Spotlight

India Business Law Journal 21

Bribery & corruption
April 2014
I
n August 2013, the UKs Serious Fraud Office (SFO)
began investigating a 23 million (US$38 million) fraud
at Sustainable AgroEnergy, a company selling biofuel
investment products involving jatropha tree plantations in
Southeast Asia. This was the SFOs rst investigation under
the UKs Bribery Act 2010, which came into force in July
2011. Since then, the SFO has launched inquiries into sev-
eral companies including Gyrus Group, a UK subsidiary of
Olympus Corporation, and its parent, for misleading, false or
deceptive accounts; Rolls-Royce, for alleged acts of bribery
and corruption; and Eurasian Natural Resources Corporation
and its subsidiaries in Africa and Kazakhstan for alleged
fraud and corruption. No one denies the SFOs determination
in probing and stamping out corrupt practices, but many
have questioned its relative quietness since the introduction
of the Bribery Act, especially given the acts extraterritorial
reach. Section 7 makes UK companies with a presence over-
seas, and international companies with a UK presence, liable
for a failure to prevent bribery.
The current section 7 offence which creates a form of
strict corporate liability for bribery which never existed prior
to the enactment of the Bribery Act 2010 is a powerful
weapon in the SFOs arsenal, says Aaron Stephens, a part-
ner in the corporate crime and investigations department at
Berwin Leighton Paisner.
Prosecution for fraud, in contrast, rests on proving that the
Falling foul?
A proposal to widen the ambit of the UK Bribery Act
could spell trouble for Indian companies
Vandana Chatlani reports
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India Business Law Journal 22
Bribery & corruption
April 2014
While corporate India adjusts to the stringent provi-
sions of international anti-corruption laws, it may also
need to learn new rules at home. The Indian govern-
ment is considering criminalizing acts of bribery in the
private sector through amendments to the Indian Penal
Code.
The Prevention of Corruption (Amendment) Bill, 2013,
which seeks to expand liability for accepting bribes
and to create offences relating to the bribery of public
servants by persons and commercial organizations, is
under scrutiny.
The new Lokpal and Lokayuktas Act, 2013, for the
rst time empowered the government to investigate
and prosecute those offering a bribe instead of only
those taking them.
According to a survey conducted by Ernst & Young
in conjunction with the Federation of Indian Chambers
of Commerce and Industry between March and May
2013 titled Bribery and corruption: ground reality in
India the sectors perceived as most vulnerable to
corruption in India are infrastructure and real estate;
metals and mining; aerospace and defence; and power
and utilities.
Due perhaps to the deep-rooted cultural acceptance
of exchanging bribes in India, a large percentage of
respondents seemed comfortable with (or were aware
of) unethical business conduct, including irregular
accounting to hide bribery and corruption, gifts being
given to given to seek favours and third parties being
used to pay bribes.
Another nding that may interest international com-
panies with an Indian presence concerns facilitation
payments, for example, giving a government ofcial
money or goods to perform or speed up a process or
duty. Of the 200 respondents, 31% were unaware that
making facilitation payments in India is illegal, and 44%
were in favour of legalizing them.
Sometimes delays can be frustrating and the temp-
tation is to accept the offer that with a small payment,
things can be sped up or overlooked, says Barry Vitou,
a partner at Pinsent Masons. This is the road to ruin.
In some respects Indian companies are striving to
raise standards, battling bribes through an introspec-
tive cleansing effort at home and abroad. Two years
ago, Infosys, Wipro, Godrej & Boyce, Genpact and
Bajaj Auto became members of the Partnering Against
Corruption Initiative (PACI), the World Economic Forums
anti-corruption drive. Through PACI, companies and
business leaders attempt to maximize their collective
impact in the ght against corruption, improve compli-
ance practices and develop tools and services to tackle
and prevent corruption.
