Perspectives

As you sow, so shall you reap

The significance and importance of adopting timely and appropriate anti-corruption compliance measures has become far more crucial than ever, as is evident from a recent judgement taken by US Regulators. In a case involving a US entity, the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) denied taking any prosecution action against the entity, even though a firm acquired (in a foreign jurisdiction) by it was found to be engaging in practices that violated the Foreign Corrupt Practices Act, 1977 (FCPA).

 

This landmark decision by the SEC and DOJ was taken, apart from others, on one key fundamental premise that the entity in question took all possible proactive anti-corruption compliance measures which an organization could have, to comply with the relevant regulatory requirements as well as to protect the interest of the shareholders. This decision demonstrates how organizations can negate or avoid penalties and liabilities under the FCPA, through taking timely and appropriate measures, viz. due diligence, robust compliance policy and program, voluntary disclosure, remediation and substantial cooperation. The entity in question undertook the following immediate and significant qualitative steps which impressed the DOJ and SEC, and eventually played a crucial role in their final decision:

  • The entity had conducted an advance pre-acquisition FCPA due diligence on the acquired firm.
  • Post-acquisition, the entity had instituted and maintained a robust compliance policy and program.
  • The entity provided anti-corruption training to the employees of the firm.
  • On a whistle-blower complaint received (through the anonymous complaint hotline implemented by them), the entity initiated an internal investigation to substantiate the veracity of allegations. 
  • The entity discovered the corruption schemes on the basis of the internal investigation conducted.
  • Post detection of the corruption schemes, the entity self-reported the violation and remediated the issues by undertaking necessary mitigation measures.

The steps mentioned above are some of the best practices which organizations can learn from and integrate into their compliance initiatives. Learning from the case cited above, taking proactive steps can result in enormous benefits by highlighting issues in advance and creating a robust compliance culture. This can also help, in the long run, towards receiving leniency by regulators in case something does go wrong.

Based on our experience, we have provided a list of some of the key anti-corruption measures below, that can be beneficial to organizations:

 

Anti-corruption measures

Stage/Timing

Objective/Benefits

Pre-acquisition anti-corruption due diligence

Pre investment/ acquisition

  • This step can help evaluate the target’s business/fraud risks and maturity of their compliance structure and policies
  • This can help avoid issues such as successor liabilities and future non-compliance(s)

Roll out/Implement a robust anti-corruption compliance framework at the investee entity (executed as part of the post-acquisition integration)

Post investment/ acquisition

  • Adds both efficiency and credibility to anti-corruption compliance efforts
  • Demonstrates an intent of zero tolerance against corruption
  • Changes the historical mind-set/ culture and deters possible potential wrongdoing
  • Helps create an adequate defence in the event of a potential future violation

Anti-corruption training

Post investment/ acquisition

  • Helps develop/build a culture of anti-corruption compliance across different levels of management
  • Creates awareness of company policies and provides guidance to employees on how to deal with complex and challenging situations

Continuous compliance monitoring

Post investment/ acquisition

  • Helps ensure business operations are compliant with company policies and requisite regulatory requirements
  • Has the potential to proactively identify indicators of potential wrongdoing or non-compliance(s)
  • Helps strengthen the existing anti-corruption program to meet new risks posed by the dynamic business and external environment

Internal investigation of potential non-compliance or wrongdoing

Whistle blower complaint received/ Internal issues highlighted

An internal investigation can help:

  • Identify the nature of the issue, root cause of non-compliance, magnitude of the allegation, people involved and related aspects 
  • Identify and secure the relevant evidence
  • Identify areas of improvements in the existing compliance processes

Self-Reporting

Immediately after identification of any potential non-compliance

  • Helps comply with relevant regulatory requirements
  • Leniency from regulators during prosecution; E.g., under a pilot program run under DOJ, a company that voluntarily and promptly discloses all relevant facts known to it, fully cooperates with the government’s investigation and adopts timely and appropriate remediation steps is eligible to receive up to a 50% reduction off the bottom end of the applicable US Sentencing Guidelines fine range calculation.

Co-operation with enforcement agencies through-out an investigation

At the time of the investigation process

  • Demonstrates an organization’s commitment towards compliance and intolerance against corruption
  • Can result in an early resolution of the investigation in question

Remediation efforts

Post investigation process

  • Helps resolve gaps within the existing processes and strengthen compliance protocols
  • Can help proactively identify instances of future wrongdoing
  • Helps create an adequate defence

Divestment or separation

Post investigation process

  • Demonstrates an intent of zero-tolerance against bribery
  • Potential to avoid future instances

 

Another element to consider in the case mentioned above is the proportionate focus laid on an individual’s accountability by the regulators. The SEC prosecuted the former CEO of the acquired firm for violating anti-bribery books and records and internal accounting controls, charging him with a $46,000 civil monetary penalty[1]. This is an interesting emerging trend that has been observed recently amongst global enforcement actions, which have begun to focus equally on an individual’s accountability as well as on the organization’s liability. This is evident from the fact that the DOJ penalized eight individuals and two organizations last year while the SEC took eight out of ten actions against organizations[2]. Following suit, Indian enforcement agencies have also begun to take similar action by questioning the local arms of certain multi-nationals.

  • Additionally, during prosecution, global regulators are also mindful of certain other elements that can be considered as a valid defence (in case of any potential case of bribery or corruption) by an organization. These elements are:
  • An organization’s effort to proactively identify anti-corruption risks (pre/post acquisition), set up a robust anti-corruption compliance framework, continuous monitoring, self-reporting and remediation efforts.       
  • Whether the issue(s) in question demonstrates a systematic failure on the part of the organization or is an isolated event.
  • Whether the history of the organization reflects misconduct including criminal, civil and regulatory action.

 

The case in question is a great example of enforcement authorities rewarding an organization on the basis of having a strong compliance program, engaging in prompt self-reporting, taking appropriate remediation measures, and extending exemplary co-operation. Organizations particularly interested in foreign acquisitions can learn a great deal from this case and should try and replicate these best compliance practices in order to mitigate any potential business risk and/or potential FCPA liability.

 

We believe, that there is also a wider need for transformation in the mind set of people and businesses on the issue of combating bribery and adhering to compliance. The board of directors/senior management need to prioritize the institution of anti-corruption compliance measures to mitigate any potential compliance risks as well as meet the expectation of the regulators. While organizations may see this as an additional cost (of compliance), these simple initiatives can play an instrumental role towards upholding reputation, ensuring long term survival, and maintaining profitability.

 

 

Authored by: Sumit Makhija (Partner – Forensic) and Rohit Goel (Director – Forensic)

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