Minimizing Bribery and Corruption Risks: Dr ... - Luthra & Luthra

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PRESENTATION PLAN. ❑ Importance of Cross Border Compliance. ❑ Anti- Corruption Laws in India: Existing and. Proposed. ❑ Defence Procurement: Mapping ...
C5 European Forum on India Defence Procurement

Minimizing Bribery and Corruption Risks: Compliance with Global and Local Anti-Corruption Requirements through the Procurement Process

Dr. Shweta Hingorani Partner Luthra & Luthra Law Offices © 2011 Luthra & Luthra Law Offices

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PRESENTATION PLAN

 Importance of Cross Border Compliance  Anti-Corruption Laws in India: Existing and Proposed  Defence Procurement: Mapping Vulnerabilities in the Process

 Safeguards in the Defence Procurement Process  Consequences of Non-Compliance

 Minimizing Risk through Adequate Procedures © 2011 Luthra & Luthra Law Offices

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IMPORTANCE OF CROSS BORDER COMPLIANCE

 Increased role for trans-national corporations  Defence sector prone to corruption  Wider reach/stricter enforcement of anti-corruption laws  Co-operation and information sharing between agencies in various jurisdictions  Continuing legal risks and adverse publicity/reputational risks for corporations involved  Need for risk assessment and adequate procedures

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ANTI-CORRUPTION LAWS IN INDIA: EXISTING Prevention of Corruption Act, 1988

 Key offences  accepting/obtaining/ agreeing to accept/ attempting to obtain  by a public servant  any gratification (not limited to pecuniary gratification/ estimable in money) from any person (Section 7), or  any valuable thing (without adequate consideration) from any person who has or is likely to have official dealings with the public servant (Section 11)

 by any person  of any gratification for inducing any public servant by corrupt/ illegal means (Section 8) or personal influence (Section 9),

to do/ forbear from doing an official act or to show favour/disfavour to any person  abetment by any person of commission of offences under Section 7 or 11  criminal misconduct by a public servant, including possession of assets beyond known sources of income © 2011 Luthra & Luthra Law Offices

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ANTI-CORRUPTION LAWS IN INDIA: EXISTING Prevention of Corruption Act, 1988 (Cont’d)

 Applies to all Indian citizens, whether in India or abroad  Covers bribe takers (public servants and middlemen) and bribe givers  Wide definition of ‘public servant’  Prior sanction from relevant authority necessary for prosecution of public servants

 Limited protection afforded to whistle-blowers © 2011 Luthra & Luthra Law Offices

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COMPARISON OF KEY FEATURES OF THE BRIBERY ACT, FCPA AND THE POCA BRIBERY ACT

FCPA

POCA



Domestic and foreign

 Only foreign

 Only domestic



Active and passive bribery

 Only active bribery

 Active and passive bribery



Also private-to-private commercial context

 Only (foreign) public officials



Corporate liability for failing to prevent bribery

 Public servants and middlemen



No accounting requirements



Lower threshold for bringing prosecutions for bribery of foreign public officials (intention to influence to obtain advantage)



Defence to corporate offence of adequate procedures in place



No exemption for facilitation payments



 No specific offence for failing to prevent bribery  Accounting requirements: strict liability  Higher threshold for bringing prosecutions for bribery of foreign public officials (knowledge of wrongdoing required)  No defence of adequate procedures in place

Close UK connection (ss.1,2,6) or  Facilitation payments exempted UK incorporated/UK business  US security issuers, US nationals, (s.7) acting in US

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 No specific offence for failing to prevent bribery  No accounting requirements  Lower threshhold for bringing prosecutions  No defence of adequate procedures in place  No exemption for facilitation payments  Citizens of India 6

ANTI-CORRUPTION LAWS IN INDIA: PROPOSED

 The Public Interest Disclosure and Protection to Persons making the Disclosures Bill, 2010

 Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations Bill, 2011  The Lokpal Bill, 2011  Proposal to introduce the Public Procurement Bill, 2011  Draft National Anti-Corruption Strategy, 2010

© 2011 Luthra & Luthra Law Offices

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DEFENCE PROCUREMENT: AN OVERVIEW

Initiation of Proposal and Allocation of Priority

Field and Staff Evaluation

Formulation of Services Qualitative Requirements (SQRs)

Determination of Lowest Bidder

Solicitation of Offers

Grant of Final Approval

Evaluation of Technical Offers by Technical Evaluation Commitee

Contract Implementation and Monitoring

# Submission of Offset proposals, their evaluation, implementation and monitoring will run simultaneously with the main contract © 2011 Luthra & Luthra Law Offices

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DEFENCE PROCUREMENT: MAPPING VULNERABILITIES IN THE PROCESS

 Formulation of Services Qualitative Requirements (SQRs): Potential bidders may sign up agents and attempt to influence the SQR formulation process to include technical parameters exclusive to their products