But joining a club does not always mean playing by
the rules. PACIs list of members includes Mahindra &
Mahindra, which is facing a US lawsuit for large-scale
fraud and a conspiracy to steal millions of dollars in
cash and trade secrets, and Diageo, which paid hefty
nes after violating the US Foreign Corrupt Practices
Act through improper payments by its subsidiaries to
government ofcials in India and elsewhere to obtain
sales and tax benets.
The biggest threat probably comes from third party
agents, consultants and intermediaries, particularly
where they are operating in high-risk jurisdictions
or sectors and are paid high commissions, says
Aaron Stephens, a partner at Berwin Leighton Paisner.
Various companies that have been investigated for
bribery have reacted by significantly reducing and
rationalizing their use of these third parties.
Complying with the provisions of the UKs Bribery Act
2010 begins with the identication of risks within an
organization, followed by education and training from
the senior to the junior most employee backed by a
strong and carefully monitored anti-corruption policy.
The rst step is to take advice to understand the
extent to which the UK operations cause the entire
corporate group to be subject to the Bribery Act on a
global basis, says Stephens. This is because the sec-
tion 7 offence has been deliberately drafted to bite on
activities and behaviour that occur wholly outside the
UK, provided the group has a demonstrable business
presence in the UK.
Vitou strongly suggests implementing a policy that
knits into existing systems and controls so that it
becomes properly integrated and therefore used. In
addition, he recommends removing the dilemma of
compliance. For example, employees should not be
afraid of losing their jobs because they missed a tar-
get through choosing not to pay a bribe. Instead they
should be worried about being red for paying or taking
a bribe.
In our experi ence, Indi an corporates wi th UK
operations are still coming to terms with the very real
tenacity required of their senior management to imple-
ment compliance programmes that will withstand the
scrutiny of the UK enforcement authorities, says
Angela Pearson, the head of the international inves-
tigations and compliance group at UK-based law rm
Ashurst. Such companies now have further reason to
sharpen their corporate governance and compliance
regimes as a failure to implement adequate controls
could expose them to vast nes, being blacklisted
from bids for public contracts in Europe, and adverse
publicity.
An uphill battle
Indian companies are under increasing pressure to implement anti-corruption
compliance measures, both at home and abroad.
Can they meet the challenge?
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India Business Law Journal 23
Bribery & corruption
April 2014
controlling mind or board of directors of a company was
aware of corrupt activity within the organization. Broadly
speaking, at the moment prosecutors need to have hard
evidence that the board of directors knew what was going
on, says Barry Vitou, a partner in the corporate crime
team at Pinsent Masons. This is often hard to prove, if not
impossible.
It is a fact that the bar for prosecuting corporates for fraud
in the UK is extremely high, the SFO said in a statement to
India Business Law Journal. If the public require more corpo-
rate prosecutions, one way of addressing this would be to
bring the law covering fraud in line with the Bribery Act, which
places an onus on the company to prove that it has taken
steps to prevent bribery on its behalf.
Extending section 7 of the Bribery Act to fraud would
mean that corporates who fail to ensure they have in place
adequate measures to prevent fraud would face the same
risk of prosecution, and nes upon conviction, as is currently
the case in respect of corporates who fail to take adequate
steps to prevent bribery, the SFO said.
A broader section 7
SFO director David Green is the brains behind a proposal
to extend the failure to prevent concept in section 7 to other
nancial crimes. In essence, this would mean that a com-
pany could be held criminally liable for a range of wrongful
acts of its employees or associated parties, such as agents,
even in circumstances in which the board or senior ofcers
of the company had no knowledge of the wrongdoing, says
Robert Amaee, a partner in Covington & Burlings white collar
defence and investigations practice. Amaee represented the
SFO on a UK attorney generals working group tasked with
drafting the UK Bribery Act Prosecutors Guidance.
The proposal has yet to be presented to parliament.
However, if such an amendment is approved, prosecu-
tors would not need to show that senior management was
complicit in a nancial crime committed by employees. In
prosecutions for bribery and nancial crimes the defence
would be the same proof that adequate measures had been
implemented to prevent bribery or the crime.
