The In-House Lawyer

Tejas Karia and Aradhana Lakhtakia discuss corporate corruption in India, the liability of companies for anti-bribery offences and examine a recent landmark judgment that offers a new perspective of criminal liability.

Just as India is seeking to battle the scourge of corruption in its governance, it is being hit by a spate of large-scale corporate corruption scandals, which have brought into sharp focus the role of India's corporate sector in the problem of corruption in India. In this context, to fix liability for corruption and bribery offences, it becomes relevant to examine criminal liability, not just of individual directors or agents of a corporation, but also of the company itself.

Recently, the Supreme Court of India, through a landmark judgment (Iridium India Telecom Ltd v Motorola Incorporated & ors [2010]), has added a new dimension to the jurisprudence relating to corporate criminal liability in India with respect to offences requiring mens rea or criminal intent, holding that despite being a legal fiction, a company can be said to possess mens rea required to commit a crime.

Development of Jurisprudence relating to Corporate Criminal Liability in India

As a general rule, common law did not impose criminal liability on corporations. This was based on the belief that a corporation lacked moral blameworthiness or the requisite mens rea, which is an essential element of a crime. Further, the thought that was prevalent was that a corporate has 'no soul to damn, and no body to kick'. Exceptions were restricted to holding a company liable to provide compensation to third parties for wrongful acts of its employees, but did not extend to liability for crimes. It was from the early 20th century onwards that courts began to recognise the criminal liability of corporations.

Until recently, courts in India were hesitant to attribute criminal liability to a company for an offence that required a criminal intent. Further, courts were of the opinion that they could not prosecute companies for offences that entailed a mandatory sentence of imprisonment.

The Supreme Court of India, in Standard Chartered Bank & ors v Directorate of Enforcement & ors [2005], decided the question of whether a company or a corporate body could be prosecuted for offences for which the sentence of imprisonment is a mandatory punishment. It had previously been held (by the assistant commissioner in Bangalore & ors v Velliappa Textiles Ltd [2004]) that when the punishment to be imposed under a statute is 'imprisonment and fine', the statute would become unworkable in the case of a juristic, since the court is bound to award a sentence of imprisonment, as well as a fine, and that there is no discretion on the part of the court to impose only a fine. Overruling this view, it was held that as far as a juristic person was concerned, a discretion could be read into the section relating to punishment and a sentence of fine could always be imposed, while the sentence of imprisonment could be ignored as it is impossible to be carried out in respect of a company. The court reasoned that, if the contrary view is accepted, no company or corporate body could be prosecuted for the graver offences, whereas they could be prosecuted for minor offences as the sentence prescribed therein is a custodial sentence or fine. Thus the legal position emerged that there was no immunity to the companies from prosecution merely because the prosecution was in respect of offences for which the punishment prescribed is mandatory imprisonment.

The challenging question of whether a corporation could be attributed with requisite mens rea to prove guilt was decided more recently by the Supreme Court of India in Iridium. In Iridium a company was charged with offences of cheating and criminal conspiracy on the basis of alleged false representations made by the company. Rejecting the argument that a company cannot possess the requisite mens rea to commit a crime, the court held that a corporation is virtually in the same position as any individual and may be convicted of common law, as well as statutory offences, including those requiring mens rea.

The court observed that the criminal intent of the 'alter ego' of the company or corporate body, ie the person or group of people that guide the business of the company, would be imputed to the corporation. Therefore, it is now an established legal position in India that a corporation can be convicted of offences that require possession of a criminal intent, as that company or corporation cannot escape liability for a criminal offence, merely because the punishment prescribed is 'imprisonment and fine'.

Liability of a Company under the Indian Prevention of Corruption Act (POCA) 1988

A company may be held liable for corruption offences in India under POCA 1988, which primarily addresses corruption in the public sector, but also brings within its ambit, private citizens who abet the corrupt actions or omissions of public servants in respect of an official act.

Under POCA 1988, an anti-bribery offence includes the following acts, committed directly or indirectly:

1. an act of a public servant of taking illegal gratification in respect of an official act;
2. an act of any individual taking illegal gratification to influence a public servant in respect of an official act; and
3. an act of abetment of any of the above acts, which may include the act of giving a bribe to a public servant.

