Doing Business In India: Anti-Corruption Best Practices Momentum Webinar May 29, 2014

2 Agenda Introduction Overview of FCPA Corruption Challenges / Enforcement in India Compliance Best Practices Questions

33 India’s Business Potential … Growing economy Barriers to entry eroding Cost-competitiveness Talent pool Emerging middle class Outpacing China in Foreign Direct Investment

… and Business Challenges Corruption cited as second most problematic factor by World Economic Forum Lack of infrastructure is ranked first Others: bureaucracy tax regulations restrictive labor regulations administrative delays 4

Overview of the FCPA

66 Foreign Corrupt Practices Act (FCPA) Prohibits bribery of non-U.S. government officials Requires companies to maintain accurate records and robust internal controls Regulators –Department of Justice (DOJ) –Securities and Exchange Commission (SEC)

77 Anti-Bribery Provisions No covered person may make, offer, promise, or authorize, A payment or anything of value, With corrupt intent, To a government official, businessunfair advantageTo obtain or retain business or an unfair advantage.

88 Payment Can be an actual payment or gift Can also be an offer or promise to pay May be in response to request from official It is enough to authorize a payment ** Includes direct and indirect payments**

99 Thing of Value Anything of value to the recipient –Money –Gift –Hospitality –Loan/favorable financing –Discounted/free maintenance –Donation –A job for official’s son / daughter

10 Foreign Official An officer, employee, or agent of any –Indian government, whether national, state, local, etc. –Department or agency of the Indian government –Company, entity, or other instrumentality owned/controlled by the Indian government –Public international organization (e.g., the UN, the WTO) –Indian political party

11 Foreign Official (cont.) Candidate for Indian political office Anyone acting on behalf of a Foreign Official Person holding ceremonial title (e.g., royal family member with no government position) Rank or title is irrelevant

12 Obtain Business / Advantage Obtain contract from government agency Achieve regulatory change that benefits business Direct award of business opportunity to family member Receive favorable ruling on applicable customs duties

13 Permissible Payments When permitted under written laws of country Mere custom is not adequate OR Reasonable and bona fide expense directly related to: Execution or performance of a contract with government party, or Demonstration, promotion, or explanation of a product or service

14 Facilitating Payments Payments to expedite non-discretionary “routine governmental actions” such as: Loading / unloading cargo Award of a visa Many companies prohibit facilitation payments entirely

15 Third Party Risks Any party acting on your behalf, e.g., a Subsidiary or other affiliate Agent, sponsor, representative, distributor, consultant Joint venture party Examples: Your Customs broker in Mumbai The lobbying firm you engage in Delhi A marketing agent in Hyderabad

16 Recordkeeping and Internal Controls Keep detailed and accurate transactional records Maintain system of internal controls to ensure management has oversight over and control of transactions −Obtain authorizations prior to transactions −Collect necessary approvals before reimbursement −Record transactions fully and accurately −Take steps so partners do the same

Enforcement Related to India Oracle (2012): Indian subsidiary involved in alleged bribery; $2 million fine to SEC Diageo (2011): Subsidiaries in India (and elsewhere) alleged to have paid $2.7 million in bribes for sales and tax benefits; $16.4 million in penalties to SEC Pride International (2010): Company apparently made $500,000 in improper payments to judges on India’s Customs, Excise, and Gold Appellate Tribunal; $32.6 million to DOJ and $19.3 million to SEC 17

Enforcement (cont.) Control Components Inc. (CCI) (2009): Allegedly made $4.9 million in illicit payments to officials in various countries, including Maharashtra State Electricity Board in India; $18.2 million in fines Wabtec (2008): Subsidiary said to have made over $170,000 in payments to Indian Railway Board employees, inspectors, and customs personnel to obtain railway contracts; $300,000 to DOJ and $87,000 to SEC Electronic Data Systems (EDS) and Srinivasan (2007): Former president of AT Kearney India caused ATKI to make over $720,000 in payments to employees of state-owned companies to retain contracts worth $7.5 million; Srinivasan paid $70,000 fine; EDS paid $490,902 in penalties 18

FCPA Enforcement (cont.)  Wal-Mart: Company investigating wide-ranging bribery allegations  Company’s agents in India allegedly procured numerous licenses required for setting up stores  Partnered with Indian company to expand India operations; ended partnership amidst FCPA probe 19

Corruption Challenges / Enforcement in India

Corruption in India Ranked 94 of 177 countries in TI’s 2013 Corruption Perceptions Index Indian economists estimate government officials earn as much as 1.26% of GDP through corruption Evidence of some companies halting business in India because of corruption 21

Factors Contributing to Corruption Government officials are poorly paid General attitude toward bribery more relaxed Bribery viewed as an accepted part of doing business Cumbersome procedures/red tape Officials have substantial discretion 22

Highest Corruption Risks Sales to government customers Obtaining licenses, permits, and registrations Clearing customs – paying duties and taxes; logistics (using freight-forwarders) Navigating bureaucracy / complex laws 23

Where Corruption is Pervasive Vulnerable sectors –metals & mining $194 billion lost in government sale of coalfields to companies without competitive bidding –aviation Air India reportedly losing millions due to corruption and mismanagement of aircraft repairs –power & utilities –aerospace & defense –infrastructure & construction –telecoms 24

Common Schemes and Themes Small sums Services already due: customs clearance, taxation, water and land records issuance Use of agents and/or consultants Slush funds or petty cash funds Fictitious invoices Indirect benefits – hiring third parties at official suggestion Lavish gifts and entertainment Donations to organizations owned/recommended by officials 25

Potential Compliance Gaps  Improper gift-giving (cash, computers, large dollar travel) “Check the box due” diligence – consider specific local factors to take risk-based approach  Improper use/oversight of third parties  Customer relationships built on trust – resistance to memorializing business agreements in formal contracts 26

Indian Anti-Corruption Law Limited in scope and enforcement Prevention of Corruption Act (PCA) 1988 India ratified United Nations Convention Against Corruption (UNCAC) in 2011 Lokpal Bill passed in December 2013; new agency established to investigate and prosecute 27

Recent Events In recent years, public has taken to streets to voice outrage after corruption scandals January $670 million helicopter deal with British- Italian company terminated due to corruption allegations April 2014 – DOJ asked India to arrest member of Indian parliament who granted mining rights for $18 million in bribes Modi’s election and pro-business platform 28

Indian Government Investigations 2010: Investigation of Commonwealth games in New Delhi 2011: CBI arrested Chief and aides of organizing committee for awarding illegal contracts to Swiss manufacturer Officials being tried for illegalities in issuing 2G telecom licenses – revenue losses reportedly $40 billion 29

Compliance Best Practices

Establish transparent tone at top Prioritize / address risks Tailor policies and procedures to risks Keep good records 31

Tone at the Top Establish top-down culture of compliance –Regularly assert importance of compliance compliance infrastructure –Commit resources to compliance infrastructure Dedicated compliance personnel Regular training Helpline / reporting mechanism 32

Prioritize Risk Expressly contemplated by DOJ and SEC Guidelines Focus compliance resources on most significant risk areas such as: Industry Use / non-use of agents Amount of interaction with government Past compliance issues Importance of cash to operation Other factors 33

Policies and Procedures Establish processes for: Vetting business partners Providing hospitality and gifts Monitoring and auditing compliance Internal reporting mechanisms Opportunity for anonymous reporting Prompt review and investigation as needed Protect personnel from retaliation when report is in good faith 34

Questions? 35

THANK YOU! Jennifer Gorman AECOM Thad McBride Sheppard Mullin Fatema Merchant Sheppard Mullin