Questioning the US FCPA – An Indian Perspective

The Saturday Times of India front-page headline – “Karnataka most corrupt state: sammelana chief” caught my attention. At one end, Bangalore, capital of Karnataka state is known as the back office center of the world and on the other hand, corruption levels have significantly increased over the last decade. When I had stayed in Bangalore in late nineties, it was known as the cleanest state in the country. Bangalore has grown because of the foreign investments and multinational offices in the city. Therefore, the question, which begs an answer is why when multinationals are governed by Foreign Corrupt Practices Acts (FCPA) of their respective countries, they have contributed to the corruption in the city.

I am not an expert in US FCPA; however, here is my view on why it has failed to control corruption in multinationals operating in India.

1.    The US FCPA Exception

 The FCPA exception to the rule as mentioned in the Department of Justice site paper ‘FCPA for Layman” is as follows:

“Regarding payments to foreign officials, the act draws a distinction between bribery and facilitation or “grease payments”, which may be permissible under the FCPA but may still violate local laws. The primary distinction is that grease payments are made to an official to expedite his performance of the duties he is already bound to perform. Payments to foreign officials may be legal under the FCPA if the payments are permitted under the written laws of the host country.”

Now this term routine governmental action means payments to smoothen the wheels for processing of licenses, work permits etc. by the government departments. This is interesting since most of the bribe payments taken by government departments be it telephone, electricity, power, income tax etc. is to fasten the process and give preferential treatment.  The Prevention of Corruption Act of India strictly prohibits a government official or public servant to take any “gratification” from any person or corporate for favoring or disfavoring them. According to the act, giving a bribe is an offense and the bribe giver can be prosecuted for it. Therefore, all grease payments received by government officials by US multinationals is a criminal offense as per laws of India. Both the government official and the US multinational can be prosecuted for the same.

My question here is how US FCPA addresses this issue. Will it consider a contravention of the FCPA or does the multinational have defense from it? According to my understanding, the multinationals are contravening the Indian laws blatantly.

2.    The Business Purpose Test

US FCPA requires that a bribe should be paid to increase business opportunities. Here is an extract from the guide:

Business Purpose Test – The FCPA prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person. The Department of Justice interprets “obtaining or retaining business” broadly, such that the term encompasses more than the mere award or renewal of a contract.”

This according to me gives further leeway to multinationals for participating in corrupt activities. Here I am giving two examples of common frauds done by Indian politicians in which multinationals are to quite an extent accomplices and partners in crime.

The first one is the licenses issue. Taking the case of 2G Telecom fraud, licenses were given at discounted prices by the then Minister of Telecom A. Raja to Indian and multinational organizations on receiving huge bribes. In this case, obtaining a cheaper license allows the multinational business opportunities to enter the market and make profits.

The second fraud, which politicians do, is the real estate bit. Each state has software technology parks for IT & ITES companies. Land is allocated to the multinationals to setup operations. The land price is discounted heavily by the politicians to favor certain companies. This is a discretionary power used by politicians. If an organization bribes them, they will get huge tracks of prime property at dirt-cheap rates.

Here in the true sense it is not a business contract, which increase business. These deals are done to establish offices and set up operations. The question is does the FCPA cover these under the business purpose test. The Indian Prevention of Corruption Act prohibits these payments.

3.    Detection of Bribe Payments

 The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. Now this is one thing that is clear. As I studied the United States of America vs. Pride Forasol case, in which Pride India paid a bribe to obtain a favorable ruling for customs case. The payments were made by the company by issuing false invoices to intermediary companies. These were routed to bank accounts in Dubai with the intent of the money to be transferred to the judge at a later date.

The company followed a roundabout way of transactions to pay the bribe money since it was a significant amount of USD 500,000. However, in normal cases, the tax consultants hike their bills by charging out-of-pocket expenses and pay the same to various government officials.

Another common practice, which, is followed by banking organizations and government officials, is of obtaining loans at discounted rates with the intention of not paying back. It operates in a simple manner. Let us say a bank wishes to grease the palms or pay bribes of a government official. The government official asks the bank to approve a loan in the name of one of his relatives, friends or house help. The loan is generally a big amount with insufficient security and guarantee papers. A couple of EMI’s are initially paid by the government official’s nominated person, and then these stop. The bank does not make an attempt to recover the money and does the paper work to show it as a non-performing asset (NPA). The NPA is written-off and nobody is wiser. It is quite difficult to track the account that was opened for the government official nominated person as this is done in the normal course of business.

