FCPA in a nutshell
Title: Foreign Corrupt Practices Act, 1977 of the United States of America
History: Passed as a result of Congressional hearings addressing corporate slush funds, illegal campaign contributions and international bribery.
Purpose: It is considered as the first aggressive anti-bribery statute among developed nations.
Prohibits: The FCPA prohibits offer, payment, promise or authorization to pay anything of value to any foreign government official for purposes of influencing any act or decision in order to obtain or retain business
Requires: Issuers must make and keep accurate books and records, devise and maintain a system of internal accounting controls.
Jurisdiction: All “issuers”, i.e. corporations that issue securities registered in the United States or who are required to file periodic reports with the Securities & Exchange Commission (SEC); Foreign Companies with ADRs listed on U.S. exchanges, U.S. based private companies; Employees of these entities.
Enforcement: Criminal violations are prosecuted by the U.S. Department of Justice (DOJ); Civil violations are enforced jointly by the SEC and DOJ
The past few years have seen a spate of FCPA enforcement actions against US Corporations with imposition of unprecedented fines and penalties. In 2008, Siemens paid the highest penalty to date – $800 million[i]. U.S. enforcement agencies have also imposed significant penalties against other companies such as Baker Hughes Inc. ($44 million)[ii], ABB Ltd. ($10.5 million)[iii], Westinghouse Airbrake Technologies Corporation (Wabtec) ($3,00,000), and The Dow Chemical Company ($325,000)[iv].
Sometime back, Wal-Mart suspended several of its top employees in the India team due to alleged FCPA violations. The trend is reflective of the increasing focus of U.S. enforcement agencies on corrupt business practices by companies including those operating in India. Given this scenario, multinational companies cannot afford to ignore the FCPA compliance in their India operations.
In October 2009, the Indian media highlighted[v] a letter written by the Indian ambassador to the United States, Ms. Meera Shankar to the Prime Minister’s Office in India where she provided details of US based firms who had allegedly paid bribes to officials in the Central Insecticides Board[vi], Indian Navy[vii], Railways[viii], Maharashtra State Electricity Board[ix] and other Government agencies. The ambassador also pointed out to the PMO that it may like to take appropriate action and investigate these cases in India.
Following this media report, actions have been initiated against wrongdoers in India including inquiries against errant public servants, companies and their respective representatives. These actions relate to inquiries under the anti-bribery provisions of the Prevention of Corruption Act, 1988 (POC Act), violation of the accurate accounting requirements under the Companies Act, falsification of accounts under the Indian Penal Code and related proceedings under the Income Tax Act and other applicable statutes.
Business community react sharply to requests for ensuring compliance with anti-bribery statutes on the ground that this affects the way business is usually done in India. Offering bribes (which sometimes can be as low as Rs. 100 to as high as 8 digit figures) is perceived as a necessary evil for their business operations. While moving to a ‘corruption-free’ zone may not be a completely smooth process, it is not impossible and is in fact necessary given the current enforcement atmosphere and the principles of good governance.
With increasing instances of FCPA compliance related scrutiny in the U.S. resulting in prosecutions and fines, it is imperative for U.S. companies operating in India to recognize what the risks of violations of FCPA provisions can entail for companies operating in India including on the profitability, expansion plans or the very existence of their businesses. To this end, it is key for these companies to:
(a) understand the scope and applicability of the FCPA to their enterprise;
(b) ensure FCPA compliance in addition to other laws applicable to companies in India including the POC Act;
(c) create and constantly bolster their compliance policies and initiatives with a view to insulate themselves from FCPA scrutiny and to otherwise adhere to established norms of good governance.
The (Indian) Prevention of Corruption Act, 1988
Scope: Primary legislation dealing with corruption in India
Offences: Makes it an offence for a public servant to accept, obtain or agree to accept or attempt to obtain any gratification other than legal remuneration as a motive / reward for doing / forbearing to do any official act or for showing favour / disfavour in any official act. Receiving gratification as a motive / reward for purpose of inducing a public servant by corrupt or illegal means or by the exercise of personal influence is equally an offence. The term “gratification” is not restricted to pecuniary gratification or to gratification estimable in money.
Penalties: Imprisonment for six months, extendable to five years, and / or fine, and / or both.
[iii] United States v. Vetco Gray Controls et al. No. 07-CR-004 (S.D. Tex. 2004)
[iv] SEC Litigation Release 20000/February 13, 2007
[vi] The Dow Chemical Company consented to pay $325,000 civil penalties to the US Government in relation to improper payments of approximately$2,00,000 made by its Mumbai based subsidiary DE-Nocil Crop Protection (Ltd.) to officials in the Central Insecticides Board for expediting registration of its products in India.
[vii] From 2001 to 2006, various subsidiaries of York International Corporation, a global provider of heating, air conditioning and refrigeration products made improper payments totaling over $7.5 million to secure orders in Middle East, China, Nigeria, Europe and India. York’s Indian subsidiary retained an agent to assist in securing after-installation services contract and to provide sales and marketing support in connection with equipment sold to the Indian Navy.
[viii] Officials in the Indian Railway Board were accused of receiving payments from employees and agents of the Kolkata based Pioneer Friction (Ltd.), a subsidiary of Westinghouse Airbrake Technologies Corporation (Wabtec), to obtain and retain business with the IRB; schedule pre-shipping product inspections; obtain issuance of product delivery certificates and curb what the company considered to be “excessive tax audits”. Pioneer Friction (Ltd.) manufactures low and high friction brake blocks for rail operations in India. Subsequently Wabtec had to enter into an agreement with the U.S. Department of Justice where it was asked to pay a penalty of $3,00,000, implement rigorous internal controls and cooperate fully with the Department.
[ix] Mr. Mario Convino, an Italian citizen, admitted that from March 2003 through August 2007 he caused employees and agents of the valve company, Control Companies Inc. to make corrupt payments totaling approximately $1 million to officials of state owned enterprises in different countries including the Maharashtra State Electricity Board in India, to assist in obtaining and retaining business for the valve company.