India: Arguing For A Settlement Framework For Commercial Organizations Under The Prevention Of Corruption Act

Introduction

Due to the changes proposed to the Prevention of Corruption Act, 1988 ("POCA"), liability of commercial organizations under POCA and vicarious liability of directors and officer-in-charge of commercial organizations has become more serious a concern than ever. Hence, it is imperative to provide a framework for voluntary disclosure of violations by commercial organizations and a settlement framework in line with the international standards in order to ensure that commercial organizations and its officer in charge are not deemed guilty for few bad acts committed by their employees.

Further, the 2015 Amendments moved in Rajya Sabha to the POCA Amendment Bill 2013 ("POCA Amendment Bill") makes an officer-in-charge of the commercial organization vicariously liable if it is proved that the offence was committed with the consent or connivance of such an officer-in-charge. However, directors and Key Managerial Personnel are not out of the woods yet. Under the Prevention of Money Laundering Act, 2002 ("PMLA") offences under POCA are treated as "scheduled offences" and provides for a similar vicarious liability provision as envisaged in the POCA Amendment Bill 2013 in its original form. Hence, in a prosecution under PMLA for violation of POCA against the company, the burden of proof would shift to the top management impleaded therein to demonstrate that they had no knowledge of such practices and hard undertaken all diligence in order to discharge the burden.

On a combined reading of the PMLA and the POCA Amendment Bill, the risk of the board or top management of a large company being held vicariously liable for the acts of a few bad employees in their corporate empire being held liable under a prosecution under PMLA still remains. For instance, X is an employee of ABC Private Limited and X bribes a public official Y to obtain certain approvals and clearances on time. X has not informed any Director of ABC Private Limited nor has X obtained prior consent for his act. Under a prosecution under PMLA post the passing of the POCA Amendment Bill 2013, every Director on the Board of Directors of ABC Private Limited would be held guilty, and the burden on proof will shift on each of these Directors to prove they had no knowledge or had exercised due diligence. The situation could be even worse if for instance, X had the high level clearance of one of the sitting Directors to bribe Y, because of which every other Director will now be faced with the difficult task of discharging their high burden of proof.

Given the above, it is important to provide a framework for voluntary disclosure of violations by commercial organizations and a settlement framework in line with the international standards in order to ensure that commercial organizations and its officer in charge are not deemed guilty for few bad acts committed by their employees.

UK Approach

In the UK, DPAs have been created under Schedule 17 of the Crime and Courts Act 2013 to provide a mode of responding to alleged criminal conduct, the effect of which has resulted in corporate bodies not being subject to a formal prosecution, but rather agree to a course of conduct where any prosecution is deferred for a period of time. At the conclusion of the DPA, if the commercial organization has complied with all the necessary obligations contained within the DPA, the matter is concluded without prosecution.

US Framework

In the US, DPAs are often negotiated by prosecutors with limited (if any) judicial involvement. Prosecutors in the US have been criticized for wielding too much power over companies in the DPA process, with the prosecutor having almost sole responsibility for safeguarding the public interest. The UK has chosen to modify this approach by giving the judiciary much more of a role in the DPA process. However, the flip side of this approach is that companies in the UK will lack the certainty they would have in the US of negotiating a DPA with a prosecutor as they would not be absolutely certain of the fact that on whether all the terms agreed with the prosecutor will be reflected in the terms of DPA.

Way Ahead for India: Carving out a Sui-Generis Model

Like the UK, India should evolve a framework for entering into Deferred Prosecution Agreements with the process monitored by a court of law. DPA should be a discretionary tool which may be created under the POCA and rules thereunder to provide a way of reacting to alleged criminal conduct specifically violation of POCA by a commercial organization. Prior to entering into a DPA, the prosecuting authorities must be clearly satisfied that there is at least a reasonable suspicion based upon some admissible evidence that a commercial organization has committed the offence, and public interest would be properly served by not prosecuting the commercial organization but instead entering into a DPA with the commercial organization.

In order to determine whether public interest would be best served by entering into a DPA, the prosecuting authorities should take into account the following factors:

  1. The commercial organizations' history of similar misconduct including prior anti-corruption, criminal and regulatory actions against it;
  2. Timeliness of the voluntary disclosure;
  3. Nature and effectiveness of the anti-bribery and anti-corruption policy of the commercial organization, if any;
  4. Remedial actions undertaken by the commercial organization including any preventive measures put in place to avoid such an happening in the future;
  5. Code of conduct policy for its employees; and
  6. Nature of the wrong doing to be evaluated based on the advantage intended to be achieved from such a wrongful act.

Further, once the settlement is arrived, it must be clearly agreed that no additional criminal charges shall be filed against the disclosing entity, or any of their direct or indirect affiliates or subsidiaries, relating to any of the conduct described in the settlement agreement, or the criminal information filed pursuant to the settlement agreement, or information disclosed by the disclosing party prior to the date of the settlement agreement if the conditions prescribed under the DPA are complied with by the commercial organization.

Cooperation with an investigation and/or a voluntary self-disclosure must be regarded as a mitigating factor while eventually imposing the fine on the disclosing entity.

The person in charge of commercial organisation and who has been actively involved in making the voluntary disclosure may not be held liable if there was active co-operation and disclosure at an early stage of the investigation process by the person concerned with the investigating authorities.

Specifically, the following criterion as laid down in the Seaboard report1 may be applied to gauge company's cooperation in cases of such voluntary disclosure: a) self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures; b) self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins, and consequences of the misconduct; c) remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, d) appropriately compensating those adversely affected; and e) cooperation with law enforcement authorities.

The DPA model in India must finally provide that an approval of court would be required for DPA to come into effect. The judge will ultimately decide whether the DPA is in the interests of justice and subject it to the standards of judicial scrutiny and review applicable and determine whether the terms of the DPA are fair, reasonable and proportionate.

Footnote

1 See 2001 Report of Securities Exchange Commission pursuant to Section 21 (a) of the Securities and Exchange Board of India and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Seaboard Report).

Originally published on Moneycontrol.com dated 25 May 2017

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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