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

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Foreign Corrupt Practices Act in India

Compliance Strategies for India's Unique Cultural and Governmental

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Compliance Strategies for India s Unique Cultural and Governmental Intricacies

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features: Anjali Chaturvedi, Partner, Nixon Peabody LLP, Washington, D.C. Jay Holtmeier, Partner, Wilmer Cutler Pickering Hale and Dorr LLP, New York Elizabeth D Keating Vice President Legal Compliance/ Building Efficiency Johnson Controls Milwaukee Wis

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Elizabeth D. Keating, Vice President, Legal Compliance/ Building Efficiency, Johnson Controls, Milwaukee, Wis.

Thursday, July 8, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific

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

Strafford Publications Teleconference July 8 2010 July 8, 2010

Anjali Chaturvedi Nixon Peabody Jay Holtmeier Wilmer Cutler Pickering Hale and Dorr LLP Elizabeth D Keating Elizabeth D. Keating Johnson Controls, Inc.

OVERALL FCPA ENFORCEMENT TRENDS OVERALL FCPA ENFORCEMENT TRENDS

“One can say without exaggeration that this past year was probably the most dynamic single year in the more than thirty probably the most dynamic single year in the more than thirty years since the FCPA was enacted.“

– Assistant Attorney General Lanny Breuer (Nov. 2009)

• “A primary mission of this Unit is to devise ways for us to be

more proactive in our enforcement of the FCPA. Members of the FCPA Unit will gain in-depth knowledge of industries and regional practices so we can uncover corrupt practices that might otherwise go undetected. We will also conduct more targeted sweeps and sector-wide investigations, alone and with other regulatory counterparts both here and abroad.”

– Cheryl J. Scarboro, Chief of the SEC Foreign Corrupt

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Practices Act Unit (Jan. 13, 2010)

FCPA – WHO DOES IT COVER? FCPA WHO DOES IT COVER?

• Anti-Bribery Provisions
• U.S. companies and citizens; foreign subsidiaries; and anyone in the world (even

non U.S. entities and people) if they take acts in furtherance of an improper payment while within the U.S.

• Accounting Provisions
• Companies that trade on U.S. exchanges (securities or debt), including public

companies and foreign companies with shares registered in the U.S.

• Places burden on parent company to ensure that all subsidiaries in which it

maintains a voting interest comply with requirements (if issuer holds 50 percent g p y q ( p

• r less of a subsidiary, then it is required only to, in good faith, use its influence to

comply with the accounting provisions).

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FCPA – WHAT DOES IT COVER? FCPA WHAT DOES IT COVER?

Anti-Bribery Provisions U S i d iti ti ithi th t it f th U S

• U.S. companies and citizens, or anyone acting within the territory of the U.S.,

cannot: (i) directly or indirectly, (ii) corruptly offer, pay, promise to pay or authorize a payment of, (iii) “anything of value”, (iv) to a “foreign official”, (v) for the purpose of obtaining or retaining business or securing any improper business advantage. Accounting Provisions Accounting Provisions

• Issuers must make and keep books, records, and accounts, which in reasonable

detail, accurately and fairly reflect the transactions and dispositions of assets. Reasonable detail is the level of detail that would “satisfy prudent officials in the conduct of their own affairs”.

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WHAT ARE THE PENALTIES? WHAT ARE THE PENALTIES?

Anti-Bribery Provisions

• Corporation
• Corporation
• Up to $2 million criminal fine (or higher under alternative penalty provisions,

including twice the amount of gain to the violator or loss to the victim)

• Debarment from government contracts
• $10,000 civil penalty
• Compliance Monitor
• Individual
• Prison (up to five years)
• Up to $100,000 criminal fine (or higher under alternative penalty provisions,

including twice the amount of gain to the violator or loss to the victim) (cannot be

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indemnified by company)

WHAT ARE THE PENALTIES? WHAT ARE THE PENALTIES?

