The Securities Exchange Commission (SEC) recently announced a $13 million settlement with Mondelez arising out of payments made by its Cadbury operation in India.
For those of you who have heard us speak about bribery risks in India, the fact pattern will come as no surprise. Before its acquisition by Mondelez, Cadbury was in the process of expanding its manufacturing facility in Baddi, Himachal Pradesh, India. The SEC alleged that Cadbury determined that the expansion would require more than 30 different licenses and approvals from various government agencies in India. As many non-Indian companies do, Cadbury hired an agent (helpfully identified by the SEC as “Agent No. 1”), according to the SEC, without conducting any due diligence on the company or its principals and without entering into a written contract, to assist in obtaining the required regulatory approvals. The SEC claimed that it paid the agent something in the range of USD 100,000 for the work.
According to the SEC, the agent withdrew (in cash) most or all of the funds paid in by Cadbury. According to Indian press reports, the payments made by Cadbury appeared to correspond in time with the dates crucial approvals came through. And, says the SEC, the agent did not even prepare the approval applications — Cadbury employees did that work. Moreover, the agent did not provide documentary support for the services it was paid to provide, other than invoices listing the licenses and approvals obtained.
The SEC concluded there was an FCPA books and records and internal controls violation — having “created the risk that funds paid to Agent No. 1 could be used for improper or unauthorized purposes.” How the SEC arrived at the $13 million USD penalty amount is not disclosed.
We have tabulated for you some of the points we discussed in our India compliance sessions, along with the best practices to be employed to tackle some of these risks.
Permissions, approvals and licenses create high risks for bribery on account of there being interaction between the company and government authorities.
The bribery risk manifests itself further on account of:
1. Poor knowledge on what permissions, approvals or licences a company must obtain.
2. Not preparing for the bureaucratic hurdles and the time involved in overcoming them.
3. Having someone from the organisation with limited or no experience in this area oversee the process.
Permissions, approvals and licenses can be obtained in India without paying bribes. Do not fall into “bribery panic” on account of the enormity of the task ahead.
1. Don’t panic –Determine the permissions, approvals and licenses that the company needs. If you do not have the capacity to do so in-house, consider engaging legal counsel for this purpose.
The bureaucracy notwithstanding, there is always a stipulated procedure (however difficult to find) and the compliance requirements must be determined in advance. Remember, you can’t be asked for “magical documents”.
2. Plan ahead – Work backwards from the date / event before which the concerned permission, approval or license is due, to prevent a last minute rush that would expose the company to a greater bribery risk.
Factor in a buffer time for contingencies such as organising documents, board resolutions with foreign directors, documents needed to be notarised in the United States for use in India etc. Over and above this, build in time to handle objections/ questions/queries/show causes from the concerned government authority.
In short, don’t cut it too fine.
3. Right person for the right job: Oversight of the permissions, approvals and licenses must rest with a person from the organisation who has the ability and capacity to oversee the process. For example, having the head of human resources overseeing approval of a factory plan isn’t the best idea.
In the event, that the company does not have such a resource, consider legal counsel or qualified project consultants.
4. Get organised: Make your compliance task simpler by listing out:
Engaging agents and consultants involves risk, where such third parties may be trading on connections and relationships and could well be making improper payments (with or without your knowledge), exposing you to serious FCPA risk.
If you do use third-party intermediaries in India to obtain permissions, approvals and licenses, take great care to:
1. Conduct appropriate due diligence to ensure they are qualified, competent, and do not have a reputation for a lack of integrity.
Due diligence in India can be complex and needs careful review. To learn more, you might reference our prior blog post on this issue: click here.
2. Enter into a written agreement that specifically identifies the work to be performed and the compensation to be provided and includes appropriate anti-bribery language.
Additionally, consider entering into a business partner integrity pledge which is a document in the form of an affidavit by the third party specifying his / her adherence to anti-bribery laws.
3. Make sure the compensation is reasonable, customary, and appropriate for the work performed.
4. Insist on complete documentation of the services before you pay invoices — if the agent is standing in line for three hours at a municipal office, the invoice should include that detail.
As a standard practice do not process invoices which include expenses incurred by a third party without adequate supporting documents being presented.
This piece originally appeared on complianceandethics.org and was co-authored by Sherbir Panag, Partner at the Law Offices of Panag & Babu in New Delhi, India.