Approaching the Risk of Corruption in India

India has stepped into the spotlight, becoming an important destination for investors from around the world. Its highly skilled workers, stable and democratic government,1 significant English-speaking population and growing domestic market are all signs of a promising future. India’s new government’s image of being business — and investment-friendly has resulted in increased investment interest and activity; currently India is viewed as the fourth most favored investment destination globally.2 In addition, the United States, one of India’s largest investment and trade partners, is negotiating a treaty with India for bilateral investment with the objective of deepening the economic relationship, improving investor confidence and supporting economic growth for both countries.3

Nonetheless, corruption remains a significant International’s Corruption Perceptions Index challenge for companies that invest in and (CPI)6 and has an unfavorable CPI score of 36 operate in India. The World Economic Forum out of 100 (the lower score indicating a greater identified corruption as among the top three perception of corruption).7 Global companies with most problematic factors for doing business Indian operations are increasingly seeking ways to in India.4 India is ranked by the World Bank in approach and manage corruption risks in an effort the bottom 30 percent of countries in terms of to minimize negative impacts on their investments “ease of doing business.”5 In addition, India is and operations in India. ranked 94 out of 177 countries in Transparency

APPROACHING THE RISK OF CORRUPTION IN INDIA 1 2 Certain regulatory requirements and procedures gamut of acts and regulations, some of which are often make conducting business in India arcane and which present significant compliance cumbersome and complex. Factors such hurdles for companies. Similarly, processes for as widespread red tape, a bottom-heavy obtaining licenses and permits can be complex bureaucracy, high tolerance for corruption and and lengthy. inefficient enforcement actions present further operational risks. Land acquisition, for instance, is In response to some of these issues, India’s new a highly complicated, time-consuming and tedious Prime Minister, Narendra Modi, has put together a process. In some states, a purchaser of property list of the top 10 priorities for India’s government. is required to establish a 30-year chain of title in He designated transparency in government and order to obtain clear and marketable title for the building confidence in the Indian bureaucracy property. In addition, labor laws in India include a among the top priorities.8

There are also six important bills awaiting Snapshot of the Anti-Corruption parliamentary approval that are essential elements of the government’s anti-corruption framework – the Regulatory Environment Judicial Standards and Accountability Bill, 2010; the Whistle Blowers Protection Bill, 2011; the Right The main law governing corruption in India is the of Citizens for Time Bound Delivery of Goods and Prevention of Corruption Act (PCA).9 The focus under Services and Redressal of their Grievances Bill, 2011; the PCA is primarily on the bribe taker; it makes the Prevention of Bribery of Foreign Public Officials the receipt of a bribe by a public official and related and Officials of Public International Organisations offenses punishable under the law. In contrast, the Bill, 2011 (FPO); the Prevention of Corruption U.S. Foreign Corrupt Practices Act (FCPA)10 focuses (Amendment) Bill, 2013; and the Public Procurement on the bribe giver. There are a number of differences Bill, 2012.16 Notably, the Prevention of Corruption between the PCA and the FCPA, but it is important Act (Amendment) Bill expands the definition of to note that unlike that under the FCPA, facilitation taking a bribe, makes giving a bribe an offense payments are illegal in India under the PCA. punishable under the law and also covers commercial organzations. The FPO Bill, like the FCPA, criminalizes A number of other Indian statutes also cover the act of bribing foreign government officials and corruption-related activity. These include the Indian officials of public international organizations. Penal Code, 1860;11 the Central Vigilance Commission Act, 2003;12 the Prevention of Money Laundering Corruption-related matters are investigated by several Act, 2002;13 and the Right to Information Act, 2005.14 different Indian law enforcement agencies, including India’s recently passed anti-corruption act – the the Central Bureau of Investigation (CBI), Central Lokpal and Lokayuctas Act, 2013 – provides for Vigilance Commission (CVC), Economic Offences the establishment of an anti-corruption ombudsman Wing (EOW), Anti-Corruption Bureaus (ACBs) and at both the central and state levels to inquire into Criminal Investigation Department (CID). In addition, allegations of corruption and to create an effective government vigilance departments, lokpals and anti-corruption framework in India.15 lokyuctas also investigate corruption-related issues.