Such an amendment would also extend the jurisdictional
reach of the SFO for the nancial crime offences to be
specied to non-UK companies, including those registered
in India, that carry on a business or part of a business in the
UK, says Amaee.
The proposal is gaining traction, setting off alarm bells
in some nancial institutions and corporations, according to
Prateek Swaika, an associate at Ashurst. Extending section
7 to include nancial crimes would provide a powerful tool
for prosecutions of complex nancial crimes in future, he
[Amending section 7 would]
extend the jurisdictional reach
of the SFO for the nancial
crime offences to be specied
to non-UK companies ... that
carry on a business or part of
a business in the UK
Robert Amaee
Partner
Covington & Burling
[Broadening the act would]
improve the SFOs prospects of
bringing successful corporate
prosecutions, securing faster
convictions and lowering the
costs of expensive investigations
Prateek Swaika
Associate
Ashurst
The temptation is to accept
the offer that with a small
payment, things can be sped
up or overlooked. This is the
road to ruin
Barry Vitou
Partner
Pinsent Masons
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India Business Law Journal 24
Bribery & corruption
April 2014
says. It will improve the SFOs prospects of bringing suc-
cessful corporate prosecutions, securing faster convictions
and lowering the costs of expensive investigations at a time
of austerity.
He adds that the amendment would also substantially
increase the already considerable compliance burden on
companies.
US example
Accepting the proposal would bring the UKs anti-bribery
enforcement machinery more in line with US anti-corruption
agencies, which have slapped heavy nancial penalties on
corporate offenders and are perceived as more aggressive
than their UK counterparts.
Stephens believes another motive behind the planned
reform is to increase the likelihood of persuading companies
under investigation to enter negotiations regarding a deferred
prosecution agreement (DPA), which is a common feature of
the US system that was only recently introduced in the UK.
However, he says amending section 7 may not be enough
to bring about the proposed reforms. Part 2 of schedule 17
to the Crime and Courts Act 2013 lists all of the common law,
statutory and ancillary offences that may be resolved by way
of a DPA, Stephens explains. In addition to the Bribery Act
offences, the list includes the common law offences of con-
spiracy to defraud and cheating the public revenue, as well
as a number of specic offences arising, for example, under
the Theft Act 1968, the Companies Acts 1985 and 2006,
the Financial Services and Markets Act 2000, the Fraud Act
2006, and the Proceeds of Crime Act 2002. If wholesale
reform of corporate criminal liability is to occur, then it may
be that new legislation is required instead of a simple amend-
ment to the Bribery Act.
Facing the consequences
If the proposed amendment is passed and the penalties
under section 7 remain the same, companies convicted of
nancial crimes would be subject to imprisonment, unlimited
nes and discretionary debarment from UK public procure-
ment activities. More damaging is the risk of mandatory or
discretionary debarment from public procurement activities
in other states of the EU, as well as debarment from receiving
World Bank or other multilateral development bank funding.
A fractured reputation and the stigma associated with fraud
and other nancial crimes is an added threat.
Given the increase in international intelligence sharing
between enforcement authorities, the recent addition of
US-style DPAs, and the mooted additional prosecutorial
tools, such as a US-style bounty system of paying whistle-
blowers a portion of penalties levied on companies and
now, the extension of the corporate bribery offence, Indian
companies with UK operations should take note of the
SFOs resolve to instil good corporate culture in the UK and
abroad, advises Angela Pearson, head of the international
investigations and compliance group at Ashurst.
g
Indian corporates with UK
operations are still coming to
terms with the very real tenacity
required to implement
compliance programmes that
will withstand the scrutiny
of the UK authorities
Angela Pearson
Head, International
Investigations and Compliance
Ashurst
GAINING TRACTION: Support is growing for an amendment
to the UK Bribery Act.
The biggest threat probably
comes from third party agents,
consultants and intermediaries
Aaron Stephens
Partner
Berwin Leighton Paisner