 Field and Staff Evaluation: Undue influence of trial teams may be sought to take subjective view of competing equipment, especially in respect of trial parameters which are descriptive/ subjective in nature

 Determination of Lowest Bidder: Total expenditure/ cost has several constituents. Difficulty in determining realistic fair price and the process may be unscientific and intuitive

 Implementation of Offset Obligations: Offset proposals, not being a part of the principal contract, generally undergo less scrutiny. So, the vendors often submit token offset proposals © 2011 Luthra & Luthra Law Offices

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SAFEGUARDS IN THE DEFENCE PROCUREMENT PROCEDURES

 Integrity Pact (Pre-Contract) 

Signed by the bidders and the MoD for all acquisition schemes (capital and revenue) above Rs.100 crores (approx. USD 20 million)



Incorporates no bribery commitment by bidder and MoD



Other relevant provisions:

 Agency clause  Commitment not to collude with other parties  No previous transgression in the last three years



Submission by bidder of Integrity Pact Bank Guarantee



Validity of Integrity Pact – for a period of five years from signing for up to complete execution of contract, whichever is later

© 2011 Luthra & Luthra Law Offices

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SAFEGUARDS IN THE DEFENCE PROCUREMENT PROCEDURES (Cont’d)

 Provisions in the standard form RFP and the standard contract document  Disclosure regarding use of third parties for marketing  Restrictions on use of agents  Penalty for use of undue influence  Access to books of accounts

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CONSEQUENCES OF NON-COMPLIANCE

 

    

Debarment from entering into contracts with the GoI Denial of contract/ cancellation of the present contract or any other contract with GoI, without any compensation to the supplier Damages for all losses suffered by the buyer and competing bidders Forfeiture of bid security/ bank guarantee Refund of all amounts paid by the buyer Imprisonment for a minimum period of 6 months and extending to 5 years (may be higher in certain offences such money laundering) Imposition of fine

## Corporations liable for criminal offences - extend to offences punishable

with imprisonment

© 2011 Luthra & Luthra Law Offices

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CONSEQUENCES OF NON-COMPLIANCE (Cont’d) No.

Name of Statute/ Rules

Offence

Consequences

Breach of Integrity • • Pact • • • 1.

DPP, 2011 and DPM, 2009

• Breach of • prohibition on use of undue influence • Breach of • restriction on use of agents • •

Debarment of the bidder for an appropriate period of time Denial or loss of contract Forfeiture of the bid security and performance bond Liability for damages to the MoD and the competing bidder Debarment for a minimum period of 5 years from entering into a contract with the GoI (in case of breach of agency clause) Cancellation of the present contract, either wholly or in part, without any compensation to the supplier, or any other contract with the GoI Refund by the supplier of all amounts paid by the buyer, along with interest, in respect of the present contract, as well as recovery of amounts paid in respect of any other contract concluded with the GoI Refund by the supplier to the buyer of any amount paid for such facilitation to any third party (in case of breach of agency clause) Forfeiture of bank guarantee

# The provision pertaining to undue influence additionally provides for imposition of any penalty as the MoD may deed fit © 2011 Luthra & Luthra Law Offices

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CONSEQUENCES OF NON-COMPLIANCE (Cont’d) No.

2.

Name of Statute/ Rules Prevention of Corruption Act, 1988

Offence

Consequences

•‘Taking’ of bribe by a Imprisonment of not less than 6 months and which may public servant extend to 5 years, along with fine •‘Taking’ of bribe by a middleman •‘Giving’ of bribe (abetment) Habitual commission of Imprisonment of not less than 2 years and may extend to ‘offence by a middleman’ or 7 years, along with a fine offence of ‘abetment’

3.

Indian Penal Code, Criminal breach of trust 1860

By a public servant: Imprisonment for life or that extending to 10 years By any other person: Imprisonment extending to 3 years

Criminal conspiracy: two or more persons conspire to commit an illegal act or an act by illegal means

© 2011 Luthra & Luthra Law Offices

Punishable as abetment: In case of conspiracy to commit offence under POCA, punishable with imprisonment of not less than 6 months and which may extend to 5 years, along with fine

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CONSEQUENCES OF NON-COMPLIANCE (Cont’d) No.

Name of Statute/ Rules

Offence

Consequences

4.

Prevention of Money Laundering Act, 2002

Indulging, assisting or being a party in any activity connected with ‘proceeds of crime’ and projecting it as untainted property

Imprisonment of not less than 3 years and may extend to 7 years and is also liable to fine extending up to 5 lakh rupees

5.