Accounting Provisions

• Range of civil penalties
• Range of civil penalties
• Criminal liability can only be imposed for knowingly circumventing or knowingly

failing to implement a system of internal controls or knowingly falsifying any book, record, or account

• Criminal penalty of up to $5 million and/or imprisoned for 20 years (individuals)
• Criminal penalty of up to $25 million (entities)
• Fines could be higher under alternative penalty provisions, including twice the

amount of gain to the violator or loss to the victim g

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OVERALL FCPA ENFORCEMENT TRENDS OVERALL FCPA ENFORCEMENT TRENDS

• Prosecutions/settlements

continue at a rapid pace

Reported FCPA Proceedings

p p

– Prosecutions have risen

steadily since 2005 Reported FCPA Proceedings

– Over 130 pending

enforcement matters 40 cases brought by DOJ

– 40 cases brought by DOJ

and/or SEC in 2009, another record year

– Continued coordination

between DOJ/SEC

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– Dedicated units at DOJ,

SEC and FBI

OVERALL FCPA ENFORCEMENT TRENDS OVERALL FCPA ENFORCEMENT TRENDS

• Focus on individuals

U f d t /i f t (L V ti )

– Use of undercover agents/informants (Las Vegas sting) – Broad interpretation of “knowledge” (Bourke) – SEC “control person” liability (Nature’s Sunshine)

• Heightened focus on the due diligence (or lack thereof) on

business partners -- agents, JV partners, acquisition targets Increase in multi jurisdiction investigations and cooperation

• Increase in multi-jurisdiction investigations and cooperation

among government authorities in different countries

• Major increase in penalties
• Companies also subject to internal compliance enforcement

through the use of independent monitors at the company’s expense

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PERCEIVED LEVEL OF CORRUPTION IN INDIA

 Transparency International – 2009 Corruption Perceptions Index

– India ranks 84 out of 180 countries with a score of 3.4

• United States (19)
• Pakistan (130)
• Pakistan (130)
• Mayanmar (178)
• Transparency International – 2009 Global Corruption Barometer

p y p

– Indian political parties are perceived to be most affected by corruption, followed by public officials/civil servants – 9% of respondents in India reported paying a bribe in last 12 months – 42% of respondents reported that the Indian government is “effective” in the fight against corruption up from 25% in 2007

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in the fight against corruption – up from 25% in 2007

REGULATORY ENVIRONMENT IN INDIA

 Despite the end of the License Raj, bureaucracy remains a

key impediment to India’s economic growth key impediment to India s economic growth

 The World Bank – Doing Business 2010

– Out of 183 countries India is ranked:

Out of 183 countries, India is ranked:

• 133 in “Ease of Doing Business”
• 169 in “Starting a Business”

g

• 175 in “Dealing in Construction Permits”
• 182 in “Enforcing Contracts”
• 138 in “Closing a Business”
• 169 in “Paying Taxes”

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INDIAN ANTI-CORRUPTION LEGISLATION INDIAN ANTI CORRUPTION LEGISLATION

 1947 Prevention of Corruption Act (“PCA”) (amended in 1988)

– Imposes criminal liability on public and private corruption – Section 7 makes it a crime for public officials to accept (or

agree/attempt to accept) “gratification” as a “motive or reward” for agree/attempt to accept) gratification as a motive or reward for doing or from refraining from doing anything in their official capacity

– Section 8 imposes criminal liability on the perpetrators of bribery – Section 11 makes it illegal to aid and abet a violation of section 7 – No exception for facilitation payments

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INDIAN ANTI-CORRUPTION LEGISLATION INDIAN ANTI CORRUPTION LEGISLATION

 Criticisms of the PCA

Not enforced regularly by Indian authorities

– Not enforced regularly by Indian authorities – The politics of prosecutions

 India has not signed the OECD Anti-Bribery  India has not signed the OECD Anti Bribery

Convention

 India signed the UN Convention Against

Corruption and the UN Convention Against Transnational Organised Crime, but has yet to ratify the treaties ratify the treaties

 India has no law punishing bribery of foreign

public officials

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ANTI-CORRUPTION GOVERNMENT AGENCIES

Various federal and state agencies enforce India’s anti- corruption laws corruption laws

 Federal

The Supreme Court of India

– The Supreme Court of India – The Central Vigilance Commission – The Central Bureau of Investigation

g

– The Office of the Controller & Auditor General – The Chief Information Commission

