The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Presenting a live 90-minute webinar with interactive Q&A FCPA in India 2016: Compliance Strategies for India's Unique Cultural and Governmental Intricacies Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, JANUARY 12, 2016 Jay Holtmeier, Partner, Wilmer Cutler Pickering Hale and Dorr, New York Elizabeth D. Keating, Vice President, Global Investigations Counsel, Johnson Controls, Milwaukee, Wis. Michael Stavridis, Partner, Ernst & Young, Chicago
Transcript
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
Industry-Specific Risks (e.g., probe of banks’ Asian hiring practices)
Increasing Cooperation with and Enforcement by Non-US Authorities
Collateral Civil Litigation 6
Enforcement by Indian Authorities
Lokpal Act of 2013 created a new agency to investigate and prosecute civil servants accused of corruption.
Black Money Act came into effect in July 2015 and aims to curb “black money,” i.e., undisclosed foreign assets and income, and it imposes tax and penalty on such income.
Pending amendments to the Prevention of Corruption Act of 1988 include tougher prison terms for individuals convicted under the Act; liability for commercial entities that induce public servants; an expansion of the types of corruption covered under the Act; and a “speedy trial” provision aimed at reducing the trial period for cases brought under the Act from an average of eight years to two years.
7
Enforcement by Indian Authorities (cont.)
Recent Supreme Court ruling expands power of Comptroller & Auditor
General to audit transactions with government.
Parliament recently passed a whistleblower protection bill.
High-profile investigations reported publicly:
– National Herald graft case continues against Sonia Gandhi, head of India’s main opposition Congress Party, and her son Rahul, for misappropriating $300M through the purchase of a non-profit newspaper company.
– Bribery in helicopter procurement led to India’s suspension of $750M contract with AgustaWestland and criminal charges against former Indian Air Force Chief.
– India’s Defense Ministry has suspended all contracts with Rolls-Royce pending inquiry of bribery allegations by India’s Central Bureau of Investigation.
– In July 2015, the Supreme Court of India transferred the ongoing Vyapam case involving widespread corruption in a state government examination board to the Central Bureau of Investigation. By July 2015, more than 2,000 individuals had been charged in the case. 8
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Louis Berger International, Inc. (2015) – Payments to Government Officials Through Third-Party Vendors
– LBI is a New Jersey-based construction management company.
– The DOJ alleged that between 1998 and 2010 LBI paid $3.9M in bribes to officials in India, Indonesia, Vietnam, and Kuwait to secure construction management contracts in those countries.
LBI concealed the payments by characterizing them as “commitment fees,” “counterpart per diems,” “marketing fees,” and “field operation expenses.”
Third-party vendors submitted false invoices to generate payments from LBI; payments tracked on a spreadsheet.
– James McClung, Senior Vice-President in charge of LBI’s India operations, pleaded guilty to violating the FCPA by participating in the scheme.
– LBI entered into a deferred prosecution agreement and paid a $17.1 million criminal penalty; a compliance monitor was imposed for three years.
9
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Diageo (2011) – Payments by Distributors to Secure Business and Ease Regulatory Burden
– Diageo is one of the world’s largest producers of alcoholic beverages, such as Johnnie Walker.
– SEC settlement papers alleged that from 2003 to mid-2009,
Diageo’s Indian subsidiary’s promoters and distributors made
hundreds of illicit payments to government officials
responsible for purchasing or authorizing the sale of its
beverages in India.
• Payments made by distributors to employees of
government-owned liquor stores to increase purchases of
Diageo beverages.
• Payments made by distributors to regional and state
officials to secure label registrations for products.
– For this and other conduct, Diageo settled SEC books and
records and internal controls charges for $16M. 10
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Baker Hughes (2001) – Payments by Agent to Ease Regulatory Burden
– Baker Hughes’ former subsidiary Western Geophysical (WG)
provided geophysical exploration services.
– In order to provide these services in the Bay of Canby, India,
WG needed authorization from the Director General of
Shipping to use a foreign-flagged vessel.
– According to the SEC’s papers, WG’s agent told a WG
manager that permits could be issued for $15k. WG manager
told the agent to “take care of it.”
– WG later authorized a $15k reimbursement for the agent
without adequate inquiry to ensure that the payment did not
violate the FCPA.
– WG accounting staff improperly described the payment as
“Shipping Permit.”
– SEC issued cease and desist order.
11
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Oracle (2012) – Side Funds Maintained by Distributors
– Oracle is a California-based computer technology company.
– Oracle’s Indian subsidiary sells its products through
distributors that retain the margin between the amount paid by
the customer and the amount paid to the subsidiary.
