According to the SEC’s Complaint (which can be found here), from 2005 to 2007, certain employees of Oracle’s Indian subsidiary, Oracle India Private Limited (“Oracle India”), secretly “parked” a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement.  More than a dozen transactions were structured in this manner so that a total of around $2.2 million was held by Oracle’s distributors and kept off Oracle India’s corporate books.  The Oracle India employees would then direct its distributors to disburse payments out of the unauthorized side funds to purported local “vendors,” several of which were merely storefronts that did not provide any services.

The SEC’s Complaint alleged that, through the actions described above, Oracle violated the “books and records” provisions of the FCPA.  Specifically, the Complaint charged Oracle with:

• failing to make and keep books, records and accounts that, in reasonable detail, accurately and fairly reflected its transactions and dispositions of its assets; and

• failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization, and (ii) transactions were recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for its assets.

According to the SEC’s press release (which can be found here), Oracle, without admitting or denying the SEC’s allegations, has consented to the entry of a final judgment ordering the company to pay a $2 million penalty and permanently enjoining it from future violations of these provisions.  The SEC noted that the settlement took into account Oracle’s voluntary disclosure of the conduct in India, the company’s cooperation with the SEC’s investigation, and the remedial measures taken by the company, including Oracle’s firing of the employees involved in the misconduct and the significant enhancements made by the company to its FCPA compliance program.

The Business Standard reports that, on the basis of a preliminary investigation carried out in consultation with the Directorate General of Civil Aviation, the Central Vigilance Commission has recommended action against twelve Civil Aviation Ministry officials for extending favours to certain private airlines for securing jobs for their relatives. According to the report:

… the Ministry of Civil Aviation has also been asked to look into the case for possibility of criminal conspiracy and corruption on part of its employees …

In addition, IBN Live reports that the New Delhi District Consumer Disputes Redressal Forum has ordered Air India to pay compensation to a woman in relation to a bribe sought from her son by a member of its airport staff to allow him to carry extra luggage on his way to Singapore for studies.

What is more worrying is the probity of certain of India’s commercial pilots.  The New York Times has lifted the lid on the practice of pilots falsifying records and paying bribes to testing officials in relation to professional examinations and qualifications.

It looks like India is not flying so high on the corruption front in the aviation sector.

“The ethos has been created to fight against corruption.”

Given the focus on all things corrupt, the Indian Central Bureau of Investigation (CBI) has been fairly active and:

• IBNLive reports that, on Sunday, the CBI arrested 3 officials of the India Tourism Development Corporation for taking bribes to award hotel star ratings; and
• Business Standard reports that, on Monday, the CBI searched the premises of one of India’s largest steel producers, BSE and NSE-listed JSW Steel, in connection with allegations of illegal mining activities.

Conduct

• From 2003 to 2009, Diageo paid $1.7 million in bribes to hundreds of Indian government officials responsible for purchasing or authorizing the purchase of its products in the country.
• From 2004 to 2008, Diageo similarly paid nearly $600,000 (approximately $12,000 per month) to a Thai government official for his consulting assistance on Diageo’s behalf in tax and customs disputes.
• Diageo likewise made nearly $200,000 in payments to South Korean customs officials for their roles in influencing government decisions to grant Diageo tax rebates and for travel and entertainment expenses connected with the negotiations leading up to the government’s favorable decisions. Diageo also made hundreds of cash payments totaling more than $230,000 to South Korean military personnel to obtain and retain their business.

Penalty

• Diageo agreed to the disgorgement of $11,306,081, prejudgment interest of $2,067,739, and an additional $3 million penalty.

Notes

• Uncharacteristically, the Department of Justice (“DOJ”) opted not to press criminal charges against Diageo for its alleged FCPA violations.
• Also uncharacteristic is the SEC’s decision to pursue and administrative action against Diageo, as opposed to a more typical civil enforcement action filed in federal court.
• Diageo undertook a series of remedial measures in response to the investigation, including the termination of the responsible employees and implementing enhancements to its internal compliance program.
• The SEC observed that Diageo’s rapid multinational expansion through mergers and acquisitions left it particularly vulnerable to FCPA violations; Diageo failed to improve the lax compliance policies of a number of its acquired subsidiaries until illicit payments had already been made.

