Prashant Mara
BTG Legal, Mumbai
prashant@btg-legal.com

Devina Deshpande
BTG Legal, Mumbai
devina@btg-legal.com

Introduction

The complexity and technicalities inherent in public procurement in India create an opportunity for agents or middlemen, as there is scope for those familiar with the convoluted process to assist bidders in navigating the process. Countertrade or local investment requirements under tenders (such as offsets, technology transfer or local content requirements) provide further scope for agents to play an effective role to ensure that the principals comply with these conditions on the ground. The need to participate in multiple technical, commercial and legal qualification rounds means that boots on the ground via employees or agents is often unavoidable. While there is no blanket ban on the use of agents, it is very easy to cross over the amorphous border between what is allowed and what is illegal, and the high financial stakes coupled with the multiple touchpoints with public officials exacerbate the risk of influence peddling and corruption.

Permission to use agents

Legally, there is no general prohibition on the engagement of agents in public procurement. However, permission to use agents should not be automatically assumed. Instead, principals must carefully consult the following to confirm any restrictions or requirements attaching to the engagement of agents.

Procurement manuals

The first step when engaging an agent is to ascertain any restrictions imposed under the procurement rules and manuals of the particular tendering authority (or the ministry overseeing the tendering authority). In the past, enlistment of agents was centrally regulated. This position was subsequently amended, leaving it to the individual ministry or government department to decide whether agents can be appointed by vendors applying for their respective tenders (and any conditions on the agent’s appointment).

Tender terms

In addition to the tendering authority’s procurement manual, consult the terms of the specific tender under consideration. The tender would typically specify whether agents may be engaged along with restrictions or compliances attaching to their appointment (for instance, pre-registration with the tendering authority, disclosure of terms of engagement and scope of work, etc). In the authors’ experience, it is not unusual for the tenderer (either under its procurement manual or tender terms) to reserve the right to reject or remove an agent at any stage of the procurement process and the right to inspect financial documents pertaining to the agent at any time.

Integrity pact

As part of the bid submission, bidders must enter into, and strictly comply with, a ‘pre-contract integrity pact’ (and the winning bidder will re-execute the integrity pact as part of the procurement contract). The integrity pact has been formulated by the Central Vigilance Commission and subsequently adopted by procuring agencies and commits the bidder to comply with ethical practices and transparency. The integrity pact requires the bidder to disclose the engagement of, and fees payable to, its agent, and also bars conditional contracts involving payment of fees or penalties linked to the success or failure of the procurement contract.

Role of agents

In any event, the nature of functions undertaken by the agent will dictate the legality of their role, as discussed below.

While an agent’s official mandate may be entirely legal and permissible, the risk of illegal or unethical activity, with or without the principal’s knowledge, remains.

The Indian Government has adopted a zero-tolerance policy against bribery, corruption and unaccounted funds. In recent years, the government has amended the existing anti-bribery and corruption law to inter alia broaden the scope of the offence to cover all forms of illegal gratification (monetary or otherwise), to punish the bribe-giver with imprisonment and to penalise both direct and indirect bribes (ie, dealings between persons with the intention to bribe and the acceptance of a bribe to influence a public servant). In addition to statutory penalties, adverse consequences could include annulling of contracts and blacklisting from future dealings with the government.

Corruption investigations and prosecution can be extremely intrusive, complicated and protracted, involving multiple enforcement authorities for different offences. There have been several high-profile investigations in India over the years, where the corruption charges were ultimately cleared (often for lack of evidence) but the accused company was blacklisted in the interim (as in the cases of Denel and Israel Aerospace Industries, each of which was blacklisted for over ten years from dealings with the government on (unproved) allegations of corruption). In addition to penalties on the company, senior management of implicated companies are at personal risk of prosecution for corruption offences.

Whistleblowers and collateral damage

In many cases, notice of corrupt activity is raised by whistle-blowers who may be employees, government officials, inter alia, who are unwilling participants in, or have knowledge or suspicion of, the malfeasance. However, there are other ways in which companies may be dragged into bribery investigations, some of which may catch the company completely off-guard and make it harder to manage the legal, financial and reputational fall out.

For instance, in the event of a dispute between the agent and principal, the agent may use its knowledge of the company’s business as leverage (or even as a threat) during dispute negotiations. In another example, where the company has been awarded a government tender, its competitors may challenge the award for reasons that may be linked to potential mishandling of the tender procedure. This could result in an investigation into the tender award, including conduct of the company and its agents.

