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Corporate compliance programme to combat the `corruption' risk
April, 19th 2007
A typical compliance programme involves two elements: clear written guidelines that are made available to all personnel operating; and effective training of all personnel, particularly those in sales and accounting. MR DEEPANKAR SANWALKA, EXECUTIVE DIRECTOR, KPMG

Corruption closer home is in a comfort zone, cosily with its perpetrators who span all levels of society. Corruption is the leading type of fraud in India, finds a recent survey by KPMG. Theft of cash has paled to the second place. At 33 per cent, `corruption' is more than three times of what `false financial reporting' scores, and seven times of `embezzlement'. Not surprising, because India is ranked 70th, along with Brazil and China, amongst 163 countries in the Transparency International (TI) Corruption Perception Index 2006, with a score of 3.3 on a scale of 10.

It may be easy to give up saying that any clean-up effort would match with the labour that Hercules was faced with at the Augean stables. Yet, we may draw lessons from the US Foreign Corrupt Practices Act (FCPA), which imposes severe civil and criminal penalties on US companies and individuals who bribe or offer to bribe foreign government officials to obtain business.

"Compliance with the FCPA is challenging in many developing countries It is especially challenging in countries where corruption is widespread and the government continues to own and manage many of the country's largest companies," says Mr Deepankar Sanwalka, Executive Director, KPMG, interacting with Business Line. "Until recently, the US law enforcement authorities gave little attention to FCPA problems, but recent issues reported by US companies have put FCPA compliance in the spotlight for the first time. FCPA issues may also no longer be confined to companies and individuals conventionally thought of as `American.'"

A chartered accountant and Certified Fraud Examiner, Mr Deepankar Sanwalka heads the forensic practice for KPMG in India . He has over 17 years of forensic and audit/accounting experience. He has appeared as an expert witness in international arbitrations, and has also assisted the regulators and government investigating agencies from time to time.

The legislation, which dates back to 1977, is now very much in the news. For instance, a March 27-dated press release of the US Department of State on says that in the last six months the Department of Justice has brought several new cases under the FCPA. "The department levied substantial fines against a US company for bribing South Korean and Chinese officials, a Norwegian company for bribing Iranian officials and a British company for paying off Nigerian officials."

During April 2004 to May 2005, more than 53 contracts worth around $15 billion available for competitive bidding by foreign companies may have been affected by bribery, says the communiqu. "Companies from emerging markets such as India, China and Russia ranked among the worst in the TI 2006 Bribe Payers Index." Among other FCPA news finds is one on, dated April 15, about how the `Sahara' movie accounts reveal line items such as `Courtesy payments,' `gratuities' and `local bribes' within the Kingdom of Morocco!

The FCPA allows the government to prosecute foreign companies that issue stock on US capital markets. The department announced the first case against a foreign firm whose stock is traded on US exchanges in October 2006.

"In recent years, a dozen companies from India have brought themselves within the ambit of the FCPA by listing on the US stock exchanges. Thousands of smaller businesses engaged in trade may also qualify as "US persons" under the statute some perhaps unknowingly," cautions Mr Sanwalka.

Excerpts from the interview:

On the applicability of the FCPA.

The FCPA has anti-bribery and accounting control provisions. The anti-bribery provisions apply to `US persons,' a term that is defined in the statute to include: all business entities organised in the US; all individual US citizens and residents; all companies listed on the US stock exchanges, including foreign issuers; and foreign persons acting within the US.

The accounting control provisions apply only to publicly listed companies, which also include foreign issuers. The US Department of Justice (DOJ) administers the anti-bribery provisions of the FCPA.

On key definitions.

The anti-bribery provisions of the FCPA prohibit "US persons" from paying or offering to pay "anything of value" to any "foreign official" with the "corrupt purpose" of obtaining business with any person.

There are several important terms here, each of which is open to interpretation like: What "US persons" are covered? What is "something of value"? Who is a "foreign official"? When is a purpose "corrupt"?

