Are IT companies disbarred from the risks arising from bribery and corruption?
In the recent past, the Government of India has put in serious efforts towards reforming the business environment and improving the ease of doing business in India. The country has climbed 16 places to the 39th place on the World Economic Forum’s Global Competitive Index and 4 places to 130th on the Ease of Doing Business ranking by the World Bank. This, combined with an increasingly heated battle against black money, and various other economic and governance reforms are slowly moving India up these rankings. However, the on-ground situation still remains a challenging environment for foreign businesses looking to set up or expand in India.
One of the biggest deterrents to India’s ascent up the rankings is the complex regulatory environment faced by companies looking to acquire land or commercial space in India. While it appears the government is working on several land reform initiatives to make it easier for multinational companies to acquire land, it is not uncommon for even multi-billion projects to come to a standstill due to red-tape and what may be the remnants of the ‘Licence Raj’; i.e. often faced with demands of ‘gifts’ or illicit payments for the simplest of matters, while dealing with the lower rungs of the government. This, combined with pressures on the companies to avoid delays to their projects can give rise to bribery and corruption risks.
Growing competition from countries such as the Philippines is perhaps also fuelling the issue. Companies in India may feel that the speed in setting up a facility would give them a leg up, and therefore may feel the need to make certain payments to speed up the process.
An example of this was reported recently when a large ITeS company disclosed to the Securities and Exchange Commission (SEC) that it was conducting an internal investigation into whether certain payments relating to its facilities in India were made improperly and violated the US Foreign Corrupt Practices Act (FCPA).
This appears to be the first such case involving a large IT company’s operations in India. This serves to highlight the risk faced by companies operating in – at least in theory - relatively low risk sectors like the IT industry. Traditionally, it has been perceived that IT companies in India are less prone to corruption risks due to reduced levels of regulation in the industry compared to sectors such as perhaps manufacturing and retail. However, India is one of the largest providers of IT services in the world and several multinational IT companies maintain a huge workforce in India with operations across several cities. This sometimes requires that companies invest in their own office space or R&D facilities, rather than leasing commercial space.
Most companies in India appoint agents or agencies to handle their real estate matters to navigate the complex regulations and political factors that can affect such transactions in India. Such agents are believed to be often well-connected and well-versed with the sector and can significantly expedite transactions. However, such agents also often make illicit payments to public officials to facilitate building permits, approvals, registration, and other matters related to the acquisition. These costs are often passed on to their clients in the form of ‘consultancy fees’ or similar heads to disguise them. While this seems like an effective solution, this does not absolve companies of liability under anti-corruption laws. Illicit payments made by agents or third parties on behalf of the company are comparable to direct payments and will be meted with the similar enforcement under the FCPA. A company cannot use lack of knowledge of an agent’s activities as a defence against prosecution under the FCPA.
There are several things that a company may do to mitigate the risks. These could include setting up robust policies and procedures, including conducting diligence on consultants and third parties used in the value chain. However, it is important to recognize that the eased regulatory environment is a signal of the political will to support this industry. There is a broad ranging support, including from industry bodies as well. Furthermore, the clout – in terms of sheer size - that many of the companies in the ITeS segment enjoy is peerless. The question one needs to ask, therefore, is “do I really need to pay a bribe?”
With several Indian-based IT companies being listed on American stock exchanges, a renewed focus on mitigating such corruption risks is of paramount importance. In the past, we have seen a spate of investigations by American regulators often following one investigation into a company in the segment. We need to ask whether the recent disclosure (in the example highlighted above) is an isolated case or not.
Authored by: Rohit Mahajan, Partner, Deloitte India