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Corruption, COVID-19 and corporates' catch-22

Corruption, COVID-19 and corporates' catch-22

Good corporate governance requires that corporates should look to revisit their compliance programmes to ensure that they remain robust in these times of heightened risks

The economic hardships manifested by the COVID-19 crisis has resulted in an exponential rise in corporate frauds and corruption The economic hardships manifested by the COVID-19 crisis has resulted in an exponential rise in corporate frauds and corruption

Over the past few years, the government has looked to adopt measures for improving the ease of doing business. However, despite these best efforts, doing business in India continues to be viewed as a high-risk proposition from an anti-corruption standpoint, given the high number of government checkpoints that a business needs to navigate. 

It is relevant to note that despite India having made major amendments in 2018 to its Prevention of Corruption Act (PCA), India's rank on Transparency International's Corruption Perceptions Index has since fallen further from 78 (in 2018) to 86 (in 2020). 
 
The amended PCA now seeks to penalise commercial organisations if any 'associated' person gives or promises to give any undue advantage to a public servant intending to obtain or retain any business or business advantage for the organisation. 

Also Read: Businesses bear the brunt in COVID fight

The PCA does not seek to limit the liability of commercial organisations to acts of employees and may also cover acts of agents and other third parties. This marks a clear departure from the traditional principle of corporate criminal liability, where a company could be held liable for the acts of its 'directing mind and will' (i.e. senior officers and employees, such as directors) only.  
 
The PCA also incorporates a defence for a commercial organisation to avoid liability, by proving that it had put in place adequate procedures to prevent associated persons from undertaking corrupt conduct. 

Therefore, while the amended PCA imposed stricter standards of liability on commercial organisations, these amendments were also aimed at incentivising Indian corporates towards improving their existing compliance mechanisms, so as to be able to demonstrate that they have adequate procedures for preventing corruption.  
 
Interestingly, the PCA amendments also provide that the corruption prevention procedures to be put in place by commercial organisations, are required to be in compliance with guidelines to be prescribed for this purpose by the central government in consultation with the concerned stakeholders. 

This is a welcome reform, in line with similar requirements under other jurisdictions e.g., the UK. These guidelines would provide clarity and help businesses to bolster their existing compliance programmes, while also helping improve the ease of doing business. 

Also Read: Surviving COVID: Businesses need to think on their feet; revisit strategies, says Ajay Piramal

It is therefore surprising that, while July 26 this year marked three years of the PCA amendments of 2018, the corruption prevention guidelines have not been prescribed to date. There appears to be limited information in the public domain as to when such guidelines will be released.  
 
The government may also be facing a veritable Catch-22 situation, against the backdrop of the ongoing COVID-19 crisis and the ensuing economic slowdown, resulting from frequent lockdowns and other restrictions on economic activity. 

Prescribing such corruption prevention guidelines at a time when the government is expected to ease the economic pressure on corporates, may not be received favourably by corporates, as these corporates may be required to incur additional expenses for comprehensively overhauling their compliance systems. 

At the same time, further delays in prescribing such guidelines may only give impetus to corporate frauds and corruption, thereby negating the objectives of the PCA amendments.  
 
The economic hardships manifested by the COVID-19 crisis has resulted in an exponential rise in corporate frauds and corruption. 

Further, the large-scale implementation of the vaccination programme has further exacerbated the issue of fraud and corruption. 

Organisations such as the United Nations, OECD and Transparency International have also recognised the heightened risk of corruption in light of the fight against COVID-19.  

We are hopeful that the government is also cognizant of this heightened risk of corruption and the need to constantly improve the ease of doing business and will release the guidelines for corporates for implementing adequate procedures for preventing corruption, at the earliest. 
 
Meanwhile, even in the absence of such guidelines in India, good corporate governance requires that corporates should look to revisit their compliance programmes to ensure that they remain robust in these times of heightened risks. 

Businesses may also look to seek guidance from global best practices in this respect, such as the guidance available under the UK Bribery Act, 2010 and the US Department of Justice's guidance on the evaluation of corporate compliance programmes.   
 
(Authored by Alina Arora, Partner and Apurva Zutshi, Principal Associate; Shardul Amarchand Mangaldas & Co.)