Tackling Corporate Frauds with Carrot-over-Stick approach: Envisioning an Indian DPA

[By Anupam Verma & Navtej Vatsa]

The authors are students of National Law University Odisha.

 

Introduction

India has witnessed a significant number of white-collar crimes (bribery, corporate fraud, etc.) in recent decades, because of which, and rightly so, questions have been raised on the competency of the country’s financial and corporate regulators. It is true that regulators should proactively employ all the resources at their disposal to prohibit such crimes, but should it happen, it is equally important for the investigative agencies to effectively and efficiently prosecute an erring organisation and associated individuals.

In India, the investigative agencies, in dealing with white-collar crimes, primarily work on the detection-prosecution mechanism, i.e., upon detection of crimes or frauds, they investigate them and prosecute the offenders in court. In this article, the authors will be vouching for the addition of the United Kingdom (UK) Styled Deferred Prosecution Agreements (hereinafter “DPA”) mechanism to the country’s anti-white collar crime framework, which is based on the ‘carrot’ principle rather than the ‘stick’ one, as is being followed by the Indian agencies currently.

The article will first explain the concept of DPAs and then move forward to have a comparative analysis between the UK’s and the United States’ (US) versions of DPAs in order to find the model framework for India to build upon. This will be followed by case analyses that will prove the supremacy of DPAs and the need for an Indian DPA, respectively. At last, the authors will provide suggestions for formulating a DPA mechanism suited to Indian needs.

What is DPA?

A DPA is a way to settle a case against a corporation accused of fraudulent practices. It lets the authorities frame charges against the erring company while also agreeing not to pursue the charges. In exchange, the company undertakes to comply with specified obligations as laid down in the agreement. The mechanism for DPAs can be traced back to the 60s in the US, where it was used to mitigate minor offences by making the signatory admit his or her guilt and pay fines, and in exchange, no proceedings were instituted against such persons. In the case of Salomon Brothers in the US, this mechanism was extended for the first time in the corporate world. The US and the UK are the two major jurisdictions around the world that actively use this mechanism.

The UK DPA

In the UK, DPAs were introduced for the first time in 2014, under Schedule 17 of the Crime and Courts Act, 2013. The Serious Fraud Office (SFO) and the Crown Prosecution Service (CPS) are the key agencies when it comes to its implementation. A UK DPA is an agreement between a prosecutor and an erring organisation under the oversight of a judge who makes sure that the terms and conditions of the agreement are just, equitable, and reasonable. If the organisation complies with the conditions, the agreement permits a trial to be postponed for a specific amount of time. After the successful conclusion of the agreement, charges are dropped.

Thus, it allows an organisation to fully atone for illegal activity without suffering negative effects like insolvency proceedings, loss of jobs, monetary setbacks to investors, etc. DPAs are applicable to various kinds of corporate offences like bribery, fraud, embezzlement, etc. Furthermore, at least in the UK, it is only applicable to organisations and not individuals. Moreover, not every organisation can come to the authorities and demand a DPA. Only those companies that properly assist and cooperate in investigations will be considered by the authorities for the same.

The US DPA

One of the most prominent distinctions within the regulatory frameworks of the United Kingdom and the United States lies in the fact that, in the latter, even an individual, for example, an erring director or officer, can enter into a DPA. Secondly, the judiciary has a limited role in the determination of the terms of the agreement and usually grants approval to the agreement reached between the authorities and the wrongdoers, be it a company or an individual. This is in contrast to the UK, where judicial sanction is required even for beginning the negotiations and later the court also has full authority to modify it.

Why the UK’s Framework is Best for India

As mentioned above, only organisations are allowed to use the DPA mechanism under the UK’s framework, unlike in the US, where individuals can also enter into a DPA. Furthermore, under the UK’s framework, the judiciary has more power and an active role in formulating and executing the DPA. There is also a growing voice in the US to put DPAs under judicial oversight, which shows the supremacy of judicially induced DPAs.

