THIRD PARTY RISKS IN INDIA: WHAT YOU NEED TO KNOW WHEN YOU SELL TO THE INDIAN ARMY

As more multinational companies turn to the growing Indian economy for new market opportunities, India is becoming one of the hot spots for US government enforcement actions under the US Foreign Corrupt Practices Act (FCPA). The FCPA prohibits bribery of foreign government officials and requires companies with securities publicly-traded in the US to maintain accurate books and records and effective internal controls. Over the last few years, overseas corruption has become one of the leading compliance risks for multinational companies with links to the US.

Managing third party intermediaries in developing markets such as India is one of the most difficult compliance challenges. When it comes to third parties, India is a particularly challenging environment for compliance for the following reasons: First, culturally, the use of intermediaries in India for both commercial and private purposes is widely accepted. Second, there is a common belief – partially supported by the enforcement practices of the Indian authorities – that liability for the actions of third parties does not attach to the principal entity as long as there is no direct knowledge of improper conduct. These two factors, combined with a massive government bureaucracy, create a perfect storm for mischief by questionable intermediaries and liability for otherwise responsible companies.

Often in India intermediaries are hired for ‘liaisoning’ with government agencies. Liaisoning is a term widely used in India across a range of contexts necessitating government interaction, including license and permit procurement, tax and customs assessments, and representation in courts and administrative proceedings. The line between legitimate activities and improper actions is often blurred where part of the remuneration paid to an intermediary for liaisoning services is shared with government officials.

Apr-Jun 2013 Issue

Baker & McKenzie LLP