - India

 TI Bribe Payers Index

• 84% of Indian companies believe bribes or facilitation payments are

being paid to do business

• 30% of Indian companies reported paying bribes to government
• fficials to expedite government services
• 54% of individuals surveyed reported paying a bribe to obtain

government services  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

24

Johnson Controls Confidential

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  Anti-corruption legislation (Jan Lokpal) remains stalled in

Parliament

 Grassroot anti-corruption campaigns still engaged – if ineffective:

• 2012 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

25

Johnson Controls Confidential

Corruption Risk Profile - India

26

Johnson Controls Confidential

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
• rder to obtain routine government services
• Seen as an accepted method of augmenting meager salaries

 Prevention of Corruption Act

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

27

Johnson Controls Confidential

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
• Often routine government services, eg., utility services, involved

demand for a bribe

28

Johnson Controls Confidential

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

• 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

29

Johnson Controls Confidential

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

30

Johnson Controls Confidential

Interaction with India’s Bureaucracy

Government Touch Points:

 Government facing activities which are problematic in India

include:

• 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

31

Johnson Controls Confidential

Interaction with India’s Bureaucracy

Government Touch Points:

 Government facing activities which are problematic in India

include:

• 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

32

Johnson Controls Confidential

Navigating the Risks

 Know Thy Vendors

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

government facing services being provided?

• 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
• 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
• Audit rights
• Vendor Anti-Bribery/Anti-Corruption certification

33

Johnson Controls Confidential

Navigating the Risks

 Know Thy Vendors

• Establish DNU/DNP list for any vendors who have been found to use

unethical business practices

• 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

34

Johnson Controls Confidential

Navigating the Risks

 Contract Review

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

provide inappropriate payments to government employees

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

specifically provided for by contract

 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

35

Johnson Controls Confidential

Navigating the Risks

 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

36

Monitoring FCPA risks in India

May 2013 Michael Stavridis

FCPA in India Page 38

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

FCPA in India Page 39

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”.

FCPA in India Page 40

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?

FCPA in India Page 41

How to monitor for corruption risks? continued

►

How can we leverage technology to find higher risk transactions?

►

Advanced 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?

FCPA in India Page 42

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

FCPA in India Page 43

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

►

Facilitation payments (if any)

►

Client travel and production facility visits

►

Capital expenditure; facilities

FCPA in India Page 44

Example of a trial balance with higher risk ledger accounts

FCPA in India Page 45

Example of a listing of higher risk ledger accounts

FCPA in India Page 46

Example of higher risk transaction descriptions for India

Keywords

FCPA in India Page 47

Example of higher risk transaction selections

Results

FCPA in India Page 48

Example of a higher risk transaction supporting documentation

49

Jay Holtmeier Wilmer Cutler Pickering Hale and Dorr LLP (212) 295-6413 jay.holtmeier@wilmerhale.com Elizabeth D. Keating Johnson Controls, Inc. (414) 426-9506 elizabeth.d.keating@jci.com Michael Stavridis Ernst & Young LLP (312) 879-2048 Michael.Stavridis@ey.com

CONCLUSION