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UK Bribery Act's compliance complexity unavoidable for Indian companies operating internationally, say experts

Wed, 15 Feb 2012 12:12 GMT

Source: Content partner // Thomson Reuters Accelus

By Ajay Shamdasani

The UK Bribery Act is an unavoidable addition to an already complicated regulatory compliance environment for Indian companies becoming more engaged in a global economy, said industry officials. Eight months after the law came into effect, implementation and enforcement remain unclear, they said. Additionally, local officials said that internal lawyers and compliance professionals would have to balance the legislation with similar foreign and local regulatory obligations.

"While the Act adds to an increasingly complex regulatory environment, it also represents a growing international focus on corruption and bribery, which companies will need to react to," said Nick Panes, director of corporate investigations at risk management consultancy Control Risks in Delhi. "It is the role of in-house counsel to balance this new piece of legislation with their pre-existing domestic and international regulatory requirements."

He added that with board directors and senior managers potentially being held personally responsible for actions taken within their organisations, compliance with the UK Bribery Act should be at the forefront of the minds of in-house counsels and compliance officers. The UK Bribery Act (UKBA) came into effect on July 1, 2011, and much like its U.S. counterpart, the Foreign Corrupt Practices Act (FCPA), the British anti-corruption legislation remains controversial due to its extraterritorial effect. Unlike the FCPA, however, the UKBA forbids facilitation payments, which many argue are needed in developing nations to expedite transactions.

"While companies have adjusted to the growing enforcement and extra-territorial reach of the FCPA, the [UKBA] arguably imposes more stringent requirements on companies as it covers bribery of private individuals and companies as well as foreign officials, and does not exclude facilitation payments from its definition of the offence of foreign bribery," Panes said. He added that the UKBA introduced a new offence of "failure of commercial organisations to prevent bribery," which had potentially serious ramifications since companies if their associates — including commercial agents — paid bribes.

"Companies can defend themselves if they can demonstrate that they have "adequate procedures" in place to prevent such [corrupt] behaviour," Panes said.

More Indian companies operating internationally

Indian companies have long been concerned about the FCPA's extraterritorial interpretation, owing to their substantial commercial ties with the United States. In recent times, Indian corporations have increasingly invested in the U.S., UK and continental Europe, placing them directly within the legislation's ambit. As Indian companies become more active in the global economy, many expect that they more frequently will come within the UKBA's reach and therefore be subject to its penalties, which include imprisonment and fines for individuals and their employers.

The UKBA applied both to companies and individuals with "close connections" to the UK, Panes said. "Given the strong commercial ties between India and the United Kingdom, the [UKBA] represents a significant piece of legislation for UK companies operating in India and for Indian companies with commercial interests in the UK," he said.

Similarly, according to Joby Mathew, founder of Joby Mathew Lawyers in Mumbai, Indian companies engaged in cross-border transactions needed compliance personnel — either in-house or external counsel — that were familiar with the provisions of the UKBA involved in such deals. For example, the UKBA will provide Indian businesses — especially those seeking to undertake trans-national mergers and acquisitions — with new impetus to tailor their strategies to avoid ensnarement in the legislation's wide-reaching anti-bribery regime, he said.

In practical terms, Anand Mehta, a partner with law firm Khaitan & Co. in Mumbai explained that the British law would mainly affect: UK businesses which have invested or would be investing in India; UK based companies with Indian subsidiaries; and Indian businesses with substantial UK business operations. "Prospective investors from the UK will need to carry out anti-bribery related diligence on the target Indian business before consummation of the transaction," he warned.

Yet, the legislation has also been the subject of much scrutiny since its launch last year, with the UK Ministry of Justice having issued guidance on the act to clarify its scope. The guidance suggests that managers make public statements on their commitment to thwarting bribery in all commercial operations, as well as appoint senior managers to develop anti-bribery programmes, as well as training for staff that would be regular, continuing, monitored and evaluated.

Senior officers should also be involved actively in the development and enactment of bribery prevention protocols. The ministry emphasised that anti-bribery protocols and policies should be part of the corporate ethos and understood company-wide through training, as well as internal and external notification. The guidance envisioned this being done in a manner commensurate with the risks an enterprise encounters.

The UK Ministry of Justice's guidance noted that commercial risks constantly evolved and therefore, business risk assessment policies needed to keep pace. Yet, the Ministry guidance acknowledged that what was suitable for larger multi-national corporations operating in multiple countries and continents may not work for small and medium enterprises and therefore, entity-wide risk assessments are needed.

"Measures such as risk assessments, comprehensive due diligence and company-wide training on related policies and procedures will all help demonstrate their commitment to anti-corruption compliance and help mitigate their risk exposure," said Panes. He added that most well run companies already had many internal procedures demonstrating compliance.

Mehta stressed that compliance officers and in-house counsel with corporations and financial institutions having inter-jurisdictional touch points with UK should be concerned about the UKBA. "They will now have to ensure compliance with not only local legislations but this foreign law as well. In fact, certain Indian companies with business links in UK are in the process of consulting legal advisors to develop practice and procedures to be compliant with the [UK Bribery] Act," he said.

Mehta added that strong audit and reporting mechanisms were needed to ensure UKBA compliance.

Enforcement difficulties

India's anti-corruption legislation, the Prevention of Corruption Act, metes out penalties ranging from unlimited fines to a maximum of five years imprisonment. The fines imposed on criminal offences in India rarely act as a deterrent owing to their paltry amounts, and the anti-bribery legislation, in force for 23 years, has seldom seen successful prosecutions leading to imprisonment. Additionally, India also has the Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Act, and the Foreign Contribution Regulation Act.

Supratim Chakraborty, a Khaitan & Co. associate, pointed out that British and Indian anti-corruption legislation would complement each other "while operating in their respective spheres".

Likewise, Control Risks' Panes stressed the UKBA was not designed to supplant any domestic legislation, but would form part of the evolving regulatory environment which companies will have to negotiate in India. "The passage of any legislation is one step, however enforcement is invariably more complex. This applies as much to the enforcement of domestic legislation as it does to extra-territorial regulations," he added.

India is ranked 87 in Transparency International's latest country rankings for corruption levels, despite having domestic anti-corruption legislation for more than two decades.

Chakraborty said that domestic enforcement and successful convictions had been problematic. "However, strict implementation of the [UK Bribery] Act could make a difference in the approach towards solutions to the problems of corruption at large and [specifically] bribery," he said.

Joby Mathew also pointed out that the UKBA might benefit overall Indian anti-corruption efforts. "Indian anti-corruption laws and the criminal courts enforcing [those] laws have not been very effective in bringing down instances of corruption or in penalising offenders," he said.