– According to the government, the subsidiary structured
transactions to create extra margins for distributors in certain
instances, essentially creating off-the-books side funds.
– Subsidiary employees then directed distributors to make
payments from the side funds to sham entities.
– No allegation of bribery.
– Oracle settled SEC books and records and internal controls
charges for $2 million.
12
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Dow Chemical (2007) – Payments Through Side Funds and Petty Cash to Ease Regulatory Burden
– Dow’s Indian majority-owned, fifth-tier subsidiary DE-Nocil
manufactures pesticides and other products.
– SEC alleged that DE-Nocil structured transactions such that
off-the-books funds were held by the company’s contractors.
As directed by DE-Nocil, the contractors disbursed funds
directly to DE- Nocil or to a third party that would bribe a
Central Insecticides Board official.
– Bribes resulted in expedited regulatory registration for DE–
Nocil’s products.
– DE-Nocil also used petty cash to make improper payments to
other officials, such as state inspectors.
– Dow settled SEC books and records and internal controls
charges and agreed to pay a $325K civil penalty. 13
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Pride Int’l (2010) – Payments to Judicial Officer Through Third-Party Bank Account
– Pride International is an oil and gas services company.
– Government settlement papers alleged that managers at
Pride’s French subsidiary (including the legal director)
authorized payment of $500K to a judge of the Indian
Customs, Excise, and Gold Appellate Tribunal to secure a
favorable determination in a customs duties and penalties
dispute.
– Payments were made through a third-party company’s bank
accounts in Dubai.
– The estimated value of the favorable decision was $10M.
– Pride’s French subsidiary pleaded guilty; Pride International
entered into a DPA with DOJ.
• For this and other conduct, Pride entities paid DOJ/SEC
$56.2M.
14
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Westinghouse Air Brake Technologies (2008) – Payments to Secure Business and Ease Regulatory Burden
– WABTEC manufactures brake subsystems for locomotives,
freight cars, and passenger transit vehicles.
– Government’s papers state that WABTEC’s Indian
subsidiary’s employees and agents made payments to Indian
Railway Board and other government officials to:
• Obtain business during the IRB tender process;
• Schedule pre-shipping product inspections;
• Have certificates of product delivery issued; and
• Curb tax audits.
– To generate cash for these payments, the subsidiary engaged
third-party “marketing agents” to create false invoices. When
the subsidiary paid the invoices, the “marketing agents”
returned the cash to the subsidiary.
– Payment of $677K to DOJ/SEC.
15
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Textron, Inc. (2007) – Payment to Secure Business with a Commercial Customer
– Textron is a conglomerate in the aircraft, defense,
manufacturing, and financial industries.
– According to the government’s papers, a subsidiary paid
approximately $52K to an employee of a non-government
customer to secure business in India.
– The payment was described as a “commission” in the
subsidiary’s records.
– Identified by an internal investigation in response to
allegations of kickbacks related to the UN’s Oil for Food
Program.
– For this and other conduct, Textron entered into a NPA with
DOJ and agreed to pay a total of $4.7M to DOJ/SEC.
16
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Electronic Data Systems (2007) – Payments to Secure Business
– EDS is one of the world’s largest technology companies.
– SEC’s papers allege that between 2001 and 2003, EDS’
Indian subsidiary had difficulty performing its contractual
obligations for two Indian government-owned clients.
– The subsidiary’s president authorized payments and gifts of
over $720K to employees of the Indian government-owned
clients.
– The payments resulted in the subsidiary retaining the
business of the two clients.
– For this and other conduct, EDS settled with the SEC for
$491K. The subsidiary’s president also settled with the SEC
and paid a $70K penalty.
17
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Control Components, Inc. (2009) – Payments to Secure Business
– CCI designs and manufactures valves used in the power, oil
and gas, and nuclear industries.
– CCI made payments of at least $4.9M from 2003 – 2007 to
employees of private companies and state-owned companies
in several countries, including in India to the Maharashtra
State Electricity Board.
– For this and other conduct, CCI pleaded guilty to criminal anti-
bribery and Travel Act charges and paid an $18.2M fine.
18
FCPA ENFORCEMENT ACTIONS RELATED TO INDIA
Indictment
Six Foreign Nationals (2013)
– USAO in N.D. Ill. alleged that six foreign nationals engaged in
international racketeering conspiracy involving bribes of Indian
government officials in exchange for titanium mining licenses and
– Conspiracy included sale of titanium products to unnamed “Company
A” headquartered in Chicago.
– Defendants include two Ukrainians, a Hungarian, a Sri Lankan, and
two Indians (one of whom is a US Green Card holder and the other is
an Indian MP).