There are also limited exceptions to the statutory prohibitions permitting, for example, reimbursement for reasonable promotional expenses and "facilitative" or "grease" payments to obtain routine bureaucratic cooperation in matters such as Customs clearances.

But the basic idea is straightforward: US companies, US individuals, and foreign companies listed on the US stock exchanges cannot bribe foreign government officials to obtain business or preferential government treatment that assists in obtaining business.

On the administration of FCPA.

The US Securities & Exchange Commission (SEC) administers the FCPA's accounting control provisions. These statutory provisions and implementing SEC regulations also raise many technical questions of interpretation.

But, again, the basic idea is straightforward: the US public companies, including foreign issuers, must accurately report all financial data in their books and records, including bribes. They cannot hide bribes in other accounts or disguise them with euphemisms.

On penalties.

The penalties for violating the FCPA's anti-bribery prohibitions are potentially severe. Both companies and individuals are also subject to civil fines.

Other potential sanctions on companies include disqualification from US government contracting and the denial of export licences. The SEC may seek additional civil penalties for violations of the accounting provisions.

On the possible fallout of FCPA action.

The commercial consequences of violating the FCPA can be equally serious. The internal investigations necessary to bring a company back into compliance are costly and time consuming. Public companies will generally need to disclose violations, with attendant damage to reputation and goodwill.

Local businesses in the country where the violations occurred, particularly businesses with government ties, may shun a US company that has publicly admitted to bribery, even if the company has taken appropriate remedial measures in the meantime.

In some cases, there may also be the risk of shareholder lawsuits in the US.

On the `how' of complying with the FCPA.

The best way to deal with the FCPA is to set up a corporate compliance programme that minimises the risk that improper payments will be made in the first place.

Most companies address FCPA issues through general compliance programmes along with the US export control rules, the Sarbanes-Oxley Act and other US statutes with extraterritorial effect.

On compliance programme.

A typical compliance programme involves two elements: clear written guidelines that are made available to all personnel operating; and effective training of all personnel, particularly those in sales and accounting.

A well-designed compliance programme can minimise the potential for FCPA violations to occur in the first place.

Equally important, if violations do occur, having an effective compliance programme in place will minimise the risk to the company. US law enforcement authorities recognise that problems sometimes arise even in the best companies and are inclined to be less severe with those companies that have attempted to minimise the problems by taking reasonable measures.

On the need for appropriate contracting procedures.

Companies can also protect themselves from FCPA problems by paying attention to FCPA issues in their contracts. This will generally entail, in the first instance, the inclusion of standard representations and warranties in contracts with agents and distributors affirming that the local party understands the FCPA obligations of the US company and confirming that it will not engage in actions that would cause the US company to violate those obligations.

On how companies may deal with questionable payments.

Potential FCPA problems that do arise need to be dealt with on several levels. First, no matter how good the FCPA training and how detailed the internal guidelines, it will not always be clear to employees whether particular activities give rise to a problem or not. Most employees are not lawyers; they are generally sales people or accountants.

A company must, therefore, have a system in place that permits employees to raise potential problems with those who can answer them. In at least some instances, the people involved in the potential transgressions may be the reporting employee's own supervisors or others in a position to engage in retribution. The reporting system must permit access to someone who can ensure that the identity of the reporting person is protected. Some companies give this function to in-house attorneys. Some have "hot line" systems that permit reports or telephone calls (anonymous if necessary), which can initiate an investigation without disclosing the source of the information.

If the company's internal procedures establish that there is a reasonable possibility that a violation has occurred, it will be important for the company to act promptly and thoroughly. US enforcement authorities are less likely to impose severe penalties on companies that can show that they investigated the problems quickly and took remedial action.

On the immediate priorities.

FCPA problems will not go away soon. All US companies must be attentive to these problems in their functioning across the world and should have special emphasis in countries where the risk of corruption and bribery is high or face the risk of incurring severe penalties that may cripple their business.

The US companies can provide themselves with significant protection if they put a comprehensive compliance programme in place beforehand and if they are prepared to act promptly and effectively to remedy any problems that do arise.

D. Murali

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