A note of caution to India Inc, Legal News, ET LegalWorld – Legal Firms

In line with the latter, Section 9 of the PCA, as amended in 2018, introduced an offense of bribery that would be deemed to have been committed by a commercial organization (i.e. any company or partnership firm conducting its business in India) if any person associated with it, obtains or retains business or advantage in the conduct of business through bribery. Unlike Section 10, that penalises the personnel of an entity with whose connivance bribery was committed, Section 9 provides for the imposition of fine on the entity itself, irrespective of whether the person associated with it promises or procures an undue advantage to the entity through bribery. The principles governing the circumstances under which an entity would be liable under Section 9 for an act of bribery committed by persons associated with it, especially when the act was committed without the knowledge or endorsement of the entity or its management, and the mitigating factors or defenses available therein are yet to be exhaustively elaborated by superior courts in India. However, two recent pronouncements overseas, imposing hefty fines on companies for acts of bribery by their subsidiaries/agents, has turned the spotlight on corporate bribery. The Recent Cases

The first pronouncement came from the Securities and Exchange Commission (“SEC”) in the United States of America (“US”), imposing a fine on an US-headquartered multinational technology company for the acts of bribery committed by the employees of its overseas subsidiaries in foreign jurisdictions. The allegations included obtaining approvals from senior personnel of the company, in the name of discount schemes and marketing reimbursement payments to finance slush funds, that were subsequently used to pay government officials in return for state contracts. Similarly, last week a Crown Court in the United Kingdom ordered a multinational mining company to pay a hefty fine for acts of bribery committed abroad by its agents in its overseas desk.

There are two features, among others, that are common to the cases before the SEC and the Crown Court. Firstly, the entity itself may not have been involved in the predicate offence of bribery. Moreover, in both the cases, the companies had cooperated with the investigations and brought to fore various details regarding alleged corrupt practices. While the management of these companies may not have approved of the practices of their agents/employees/subsidiaries, they were nevertheless fined for bearing the commercial fruits of the alleged act of bribery. Secondly, both companies had relevant prevention and compliance mechanisms in place, yet fines were imposed on them for either lax implementation or deficient compliance thresholds. For instance, in the case before the SEC, approvals to request for purchase orders not exceeding a certain amount could be given by the superiors in the subsidiary of the Company. Exploiting this threshold, the employees of an overseas subsidiary opened multiple independent purchase orders below this threshold, but aggregating to amounts far exceeding the said threshold, with the approval of the supervisors employed in the subsidiary, who were complicit in the deceptive scheme. Even in instances where the approval was required from an external party within the corporate structure, they were found to be rubberstamped.

A cautionary tale for India Inc.

Just as in the cases before the SEC and the Crown Court, a commercial organisation in India could also be fined in terms of Section 9 of the PCA if any person associated with it offers inducements to government officials in return for favorable treatment. While a defense is available under Section 9 for the commercial organisation to prove that it has adequate mechanisms in place to prevent bribery in compliance with the guidelines prescribed by the Central Government, these guidelines are yet to be notified. In the absence of guidelines in this regard, it is further unclear if conventional corporate governance thresholds would suffice to meet the mitigation thresholds of Section 9. The situation is more precarious for unlisted entities, including partnership firms which may not have in-built corporate governance structures mandated by law for listed entities. Moreover, as the cases discussed above demonstrate, the promulgation of anti-bribery policies alone may not be enough. Instead, it must be ensured that such mechanisms are dutifully adhered to.

Apart from the financial burden, being subject to a penalty for bribery at the instance of a person associated with it, can bring about a significant loss of reputation for a commercial organisation. It may also have a negative bearing on future engagements that the commercial organisation may have with the government, including the possibility of being blacklisted. It is imperative, therefore, that entities in India maintain enhanced vigilance to curb corporate bribery, lest they might be penalised for the misgivings of their personnel, notwithstanding their own inculpability.