A landmark judgment issued by the Indian Supreme Court could have the broader effect of significantly expanding the compliance risk that companies face under numerous anti-bribery laws, including the U.S. Foreign Corrupt Practices Act.

In a decision issued Feb. 23, the Indian Supreme Court in the case Central Bureau of Investigation v. Gelli ruled that employees of private banks are “public servants” and, thus, can now be prosecuted for bribery and corruption under the Prevention of Corruption Act (POCA). Up until this ruling, the POCA was used to prosecute government officials who had been engaging in corrupt acts.

“This development introduces a new layer of compliance risk for anyone involved with the private Indian banking sector,” says Anuj Bugga, managing director of global risk and investigations at FTI Consulting.

The ongoing saga leading up to the Supreme Court’s judgment dates back more than a decade, when the Central Bureau of Investigation (CBI), India’s central law enforcement agency for corruption cases, brought charges against two directors of Global Trust Bank, which was a private sector bank up until its merger with the Oriental Bank of Commerce, a public sector bank, in 2004. Following the merger, the Oriental Bank of Commerce in 2005 filed a criminal complaint against Ramesh Gelli, former chairman and managing director of the bank, and former executive director, Sridhar Subasri, after allegations of share price manipulation emerged.

A trial court refused to entertain the case on grounds that Gelli and Subasri were private bank employees, not public officials, and sent the case to be tried by a magistrate for offenses under the Indian Penal Code (IPC). The Bombay High Court upheld the trial court’s order.

The CBI appealed to India’s Supreme Court, which reversed the lower court’s judgment. At the core of their ruling, Justices Ranjan Gogoi and Prafulla Pant, in separate yet concurrent judgments, held that the legislative intent behind enactment of the POCA was “to make the anti-corruption law more effective and widen its coverage.”

“This development introduces a new layer of compliance risk for anyone involved with the private Indian banking sector.”
Anuj Bugga, Managing Director, FTI Consulting

Based on that logic, the justices reasoned that before enactment of the POCA, Section 46A of the Banking Regulation Act broadly defined a public servant as a “chairperson, managing director, director, auditor, manager, or any other employee of a banking company” for purposes of prosecuting corrupt acts under the IPC.

When the IPC was repealed in place of the POCA, however, no corresponding language was inserted in Section 46A with respect to officials of a banking company concerning related offenses under the POCA. This was an “unintended legislative omission, which the court can fill up by a process of interpretation,” Justice Gogoi wrote.

Justice Pant concurred. “For banking business, what cannot be forgotten is Section 46A of Banking Regulation Act,” Pant wrote. Just because the IPC has been repealed by the POCA, “relevance of Section 46A of Banking Regulation Act … is not lost.”

With the Supreme Court’s judgment, the criminal complaints by the CBI against Gelli and Subasri will continue.

Compliance risks

For companies doing business in India’s financial sector, the Supreme Court’s ruling could signal increased compliance risk in at least two respects. First, as a direct implication of the Indian Supreme Court’s ruling, “employees of all banking companies—foreign and domestic—fall within the ambit of public duty and are prevented by the law of the land from abusing their position to indulge in fraudulent or any other activities in breach of the legislation,” says Bugga.

Secondly, the Indian Supreme Court’s ruling may have the dual effect of opening the door to employees in India’s private banking sector being deemed as foreign officials under the U.S. FCPA and U.K. Bribery Act. “It’s a risk that simply can’t be ignored,” says Asheesh Goel, co-chair of the global anti-corruption and international risks practice at law firm Ropes & Gray.

“U.S. companies with largely indigenous staff, with a reporting line to a non-U.S. counsel elsewhere in Asia-Pacific, are prime candidates for problems,” says Russell Stamets, a partner with the Indian firm Tatva Legal and former general counsel of Religare, an India-based financial institution. The home office often has very little idea of what is really happening on the ground, he says.


