Scouring the Wheels: Reducing the Prevalence of Bribery in India

Introduction

India’s public perception has been extensively damaged by the corrupt actions of both public officials and private businesses. The 2010 Corruption Perceptions Index ranked India 87^th out of 178,¹ and the 2008 Bribe Payers Index ranked India 19^th out of 22.² Petty corruption in basic government services has been estimated to account for losses of approximately USD 4.7 billion,³ while the recent 2G spectrum scam involving the manipulation of the license allocation process by numerous high-ranking Indian officials has been estimated to have cost the Indian exchequer between USD 12.8 to 39 billion.⁴ As well, high levels of corruption in a nation may deter long term investment and induce current investors to divest their holdings. Thus, protection of investors and residents requires the Indian government to adopt a strong anti-corruption stance that is bolstered by effective anti-corruption legislation. This bulletin compares India’s current legal framework for restraining corrupt practices, specifically bribery, to those of other nations, and suggests additional measures that may be taken by the government and companies operating in India to reduce potential avenues for abuse by both private and public entities.

1.0 India’s current legal environment regarding prevention of bribery

1.1Principal legislations
India’s principal legislation against corruption is the Prevention of Corruption Act, 1988 (“POCA”) which acts as the main deterrent against bribery in India, the main thrust of which is to prohibit public servants⁵ from accepting or soliciting illegal gratification in the discharge of their official functions. As well, bribe-givers and intermediaries may be held liable under POCA for abetting a public official in accepting or soliciting a bribe and violations of POCA carry terms of imprisonment between 6 months and 5 years for isolated offenses and between 2 and 7 years for habitual offenders, as well as an unlimited pecuniary fine correlated with the value of ill-gotten gains.⁶ However, courts may not take cognizance of an offence punishable under POCA unless the public servant has previously been sanctioned by the government authority competent to remove the public servant from office,⁷ severely reducing POCA’s force where there is collusive activity within government branches.
The Right to Information Act, 2005 (“RTI”) is another significant legislation in that it allows Indian citizens to request information from central or state governments and their instrumentalities, which are required to reply to such requests typically within 30 days of the request being made.⁸ The RTI identifies its central purpose as the reduction of corruption through increased transparency and accountability. As well, while exceptions exists as to the information that can be divulged under RTI,⁹ information related to allegations of corruption do not fall within these exclusions, even in the context of information requested from intelligence or security institutions.¹⁰ Thus, individuals and companies who have received unfavorable treatment from public servants as a result of corrupt practices may seek information from the relevant government department via RTI which may help prove their case.¹¹
In addition to POCA’s prohibitions, various sections of the Indian Penal Code (“IPC”) provide criminal punishment for public servants who disobey relevant laws or procedures, frame incorrect or improper documents, unlawfully engage in trade, or abuse their position or discretion.¹² As well, the IPC provides criminal punishment for offering, paying, soliciting, or receiving a bribe to secure favorable treatment from an elected official. Thus, public servants who illegally secure contracts or show improper (dis)favor for companies in the execution of their official capacities as well as the parties who induce such actions by elected public servants could be convicted under these statutes in addition to POCA.
1.2. Certain record keeping requirements
Practical enforcement of POCA will require a paper trail as evidence, due to the secretive nature of most corrupt practices. One such avenue for incriminating records will be the record keeping requirements of the Companies Act, 1956 (“CA”), which require true and fair accounts of all money received or expended by a company to be made available for official review.¹³ As well, the Prevention of Money Laundering Act, 2002 (“PMLA”), which requires all financial institutions to maintain records of their transactions with and between clients,¹⁴ may be another source of incriminating records. However, the evidentiary value of these records may be less than they first appear, as reliance on them assumes that individuals or companies willing to engage in bribery are unwilling to engage in fraud through comission or careful fixing of books designed to disguise their payment or receipt of bribes in less conspicuous forms.

1.3 Enforcement agencies
The Central Vigilance Commission (“CVC”) is the main enforcement agency whose role is “to advise and guide central governmental agencies in the field of vigilance.” CVC receives complaints of corruption from government departments and has jurisdiction over central government ministries and departments but only has an advisory role. CVC has no jurisdiction over individuals or state governments and can refer cases to Central Bureau of Investigation (“CBI”). CBI is an investigative police agency that handles interstate and international crimes. It has a special Anti-Corruption Division and Special Crimes Division which deals with economic offenses as well. The state police investigate charges against individuals under POCA.

2.0 Other nations’ anti-bribery legal frameworks

The US’s Foreign Corrupt Practices Act (“FCPA”) prohibits US citizens, companies whose securities are listed on US exchanges, as well as foreign firms located within the US, from offering or paying anything of value to a foreign official in return for obtaining or retaining business. It also requires that companies maintain books and records that accurately reflect the transactions of the company and maintain internal accounting controls designed to prevent bribery of foreign officials. As well, the FCPA contains an opinions procedure under which an official statement regarding potential liability under FCPA for any proposed business conduct may be requested.

