Anti-Bribery Due Diligence in India and What happened with Walmart

If you have any interest in business news, you probably read about the ongoing hoopla about bribery in India by Bharti-Walmart (link). Well – so far we have not heard of any Indian law enforcement agency or anti-bribery agency investigating Walmart although the allegation in the US is of paying bribe to Indian officials for getting licenses in India. Hence, investigation is going on in the USA. Some people have tried to play down the charges by calling the activity by Walmart “lobbying” – though it should be clear as daylight that lobbying is prohibited neither in USA nor in India – and would not have made the parent company so nervous. In fact, the “consultants” would not have been shunted out if the matter was just of “lobbying” and not corruption.

USA has a stringent anti-bribery law that requires US companies to not engage in bribery anywhere in the world. Hence, although the bribery seem to have taken place in India, it is an offence that can be tried in the USA under US law (it is an offence in India too, but who’s paying attention).

The story in the Economic Times mentions how Walmart hired many “consultants” to get licenses – who have now been suspended. Hiring consultants for getting licenses and clearances is not necessarily illegal or unreasonable. My experience of doing due diligence for several foreign subsidiaries suggests that consultants are often hired to deal with Indian bureaucracy, as the foreigners supervising projects or business on behalf of a foreign company in India are rarely capable of handling the infamous red-tape and government bureaucracy they encounter. Sometimes, retired bureaucrats, labour officers, local politician’s son-in-law etc. start working as consultant for such companies and help them to get the numerous clearances and licenses needed to operate.

However, what usually shocked me are the amounts charged by some of these consultants. Some of the consultants charged in percentages of the entire value of a project – imagine a factory being established, and a consultant is charging a few percent of the project cost as consultancy fee to obtain necessary licenses for the factory. The amounts would often run into unbelievable numbers.

It certainly looked suspicious. In any case, lawyers are not investigators, we record what we see and what is missing while doing due diligence – but we do not make speculations or allegations. If some things raise eye brows, we solicit information. We record the explanation provided to us.
Bribe
Sometimes, lawyers are asked to do anti-bribery due diligence, especially when one of the parties to a deal is a foreign entity, to ensure that anti-bribery laws of the country of origin of the foreign entity are not violated. Here we need to keep in mind that anti- bribery laws in countries like UK or USA are very strictly enforced and prohibit payment of bribes anywhere in the world.

It is very difficult to ascertain whether a bribe was paid while doing due diligence – hence lawyers focus on obtaining a number of representations from the senior management before a deal is closed. In many cases, management may not be aware of whether bribes have been paid at all (or the specific instances of when they had to be paid), as it is left upon the consultants to ‘manage’ such dealings on their own without communicating specific instances with the company, to minimize any evidential trails of bribery.

Sometimes, a target which is being due diligenced will admit to having paid bribes – and then the lawyers on both sides will rack their brains about the legal consequences of the same after the deal – and will usually close it with representations and warranties being obtained from the target’s management.

Corporate bribery is a reality in India, and foreign companies with exceptionally clean track record and image also fall victim to the culture of corruption in India, out of necessity. Payment of a “fee” to “consultants” seems to be the most common channel of financing bribes – as evidenced again in the Walmart case.

Is there a lesson in this for researchers on Corporate Governance and government policy makers? You bet.

[Guest post by Ramanuj Mukherjee - co-founder of iPleaders, started in 2011 with the vision to make law accessible. iPleaders is currently teaching practical aspects of business law to entrepreneurs, managers, working professionals, engineers and innovators. It started an online diploma course in Entrepreneurship Administration and Business Laws in collaboration with NUJS, one of the best law universities in India in July 2011. More details here.]