Legislation designed to enshrine various principals of the UN Convention in Indian law remains outstanding. Similarly, a longstanding bill to establish an ombudsman with jurisdiction over corrupt practices and grievances is still out to consultation. At present, there are no laws applying to the bribery of foreign officials, although a bill has been tabled in the Indian parliament that would criminalise such acts. In addition, private commercial bribery is not yet outlawed by statute.

Currently, the primary legislation in India dealing with anti-corruption is the Prevention of Corruption Act 1988 (PCA) (PDF/127KB/17 pages). The PCA prohibits the receipt of illegal gratification by ‘public servants’ and gratification is not limited to pecuniary gratifications or to gratifications estimable in money.

Chapter III of the PCA contains the relevant offences and penalties and of particular note:

• section 7 of the PCA provides that if a public servant accepts or obtains or agrees to accept or attempts to obtain from any person, for himself or for any other person, any gratification (other than legal remuneration), as a motive for doing or forbearing to do any official act or for showing or forbearing to show, in the exercise of his official functions, any favour or disfavour to any person or for rendering or attempting to render any service or disservice to any person specified in the section, he would be punished with imprisonment which shall not be less than six months but may extend to five years along with a fine; and
• section 11 of the PCA provides that, where a public servant receives any valuable thing (without consideration, or for a consideration, which he knows to be inadequate), from any person whom he knows to have been, or to be, or to be likely to be concerned in any proceedings or business transacted or to be transacted by such public servant or having any connection with the official functions of himself, he may be punished with imprisonment for a term which shall not be less than 6 months but may extend to five years, along with a fine.

Whilst the PCA’s focus is on the bribe taker, the bribe giver may be caught through the offence of abetment. In respect of offences under sections 7 and 11 of the PCA, the payer of the illegal gratification is liable as an ‘abettor’ under section 12 of the PCA. Sections 107 to 116 of the Indian Penal Code 1860 provide that ‘instigation’ is considered as the key element of abetment.

In terms of record keeping, Indian companies are required to maintain their books of accounts and other business records under, as is typical, various company and tax legislation laws including the Companies Act 1956 and the Income Tax Act 1961.

Certain regulated companies are also subject to requirements to maintain records under the Prevention of Money Laundering Act 2002 (PML). It is worth noting that Part B of the Schedule to the PML treats the proceeds of offences under sections 7 to 10 of the PCA as ‘proceeds of crime’.

In addition, we are seeing piecemeal legislation that is expected to have the effect of reducing corrupt behaviours and practices. In this regard, the Foreign Contribution (Regulation) Act 2010 (FCRA), which came into force in May, is intended to consolidate the law regulating the acceptance and utilisation of foreign contributions in India. Whilst any step to try and eradicate bribery is welcome, TrustLaw reports that, in a country where corruption is part of the tapestry, enforcement of the FCRA could pose a problem.

The Supreme Court of India (“Supreme Court”) was asked to look at the legality of the appointment of Mr Thomas to the office of the Central Vigilance Commissioner (“Commissioner”).  Specifically, the court opined (Writ Petition (C) No 348 of 2010 (PDF)) on the legality of the recommendation of Mr Thomas for such appointment by the Indian government.  In this role, Mr Thomas would be responsible for, among other things, looking into corruption allegations surrounding the recent commonwealth games and the sale of telecoms licences at an undervalue.

Mr Thomas’ suitability for the post was bought into question by allegations around the time that he served as a civil servant in the Indian state of Kerala in the early 1990′s.  The allegations relate to the acceptance of a contract relating to the import of palm oil at inflated prices on Mr Thomas’ watch.

The Central Vigilance Commission Act, 2003 (“Act”), and ensuing regulations give the CVC a statutory footing and also sets out various guidelines for the appointment of the Commissioner.  In considering relevant case law, the Supreme Court stated that:

“… persons should be without any blemish whatsoever and that they should not be appointed merely because they are eligible to be considered for the post.”

Clearly, the post of Commissioner and the role of the CVC are accepted as being to promote and maintain integrity.  Bearing this in mind, along with other considerations pursuant to the Act, the Supreme Court decided that:

“… the impugned appointment of Shri P J Thomas as Central Vigilance Commissioner is quashed.”

Unfortunately, this does not bode well for the Indian Prime Minister, Dr Manmohan Singh, especially given that he led the committee appointing Mr Thomas.  As reported by the Independent recently, he is feeling the pressure from a raft of anticorruption allegations against his administration.  It is a shame since Dr Singh has been credited with many of India’s recent economic reforms and strategy.  But it goes to show that that anticorruption is to be marginalised at your peril.