Violations of FCPA’s anti-bribery provisions and record-keeping provisions can result in business entities being fined up to $2 million and $25 million per violation, respectively, while violations by individuals of the anti-bribery provisions and record-keeping provisions are up to $100,000 per violation and imprisonment for up to 5 years and up to $5 million and imprisonment for up to 20 years, respectively. ¹⁵ In addition, FCPA violations can result in further penalties, such as suspension or debarment from government contracting programs, disgorgement of profits on contracts obtained via improper payments, appointment of an independent compliance monitor, along with potential liability under the Racketeer Influenced and Corrupt Organizations Act to third-party competitors injured by the acts of bribery. As well, US federal government officials are subject to the Bribery Act, 1962, which makes it a crime to pay, solicit, or receive a bribe in return for influence over an official act and carries with it a punishment of imprisonment of up to 15 years and a fine of up to 3 times the value of the ill-gotten gains for both the bribe-giver or bribe-taker.¹⁶

The UK’s Bribery Act 2010 (“UKBA”), which has become effective from July 1, 2011, prohibits bribery of domestic and foreign officials by UK citizens, residents, or companies incorporated in the UK. UKBA also creates liability for companies that fail to prevent bribery on their behalf, but provides an affirmative defense for companies that demonstrate the existence of adequate procedures designed to prevent such conduct.¹⁷ Violation of UKBA’s provisions include a maximum imprisonment term of 10 years along with an unlimited fine, confiscation of property obtained from illicit contracts, as well as disqualification of directors of violating companies, who themselves may be charged as individuals if they consented to such conduct.¹⁸

3.0 Increasing effectiveness of POCA: suggestions

Companies doing business in India should institute effective anti-bribery compliance and education programs at all levels of their organization, and face liability similar to that of UKBA for failure to do so. Present punishment for improper record-keeping under the CA and PMLA is set too low to ensure compliance. Punishment should be increased to levels similar to the FCPA’s fines and terms of imprisonment to create credible threats for failure to record accurate and detailed records. As well, an independent external audit requirement, such as that instituted under the US Sarbanes-Oxley Act, 2002,¹⁹ should be instituted to ensure oversight of these records, and direct liability should exist for directors who fail to ensure compliance. Companies should institute strict accounting principles requiring accurate and detailed recording of all gifts, political contributions, or client expenses, and should exercise continuing due diligence over intermediaries and other business partners for potential abuses.

A unified system of whistleblower protections such as those suggested in the Whistle Blowers (Protection in the Public Interest Disclosures) Bill, 2006 should be instituted. In addition, companies should institute internal whistleblower mechanisms that allow reporting of non compliance directly to upper management or independent internal monitoring bodies if direct supervisor has failed to take action. There is no centralized forum for companies or individuals to seek guidance as to the validity of current business practices where there is reasonable uncertainty other than the Ministry of Corporate Affairs. It may be advisable to follow the FCPA’s lead and create an opinions procedure where advisory opinions can be issued regarding potential liability of proposed business conduct. Finally, in an attempt to increase transparency, companies that have received unfavorable treatment from public officials should utilize RTI’s protections to require adequate justification for the public official’s decision as well as his decision-making process.

Conclusion

Corruption hurts everyone, whether it is in the form of higher prices, reduced quality, budget deficits, or general distrust of government institutions. In particular, companies that are unwilling to engage in corrupt practices are at a severe disadvantage compared to unscrupulous competitors. While POCA and other regulations have reduced the prevalence of bribery in India, several avenues for exploitation still exist. Among others, concerted efforts should be made to directly target the bribe-givers in a more direct fashion than POCA’s current abettor liability, specific criteria should be created for determining applicable punishment, and companies doing business in India should be required to establish and maintain adequate anti-bribery compliance protocols. In the meantime, companies in India should be proactive in instituting their own oversight and compliance protocols as well as developing a corporate culture that discourages bribery at all levels.This bulletin is prepared by Eric Joseph Garber (under the supervision of Priyanka Das, Associate), a final year law student at the University of Georgia School of Law, who is pursuing his internship at PSA

1For details please visit, http://www.transparency.org (As visited on June 14, 2011).
2Ibid at 1 above.
3http://www.iri.org.in/related_readings/India%20Corruption%20Study%202005.pdf (As visited on June 15, 2011).
4http://saiindia.gov.in/cag/sites/default/files/2010-11_19_PA-civil/chap5.pdf (As visited on June 14, 2011).
5 The term “Public servant” under POCA (section 2) is quite broad, and includes central and state government employees, employees of government-owned corporations, judges, arbitrators, elected officials, and anyone authorized or required to perform a “public duty”.
6 For details, please refer sections 7, 11, 12, 13, 14 and 16 of POCA.
7 Section 19 of POCA.

8 Sections 2, 4, & 7 of RTI.
9 Section 8 of RTI lists several exemptions to RTI’s disclosure requirements, such as information, the disclosure of which would prejudice India’s security or economic interests, harm relations with foreign nations, impede the investigation or prosecution of offenders, breach parliamentary privilege, or harm the competitive position of a third party.
10 Section 24 of RTI.
11 Under Section 4 of RTI, every public authority is required to publish all relevant facts involved in the formulation of important public policies as well as provide justification for its administrative or quasi-judicial decisions where requested.
12 See Sections 166 – 169 & 409 of IPC.
13 Section 209 of CA, failure to ensure compliance with the CA record-keeping requirements is punishable by 6 months imprisonment and/or a fine of up to Rs. 10,000 per offense.
14 Section 12 of PMLA, failure to maintain adequate records may result in a fine between Rs. 10,000 and one lakh per violation.
15 15 U.S.C. § 78dd-1(g) & § 78ff, respectively.
16 18 U.S.C. § 201(b) (2010).
17 2010 c. 23(7).
18 2010 c. 23(14).
19Under the Sarbanes-Oxley Act, the external accounting firm hired to perform these functions is prohibited from engaging in any other business with that company.