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September 23, 2014

Investors from around the world are increasingly attracted to India, the world’s fourth most favored investment destination.1 With its highly-skilled work force, large English-speaking population, growing domestic market, and stable, democratic government,2 India is an important investment and business location for many global companies. Significantly, the United States, one of India’s largest trading partners, is negotiating a treaty with India for bilateral investment, to support growth for both countries, deepen the economic relationship, and increase investor confidence.3

Yet, a significant challenge for global companies that invest in and operate in India is the risk associated with corruption. The World Economic Forum identifies corruption as among the top three most problematic factors for doing business in India.4 The World Bank ranks India in the bottom third of countries in terms of ease of doing business.5 Certain regulatory requirements and procedures often make conducting business in India cumbersome and complex. Widespread red tape, a bottom-heavy bureaucracy, high tolerance for corruption and inefficient enforcement actions present operational risks. Global companies must continuously strive to formulate ways to address and manage corruption risks in order to minimize negative impacts on their investments and operations in India.

India’s Regulatory Structure to Fight Corruption

The main law governing corruption in India is the Prevention of Corruption Act (PCA).6 The focus under the PCA is primarily on the bribe taker; it makes the receipt of a bribe by a public official (and related offenses) punishable under law. In contrast, the U.S. Foreign Corrupt Practices Act (FCPA)7 focuses on the briber giver. An important difference in the two schemes is that facilitation payments are illegal in India under the PCA.

Several other Indian statutes also cover corruption-related activity, from the Indian Penal Code of 1860,8 to the recently passed Lokpal and Lokayuctas Act, 2013, which provides for anti-corruption watchdog organizations at the central and state levels.9 Six important bills awaiting parliamentary approval are also elements of the government’s anti-corruption framework, including the Prevention of Corruption Act (Amendment) Bill, which expands the definition of taking a bribe and makes giving a bribe an offense, and which has authority over commercial organizations. Another bill awaiting parliamentary approval criminalizes the act of bribing officials of foreign governments and public international organizations.

Where Corruption Risk Lurks

A number of recent high-profile corruption scandals have put India in the spotlight. In 2011, the 2G spectrum scam shook the Indian telecom industry.10 This scheme involved illegal payments and underpayments in the issuance of certain licenses and resulted in the loss of millions of dollars to Indian and foreign companies.11 Other recent corruption scandals have entangled the coal industry,12 public land management,13 public healthcare,14 irrigation,15 and defense procurement.16

Reported FCPA cases involving Indian operations reveal the extensive use of third-party intermediaries. Typically, improper payments are disguised by creating fake documents, paying excessive commissions or margins, creating and parking slush funds with third parties, and making payments in cash.

Certain activities and areas within businesses are more prone to corruption than others, including government sales; licenses and permits; gifts and charitable / political contributions; land acquisition and construction; customs and taxes; and reliance on third parties for government interactions. Companies in certain sectors face greater corruption challenges, namely: defense, life sciences / healthcare, alcoholic drinks, mining, energy, hospitality, infrastructure / construction, manufacturing and retail.

Successful Management of Corruption Risk

To mitigate corruption risks, many successful global companies implement a risk-based anti-corruption compliance program suited for the company’s operations in India.17 Such programs take into account India-specific operational and regulatory risks, the nature of products / services, nature of government interactions, the business supply chain, and reliance on third-party intermediaries.

Compliance teams utilize local individuals with compliance experience who understand local customs and culture and are positioned to assess risks and respond effectively. They provide anti-corruption training in the local language to employees, high-risk vendors and business partners not fluent in English. Most important, they conduct a risk ranking of third-party intermediaries and business partners within an appropriate integrity due diligence program.

Successful global companies also incorporate anti-corruption controls within the business process frameworks for local finance, internal audit and other operational teams. A robust and dynamic internal control framework helps to prevent, detect and remediate corrupt activity within the organization.18

Conclusion

India continues to be among the world’s top investment destinations. Despite the risk of corruption, numerous global players successfully conduct large operations there. What is common among those who succeed in managing corruption risk is the focus on growth, maintenance of a strong internal control system, and implementation of a customized and effective anti-corruption compliance program.