Considering the factors that (a) allowing an individual to use the DPA mechanism may not resonate well with the Indian public and (b) India’s robust judicial system, it is preferable that the UK’s framework be used as a model on which the Indian DPA should be built.

Effectiveness of the DPAs: The Standard Banks Case

In 2015, The Standard Bank (hereinafter “the bank”) became the first entity to enter into a DPA since the mechanism’s incorporation into the UK’s anti-corruption framework. The bank was alleged to have violated Section 7 of the Bribery Act, 2010, which provides for liability in cases of failure in the prevention of bribery. The bank, as per the terms of the DPA, was mandated to pay a total of US $32.2 million in fines, including US $7 million to the Government of Tanzania. In parallel with paying the fine, the bank also committed to submitting its current anti-bribery and corruption controls, rules, and protocols to an external review. Just after three years, i.e., in 2018, the SFO announced that the bank had successfully complied with and fulfilled all the conditions as laid down in the terms of the DPA, thus marking the successful culmination of UK’s first DPA.

Need for an Indian DPA

In 2017, Rolls Royce PLC entered into a DPA with the SFO owing to charges of corruption, bribery, and accounting fraud and agreed to pay £497.25 million in fines. These charges stem from bribes made by three divisions of the company to intermediaries in seven foreign markets, including India, starting in 1989. These payments were related to the acquisition of lucrative contracts, which collectively generated over £250 million in gross profit for the company.

Similarly, the company also admitted to have violated the Foreign Corrupt Practices Act of the US by paying bribes in six other jurisdictions, including Brazil, before the US court. In pursuance of these admissions, the company also entered into a DPA with the US Department of Justice (DoJ) and signed a Leniency Agreement, a Brazilian version of the DPA, with Brazil’s Ministério Público Federal (MPF). As part of these agreements, the company agreed to pay fines to the DoJ and MPF, resulting in a total payment of approximately £800 million to all three prosecuting bodies.

On the other hand, when one looks at how India has dealt with this particular offence, the chasms in the country’s ‘stick’ approach come to the fore. In 2016, the Central Bureau of Investigation, India’s domestic crime investigating agency, launched a preliminary inquiry against Rolls-Royce PLC in relation to the allegations of bribery to Indian officials by the company. It was not until May 2023, i.e., approximately nine years since the inquiry was first launched, that a First Information Report (FIR) was registered against the company. Therefore, while the company had admitted its wrongdoings before the US, the UK, and Brazil, and these jurisdictions had already levied fines against the same approximately six years ago, India, on the contrary, has only taken the initial step of filing an FIR thus far.

The Way Forward

It is one thing to simply suggest the incorporation of a foreign instrument into the domestic framework and quite another to actually do it. An Indian DPA can be efficiently introduced only after taking ground issues and realities into consideration. The essential requirements for a successful Indian DPA are a national DPA system covering major financial offences, accessible by corporations and not individuals, a greater role for the judiciary, and transparency in the process.

Further, the issue of ‘relapse’ must be given due consideration. The Pfizer saga is a great case study in this regard. In 2002, Pfizer, a US pharmaceutical giant, had to enter into a DPA with US authorities on account of its subsidiaries committing bribery. But, just after two years, the same subsidiary was under investigation, but this time for illegal market activities. This culminated in a second DPA. In 2007, one of Pfizer’s subsidiaries was again under the authority’s radar, this time for the illegal marketing of a growth hormone. Consequently, a DPA, the third of its kind involving Pfizer, was signed. Therefore, the Indian DPA should be equipped with robust oversight mechanisms in order to keep a close eye on erring corporations and prevent such instances.

Conclusion

From the above discussion, it is tangible that India’s ‘stick’ approach has failed to illicit desired outcomes when it comes to bringing erring companies to justice. Therefore, now the time has come to look outward in order to come up with a new and robust mechanism that will effectively and efficiently deal with white collar crimes. For that, a UK-styled DPA mechanism modelled specifically for the Indian jurisdiction is precisely what is needed.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top