It is commonplace for commercial contracts between Indian companies to have strict anti-bribery provisions. Such provisions often refer to overseas laws and it is routine for parties to require one another to comply with certain requirements of the United States Foreign Corrupt Practices Act, 1977 (FCPA) and the United Kingdom Bribery Act, 2010.

While negotiating contracts, legal advisors consistently argue that their clients should not be required to comply with laws of any other country. Yet, this argument is seldom used when it comes to requiring a party to comply with the relevant requirements of the FCPA. Why is this the case?

There are rising number of instances now where owing to an act of bribery in India, excruciating consequences are faced by companies in other jurisdictions, particularly the US. The US Securities and Exchange Commission (SEC) has levied hefty penalties on US based entities where Indian subsidiaries of such entities have engaged in acts of bribery.

This article identifies a few such instances and sets out certain minimum measures which must be implemented to avoid these instances going forward.

Case studies

Cognizant – Cognizant Technology Solutions Corporation (a US based entity, which is a global information technology and business process service provider) was determined to have violated FCPA due to bribery related acts in India. In this case, Cognizant’s Indian subsidiary, through a third-party, had paid a bribe of INR 12 crores to certain government officials for obtaining a building related permit and had also paid a commission to the third-party for facilitating this payment. The bribe paid to the officials was reimbursed to the third-party on the basis of falsified documents. Senior officials of Cognizant (in US and India) and the third-party had approved the payment of this bribe.

On learning about this instance pursuant to an internal audit, in the US, Cognizant made a self-disclosure to SEC and shared all relevant details of its internal investigation. SEC ordered Cognizant to pay (approx.) INR 135 crores disgorgement, INR 23 crores prejudgment interest and a monetary penalty of INR 50 crores. Cognizant terminated the employment of employees who engaged in improper conduct, took steps to enhance its compliance and applicable policies, and agreed to take additional steps for 2 years (including undertaking due diligence of existing and prospective consultants, FCPA training, etc.). In addition to the action taken in US, a FIR has also been registered in India against the former employees of Cognizant India and the concerned third-party for violation of various provisions of Indian laws, including those of the Prevention of Corruption Act, 1988 and the Indian Penal Code, 1860.

Oracle – Oracle Corporation (a US based technology company) was determined to have violated FCPA due to bribery related acts in India and in certain other countries. Particularly in India, employees of Oracle India seemed to have provided excessive discount (70%) on a software component in a transaction involving a company, which was majorly owned by Ministry of Railways. Provision of such excessive discount was approved without seeking any supporting documents. These discounts were used to create slush funds with Oracle’s distributors / resellers, which were used for making improper and unauthorized payments to government officials.

Oracle made a self-disclosure to SEC and paid a disgorgement of (approx.) INR 59 crores, prejudgment interest of INR 7 crores and monetary penalty of INR 123 crores. It also terminated employment of senior managers, terminated its engagement with distributors / resellers involved in the misconduct and enhanced its trainings programs and policies.

CDM Smith – CDM Smith (a US based engineering and construction firm) was determined to have violated FCPA due to bribery related acts of its subsidiary’s employees in India. The employees of CDM Smith India were found to have bribed certain officials of the National Highway Authority of India for the purpose of receiving contracts, these bribes were paid through fraudulent sub-contractors, and were shown in CDM Smith India’s income tax returns as “Allowable Business Expenditure”. It seems that senior personnel of CDM Smith India (including Finance Director) were aware of and participated in the misconduct.

CDM Smith made a self-disclosure of payment of bribery and agreed to pay approx. INR 34 crores in disgorgement. It terminated the employment of all employees involved in the misconduct.

In addition to action taken in the US, a FIR was also registered in India against officials of CDM Smith India for various offences including criminal conspiracy, cheating, using forged documents as genuine, falsification of books of accounts, etc.

Cadbury Limited and Mondelez International – Cadbury India Limited (an Indian entity which is a subsidiary of Cadbury Limited, a London based manufacturer and distributor of confectionaries and snack beverages) was found to have engaged an agent without conducting any appropriate due diligence. The agent assisted Cadbury India in obtaining licenses for expansion of its manufacturing facilities. It appears that payments made to this agent were used for improper and unauthorized purposes, and that the services provided by the agent were not duly verified. There was no contract with the agent for making payments and it has been suggested that the license applications were prepared by employees of Cadbury India and not the agent.

Cadbury Limited and Cadbury India were acquired by Mondelez International, Inc. Mondelez conducted post acquisition due diligence and upon an internal investigation into the engagement with the agent, Mondelez required Cadbury India to terminate its arrangement with the agent. Mondelez paid a penalty of (approx.) INR 107 crores to SEC in this matter and as a remedial measure, conducted a comprehensive review of third parties engaged in Cadbury India’s business.

Learnings

It is abundantly clear from abovementioned instances that acts of companies in India can have far reaching consequences. Indian companies and their overseas parent entities ought to take steps to ensure that thoughts of bribery (much less than actual payment) are completely weeded out.

Some of the steps that can be considered include – (a) having a comprehensive and recurring anti-bribery training program, (b) having documented anti-bribery policies and sending highlights of such policies from time-to-time to employees and third-parties, (c) conducting appropriate due diligence of third parties engaged by Indian companies (particularly those which represent the Indian companies before government authorities), (d) including appropriate provisions in the agreements with third parties requiring them to comply with anti-bribery laws, (e) verifying any payments made to third parties and collecting appropriate supporting documents, (f) communicating to the third parties from time-to-time about the importance of compliance with anti-bribery laws, and (g) properly and accurately recording all payments which are made by Indian companies (or other entities on their behalf).

Any laxity in implementing these minimum checks can severely negatively impact the Indian company, its overseas parent and associated personnel. In addition to hefty penalties that may be levied, instances of bribery can have other damaging consequences including negative press, hampering the ability to engage with government going forward, blacklisting, etc. There can even be incremental action under various Indian laws, including the revamped Indian anti-corruption law, which now penalizes and contemplates imprisonment for bribe givers and monetary fines on commercial organizations.