Managing FCPA Compliance When Dealing With Subcontractors In India
India is one of the biggest countries for finding outsourced talent, due to its high population and the educational background of many of the individuals seeking work there. It can be a good place to create a corporate office due to low property costs and the ability to hire quickly. However, there are a few pitfalls to working in India, and those pitfalls are generally centered around FCPA compliance.
If you choose to have offices in India, you’re going to have to put a lot of faith in your workers there. That can be a challenge when dealing with compliance issues, as many of those workers won’t be familiar with US-based laws. However, when your workers there run afoul of those laws, it’s your company that’s going to pay. That’s something we saw with the recent case of CDM Smith, a company that managed to mitigate the risk of FCPA compliance violations by being proactive.
What We Can Learn About Managing FCPA Compliance From CDM Smith
CDM Smith is a large construction and engineering company with contracts all over the world. One place they were very interested in getting involved was India. The country’s National Highway Authority was seeking the help of contractors to expand the country’s infrastructure. Eventually, CDM received the contracts, but that’s when it noticed a problem.
The company later disclosed that employees in India had used third party subcontractors to pay about $1.8 million in bribes. While that sounds like a lot, these amounts were only around 2-4% of the contract’s value. Eventually, CDM decided to disclose the issue under the voluntary program while disgorging $4 million in profits. The investigation was closed and the billion-dollar company was able to avoid major repercussions. CDM Smith was not pursued by the DOJ on any additional charges for several reasons:
- They quickly disclosed the issue as soon as it was discovered
- They investigated the suspicious activity as soon as it became a concern, keeping it from growing
- They disclosed all the information they had and thoroughly cooperated in the investigation
- They voluntarily relinquished profits made from the violation and terminated all employees directly involved
- They had proactive processes in place for both accounting and reporting practices that show they take these issues very seriously.
By using the voluntary disclosure program, the company significantly mitigated its exposure to fines and penalties. They paid out about $4 million, which, to a billion-dollar company, is not unrecoverable. They also didn’t suffer any stock drops or reputation damage. This was all because of their proactive attempts to control these issues in India. Had they not had the controls they did in place, it’s likely the issue would have been much bigger. Companies that do business in India can learn a lot from what CDM did to manage their own exposure in the region.
Applying CDM’s Lessons To Your Organization
While the specifics of the incident were not given, there’s room to give CDM the benefit of the doubt in that the individuals involved may not have known they were doing something wrong. After all, facilitation payments are not entirely unusual, especially when they represent a nominal amount when compared to the value of the overall contract. The executives in the India office were all on board with the payments and approved them. This could have been an issue with culture rather than one of intentional non-compliance, in that those executives believed it was perfectly reasonable to make these payments. It’s entirely likely that, being in India, they were unaware of the FCPA issue. After all, the FCPA can be difficult for even those inside the US to understand, so those outside may have difficulties understanding the facets of the act as well.
CDM responded appropriately and received a very positive result. One of the key points is that they proactively investigated the issue, which made them eligible for the voluntary program. Companies who want to do the same and mitigate their risk in India should:
- Have clear, concise FCPA policies specific to the market – India has an extremely large government and officials in that government tend to be underpaid. In addition, the country’s process for licenses and permits can be lengthy and cumbersome. The hiring of third party contractors to pay bribes to these officials to award contracts or speed up processes is not unheard of. Policies relating to the FCPA in India must address these issues by making it clear which fees are proper (such as facilitation payments) and which are not, as well as who is responsible for the oversight of any in-country third party contractors.
- Build a strong internal auditing program – CDM caught their issues by carefully watching for the signs through proactive auditing. When they saw suspicious transactions, they immediately moved to investigate these payments.
- Proactively investigate concerns – When their audits showed issues within India’s division, CDM quickly moved to investigate. They interviewed the employees involved and took corrective measures. It was then they moved to voluntarily disclose the problem.
The case of CDM Smith was considered a great endorsement of how the voluntary disclosure program can help companies manage issues with FCPA compliance in markets where it can be a challenge. A big part of this program is that it encourages companies to manage their own investigations.
Clearspeed offers Remote Risk Assessment (RRA) as a tool in investigations such as these. Our proprietary technology offers interviewing options which give accurate results based on questions you ask, which can then be used to get to the bottom of FCPA issues in India. For more information on using our technology, contact us.