Below is an excerpt from the Indian Supreme Court's decision in the case Central Bureau of Investigation v. Gelli.
Be it noted that when Prevention of Corruption Act, 1988 came into force, Section 46 of Banking Regulation Act, 1949 was already in place, and since the scope of P.C. Act, 1988 was to widen the definition of “public servant.” As such, merely for the reason that in 1994, while clarifying the word “chairman”, legislature did not substitute words “for the purposes of Prevention of Corruption Act, 1988” for the expression “for the purposes of Chapter IX of the Indian Penal Code (45 of 1860)” in Section 46A of Banking Regulation Act, 1949, it cannot be said, that the legislature had intention to make Section 46A inapplicable for the purposes of P.C. Act, 1988, by which Sections 161 to 165A of [Indian Penal Code] were omitted, and the offenses stood replaced by Sections 7 to 13 of P.C. Act, 1988.
A law which is not shown ultravires must be given proper meaning. Section 46-A of Banking Regulation Act, 1949, cannot be left meaningless and requires harmonious construction. As such in our opinion, the Special Judge (CBI) has erred in not taking cognizance of offense punishable under Section 13(2) read with Section 13(1)(d) of P.C. Act, 1988. However, we may make it clear that in the present case the accused cannot be said to be public servant within the meaning of Section 21IPC, as such offense under Section 409 IPC may not get attracted, we leave it open for the trial court to take cognizance of other offenses punishable under Indian Penal Code, if the same get attracted.
Therefore, having considered the submissions made before us, and after going through the papers on record, and further keeping in mind the Statement of Objects and Reasons of the Bill relating to Prevention of Corruption Act, 1988 read with Section 46A of Banking Regulation Act, 1949, we are of the opinion that the courts below have erred in law in holding that accused Ramesh Gelli and Sridhar Subasri, who were Chairman/Managing Director and Executive Director of GTB respectively, were not public servants for the purposes of Prevention of Corruption Act, 1988. As such, the orders impugned are liable to be set aside. Accordingly, without expressing any opinion on final merits of the cases before the trial courts in Mumbai and Delhi, Criminal Appeal Nos. 1077-1081 of 2013 filed by CBI, are allowed, and Writ Petition (Crl.) No. 167 of 2015 stands dismissed. Source: Indian Supreme Court.
Source: Indian Supreme Court

U.S. prosecutors, who have taken an ever-expanding view of who qualifies as a foreign government official under the FCPA, may use this ruling to bring similar charges against companies and individuals in the United States and abroad for improper dealings with private bank employees operating in India, says Goel. “I don’t see why they would not seek to use this as a hook to expand their jurisdiction under the law,” he says.

If a U.S. company pays a bribe to an employee in India’s private banking sector, for example, “this incident will be deemed an offense under the FCPA as well as the PCA and will be open for prosecution,” says Rohit Mahajan, head of the forensic and financial advisory practice Deloitte India.

Though this ruling doesn’t significantly change existing anti-corruption and bribery policies and framework, “companies need to communicate the new change to drive awareness with respect to the possibility of elevated risks that may arise,” Mahajan says. “They may also need to consider any further training requirements for officers and staff.”

Anti-corruption efforts

The ruling is of even greater significance to multinationals given that corruption in India remains a deep-seated concern. Transparency International’s 2015 Corruption Perceptions Index highlights just how much room for improvement still exists. It ranked India 76 out of the 168 countries it evaluated, giving it a low score of 38 out of 100 on a scale of 0 to 100, indicating high perceived levels of public sector corruption.

Companies may need to revamp their anti-corruption programs for managing corruption risk in India. Multinationals are quite adept at compliance with the FCPA and U.K. Bribery Act, but when operating in India, you have to realize that “your first and foremost obligation is to comply with Indian law,” says Goel.

Compliance officers need to keep in mind that some aspects of local law may deviate from global standards. Thus, one element that should be part of a comprehensive portfolio of anti-corruption measures to navigate associated risks is “alignment between foreign and local management to ensure foreign management has a grip on local culture and understands how business is conducted in the local setting,” says Bugga.

In case compliance officers need yet another reason to keep on top of local law in India, new anti-corruption reform is on the horizon. Last year, the Lok Sabha (India’s Lower House of Parliament) passed the “Prevention of Corruption (Amendment) Bill,” India’s version of the FCPA, which would amend the POCA. The Bill is now pending at the Rajya Sabha (India’s Upper House of Parliament) for enactment.

Under the proposed provisions, in addition to the act of accepting a bribe, the Bill would make it an offense to give a bribe to a public servant. The bill also proposes to ensure speedy conclusion of corruption-related cases by providing that trials be completed within a two-year period. “These reforms could be viewed as part of a bigger move to stymie corruption in India,” says Bugga.

Doing business in India in an ethical manner is possible, says Mahajan. As with doing business anywhere in the world, however, a robust anti-corruption compliance program needs to be in place, including clear policies and procedures, regular training and education on anti-corruption measures, an overall commitment to an ethical corporate culture supported by senior management and validated by a comprehensive and periodic risk assessment alongside continuous monitoring practices.