The provisions of POCA 1988 apply not only to all citizens living in India, but also to all Indian citizens living outside India.¹ While POCA 1988 does not specifically create a corporate offence relating to bribery, a company being a 'person' could be held liable under the provisions of POCA 1988.² Courts may prosecute a company along with its directors or agents for offering bribe to a public servant under the offence of criminal conspiracy under the Indian Penal Code 1890.³ In respect of these offences, a company would be liable for a fine, the maximum limit for which has not been prescribed.

Serious Fraud Investigation Office (SFIO)

In addition to the machinery existing under POCA 1988, the Indian government has set up the SFIO under the Department of Company Affairs, Ministry of Finance to professionally investigate white-collar crimes.⁴ The SFIO was set up in the backdrop of stock market scams, failure of non-financial banking companies, phenomena of vanishing companies and plantation companies. This organisation takes up investigation of the cases of alleged frauds referred to it by the central government under s235 and s237 of the Companies Act 1956.

The criteria for referring the cases to the SFIO by the central government are:

• complexity and having inter-departmental and multidisciplinary ramifications;
• substantial involvement of public interest to be judged by size, either in terms of monetary misappropriation or in terms of persons affected; and
• the possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures.

On the receipt of a report after the investigation, the government can, in appropriate cases, bring a petition to wind up the company. The government may also bring civil proceedings in the name of the company for recovery of damages against delinquent directors, as well as for recovery of property that has been misapplied or wrongfully retained. Criminal proceedings may be instituted against the officers of the company.

Theoretically, under Indian law a company that is found to have committed offences relating to corruption and bribery could face potentially unlimited fines and may even be wound up in circumstances where the court holds that it is just and equitable to do so.

Liability of an Indian company under foreign anti-corruption laws: UK Bribery Act 2010 and US Foreign Corruption Practices Act 1977

As Indian companies set to expand globally, with increasing cross-border transactions and foreign investments, there is a need for them to be aware of the extraterritorial reach of foreign anti-corruption legislations, and to implement adequate compliance measures. The UK's Bribery Act 2010 (the 2010 Act), which is due to be brought into force this year, is being hailed as one of the 'toughest anti-corruption laws' in the world. In the US the Foreign Corrupt Practices Act (FCPA) 1977 (as amended in 1988) deals with anti-corruption. Both legislations have a broad reach extending to companies and persons outside of the territorial jurisdictions of their respective countries, and have significant implications for Indian companies.

The 2010 Act penalises bribery of private persons, public officials of the UK, as well as of foreign officials. All individuals who are nationals of the UK or are ordinarily resident in UK are liable to be penalised under the 2010 Act for anti-bribery offences. Further, the 2010 Act also applies to organisations that are resident in the UK or conduct some part of their business in UK. This would extend the application of the 2010 Act to any company that has a subsidiary or affiliate in the UK. Therefore, for example, if an agent of an Indian company, with a subsidiary in the UK, engages in bribery in any part of the world, it would render the company liable to prosecution in the UK.

Under the 2010 Act, a new corporate offence is created and strict liability is imposed for failure to prevent bribery by corporate entity. Under this offence companies will be liable if anyone acting under its authority commits an offence of bribery. Such persons can include employees, consultants, agents, subsidiaries and joint venture partners. The only defence available to a company would be that it has put 'adequate procedures' in place to prevent offences of bribery and failure to demonstrate such compliance could expose them to potentially unlimited fines, as well as imprisonment of their directors. Further, a person's acts or omissions done or made outside the UK would form part of such an offence if done or made in the UK and the person has a 'close connection' with the UK (s12 of the 2010 Act).⁵

FCPA 1977 prohibits corrupt payments made to a 'foreign official', a foreign political party or party official, or any candidate for a foreign political office.⁶ The purpose of the bribe should be to influence or induce the official, so as to assist the person in obtaining, retaining business or directing business to any person.

Under FCPA 1977 the following persons or entities can be penalised for an offence of bribery:

1. Issuers: includes US or foreign corporations that have a class of securities registered, or that are required to file reports with the Securities and Exchange Commission.
2. Domestic concerns: includes US citizens, nationals and residents, and companies and organisations managed by US laws or having a place of business in the US.
3. Any natural person carrying out an offence of bribery while in the US.

