Changing corruption laws in India and its effect on business

November 2013 | SPOTLIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

The last few years in India have seen numerous, innovative fraud and corruption cases. With newspapers reporting a new issue, a new fraud or corruption case, across industry sectors regularly, it is a question of whether there is enough in terms of law and enforcement to take action and discourage these acts, and also whether companies governed by stronger international regulations can still do business in India. There is no straightforward answer or analysis to this question and it depends on a company’s policies.

Operational and day-to-day bribes in India are most common, and these are the areas where companies face the biggest issue. Whether a company is importing a product into India, transferring the product over state borders or just getting approval to set up a factory, all of it involves multiple touch points where government authorities are involved, which may result in instances of bribery. From a legal standpoint, India has a dedicated Corruption Act, is also a signatory to the United Nations Convention Against Corruption (UNCAC) and has service rules which oversee the conduct of public officials and separate acts such as the Companies Act, the Central Vigilance Act, and the Prevention of Money Laundering Act, which include bribery and corruption. India enacted its primary corruption law, the Prevention of Corruption Act (PCA) in 1988, which criminalises receipt of bribes by public servants, including all categories of Indian government officials, and is applicable to all Indians whether in India or abroad. This act also covers the payer, an individual, of such bribes under ‘abetment’ for giving bribes to such public servants. This, however, does not bring corporate entities into its purview. Facilitation payments are not recognised as legal and are thus prohibited. In short, the act covers bribes taken by public servants and does not cover aspects such as private bribery, bribes to foreign officials and failure to prevent bribery.

After ratification of UNCAC in 2011, India had to respond to the specific requirements of UNCAC by either strengthening its existing law or by adding new laws. In order to fill the gap between existing laws and adherence to UNCAC rules, India introduced the Prevention of Bribery of Foreign Public Officials and Officials of Public Interest Organisations Bill in 2011, to address the issue of bribery of foreign public officials. It is still unclear when the bill will be implemented. In order to address the issues in government tendering, the Public Procurement Bill was introduced in 2012 and is still pending with the lower cabinet. The Lokpal Bill, which has been approved by the lower cabinet but is yet to receive clearance from the upper cabinet, also addresses corruption by increasing government accountability.

It is now three years since India ratified UNCAC and the government has been largely unable to strengthen the laws in India in relation to corruption. Some of the most blatant fraud and corruption cases are reflected in India’s ranking in the latest World Economic Forum’s Global Competitiveness Report 2013-14. This report shows an adverse fall in India’s overall ranking from 48 in 2008 to 60 (out of a total of 148 countries) and recently the government has decided to amend the act. The Prevention of Corruption (Amendment) Bill, 2013 was introduced in August this year and is currently referred for consideration to the Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice for a period of three months. This bill amends the act and aims to include bribe givers in the offence of consensual bribery, proposes punishment for the offence relating to a bribe given to a public servant by a commercial organisation, and forfeiture of property of a corrupt public servant. Recently, discussions have also been rife on whether ‘failure to prevent bribery’ should also be covered by the legislation. On a more positive front, India has revised the much anticipated Companies Act this year, and while this act has many amendments, it makes it mandatory for listed companies and certain classes of companies to have a vigil mechanism; in other words, a whistleblower mechanism in place. This is expected to highlight more cases of corruption and fraud and build a strong corporate governance framework within corporates.

The question that now arises is, firstly, how these laws will be implemented and, secondly, the level of enforcement of these laws. It is reasonable to suggest that, unfortunately, we are not going see any immediate implementation or enforcement. In these circumstances, the pitfalls and issues often faced by multinational companies in emerging markets are largely expected to remain the same. However, what companies need to bear in mind considering the PCA, the US Foreign Corrupt Practices Act and UK Bribery Act is to be prepared and be aware of the issues their businesses face in India. The issues can be corrupt practices by low level employees who are unaware of the laws and their implications, by mid management who are focussed on getting work done either by using agents or by misrepresenting financials in books and records, or senior management who are often faced with growing businesses and achieving targets. This can lead to increased risks including reputational, legal, political, financial and security risks.

In this case, the easiest way to know the on the ground situation is for global offices to conduct periodic due diligence and risk assessments of their operations, in addition to regular audits, which will highlight specific issues and provide a holistic view of the business practices actually followed. Companies often make the mistake of having internal staff conduct such assessments in order to manage costs; however, it is important to appoint an independent consultancy to provide local knowledge, an independent assessment of business practices, highlight the seriousness of corporate governance and also to interpret local practices effectively – all of which are important to achieve a substantive result.

These reviews enable quicker action and assist in decoding the situation. Additionally, creating awareness and training employees at all levels with regard to the laws, and letting them know of the company’s tolerance for such issues, is a highly effective way of creating a strong corporate governance environment.

While India marches towards better governance measures, it is important for companies to be proactive, keeping in mind the global legal and business landscape which makes them liable to bribery and corruption.

Kanupriya Jain is Practice Leader of Corporate Investigations, India and South Asia, at Control Risks. She can be contacted by email: kanupriya.jain@controlrisks.com.

Kanupriya Jain

Control Risks