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1 “India slips to 4th place in UNCTAD's FDI destination ranking” (discussing the United Nations Conference on Trade and Development’s World Investment Report 2014), The Economic Times, accessed July 26, 2014, http://articles.economictimes.indiatimes.com/2014-06-24/news/50825711_1_fdi-destination-fdi-inflows-fdi-policy.

2 India had a record voter turnout in its 2014 general elections, with more than 553 million participants. “State Wise Turnout for General Election – 2014,” Election Commission of India, accessed July 26, 2014, http://eci.nic.in/eci_main1/GE2014/STATE_WISE_TURNOUT.htm.

3 “U.S. Relations with India, Fact Sheet, December 21, 2012,” U.S. Department of State, accessed July 26, 2014, http://www.state.gov/r/pa/ei/bgn/3454.htm.

4 Klaus Schwab, The Global Competitiveness Report 2013-2014, World Economic Forum, accessed July 26, 2014, http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf.

5 In its Doing Business Report 2014, the World Bank ranked India 134 out of 189 economies in terms of ease of doing business. “Ease of Doing Business with India,” Doing Business, The World Bank, accessed July 26, 2014, http://www.doingbusiness.org/data/exploreeconomies/india/.

6 Government of India, The Prevention of Corruption Act, 1988, accessed July 25, 2014, http://www.persmin.gov.in/DOPT/EmployeesCorner/Acts_Rules/PCAct/pcact.pdf.

7 U.S. Department of Justice, Foreign Corrupt Practices Act of 1977, accessed July 25, 2014, http://www.justice.gov/criminal/fraud/fcpa/.

8 Government of India, The Indian Penal Code, 1860, accessed July 25, 2014, districtcourtallahabad.up.nic.in/articles/IPC.pdf.

9 Press Information Bureau, Government of India, The Lokpal and Lokayuktas Bill (backgrounder with salient features of the legislation), accessed July 26, 2014, http://pib.nic.in/newsite/erelease.aspx?relid=102096.

10 “What is the 2G spectrum scam?” India Today, October 19, 2012, accessed July 26, 2014, http://indiatoday.intoday.in/story/what-is-the-2g-scam-all-about/1/188832.html.

11 Devidutta Tripathy, “2G case: Supreme Court quashes 122 telecoms licences,” Reuters, India Edition, February 3, 2012, accessed July 26, 2014, http://in.reuters.com/article/2012/02/03/2g-india-supremecourt-unitech-tata-relia-idINDEE81104E20120203.

12 “Coal scam: Enforcement Directorate attaches assets of Vijay Darda's firm, Nagpur company,” The Economic Times, July 1, 2014, accessed July 26, 2014, http://articles.economictimes.indiatimes.com/2014-07-01/news/51002757_1_devendra-darda-congress-mp-vijay-darda-coal-ministry.

13 “Rs 2 lakh cr-scam hits Karnataka Wakf Board,” Hindustan Times, March 26, 2012, accessed July 26, 2014

14 “NRHM scam: 2 former UP ministers to appear before CBI Agencies,” The Indian Express, December 26, 2011, accessed July 26, 2014, http://archive.indianexpress.com/news/nrhm-scam-2-former-up-ministers-to-appear-before-cbi/892257/.

15 “Maharashtra govt in crisis, all NCP ministers quit,” The Times of India, September 25, 2012, accessed July 26, 2014.

16 Rajat Pandit, “Another scam hits defence ministry, Antony orders CBI probe,” The Times of India, March 3, 2014, accessed July 26, 2014, http://timesofindia.indiatimes.com/india/Another-scam-hits-defence-ministry- Antony-orders-CBI-probe/articleshow/31301383.cms.

17 Dhruv Phophalia, “Approaching the Risk of Corruption in India” (white paper), accessed August [insert day], 2014, [insert URL]. Among subjects, Phophalia details the hallmarks of an effective anti-corruption compliance framework tailored for business operations in India.

18 Ibid.