4.    Complicating Matters

Now it is a well know fact that corruption is a systemic risk in India and Indian law regulation authorities’ compromise ethics to pass favorable judgments. Here my question is how is the FCPA applicable if a bribe is paid to a judge or police officer to hide a criminal offense.

For example, a million dollar account takeover fraud is conducted under the instructions of senior managers of a multinational bank having back office operations in India. The banks customers reside in UK and the fraudulent amount is transferred to third-party accounts in UK and US. A junior employee is setup as a pawn and a case filed against him for customer data theft and being accomplice to a fraud. The Indian police during interrogation of the junior employee discovers the true parties involved. The senior managers of the bank pay the police officers to hide facts and charge the junior employee. Now this case if pursued properly will affect various provisions of banking regulation, information technology and data security acts. However, if the true picture of the case is not reflected, then how can the impact of FCPA be considered?

According to my understanding, the FCPA provides various loopholes by which multinationals can escape being penalized by the act. There is no simplistic solution available for FCPA applicability. I maybe wrong, but under the circumstances, I am not surprised that various multinationals paying such huge bribes escape unscathed from the implications of FCPA.

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18 comments on “Questioning the US FCPA – An Indian Perspective

  1. Pingback: Tweets that mention Questioning the US FCPA – An Indian Perspective « Sonia Jaspal's RiskBoard -- Topsy.com

  2. I totally agree with you Sonia that “various multinationals paying such huge bribes escape unscathed from the implications of FCPA”.

    By using above examples a book can be written “How to be FCPA compliant in India”.

    • Hardeep,

      reading books help those who want to do something right. In most of these situations people read books to figure out how to exploit the rules and take the regulators, customers, employees and shareholders for a ride.

      One does business with whom one trusts and like, and those who are exploitative and abusing. Unfortuantely the exploitative are good talkers who end up fooling quite a few people to get their own way.

      Kind regards,

      Sonia

  3. Sonia,

    I understand your view and I meant the book for people who want to figure out how to exploit the rules!!!!

  4. Than why are you citing these examples on open blogs??? These blogs are read by all and we giving these examples are teaching people who may not be aware or are partly aware of these examples.

    Due Regards
    HardeeP

    • There is a difference between training and educating people on how to prevent fraud and how to conduct a fraud. There is fine line which seprates the two and that balance should be maintained.

      I do not prescribe to the thinking as you requested on teaching how to conduct a fraud. I do prescribe to the thinking on building awareness on how to identify fraudulent activities and stop them.

      Have you missed that in your training as a risk manager?

      Sonia

  5. When did I say that book will serve as training guide for people??

    Building awareness with a common set mind frame people (Risk Managers) is quite good and will serve the purpose but open house or open forum you never know how the other person is interpreting.

    How certain are you that all your readers will take this reading as building awareness on how to identify fraudulent activities and will not use these examples to exploit the rules???

    Thanks for reminding me what I have missed out. You better take care how to accept/ reject or reply for each comments. This is open forum your views can be accepted or rejected.

    I had made ludicrous comment that “By using above examples a book can be written “How to be FCPA compliant in India” but looks you have taken it personally. This is all interpretation!!!

    Due Regards
    HardeeP

    • Surprising, some people have made a mission statement and purpose of life to carry on giving messages through open forums and third parties. They hide behind various people and give stupid messages all day long. And suddenly they have questions on what I should be writing on my blog? Laughable.

    • Though you are right about one thing. I am not replying to anyone through blogs. I am not a ping pong ball which two parties can throw from one side to another, and hitting it hard all the time.

      When people show the courtsy of talking to me directly, within a legal framework then I shall speak.

  6. Sonia,

    I am amazed to read your comments; you are 15+ years experienced professional with such short temper. If you cannot take comments sportingly then please close the option for reader’s comments.

    Instead of making this open blog, restrict it for near and dear ones of yours; who always accept your views with bowed heads. For open blogs we as a reader have full liberty and right to express our opinion with or without disclosing our identity.

    Due Regards
    HardeeP

    • Hardeep,

      Simply put, quit commenting on my blog with stupid stuff. I have been tolerating stupidity for quite a few years, and am entitled to accept, reject and put my views.

      What I do or do not do with the blog , is my decision and nobody’s elses.

      Kind regards,

      Sonia

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