APPROACHING THE RISK OF CORRUPTION IN INDIA 3 4 Areas of Corruption and High Risk Sectors In the recent past, India has witnessed a number of high-profile corruption scandals that have garnered significant global attention. The 2G spectrum scam,17 involving allegations of illegal payments and underpayments in the issuance of certain allocation licenses, shook the Indian telecom industry. As a result of the investigation into this matter, the Supreme Court of India cancelled 122 telecom licenses that were allotted under the 2G spectrum, resulting in the loss of millions of dollars to Indian and foreign companies.18 Other corruption-related scams that have caught recent media attention include: the Coal Allocation scam,19 the Wakf Board land scam,20 the Maharastra irrigation scam,21 the National Rural Health Mission scam,22 the Commonwealth Games scam23 and, more recently, the Defense Procurement Scam.24

A review of reported FCPA matters involving Indian operations shows the extensive use of third-party intermediaries. In some cases improper payments were routed via marketing agents and distributors/ dealers, while in other schemes third parties were used to make improper payments, e.g., to an Indian official to get certain products registered, to an Indian CEGAT judge to influence a customs litigation matter, and to Indian government officials allegedly responsible for purchasing and authorizing the sale of alcoholic beverages. Typically, the improper payments were disguised by creating fake documents (such as fictitious invoices, purchase orders, etc.), paying excessive commissions or margins, creating and parking slush funds with third parties, and making payments in cash.

Certain types of entities and areas within businesses are more prone to corruption than others and merit close scrutiny. Such risks include government sales; licenses, approvals and permits; donations, gifts and charitable/political contributions; land acquisition and

APPROACHING THE RISK OF CORRUPTION IN INDIA 5 construction; customs; direct and indirect taxes; and significant reliance on third parties for government interactions. However, each organization must also assess its specific activities and its related specific corruption risks – factors that are influenced by company size, industry, central and local political landscape, and level of government interaction. Generally, companies in the following sectors face greater anti-corruption challenges and require program elements that are particular to their circumstances: defense, life sciences/healthcare, alcoholic drinks, infrastructure/construction, mining, energy, hospitality, manufacturing and retail.

Mitigating Corruption Risks in India and Developing an Anti-Corruption Compliance Program

Global companies should consider setting up a risk-based and customized anti-corruption compliance program suited for the company’s operations in India. A “custom-made” compliance program should be designed after taking into account India-specific operational and regulatory risks, the nature of products and services, nature of government interactions, business supply chain, and reliance on third-party intermediaries. It is essential that compliance teams include local individuals with requisite compliance experience – individuals who understand local customs and culture and who are positioned to assess risks and respond effectively. Additionally, the

