In 2005, Cadbury India established a production plant in Baddi, Himachal Pradesh, with the aim of expanding its production capacity. In 2009, the company decided to add another floor to the existing plant to take advantage of the Indian government's ten-year excise duty holiday scheme for new manufacturing plants. However, to qualify for this benefit, Cadbury India was required to declare the new floor as a separate manufacturing plant and make it operational by March 31, 2010. Consequently, it enlisted a third-party agent in January 2010 to help obtain the necessary government approvals and licenses.
In February 2010, Cadbury India's parent company, the UK-based Cadbury Limited, was acquired by the US-based Kraft Foods, Inc. which later changed its name to Mondelez International, Inc.
Following the acquisition, Mondelez International conducted a thorough due diligence review of Cadbury's policies and practices to ensure compliance with US and international standards. During the investigation, irregularities were identified in Cadbury India's dealings with the aforementioned third-party agent, including potential bribes paid to government officials.
Although the investigation report was meant to be a confidential internal document, a whistleblower provided it to both the SEC and the Wall Street Journal. As a result, the SEC launched an investigation under the Foreign Corrupt Practices Act (FCPA). To mitigate potential losses and penalties, Mondelez International decided to settle the matter by paying a fine of $13 million. The FCPA, a law that has been in effect for over four decades, has already resulted in over a dozen penalties in India. If you are not familiar with the FCPA or its potential implications, please read on to learn more about it.
FCPA Simplified
FCPA is a federal law that was enacted in 1977 to prevent companies from engaging in bribery and other unethical business practices. Although it has been in existence for over four decades, its application has gained prominence in recent years. The FCPA prohibits companies from paying, offering, or promising to pay money or anything of value to a foreign official for the purpose of obtaining or retaining business. It applies to all companies and individuals who are engaged in business activities both within the United States and abroad. This includes companies and individuals that are based in the United States, those that are based outside of the country but are conducting business within it, and any company that is listed on a United States stock exchange.
The Burden of Follies
Bribery is often camouflaged as legitimate business expenses, such as consulting fees or commissions. To ensure accountability, regulations demand accurate accounting of all financial transactions, but historically, it has been challenging to enforce. In practice, many businesses have misreported significant bribe payments or intentionally kept inaccurate records of smaller payments made as part of a continued pattern of corruption.
The example of Oracle is illustrative. The corporation paid $22.9 million to the SEC in 2022 to settle charges for violating the FCPA through subsidiaries in Turkey, India, and the United Arab Emirates. The subsidiaries were found to have established slush funds to bribe foreign officials in exchange for business. This was not the first time that Oracle had been penalized for such actions. In August 2012, the company had to pay a $2 million civil penalty to the SEC for violating the FCPA by creating a slush fund in India.
Another example is Alere, a medical manufacturer based in Massachusetts. In 2011, Alere's Indian subsidiary secured a contract to supply malaria testing kits to local government entities for a national disease control program. However, the contract required a commission of 4% to be paid to the contractor, which Alere India agreed to pay to increase their orders from 200,000 to 1,000,000 testing kits. The parent company benefited from the commission, which amounted to about $150,000. The DOJ and SEC caught wind of it and as a result, Alere had to pay more than $13 million to settle charges related to accounting fraud and inappropriate payments to government officials.
A Stitch in Time
Corporations with a global presence are acutely aware of the severe consequences of violating the FCPA. As a result, they often make substantial investments in developing and implementing compliance programs. With enforcement authorities now more focused than ever on investigating and prosecuting corrupt practices, compliance programs must take a prominent position within organizations, or they run the risk of facing severe penalties.
Staying Compliant with FCPA: Best Practices for Indian Corporates
It is imperative for Indian companies, along with their overseas subsidiaries, to be extremely vigilant of their operations and practices from the very beginning. Pharmaceutical companies, in particular, are likely to come under scrutiny as their operations involve frequent interactions with government officials. However, before any violation of the FCPA is detected, it is crucial to establish a robust compliance program. A detailed and comprehensive corporate compliance program not only helps in preventing and identifying potential violations but also serves as a mitigating factor by the DoJ and SEC when determining enforcement actions. An effective compliance program goes beyond mere words and becomes an ingrained culture that guides all corporate actions. The program should also include extensive anti-bribery training and a due diligence system for recruiting consultants, distributors, and vendors.
Offense is The Best Defense
Companies that have violated the FCPA typically engaged in unacceptable business practices that were often known by multiple individuals within the organization, including senior executives. This raises the question of how to counteract such behavior. Drawing on major FCPA settlements from the past, here are some guidelines to consider:
1) Mull over your policies- In each of the cases mentioned, there was a common issue of inadequate and ineffective control over compliance activities by employees, senior managers, and executives. It is widely understood that establishing clear policies and procedures for employees is crucial, and these should be crafted to facilitate the business in achieving its goals in a lawful manner. These policies should outline the responsibilities of staff members, including supervisors, senior managers, directors, board members, and approved individuals, and they should be revised periodically to align with changes in regulations.
2) Educate- Simply drafting policies and procedures without explaining to employees how to use them is insufficient. Regular compliance training is necessary to ensure that employees understand how to comply with policies and procedures. These training sessions can now leverage various formats to make learning more engaging and applicable to employees' specific roles and departments. They can incorporate relevant scenarios and activities into assessments to ensure that the training is relevant and effective.
The FCPA is a powerful tool for combating corruption and promoting fair competition in the global marketplace. However, as we have seen, violations of this law can result in significant consequences for companies. To avoid such risks, it is crucial for corporations to take proactive steps to provide their employees with Anti-Bribery and Anti-Corruption (ABAC) training modules based on the FCPA and the Prevention of Corruption Act (PCA), which can help reduce their exposure.
Rainmaker offers training programs that serve as a panacea for organizations looking to comply with these laws. We ensure that your employees are equipped with the knowledge and skills they need to adhere to FCPA and PCA regulations, helping to protect your company's reputation and ultimately your bottom line.
Author: Sagnik Mukherjee, Legal Associate, Rainmaker Directions and Contributions: Akanksha Arora, AVP-Legal, Rainmaker
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