– 5 out of 6 defendants remain at large; an Indian court stayed the
arrest of one of the Indian nationals, and an Austrian court refused to
extradite one of the Ukrainian defendants to the U.S., calling the
request “politically motivated.” 19
PUBLICLY REPORTED FCPA INVESTIGATIONS IN INDIA
Rolls Royce
– DOJ is investigating Rolls Royce for bribes in connection with contracts in Indonesia, China, and India. The UK SFO and India’s CBI are also investigating the allegations. In September 2014, India lifted its military procurement ban on the company.
Anheuser-Busch InBev
– Both DOJ and SEC are investigating the brewing company in connection with its Indian joint venture, InBev Indian Int’l Private Ltd. In February 2015, AB InBev ended ties with the joint venture in India that is the subject of the investigation.
Wal-Mart
– Continuing global FCPA investigation, including of Wal-Mart’s Indian joint venture with Bharti Enterprises. In late 2013, the companies announced the breakup of the joint venture.
20
OTHER PUBLICLY REPORTED DEVELOPMENTS
Alstom Network UK
– In July 2014, the UK Serious Fraud Office brought criminal charges against the British subsidiary of the company, as well as two British nationals, for corrupt practices involving transport projects in India, Poland, and Tunisia. The company allegedly paid €3.3M in bribes disguised as consultancy fees to secure infrastructure contracts relating to Delhi Metro construction.
Yara International
– In January 2014, Norwegian authorities fined the fertilizer company $48M for bribing officials in India and Libya and making corrupt payments to a supplier in Russia. Yara allegedly agreed to pay $3M in bribes to the relative of an Indian government official in connection with a joint venture with an Indian government controlled entity. Norwegian Authorities also indicted four Yara executives, who in July 2015 were sentenced to prison terms ranging from 2 to 3 years.
21
OTHER PUBLICLY REPORTED DEVELOPMENTS (CONT.)
Cryptometrics Agent
– In August 2013, Nazir Karigar, a former agent of Cryptometrics, became the first individual to be convicted of violating Canada’s Corruption of Foreign Public Officials Act. Authorities alleged that Karigar offered to bribe Indian officials to rig the bidding process for Air India contracts.
Bunge
– In June 2013, five executives of the Indian unit of the American food company Bunge resigned amid an internal audit related to the subsidiary’s purchase of land in Kandla, India.
22
CONTACTS WITH GOVERNMENT OFFICIALS IN INDIA
Public procurement/contracting with government agencies
Customs clearance/importation of goods
Immigration processes
Real estate (both purchasing and leasing land)
Tax administration (excise and sales taxes, audits)
Obtaining certificates, registrations, permits, and licenses (approval from multiple officials often required to obtain one permit/license)
Gifts and entertainment (especially during religious festival, Diwali)
Communicate expectations to vendors re ethics and anti-bribery/anti-corruption training for all high
risk vendors
Training to include discussion of India Prevention of Corruption Act
Copy of Code of Conduct
Johnson Controls, Inc. - Confidential 41
Navigating the Risks
Financial Controls
Establish monitoring process to ensure vendor transactions are for legitimate services
Red flag/warning sign training for AP function
Stringent controls around employee advances and petty cash
Evaluate use of “miscellaneous vendor codes”
Red Flag training for all finance personnel
Government Interfacing Activities
Establish “Compliance Task Force” to handle all licensing, permitting and inspection requirements
Only “Task Force’ will interface with government agencies
Administers, manages and enforces all statutory compliance activities
Communication to Customers
Need to communicate to customers that the refusal to make improper payments may slow the
process of obtaining government approvals necessary to operate
Monitor all Licensing/Permitting Activities
Review all licenses and permits necessary to conduct business
Monitoring and Auditing
Regular and periodic forensic reviews of business practices and control environment
Johnson Controls, Inc. - Confidential 42
Navigating the Risks – Monitoring/Auditing
RED FLAGS
Rumors regarding unethical or suspicious conduct by an employee, marketing representative, consultant or other business partner, or a government official
Unnecessary third-parties or multiple intermediaries
Requests for payments to a third-party rather than the consultant
Requests for payments in a third country
Business in a country with bribery problems
Requests for payment in cash
Requests for unusually large commissions or other payments, or payments that appear excessive for the service rendered
Non-government organizations, lobbying costs, public relations expenditure, political contributions etc.
Requests for reimbursement of expenses that are poorly documented
Incomplete or inaccurate information in required disclosures
Refusal to certify compliance
Government end-users
Government touch points such as customs, taxes, licenses, etc.
