It is no great secret that facilitation payments, as defined by the U.S. Foreign Corrupt Practices Act (FCPA), are a common fact of life in India, among many other countries. In fact, a quick perusal of the bribe reporting website ipaidabribe.com reveals a plethora of reported bribes, some of which would arguably be classified as facilitation payments — nearly 45,000 reports at the time of publication.
According to the Resource Guide to the U.S. Foreign Corrupt Practices Act published by the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice:
“The FCPA’s bribery prohibition contains a narrow exception for ‘facilitating or expediting payments’ made in furtherance of routine governmental action. The facilitating payments exception applies only when a payment is made to further ‘routine governmental action’ that involves non-discretionary acts. Examples of ‘routine governmental action’ include processing visas, providing police protection or mail service and supplying utilities like phone service, power and water. Routine government action does not include a decision to award new business or to continue business with a particular party.”
Many companies that fall under the jurisdiction of the FCPA have expressly forbidden the use of facilitation payments in their corporate policies for a number of reasons. For example, many multinational companies also have a nexus to the United Kingdom, and their Bribery Act of 2010 does not contain an exception for facilitation payments. In fact, the UK’s Serious Fraud Office declares:
“A facilitation payment is a type of bribe and should be seen as such. A common example is where a government official is given money or goods to perform (or speed up the performance of) an existing duty. Facilitation payments were illegal before the Bribery Act came into force and they are illegal under the Bribery Act, regardless of their size or frequency.”
Thus, companies operating in India face a dilemma – to pay or not to pay?
In practice, companies often use intermediaries – consulting companies, even accounting firms and similar otherwise potentially legitimate agents – to make payments on their behalf. This, however, is still likely considered illegal under U.S. law – the aforementioned FCPA Guide reads, in relevant part:
“The FCPA expressly prohibits corrupt payments made through third parties or intermediaries. Specifically, it covers payments made to ‘any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly,’ to a foreign official.”
An additional consideration about payments through intermediaries is the recent enactment of required corporate social responsibility payments in India. Some have expressed doubts about the enactment. A 2014 article from The Guardian quotes a nongovernmental organization which states (emphasis added):
“The 2 percent ruling could lead to forced philanthropy, ‘tick box’ behavior, tokenism or even corruption, and masking of data to avoid having to comply. Time will show if this legislation will have a real impact on poor people’s lives and prevent actual environmental degradation.”
The final nails in the facilitation payments coffin for most companies that must file reports with the SEC, however, are the Accounting Provisions of the FCPA. Summarized, these provisions (also called the Books & Records and Internal Controls provisions), also as noted in the Guide, require that issuers:
“… make and keep books, records and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issuer’s assets. Second, under the ‘internal controls’ provision, issuers must devise and maintain a system of internal accounting controls sufficient to assure management’s control, authority and responsibility over the firm’s assets.”
This means that, were a company operating in India to make a facilitation payment, it would have to A) record it as such (generally, most companies do not, in our experience, maintain a facilitation payment account) and B) demonstrate that management authorized the payment.
The additional troublesome fact, though, is that most payments that could be considered facilitation payments under U.S. law would be considered illegal under local Indian law, rule or regulation. The relevant Indian law is the Prevention of Corruption Act of 1988, which contains no exception for facilitation payments and which is in the process of being strengthened further by, among other things, upgrading bribery to the status of a “heinous crime.”
India’s civil service rules, however, have recently (in mid-April 2015) been modified to allow for slightly larger “gifts” to government officials than previously allowed. Prior to the amendment, the All India Service (Conduct) Rules of 1968 stated:
“11(2) Save as otherwise provided in sub-rule (1), no member of the service shall accept any gift without the sanction of the Government if the value of gift exceeds [1,000 rupees.]
11(3) Member of the Service shall avoid accepting lavish hospitality or frequent hospitality from persons having official dealings with them or from industrial or commercial firms or other organizations…”
The recent revision allows for 5,000 rupees (approximately $80) to be given as a gift under this sub-rule. And while it is questionable whether a government official, much less a company operating in India, could or would be prosecuted for an unreported “gift” exceeding this limit, it is nonetheless possible that accurate recordation, compliant with U.S. law, could potentially open the door for problems from a local tax perspective.
Thus, it is important for companies under FCPA jurisdiction operating in India to:
- Be aware of these rules and their recent changes.
- Ensure that company policies, procedures and practices are consistent with those rules and clearly articulate the company’s stance on facilitation payments.
- Understand what interactions company personnel and business partners have with government officials.
- Appropriately train local finance personnel on how to accurately record gifting and other transactions in their accounting books and records.
- Train sales, marketing, tax and other personnel who interact with government officials about how to do so appropriately.