6 Hallmarks of an effective anti-corruption compliance framework, tailored for business operations in India, include:

n1 Compliance championed by Indian senior compliance teams should evaluate and implement management and enforced throughout the necessary changes in the company’s code of conduct organization, via periodic communications, and corporate policies. Further, local finance, internal trainings and institution of an effective audit and certain operational teams should include whistleblower policy that includes not only relevant anti-corruption controls within the business employees but also third-party intermediaries process frameworks. And, there are over 20 primary n2 Practical, well defined and customized native languages spoken across India, as well as policies and procedures for Indian operations, many other regional languages. Thus, all employees, particularly those in compliance-sensitive high-risk vendors and business partners should be areas such as gifts, donations, political provided with anti-corruption training in the local contributions, marketing and business language if they are not fluent in English. development activities and costs, government interactions, etc. Most importantly, companies should conduct a risk ranking of third-party intermediaries and business n3 Strong internal control environment covering partners and, accordingly, design an appropriate both operational and financial controls integrity due diligence program. Unlike that in the n4 Risk-based integrity due diligence of third United States, public record searches in India may parties, especially those with government provide very limited information for individuals and interactions on behalf of the company smaller third parties. Depending upon the risks associated with third parties, companies should n5 Periodic and event-specific anti-corruption consider conducting additional integrity due diligence risk assessments procedures targeted to address specific risks or concerns regarding third parties. n6 A comprehensive incident-response framework that includes: how allegations of corruption are identified and escalated Lastly, a robust and dynamic internal control not only within Indian operations but also framework will help to prevent, detect and remediate to global legal/compliance teams; need corrupt activity within the organization. It is important for and role of external counsel and anti- that the information systems used by the Indian corruption/fraud specialists; engaging the operations are current, updated and effective. Some whistleblowers; conducting the investigation; global companies may choose to implement a limited and considerations of reporting obligations version of the company’s ERP system or use a in the United States and under the Indian different system depending on the size of the Indian Companies Act, 2013, if any operations. In such cases, local compliance teams should work with local finance and internal audit n7 Periodic ongoing monitoring of the teams to evaluate whether any additional processes anti-corruption compliance program, or systems are required to ensure effectiveness of the including the whistleblowing program and company’s anti-corruption compliance controls. incident-response framework

APPROACHING THE RISK OF CORRUPTION IN INDIA 7 Conclusion India continues to be among the world’s top AUTHOR: investment destinations, and there are numerous global players that successfully manage large Dhruv Phophalia operations in India. While these companies face Managing Director corruption risks, what is common among those who +91 22 6129 6038 succeed in managing their corruption risk is the focus [email protected] on growth, maintenance of a strong internal control system and implementation of a customized and effective anti-corruption compliance program. An important characteristic of these successful programs ABOUT DHRUV PHOPHALIA is that they are not only championed by local senior Dhruv Phophalia is a Managing Director with management but are also embedded in the culture Alvarez & Marsal and leads the firm’s Global of the Indian operations. The policies and procedures Forensic and Dispute Services practice in India. are practical and well defined, and incorporate strong internal controls as well as periodic and event-specific risk assessments. Cognizant of variances in language For More Information: and culture, the companies engage local personnel Alvarez & Marsal India who are positioned to assess risks and respond effectively and to assure that training is adequate and clearly understood. Finally, the most effective anti-corruption compliance programs also include the implementation of a comprehensive risk-based third party due diligence plan.