 State

– Anti-corruption bureaus established in certain states, e.g., the

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Anti-Corruption Bureau of Maharashtra

RECENT CASES INVOLVING INDIA RECENT CASES INVOLVING INDIA

Settled Enforcement Actions:

• Westinghouse Air Brake Technologies Corp. (2008) –

payments to officials of the Indian Railway Board to obtain business, schedule inspections, curb tax audits

• Mario Covino (2008) – payments to officials at the

Maharashtra State Electricity Board

• Dow Chemical Co (2007)

payments to officials from

• Dow Chemical Co. (2007) – payments to officials from

various government agencies

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RECENT CASES INVOLVING INDIA Settled Enforcement Actions (cont’d): Settled Enforcement Actions (cont d):

 Electronic Data Systems Corporation (2007) –

inaccurate books and records arising from g improper payments made by Indian subsidiary, A.T. Kearney, Inc., to obtain business Ch d li S i i (2007) f

 Chandramowli Srinivasan (2007) – former

president of A.T. Kearney involved in making payments to senior employees of two state- p y p y

• wned energy companies

 Textron Inc. (2007) – payments to officials of

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state-owned companies in India

RECENT CASES INVOLVING INDIA RECENT CASES INVOLVING INDIA

 Publicly Announced US Investigations:

y g

– STR Holdings, Inc (2009) – payments and entertainment provided

to Indian government officials

– Pride International Inc. (2008) – indirect payments to officials to

resolve a customs-related dispute

– Millipore Corp. (2006) – investigated unspecified payment and

po e Co p ( 006) est gated u spec ed pay e t a d commission practices; SEC decided not to take enforcement action (2009) X C (2003) t t ffi i l i ti ith

– Xerox Corp (2003) – payments to officials in connection with

sales to government customers

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FCPA RISK FACTORS IN INDIA

 History of corruption in all levels of government

E i b d l ti d

Excessive bureaucracy and regulation – procedures are

complicated and not transparent

 Approvals from several government officials required to  Approvals from several government officials required to

• btain one permit/license

 Underpaid civil servants yield broad discretionary power;

some deliberately stall administrative procedures to induce improper payments Rules and regulations governing public procurement

 Rules and regulations governing public procurement

rarely enforced

Need for agents to assist in processing

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g p g

FCPA RISK FACTORS IN INDIA

 Customary in India to give gifts to business contacts and

government officials during Diwali (religious festival)

 Indian government officials solicit (pressure) donations

from businesses for charitable organizations from businesses for charitable organizations

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VULNERABLE SECTORS AND INSTITUTIONS VULNERABLE SECTORS AND INSTITUTIONS

Public Procurement

 Public Procurement

 Customs Clearance / Importation  Tax Administration (Excise Sales)  Tax Administration (Excise, Sales)  Construction Industry  Police  Police  Judiciary

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MONITORING: FORENSIC TESTING - INDIA MONITORING: FORENSIC TESTING INDIA

• Public Procurement:
• Review all government customer projects and govt end users
• Review all government customer projects and govt end-users
• Customs Clearance / Importation:
• Review due diligence investigations of all Custom Brokers & Freight
• Review due diligence investigations of all Custom Brokers & Freight

Forwarders

• Tax Administration (Excise, Sales):
• Review due diligence investigations of government-facing tax

consultants

• Construction Industry
• Review payments to major subcontractors

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MONITORING: Red Flag Indicators MONITORING: Red Flag Indicators

• 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

U ecessa y d pa es o u p e e ed a es

• 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 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 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

Johnson Controls

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Red Flag: High-Risk Vendors Red Flag: High Risk Vendors

• Sales Representatives / facilitators /

Sales Representatives / facilitators / contractors / sub-contractors

• Distributors

E i i / th t h i l lt t

• Engineering/other technical consultants
• Customs agents and freight forwarders
• Law firms/accounting firms/tax

g consultants/other professional services firms

• Other third-party agents/consultants
• Government-facing business consultants
• Government-facing business consultants

Johnson Controls

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Red Flag: Supplier Due Diligence Red Flag: Supplier Due Diligence

Key Questions to Ask:

• What services are being provided?
• What is the status and type of the supplier?
• What does the supporting documentation look like?