Therefore, an Indian company that is listed on the New York Stock Exchange could be held liable for violation of FCPA 1977 committed in another country. Further, a foreign company or person is subject to FCPA 1977 if it causes, directly or through agents, an act in furtherance of the corrupt payment to take place within the territory of the US (whether or not they make use of US mail or other means or instrumentalities of interstate commerce).⁷ Even a minor action, such as sending an e-mail to a person in the US, will suffice to bring a person under the ambit of FCPA 1977.

Penalties under the 2010 Act extend to up to ten years' imprisonment and/or fine for individuals and potentially unlimited fines for corporates. Penalties under FCPA 1977 extend up to:

• $2m for firms;
• fines of up to $100,000 and imprisonment of up to five years for officers, directors and stockholders; and
• fines of up to $100,000 for employees and agents.

Conclusion

The concept of a separate legal personality of a corporation was, at one time, exploited by individuals to escape or evade personal liability. By way of timely intervention, courts were able to prevent the use of the corporate shield to perpetrate fraud or escape liability for offences. In more recent times, courts have pierced the corporate veil by attributing individual liability to the persons responsible for wrongful acts of a company, while simultaneously they have developed the law on corporate criminal liability and have thereby retained the legal fiction. This has been important in view of the fact that many times, individual liability is difficult to determine. Prosecution of a few officials may not be an adequate relief in cases of large corporate crimes. It is now well established that a corporation cannot escape liability for offences simply on the basis that they have no body or soul and cannot possess any mental state.

In light of the growing power, economic, social and political, exercised by large companies and corporations in the world today, it has become necessary to regulate the moral behavior of such corporations. As the influence of multinational corporations increases, questions relating to their accountability are also raised more frequently. Law has accordingly been evolved by both judicial interpretation and legislation. The multinational entities are now required to comply with anti-corruption laws of not only their place of registration, but also of the countries they operate in. This is a step forward towards ensuring strong internal control framework to prevent and manage fraudulent activities in business organisations.

(The views expressed are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.)

By Tejas Karia, partner, and Aradhana Lakhtakia, associate, Amarchand & Mangaldas & Suresh A. Shroff & Co.

E-mail: tejas.karia@amarchand.com; aradhana.lakhtakia@amarchand.com.

Bangalore & ors v Velliappa Textiles Ltd [2004] AIR SC 86

Iridium India Telecom Ltd v Motorola Incorporated & ors [2010] 160 Comp Cas 147 (SC)

Standard Chartered Bank & ors v Directorate of Enforcement & ors [2005] AIR SC 2622

1. Section 1(2), Prevention of Corruption Act (POCA) 1988.
2. Section 11 of the Indian Penal Code defines 'person' to include any company of association of body of persons, whether incorporated or not.
3. Under s120A of the Indian Penal Code, when two or more person agree to do, or cause to be done:
   • an illegal act; or
   • an act which is not illegal by illegal means, such an agreement is designated a criminal conspiracy, provided that no agreement except an agreement to commit an offence shall amount to a criminal conspiracy, unless some act besides the agreement is done by one or more parties to such agreement in pursuance thereof.
4. Vide Resolution No 45011/16/2003 - Admn I dated 2 July 2003.
5. The UK's Bribery Act 2010 defines 'close connection' to mean a British citizen, a British overseas territories citizen, a British national (overseas), a British overseas citizen, a person who under the British Nationality Act 1981 (the 1981 Act) was a British subject, a British protected person within the meaning of the 1981 Act, an individual ordinarily resident in the UK, a body incorporated under the law of any part of the UK or a Scottish firm.
6. The Foreign Corruption Practices Act (FCPA) 1977 defines a 'foreign official' to mean any officer or employee of a foreign government, a public international organisation, or any department or agency thereof, or any person acting in an official capacity.
7. Prior to 1998, foreign companies, with the exception of those who qualified as 'issuers', and most foreign nationals, were not covered by FCPA 1977. The 1998 amendments expanded FCPA 1977 to assert territorial jurisdiction over foreign companies and nationals. A foreign company or person is now subject to FCPA 1977 if it takes any act in furtherance of the corrupt payment while within the territory of the US.