8 1 India had a record voter turnout in its 2014 general elections, with more than 553 million participants. “State Wise Turnout for General Election – 2014,” Election Commission of India, accessed July 26, 2014, http://eci.nic.in/eci_main1/GE2014/STATE _WISE_TURNOUT.htm. 2 “India slips to 4th place in UNCTAD’s FDI destination ranking” (discussing the United Nations Conference on Trade and Development’s World Investment Report 2014), The Economic Times, accessed July 26, 2014, http://articles.economictimes.indiatimes.com/ 2014-06-24/news/50825711_1_fdi-destination-fdi-inflows-fdi-policy. 3 “U.S. Relations with India, Fact Sheet, December 21, 2012,” U.S. Department of State, accessed July 26, 2014, http://www.state.gov/r/ pa/ei/bgn/3454.htm. 4 Klaus Schwab, The Global Competitiveness Report 2013-2014, World Economic Forum, accessed July 26, 2014, http://www3.weforum. org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf. 5 In its Doing Business Report 2014, the World Bank ranked India 134 out of 189 economies in terms of ease of doing business. “Ease of Doing Business with India,” Doing Business, The World Bank, accessed July 26, 2014, http://www.doingbusiness.org/data/ exploreeconomies/india/. 6 Corruption Perceptions Index 2013, Transparency International, accessed July 25, 2014, http://cpi.transparency.org/cpi2013/results/. 7 Ibid. 8 “PM Modi outlines priorities, tells ministers to focus on governance,” The Times of India, May 29, 2014, accessed July 25, 2014, http:// timesofindia.indiatimes.com/india/PM-Modi-outlines-priorities-tells-ministers-to-focus-on-governance/articleshow/35717768.cms. 9 Government of India, The Prevention of Corruption Act, 1988, accessed July 25, 2014, http://www.persmin.gov.in/DOPT/ EmployeesCorner/Acts_Rules/PCAct/pcact.pdf. 10 U.S. Department of Justice, Foreign Corrupt Practices Act of 1977, accessed July 25, 2014, http://www.justice.gov/criminal/fraud/ fcpa/. 11 Government of India, The Indian Penal Code, 1860, accessed July 25, 2014, http://districtcourtallahabad.up.nic.in/articles/IPC.pdf. 12 Ministry of Law and Justice, Government of India, The Central Vigilance Commission Act, 2003, accessed July 26, 2014, http://cvc.nic. in/cvcact.pdf. 13 Ministry of Finance, Government of India, The Prevention of Money Laundering Act, 2002, accessed July 26, 2014, http://fiuindia.gov.in/ pmla2002.htm. 14 Ministry of Law and Justice, Government of India, The Right to Information Act, 2005, accessed July 26, 2014, http://www1.iitb.ac.in/ legal/RTI-Act.pdf. 15 Press Information Bureau, Government of India, The Lokpal and Lokayuktas Bill (backgrounder with salient features of the legislation), accessed July 26, 2014, http://pib.nic.in/newsite/erelease.aspx?relid=102096. 16 Chakshu Roy, “Six Bills, Twelve Days,” The Indian Express, February 5, 2014, accessed July 26, 2014, http://indianexpress.com/article/ opinion/columns/six-bills-twelve-days/. 17 “What is the 2G spectrum scam?” India Today, October 19, 2012, accessed July 26, 2014, http://indiatoday.intoday.in/story/ what-is-the-2g-scam-all-about/1/188832.html. 18 Devidutta Tripathy, “2G case: Supreme Court quashes 122 telecoms licences,” Reuters, India Edition, February 3, 2012, accessed July 26, 2014, http://in.reuters.com/article/2012/02/03/2g-india-supremecourt-unitech-tata-relia-idINDEE81104E20120203. 19 “Coal scam: Enforcement Directorate attaches assets of Vijay Darda’s firm, Nagpur company,” The Economic Times, July 1, 2014, accessed July 26, 2014, http://articles.economictimes.indiatimes.com/2014-07-01/news/51002757_1_ devendra-darda-congress-mp-vijay-darda-coal-ministry. 20 “Rs 2 lakh cr-scam hits Karnataka Wakf Board,” Hindustan Times, March 26, 2012, accessed July 26, 2014, http://www.hindustantimes. com/india-news/rs-2-lakh-cr-scam-hits-karnataka-wakf-board/article1-831182.aspx. 21 “Maharashtra govt in crisis, all NCP ministers quit,” The Times of India, September 25, 2012, accessed July 26, 2014, http://timesofindia. indiatimes.com/india/Maharashtra-govt-in-crisis-all-NCP-ministers-quit/articleshow/16543191.cms?referral=PM. 22 “NRHM scam: 2 former UP ministers to appear before CBI Agencies,” The Indian Express, December 26, 2011, accessed July 26, 2014, http://archive.indianexpress.com/news/nrhm-scam-2-former-up-ministers-to-appear-before-cbi/892257/. 23 “CWG Case: CVC recommends action against Kalmadi,” The Hindu, October 9, 2013, accessed July 26, 2014, http://www.thehindu.com/ news/national/cwg-case-cvc-recommends-action-against-kalmadi/article5217444.ece. 24 Rajat Pandit, “Another scam hits defence ministry, Antony orders CBI probe,” The Times of India, March 3, 2014, accessed July 26, 2014, http://timesofindia.indiatimes.com/india/Another-scam-hits-defence-ministry-Antony-orders-CBI-probe/articleshow/31301383.cms.

APPROACHING THE RISK OF CORRUPTION IN INDIA 9 LEADERSHIP. PROBLEM SOLVING. VALUE CREATION.

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