Illegal activity could also be uncovered via an unrelated (ie, not corruption-based) investigation of the agent, such as for tax evasion or foreign exchange violations. For instance, where money owed to an agent has been paid outside India and not declared to the tax authorities or paid overseas and then routed back into India by the agent, the investigation may trace the initial remittance to the company which will then need to explain the purpose for paying out these funds to the agent (besides potentially also exposing the company to anti-money laundering investigations). The investigation could also uncover suspicious payments made by the agent which the agent may claim were made on behalf of the company. In each case, the fact that the company did not pay any bribes itself, and that it did not know its agents engaged in corrupt practices, may not help the company or its employees avoid liability.

For foreign companies, domestic regulations and reporting requirements on anti-bribery and corruption (such as under the United States’ Foreign Corrupt Practices Act 1977 or the United Kingdom’s Bribery Act 2010) may also be triggered by an infraction in India. Unlike in the US, there is no concept of a deferred prosecution agreement or financial settlement in corruption investigations in India. Once an investigation is commenced by the Indian authorities, it will run its course, and the quantum of damages and fines will be set by a judicial authority. In addition, where a company undertakes internal investigations into bribery or money-laundering allegations, it should do so under the protection of legal privilege to ensure that information uncovered is not subject to reporting requirements, unless waived.

Red flags and mitigation measures

Companies working with agents will need to build sufficient processes to demonstrate that they followed due process in appointing, monitoring and interacting with their agents (if called upon to do so in an investigation). There are some measures that can be followed which should alleviate risks to a significant extent:

• While principals may prefer success-based fees or commissions which ensure that the agent also has ‘skin in the game’, this could indirectly incentivise unethical practices as a means to success. Therefore, remuneration to agents should be structured carefully and with due regard to what is reasonable vis-à-vis the services being provided. Money trails are often smoking guns in corruption investigations and are usually the first line of inquiry by law enforcement;
• There may be further cause for concern if the agent maintains offshore banking facilities or convoluted shell company structures and requires payments to be made overseas in foreign currency. While the principal may be amenable to make payments abroad in foreign currency (and, in fact, given India’s stringent foreign exchange laws, may even find this easier than domestic payments), this would make suspicious activity even harder to identify and trace. Therefore, insist on payment via normal banking channels to a bank account in India if services are provided in India;
• Institute specific whistleblower programmes, anti-bribery practices and training programmes for India-specific projects, as there are nuances of the market that will need to be captured in these policies. Ensure that these measures are communicated to employees and intermediaries (and that there are records of such communication) and that they have easy access and know how to activate them, if required;
• Evaluate the effectiveness of company policies by undertaking timely in-house or external audits of such policies, monitoring third-party relationships, auditing high risk transactions and reviewing internal financial control mechanisms;
• Establish the ‘tone from the top’ – top-level management must devote appropriate time to anti-bribery compliance, and commit adequate resources to ensure such compliance. Thoroughly communicate the company’s ‘zero tolerance’ policy towards corruption to both internal and external stakeholders;
• Classify and be clear as to the role that the agent is playing – back-end support or agency functions (influence peddling is obviously illegal and should be clearly prohibited). If the use of agents is prohibited, ensure that all efforts are restricted to back-end support, with no direct front-facing interaction or communication with the government. To further eliminate the agency risk, consider if the agent can be hired as an employee. This will allow them to officially represent the company’s interests including through the use of company facilities, and it may also be easier for the company to monitor employee activities more strictly (that said, this may increase the company’s administrative and compliance burden in India such as corporate compliance, employment and tax issues);
• Conduct thorough due diligence on the proposed agent at the time of appointment or re-appointment. In the case of long-term appointments, refresh the due diligence periodically. Ensure that all relevant disclosures in respect of the agent are made to the relevant tendering authority;
• Institute sufficient contractual checks and balances to gain full control over the agent’s activities and the manner in which the agent represents the company before the government (if relevant), including strict monitoring mechanisms to avoid illegal or unethical acts on the company’s behalf. Ensure that these contracts are reviewed periodically. All payments must be compliant with India tax and foreign exchange laws (and periodically audit agents to ensure such compliance). Include strict payment terms that specifically exclude transacting with an offshore account in order to avoid allegations of corruption and investigations relating to foreign exchange violations; and
• If, despite proactive measures, the company is investigated for corruption, develop and implement an ‘incident response protocol’ – that is, a combination of legal, commercial and public relations actions to manage, contain and mitigate risks, under the protection of privilege to the extent possible. Devise and adopt a broad level legal response strategy to deal with any investigations, which can be fine-tuned to suit the particular case.