Previous issues, incidents
Monitoring FCPA risks in India January 2016
Michael Stavridis
44
Perceived as most corrupt sectors
Presentation title
Infrastructure and
real estate Metals and
mining
“According to 73% of the respondents from PE
firms, a company operating in a sector that is
perceived as highly corrupt, may lose ground
when it comes to a fair valuation of its business,
as it bargains hard and factors in the cost of
corruption in the sector during a transaction.”
Aerospace
and defense
Power and
utilities
45
What is making bribery and corruption rampant in the country? (survey findings)
Top five factors facilitating bribery and corruption
1 Weak law enforcement
2 Numerous government “touch points”
3 Complicated taxes and licensing system
4
Lack of will for making an effort
in getting permissions the right way
5
To get unfair advantage in business
“Automation of all procedures or processes involving interface with the Government is the ideal it needs to focus on. Doing away with person-to-person interface (to the extent feasible), especially for approvals, services, licenses, etc., would greatly reduce the scope for corruption.” - Respondent from an Indian MNC
Source: Survey report - Bribery and corruption: ground reality in India
46
Production
Sourcing
Logistics
Customs CHA
Police
Labour law
officials
FDA
Municipal
dept.
Octroi
Excise
W&M
Labour
law
Shops &
Establishment
Fire
department
Sales tax
Income
tax Service
tax
Road
permits
Companies
Act
Electricity
board
Pollution Control Board
DGFT
Local + imports
Imports
Lift
license
Tax compliance
Manufacturing
a a
a a
a
a
a a
a a
a a
a a a a
a a
a
a
Indian
company
Government interaction at a glance
47
Step 1
Step 2
Step 3
Step 4 Step 5
Conversion of land
and change of land
use
Pre-approval NOCs
and clearance from
agencies
Plan sanction
Occupancy certificate
Some of the permits required
Conversion of land use
Sanction of development plan
NOC from electricity board
NOC from fire service department
NOC from Airport Authority of India
NOC from Ministry of Environment and Forest Clearance
57
172
40
Number of approvals a
builder needs to construct
a property
Number of documents a
builder has to produce
Number of departments
of central and state
governments and
municipal corporations a
builder engages
Example of licenses and permits challenges
48
Proactive
Sample FCPA compliance program framework
Reactive
Proactive
Setting the Proper Tone
Code of Ethics
FCPA Prevention Policies
FCPA Risk Assessment
FCPA Controls Monitoring
FCPA Awareness Training
Response Plan
Conduct FCPA Risk Assessment
FCPA Monitoring
Program assessment
Implementation review
Substantive review
Results drive
monitoring
49
FCPA compliance program Risk assessment criteria
Government end-users;
sales intermediaries/
direct sales
High risk geographic
markets
Significant movement of
goods/ imports/ exports/
certifications Government touch points –
VAT/ taxes/ licenses/ etc.
Travel, entertainment
and gifts, customer travel,
petty cash
50
How to monitor for corruption risks?
► What kind of testing should be conducted?
► Controls testing versus substantive testing
► Controls alone may not prevent irregularities; control testing alone may not
detect irregularities
► The DOJ/SEC guidance to the FCPA states that a compliance program that is
“followed in practice will inevitably uncover compliance weaknesses and require
enhancements” and that programs that employ a “check-the-box” approach may be
inefficient and, more importantly, ineffective”
► “DOJ and SEC evaluate whether companies regularly review and improve their
compliance programs and not allow them to become stale.”
► The UK MOJ guidance to the UK Bribery Bill requires organizations to “monitor the
ethical quality of transactions”.
51
How to monitor for corruption risks? continued
► How to choose a sampling methodology? Where and how are potential
problem payments recorded?
► Understand the business? Where are the customers? Where are the
government touch points?
► Choose accounts that could have risk – Commissions, permits, licenses,
consultants, freight forwarding, customs clearance, etc. as well as major
Government or SOE contracts/projects
► Choose T&E reports from individuals who direct or touch the risk Who manages imports/exports?
Who entertains our big Government clients?
► Controls over cash?
52
How to monitor for corruption risks? continued
► How can we leverage technology to find higher risk transactions?
► Analytics
► Key word searches on text fields in GL or T&E systems
► Who should conduct these audits?
► Experience (how many of the auditors have ever seen a bribe?)
► Local expertise (how many have ever seen a bribe in India?)
► Training
► Who should be interviewed?
► Employees
► Vendors?
53
Higher risk ledger accounts and expenses
► Obtain listing of major customers and identify potentially high risk customer
contracts
► From the chart of accounts and trial balance, select higher risk accounts for
