CHAPTER 7 Criminal Problems in the Use of Agents in India
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CHAPTER 7 Criminal Problems in the Use of Agents in India Priti Suri* § 7.01 Introduction § 7.02 Notable Criminal Cases Involving Foreign Corporations A. The Bofors Scandal B. HDW Submarine Sale C. Airbus A-320 D. Sumitomo § 7.03 Regulations on the Use of Indian Agents § 7.04 Conclusion Appendix A No. RegnJ./Indian Agents/89 Appendix B D.G.S. & D.-237-Special Condilions for Imported Scores in Addition to those ConLamed in Form D.G.S. & D.-230 INTL. TRADE Issue 0 (1991) 1 § 7.01 Introduction The latter half of this century has witnessed remarkable economic changes between the nations of the world. In India, decades of socialist. Priti Suri is a member of the Bar Council of Delhi, India, and currently is affiliated with the law firm of Rekhi, Taisky & Singh in New Delhi, India. She specializes in international legal transactions and international business law. State planning has resulted in slow economic growth rates. On the other hand, countries like Taiwan, Hong Kong, and Japan have achieved double digit economic growth rates~ A push for free market policies was initiated by Former Prime Minister Rajiv Gandhi, who was voted into office in 1984 after the assassination of his mother and predecessor. His administration started this liberalization process by eliminating the regulations that restricted economic growth and by promoting foreign investments through equity participation, transfer of technology, and direct sales. For the first few years, this liberalization process quickly produced positive results. Then the l3ofors arms-procurement scandal surfaced with allegations that high political officials within the Gandhi administration had been receiving kickbacks. The Bofors scandal involves the sale of 400 155mm field howitzers worth $1.4 billion. The contract for producing these howitzers was awarded to AB Bofors of Sweden in March 1986 when Mr. Gandhi was the Prime Minister and Minister of Defense. The government policy at that time prohibited the use of middlemen in defense deals. However, less than a year after making this contract, the newspapers were alleging that Bofors had paid “commissions” to middlemen amounting to $40 million. Both Bofors and the Indian government denied the payments to Indian agents for securing the contract, but the courts have not yet made their final determination. As indicated by the Bofors case, governmental and public-sector purchasing bodies in India buy large volumes of high-tech equipment from transnational corporations. Foreign firms usually engage local agents to market their equipment to these purchasing bodies. These agents procure tender documents, communicate the positions of their overseas principals, and monitor the local market. The purpose of this chapter is to apprise foreign businesspeople of the criminal sanctions for violations of the Indian criminal laws that may arise from the use of agents in India. This chapter analyzes the role of agents who act for foreign principals and the potential criminal law problems that may arise from using these agents. To demonstrate these criminal law prob- :ems, four prominent criminal cases that involve allegations of illegal commissions to agents for the purpose of securing vital sales contracts will be analyzed. The controversy sparked by these cases prompted the government to pass certain regulations controlling the activities of agents. The remainder of this chapter analyzes these new regulations as they apply to corpo- rations with overseas business interests. It is also the goal of this chapter to help foreign businessmen avoid the potential criminal law pitfalls involved in the use of agents in India. INTL. TRADE Issue 0 (1991) 2 § 7.02 Notable Criminal Cases Involving Foreign Corporations Recently, there have occurred several notable cases involving allegations of corrupt practices by foreign corporations. These cases illuminate the functioning of the Indian government in matters involving international transactions and the manner it carries out invesmigations. A. The Bofors Scandal On March 24, 1986, India signed a $1.4 billion contract with AB Bofors, a unit of Nobel Industries Sweden AR, to purchase 400 155mm howitzers and ammunition for the Indian army. The contract was negotiated by the countries’ two prime ministers and was supposed to be free of commissions or agents’ costs. The purpose of this condition was to ensure that India obtained the best price by keeping to a minimum the overhead expenses to be paid by the company. On April 16, 1987, Swedish National Radio reported that about $40 million—nearly 3 percent of the total contract—had been paid by Bofors as commissions to middlemen. This allegation was denied by Bofors and by the administration of the then Prime Minister, Mr. Rajiv Gandhi.’ In June 1987, Sweden’s National Audit Bureau released a report confirming the payment of $40 million by I3ofors to certain Indians, but a portion of the report was withheld on the basis of bank secrecy requirements. The report stated that investigations were hampered severely by lack of cooperation from Bofors. In August 1987, Bofors confirmed the payments, but refused to identify the middlemen on the ground that it would jeopardize industrial confidentiality.2 In April 1988, a Madras-based newspaper, The Hindu, published facsimiles of bank documents for foreign exchange remittances and letiers between Bofors and certain private companies related to the sale of guns to India. Four (lays later, a Joint Parliamentary Committee (JPC) dominated by the Congress (I) Party concluded that there were no middlemen in the deal and no payment to any Indian individual or company.3 The whole affair then was investigated by the Comptroller and Auditor General of India (CAG). On July 18, 1989, serious lapses in the govern technical and financial evaluation of (the Bofors deal were reported by the CAG.4) 1. Spaeth, Rajiv Gandhi Sets Ilirnse!f tip for Verdict, WALl. ST. J., Oct. 18, 1989. 2. Id. 3. Id. 4. The Smoke Screen Clears (GAG Report), INDIA TODAY, Aug. 15, 1989, at 28-30. INTL. TRADE Issue 0 (1991) 3 A General Staff Qualification Requirements (GSQR) was prepared fur all the competing guns. “Normally the parameters of a GSQR are assigned infer se importance through a matrix of marks. This exercise is necessary for balanced appreciation of different characteristics of the minimum parameters.” This was not prepared in the Bofors case, making the selection process unscientific and defective. The four countries whose guns were competing for the contract were France, Britain, Austria, and Sweden. French Sofma guns topped the list of evaluators initially, with Swedish Bofors trailing a poor second. This choice was made on the basis of results sent by the Army Headquarters in March 1985. This evaluation, however, was followed by yet another evaluation, which added eight characteristics and two sub-characteristics to the list. When judged according to these new parameters, Bofors moved to the top position. The bottom line justification was that the Bofors gun’s burst fire capacity was better than that of the Sofma gun. One more factor chat helped Bofors obtain the contract was their financial package. They reduced the price by several million dollars. Soon after the news of commissions paid by Bofors was revealed, the Government of India wrote to Bofors asking details regarding the amount paid by Bofors, to whom was it paid, and what services were rendered by the payee. Bofors response was sheltered behind a plea of commercial secrecy. By this time, it was realized that the only way to get an answer from Bofors was to use the leverage of Bofors’ interest in negotiating a new project of another gun system in India. The managing director of Bofors was told, on his visit to India, that all their top officials would be summoned to India to discuss cancellation of the contract and blacklisting of Bofors.5 Bofors agreed to send a delegation, including the president of their company, to Delhi to answer all the questions that had been posed to them by the Indian government.6 For unexplained reasons, the Indian government then backed off from its efforts to question l3ofors. The Prime Minister, in a meeting on July 4, 1988, said that India had gone coo far in its “arm twisting tactics.” After this meeting, Bofors was advised not to send the delegation.7 5. Getting Away—b9 ofors), INDIA TODAY, Sept. 15, 1989, at 22-23. 6. Id. 7. Id. INTL. TRADE Issue 0 (1991) 4 The Bofors scandal galvanized the opposition parties in Indian politics before the nation went to polls in 1989, and apparently’ went a long way in causing the defeat of the ruling Congress (I) party. The new government, under the leadership of Mr. V.P. Singh, acted swiftly by framing a First Information Report, which was filed in the district court of Delhi by the Central Bureau of Investigation (CBI), India’s equivalent of the FBI.8 The CR1 filed allegations of criminal conspiracy, corruption, abuse of official position by public servants, cheating, criminal breach of trust, and forgery against 14 persons and companies, including: Mr. Martin Adbo, former president of l3ofors; Mr. Win Chadha, the Swedish company’s former principal agent in India; and Mr. C. P. Hinduja, a London-based Indian industrialist. Mr. Chadha was alleged to be the president of Anatronic General Corporation of New Delhi, and Mr. Hinduja the owner of Pitco/Moresco/Moineas SA. Both were accused of having illegally received payments from Bofors. The 11 other accused were not identified by name, but referred to as directors and beneficiaries of some companies, including Bofors, Anarronic General Corporation of New Delhi, Svenska Inc. of Panama, Pitco/Moresco/Moineas SA of Switzerland, and A.E. Services of the United Kingdom.9 The initiation of criminal proceedings laid the groundwork for seeking information from Swiss banks about accounts into which “commissions” were paid by Bofors, as well as the possible freezing of the accounts.10 The head of the Swiss police and justice department, Dr.