The government has taken measures on prevention of formation and return back from foreign shores of black money, like grandfathering double taxation avoidance treaties with Mauritius and Singapore, signing the FATCA with the US and Switzerland, pan requirements for high value purchases (jewellery, cars, houses).
By Mallika Mahajan & Pawan Kumar Sinha
A nation does not have to make a Faustian bargain to get laundered money back to its coffers. Sometimes, to borrow Rumi’s words, what we seek is seeking us. The government has taken measures on prevention of formation and return back from foreign shores of black money, like grandfathering double taxation avoidance treaties with Mauritius and Singapore, signing the FATCA with the US and Switzerland, pan requirements for high value purchases (jewellery, cars, houses). There is investigation of Indians named in Panama Papers and Paradise Papers leaks. These are, at best, inchoate methods. A more granular, relevant and developed dataset exists in this field and it will not be amiss to conflate it in this matter. This is the leniency agreements signed under the Foreign Corrupt Practices Act.
The US passed the FCPA in 1977, criminalising bribery of foreign public officials for the purpose of obtaining or retaining business. Two agencies are responsible for FCPA enforcement: the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The Fraud Section of the Criminal Division of the DOJ is responsible for all criminal prosecutions of foreign bribery under the FCPA, whereas the SEC Enforcement Division is responsible for civil enforcement of the FCPA, for violation of FCPA’s anti-bribery books and records, and internal controls provisions.
At the time of its implementation and much after, FCPA enforcement was not done vigorously. Early in FCPA’s life, the DOJ instructed US attorneys to only pursue bribery investigations with “express approval from Washington” because of the fear that it could potentially offend or embarrass officials in allied countries. Enforcement of the FCPA began gathering momentum from 2002 onwards.
Federal prosecutors have three options when they investigate a corporation for bribery. They can (1) file an indictment and pursue a prosecution, ending in a guilty plea or a trial, (2) decline to prosecute altogether, or (3) negotiate a pre-trial diversion agreement that places the corporation into a probationary period during which it must comply with the agreement or face prosecution. The pre-trial diversion agreements come in two forms: a deferred prosecution agreement (DPA) or a non-prosecution agreement (NPA), together they are called leniency agreements in this article.
These agreements are a dilution of the corporate criminal liability prevalent in the US. Under this, corporations have a vicarious criminal liability, under which the actus reus or the performance of a legally prohibited act and the mens rea or criminal intent of an individual who acts on behalf of the corporation are automatically imputed to the corporation. Thus, if an employee or agent of the corporation commits an offence while acting within the scope of his/her employment, and acting, at least in part, to benefit the corporation, the corporation is criminally liable.
But the Arthur Anderson case necessitated some changes. In 2001, Enron faced criminal prosecutions. Enron’s auditor, Andersen, was convicted on June 15, 2002, by a federal jury for obstructing justice in an official proceeding of the SEC, because it passed instructions to its employees to destroy documents relating to its accounting work for Enron. After its conviction in August 2002, the firm stopped auditing public corporations; by end-2002, Enron, which employed 85,000 people, was left with only 3,000. Eventually, it dissolved.
In January 2003, then Deputy Attorney General Larry D Thompson issued a memo entitled Principles of Federal Prosecution of Business Organizations; it was binding on all DOJ prosecutors. It authorised agreements of NPAs and DPAs in exchange for corporate cooperation. The Principles, now set forth in the US Attorney Manual, explicitly instructed prosecutors to “consider the collateral consequences of a corporate criminal conviction or indictment in determining whether to charge the corporation with a criminal offence and how to resolve corporate criminal cases.” In the FCPA cases, DPAs and NPAs began to be used from 2004 by the DOJ. The SEC began using the agreements from 2010.
In a DPA, the prosecution files a charging document with the court, but requests that the prosecution be ‘deferred’ for the duration of the agreement. DPAs require defendant to admit relevant facts, commit to certain compliance/remediation, and pay a fine. If the defendant complies with the agreement, then the prosecution withdraws the charge. DPAs are subject to judicial review and approval. Unlike a DPA, an NPA does not involve the court. The other conditions remain the same as a DPA.
These leniency agreements enable limited resources to be focused on egregious crimes. NPA/DPA are cost-minimisation devices for corporations as they do not face criminal indictment if they complied with terms of agreement, avoided criminal conviction, associated collateral damages of a long-term fall in share prices, class action law-suits and debarment from government contracting. In case of medical products manufacturers, there was additional threat of excluding them from receiving medicare payments for their products.
The agreements induce self-reporting by corporations that fear adverse publicity, jail terms for senior managers, penalties and sanctions. So, they incentivise huge corporate investment in compliance.
The leniency agreements are given to a corporation when it voluntarily self-discloses misdemeanour, cooperates with the DOJ and SEC in the ensuing investigation, and appropriately remediates the misconduct. Till date, 44% corporations have self-reported their own violations of the FCPA.
Corporations have to act with alacrity and invest millions of dollars in investigation of their corrupting of foreign public officials throughout their global empires. The gold standard is to engage outside counsels, complete the investigation and report the findings in least possible time, to get the benefit of leniency agreements.
India is the fourth-highest location of corrupt payments during 2009-18 under the Act. Although foreign companies that trade on US exchanges must comply with the FCPA, foreign public officials who are recipients of bribes are outside its purview. This appears to be a conscious decision in order to avoid treading upon sovereignty of foreign nations. Other than holding foreign officials who are recipient of bribes to be criminally liable when they use the US financial system to launder their proceeds of corruption, the US has left untouched demand side of foreign corruption. This dataset resultant of sacralised investigations can be useful to tackle corruption and its secretion abroad by a country like India, and can also be used to address systemic reforms to eliminate clogs, which have become festering points of harassment for foreign businesses. This will also help in easing regulatory ecosystem in India, making it more investor friendly.
Mahajan is principal commissioner, Central Board of Indirect Taxes & Customs, India. Sinha is director, International Anti-Corruption Academy, Austria.