All about FCPA
|Stands for: Foreign Corrupt Practices Act|
|Why is it feared? Penalises US companies and non-US companies listed on US stock exchanges for acts of corruption by their arms in other countries|
|Biggest victim till date: Siemens AG, which paid a fine of $800 million in the US for bribes paid in other countries|
In a closed-door meeting in June 2009 in Cuffe Parade, Mumbai, Elliott Leary, Partner of KPMG LLP, USA addressed around 50 chief financial officers of Indian subsidiaries of multinational corporations. The subject: How to make their operations in the country bribery-proof. It seems that the best worked-out systems and processes to stop corruption in its tracks have proved futile in many countries in the world, including India, as the devil hid itself in the implementation. All over the world, according to Leary, the processes have been beaten by slack implementation. The challenges in India are bigger.
The cause for worry among the MNC subsidiaries is the Foreign Corrupt Practices Act (FCPA) of the US which came into effect in 1977 but prosecution has picked up recently. This Act penalises US companies or companies listed in the US for acts of corruption by their arms in other countries. Often, this act includes payments made through third parties like contractors, consultants or distributors.
The US Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) of the US have both prosecuted companies for alleged bribery in other countries, including India. While the DoJ picks on the companies for violating the FCPA, the SEC holds them guilty of not reporting the payments correctly in their books. In 2004, the two US bodies took action against five companies; in 2008, the number climbed to 33. Quite a few cases of FCPA violations in India have been recorded (see info boxes). The most recent cause for worry: In 2008, Siemens AG paid a fine of $800 million (Rs 3,840 crore at current rates) in the US for bribes paid in other countries—the biggest fine ever levied for FCPA violation. Scott Friestad, the Deputy Director of Enforcement for the SEC had said on November 24, 2008: “The dollar amounts in the (FCPA) cases that will be coming within the next short while will dwarf the disgorgement and penalty amounts that have been obtained in prior cases.”
|US company: Dow Chemical Company|
|Indian affiliate: De-Nocil Corporation|
|Offence: Paid Indian government officials $200,000 (Rs 1 crore) between 1996 and 2001; one particular officer was given $39,700 (Rs 19.85 lakh) through contractors working for the company who got the extra cash via fictitious bills.|
|Penalty: Dow Chemical was found guilty of violating book-keeping norms related to the above in 2007; Dow agreed to a penalty of $325,000 (Rs 1.62 crore).|
|US company: AT Kearney|
|Indian affiliate: AT Kearney India (ATKI)|
|Offence: Between 2001 and 2003 ATKI paid $720,000 (Rs 3.6 crore) to Indian government-owned companies on directions of founding President Chandramouli Srinivasan.|
|Penalty: In 2007, ATKI parent EDS was fined $490,902 and Srinivasan $70,000 after the SEC brought in prosecution against them for violating the FCPA.|
|US company: Westinghouse Air Brake Technologies Corporation (Wabtec)|
|Indian subsidiary: Pioneer Friction Ltd|
|Offence: Paid cash worth $137,400 (Rs 68 lakh) to Indian government employees; Wabtec was accused of violating the FCPA as well as the SEC Act of 1934.|
|Penalty: Wabtec paid a fine of $300,000 (Rs 1.5 crore). Pioneer was also fined $377,000 (Rs 1.8 crore).|
|US company: Xerox Corporation|
|Indian affiliate: Xerox ModiCorp (now Xerox India)|
|Offence: Xerox voluntarily disclosed in 2003 improper payments (related to sales to government customers of the company’s products) made by Xerox ModiCorp Ltd to Indian government officials.|
|Penalty: Not known|
If Leary says India is a red flag, here’s why: If a company is caught paying bribes somewhere else in the world, their Indian operations are immediately checked as it is almost assumed that they would be paying bribes in India too.
How MNCs dealt with It
Among the major India-related cases are Dow Chemicals’ arm De-Nocil, AT Kearney India and Xerox (in its ModiXerox avatar). Xerox refused to participate in this feature. Douglas Macdonald, AT Kearney’s global spokesperson, told BT: “The incident involving the US authorities occurred prior to AT Kearney’s 2006 management buyout, when our firm was a part of a much larger corporate organisation, and has been fully resolved to the satisfaction of all parties. As a stand-alone firm, we’ve taken the opportunity to further strengthen our commitment to compliance and integrity by designing and implementing an AT Kearney-specific Code of Business Conduct—including strong measures to promote full compliance with anti-corruption measures in every country where we operate— backed by rigorous training and enforcement.”
The Founder President of AT Kearney India, Chandramowli Srinivasan, had to pay a fine of $70,000 (Rs 33.6 lakh) personally and is no longer associated with the group.
Mike Grisham, Ethics and Compliance Leader at Dow AgroSciences LLC, told BT that the company had made a thorough investigation of the payments made by De-Nocil, its fifth-tier subsidiary in India, and had submitted its findings with the US authorities. “At the time of the investigation, Dow had effective internal controls and compliance processes in place. Dow’s audit process uncovered the payments and the investigation identified the individuals who were responsible, leading to the punishment of several De-Nocil employees, including the dismissal of some,” adds Grisham.
Grisham explains that financial controls in India were strengthened soon after, employees are now being given training on the FCPA; due diligence processes with distributors and other intermediaries have also been improved. “Dow AgroSciences (Dow Chemicals is renamed Dow AgroSciences) must ensure that our employees understand the law and feel empowered to reject demands for personal favours or cash, secure in the knowledge they are doing the right thing, even if it appears that business may be lost,” sums up Grisham.
Do Indian companies need to worry?
Till date, no Indian company with has had a run-in with the FCPA, but that day may not be far off. Those listed in the US would need to be careful. The action against Siemens—which got listed in the US in 2001—for paying bribes of around $800 million across the world has sent a loud and clear message to corporations to clean up their acts. Siemens’ CEO as well as the Chairman both had to quit. The new CEO, Peter Loescher, told Business Today recently that the transformation costs (for making the company cleaner) may finally taper off two years after it all started in 2007. “This example,” points out Arpinder Singh, Executive Director, KPMG India, “is enough to show Indian companies the big risk they are carrying and how important it is to be compliant with FCPA processes. It hasn’t yet hit Indian companies; they are yet to wake up to the Siemens case and will not unless someone is slapped with penalties by US courts.”
Adds Neeta Potnis, Partner at Deloitte Haskins and Sells: “In India, most of the work on the subject is reactive. So far all the work we have done on FCPA have been for MNCs in India.” The meeting that Leary addressed in Mumbai in June was to be attended by some SEC officials, too, who couldn’t make it because they couldn’t catch their flight. While the US SEC officials could afford to miss the plane, for US-listed Indian companies, missing the FCPA compliance bus can be a very costly miss.