Foreign Contribution Regulation Act, 2010

Accepting of gifts beyond a threshold to be specified and of “foreign hospitality”

Imprisonment for a period of 5 years or fine. If the currency/ article is confiscated it shall be disposed off, if it is not been able to be confiscated, a fine of value equal to 5 times would be imposed Non-compliance with hospitality provision would be punishable with imprisonment for a term extending to one year Person in-charge of the business shall also be guilty – No liability, if the act committed without knowledge and if had exercised due diligence.

6.

Official Secrets Act, 1923

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Punishes offence of wrongful communication of information with regard to official secrets

Imprisonment for a maximum period of 3 years or fine or both Also punishes responsible persons in case of offence by company

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MINIMIZING RISKS THROUGH ADEQUATE PROCEDURES Use of Agents and other Third Parties  Ambiguity surrounding use of agents  2001 Notification issued by MoD provides for regulation of defence agents  No known instance of registration of agent pursuant to the 2001 Notification  Language of agency clause in DPP/DPM does not permit the use of agents  Declaration required from the seller that it has not engaged any individual or firm, whether Indian or foreign, to intercede, facilitate or in any way recommend to the Government in relation to the award of the contract to the seller

 Ambiguity in phrase ‘intercede, facilitate or in any way recommend’  Potential of covering all third party assistance  Test is one of fact (rather than of form or content)  Scope of this phrase is yet to be clarified by MoD or by courts in India

© 2011 Luthra & Luthra Law Offices

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MINIMIZING RISKS THROUGH ADEQUATE PROCEDURES Use of Agents and other Third Parties (Cont’d) 

Suggested guidance for appointment of consultants 

To be engaged for business opportunities in India in general (not for any particular procurement program)



Cognizance to be taken of the ‘Agency Restrictions’



Appropriate due diligence to be undertaken and updated



Relationships to be documented , including terms on bribery prevention



Compensation to be appropriate and justifiable remuneration for legitimate services rendered



Payments to be made in compliance with applicable laws



Conduct to be monitored coupled with right of termination



Setting up liaison or representative office and hiring people as employees



Partnering with Indian companies

© 2011 Luthra & Luthra Law Offices

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MINIMIZING RISKS THROUGH ADEQUATE PROCEDURES Gifts & Hospitality No. 1.

2.

Name of Statute/ Applicability Rules Prevention of All public servants Corruption Act, 1988 Foreign Contribution Regulation Act, 2010

Prohibitions/Restrictions Imposed 

Taking ‘gratification’ other than legal remuneration



Accepting ‘valuable things’

Applicable to, inter alia, member of  legislature, office bearer of a political party, judge, government servant, employee of any government corporation or other body 

Accepting ‘foreign contribution’ which includes an article as a gift for personal use if the market value exceeds a specified sum (until notified may be deemed as INR 1000) Accepting ‘foreign hospitality’ (not being purely casual), while travelling outside India, without prior permission of the Central Government

3.

Central Civil Service (Conduct) Rules, 1964

Any person appointed by the  Accepting gifts from foreign firms Central Government (including a civilian in a Defence Service), save  Accepting ‘gifts’ from other persons beyond a value of for a few exceptions, such as the INR 1000 without prior permission members of the All India Services  ‘Gifts’ does not include any casual meal, lift or social hospitality

4.

All Service (Conduct) Rules, 1968

Members of the All India Services  Accepting gifts from any person beyond a value of INR (IAS, IPS, and others) 1000 without prior permission  ‘Gifts’ does not include any casual meal, lift or social hospitality

© 2011 Luthra & Luthra Law Offices

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MINIMIZING RISKS THROUGH ADEQUATE PROCEDURES Gifts & Hospitality (Cont’d)

 Suggested guidance for gifts and hospitality  Publication of an external policy statement committing it to transparent, proportionate, reasonable and bona fide hospitality and promotional expenditure  Issue of internal guidance on procedures that apply to provision of hospitality/ promotional expenditure taking into account:  conformity with applicable laws (in India and elsewhere)  no obligation on recipient to confer any business advantage  clearing of provision of hospitality/ gifts for public officials with the relevant public body  approval by a person in the senior management for expenditure over certain limits  formulation of criteria for deciding appropriate level of hospitality © 2011 Luthra & Luthra Law Offices

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MINIMIZING RISKS THROUGH ADEQUATE PROCEDURES General Principles

 Formulation of a comprehensive compliance policy based on risk assessment  Assignment of one or more senior officials for oversight of compliance  Internal and external communication of policy and regular training  Conduct of due diligence on prospective business partners

 Establishment of a ‘whistle blower’ policy to encourage reporting of suspected non-compliance  Prompt investigation and enforcement of appropriate disciplinary actions  Effective monitoring and review mechanism © 2011 Luthra & Luthra Law Offices

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Thank You Dr. Shweta Hingorani Partner

Email: [email protected]

NEW DELHI 07/12/2011 © 2011 Luthra & Luthra Law Offices

MUMBAI

BANGALORE

This does not constitute legal advice www.luthra.com

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