For example what information was

–For example, what information was

submitted as proof of the vendor’s existence?

• Does a third-party agent have a contract directly with

the Company or is a temporary employee agency involved?

• Were all due diligence steps followed and approved

per the Company’s policy?

• Is the supplier on a “Do Not Use” or “Do Not Pay”

Johnson Controls

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• Is the supplier on a Do Not Use or Do Not Pay

list?

Red Flag: Agents and Consultants Red Flag: Agents and Consultants

Bribes are often paid indirectly through agents. Red flags include:

• Country has historical bribery problem (see Appendix B for CPI)
• An excessive commission
• Government customer recommends or requires use of an agent

Government customer recommends or requires use of an agent

• Partner or agent related to foreign official
• Suggestions that money needed to “win the business”

f f

• Requests for false invoices or other documents
• Invoice or request for payment that is unusual or departs from normal

practice

• Offshore payment requests
• No one can describe services rendered by agent

Johnson Controls

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Red Flag: Travel Entertainment and Red Flag: Travel, Entertainment, and Gifts

Travel Entertainment and Gifts

• When legitimate expenses become illegitimate benefits
• Custom, local law, and common sense
• 2007 Department of Justice (DOJ) opinions allow for reasonable travel and

00 epa t e t o Just ce ( OJ) op

• s a o
• easo ab e t a e a d

entertainment of foreign officials in US promotional tours

Warning signs:

• Business purpose is, or appears, incidental to entertainment purpose
• Official is strategically placed to grant business or improper business advantage

to company

• Expenses are lavish or out of line with company guidelines and local customs
• Spouse or children are invited
• Expenses are paid to official personally

Johnson Controls

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p p p y

Red Flag: Gifts to Foreign Government Red Flag: Gifts to Foreign Government Officials

Gifts to Foreign Government Officials Gifts to Foreign Government Officials

• Prevalent in countries where gift giving is ingrained in the business culture
• Appears to have been given in connection with processing business
• Excessive in amount, especially if given cash
• Promotional items without corporate logos
• Potential “foreign officials”

– Ministry, agency employee

J d l i l t

– Judge or legislator – Local officials – Employee of government-controlled company

Employees of state owned universities

– Employees of state-owned universities – Private person acting officially – Official of public international organization – Candidates for office, political parties, or party officials

Johnson Controls

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Candidates for office, political parties, or party officials

– Spouse/dependent/sibling of an official

Red Flag: Charitable Political and Red Flag: Charitable, Political, and Social Contributions

• Donations can be considered “anything of value”
• Donations can be considered anything of value
• If other elements of an FCPA violation are present, it is not a defense

that the charity is legitimate

Johnson Controls

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MITIGATING FCPA RISKS IN INDIA MITIGATING FCPA RISKS IN INDIA

 Effective due diligence procedures  Warranties/certifications/integrity pacts  Clear anti-corruption policies and procedures

St i t l dit d t t

 Strong internal audit department  Willingness to terminate relationship(s)

Regular training on the FCPA and local anti corruption laws

 Regular training on the FCPA and local anti-corruption laws  Use electronic filing whenever possible, e.g., registrations  Initiate the customs clearance process electronically through  Initiate the customs clearance process electronically through

ICEGATE (Indian Customs and Excise Gateway)

 Request “information” from a “public authority” pursuant to the

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2005 Right to Information Act

Steps to Take if Misconduct is Suspected Steps to Take if Misconduct is Suspected

Investigate investigate investigate

• Investigate, investigate, investigate
• Use of 3rd party consulting firms - objectivity
• Remediate & terminate
• Remediate & terminate
• Self report?

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CONCLUSION

Anjali Chaturvedi

CONCLUSION

Nixon Peabody (202) 585-8270 achaturvedi@nixonpeabody.com Jay Holtmeier Jay Holtmeier Wilmer Cutler Pickering Hale and Dorr LLP (212) 295-6413 Jay.Holtmeier@wilmerhale.com Elizabeth D. Keating Johnson Controls, Inc. (414) 524-5590 Eli b th D K ti @j i Elizabeth.D.Keating@jci.com

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