The previous post discussed amendments to Section 8 of the Prevention of Corruption Act, 1988 [PC Act], which will now punish giving bribes as a standalone offence rather than a case of abetting bribe taking by the public servant. The post did not discuss one proviso that the amended Section 8(1) carries: providing that when an offence under Section 8 is committed by a "commercial organisation", it is punishable by fines. This is my gateway to discuss the new regime on corporate criminal liability that the PC Act will introduce, the fulcrum of which is amended Sections 9 and 10. This second post in the series focuses on what this new regime is, and its potential positives and pitfalls.
Prosecuting Corporate Corruption: The New Text
Before moving to the text, let's take a step back and cover some basics on the criminal liability of commercial organisations [called "corporation" hereafter]. Corporations are purely legal creatures, so to hold them criminally responsible we need to use the conduct and mental state of some humans. So far so good. But which humans are to be considered? Some jurisdictions, like the U.K., recognise a narrow basis for affixing liability to corporations. Commonly called the "alter-ego" or "directing-mind" theory, under this rule only the acts of humans in management roles or other decision-making capacities can be the basis for imputing liability to corporations. Contrary to this, other jurisdictions - most prominently the United States, adopt a much broader rule where the conduct of any employee can be imputed to a corporation, as long as this resulted in some benefit to the corporate entity.
When the Indian Supreme Court recognised criminal liability for corporations it chose to follow the U.K. model and adopted a narrow basis of liability. Because of this, corporate prosecutions in India needed allegations against management-level persons for the case against a corporation to stick. In what is a seismic shift, the legislature has marked a break away from this position for corruption offences in the recent amendments. India will now follow a model more akin to the U.S., potentially making it much easier to prosecute corporations. Let's turn to the text:
Section 9. (1) Where an offence under this Act has been committed by a commercial organisation, such organisation shall be punishable with fine, if any person associated with such commercial organisations gives or promises to give any undue advantage to a public servant intending -
(a) to obtain or retain business for such commercial organisation; or
(b) to obtain or retain an advantage in the conduct of business for such commercial organisation:
Provided that it shall be a defence for the commercial organisation to prove that it had in place adequate procedures in compliance of such guidelines as may be prescribed to prevent persons associated with it from undertaking such conduct [to be created under Section 9(5) read with Section 29A].
Some further points of interest:
- While "an offence under this Act" indicates this regime applies to all offences under the PC Act, Section 9(2) clarifies that it is unnecessary for the human to be prosecuted under Section 8 for the Section 9(1) offence to stick against a corporation.
- Section 9(3) explains various terms, such as "commercial organisation" [Section 9(3)(a)], "business" [Section 9(3)(b)], and "person associated ..." [Section 9(3)(c)].
- A person is "associated" with the corporation if she performs "services for on or behalf" of the corporation, which shall be determined by looking at all the relevant facts and not merely the nature of relationship between the two [Section 9(3)(c), Explanation 2].
- The "person associated" need not be an employee, and can equally be an "agent or subsidiary" of the corporation [Section 9(3)(c), Explanation 1].
- Lastly, if the "person associated" is an employee, it is presumed that she performed "services for or on behalf of" the corporation [Section 9(3)(c), Explanation 3].
Before moving on, note that Section 9 is not the only relevant provision in context of corporate crime. Section 10 goes after management level officers after Section 9 cases are proved in court:
Section 10. Where an offence under Section 9 is committed by a commercial organisation, and such offence is proved in the court to have been committed with the consent or connivance of any director, manager, secretary or other officer ... such [person] shall be guilty of the offence and shall be liable to be proceeded against and shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years.
The Promises and Pitfalls of Reform
A directing-mind test can prove too limiting in a corporate context where decision-making authority is increasingly decentralised. Not only this, it also offers an easy escape hatch to avoid corporate liability by concentrating focus on a select corps of officers. Recognising both of these problems, many jurisdictions - even the U.K. - moved away from the rule in the corruption context. The 2010 U.K. Bribery Act carries a "Failure to Prevent Bribery" offence under Section 7, which seems to have inspired our legislature the most. More recently, Argentina and Malaysia both took radical steps to move away from a directing-mind approach for corruption cases, to impute corporate liability based on acts of any employee. In finally shedding the alter-ego in Section 9, the Indian statutory regime better reflects the realities of the modern corporate context and offers a potentially more robust tool to prevent and prosecute corporate corruption in the country.
The shift to a broader basis of liability carries a downside: law enforcement agencies get extremely powerful tools to regulate corporate conduct which can be misused. By making offences cognizable and empowering police to arrest "persons associated" with corporations, the problem becomes more stark. Naturally, then, we need some corresponding protections for corporations to protect against abuse and ensure a degree of fairness in legal enforcement. The global norm seems to be having protections for corporations that install adequate compliance procedures. The U.K., Argentinian, and Malaysian examples mentioned above all have such provisions. The new Indian amendments also provide corporations this kind of protection in the proviso to Section 9(1), as extracted above.
But there is a catch. Having a defence at a criminal trial is not a protection against prosecution, and the difference can be huge in the corporate context. Installing adequate compliance procedures is a cost, and the bigger the corporation, the higher that cost is bound to be. For the corporation to make these expenditures, it needs incentives to do so. Since potential prosecutions for management level personnel under Section 10 have been pegged to the corporate crime under Section 9, there is certainly some incentive to install adequate compliance regimes. But is that enough? I would argue that it isn't. Effectively, the law is telling corporations to spend the money, but that more money will still have to be spent in facing a criminal trial for years, where eventually it can plead innocence by pointing to compliance procedures.
Nobody, especially corporations whose reputation carries considerable financial value, want to go to court and have their name dragged through mud. Which is why globally, it is more common for the legal system to reward those corporations with adequate compliance regimes by helping them avoid prosecutions altogether. They do not get a get-out-of-jail-free card, mind you, and still end up having to cooperate with investigators, paying fines, and being monitored for a few years afterwards under Deferred Prosecution or Non Prosecution Agreements. In the United States, the Department of Justice has been issuing "Principles of Federal Prosecution for Business Organizations" that implement this regime. Similarly, in the U.K., the Crown Prosecution Service is instructed to not prosecute cases where it finds corporations met the Statutory Guidance. Within India itself, this idea of avoiding prosecutions exists in context of the Information Technology Act, 2000, which triggers legal action only if online platforms do not pull down objectionable content within 36 hours after a takedown notice or court order. Since the statutory rules on compliance under the PC Act are yet to be drafted, I expect the powerful corporate lobby in India will try and push for a regime which avoids prosecution altogether. In the event that comes to pass, it will be fascinating to see what follows: will India start seeing innovations of the kinds seen in the U.S., or will corporations be getting a clean chit.
The Big Lapse on Sentencing Reform
At the end of the day, what matters most is the eventual punishment. What happens to corporations if they are found guilty of paying bribes? Do they fear hefty penalties, or a situation like the infamous case of Arthur Andersen in the United States - the accounting firm that went bust facing criminal charges? Not really. The new amendments to the PC Act leave untouched the sentencing formula of the earlier system, where penal provisions only provide for a "fine" to be imposed on corporations. This is not statutorily linked to wrongful advantage gained by the paying bribes, nor is there any clear authority to revoke corporate licenses or impose curbs on business activities if the corporation is found guilty (such powers seem to exist for charitable organisations). Sentencing will remain entirely dependent on the judges' discretion. From my limited experience of seeing corruption trials with corporate defendants, I saw three scenarios most commonly play out: judges either levied no separate fine on corporations, imposed the same fine as the human defendant, or simply doubled the amount of fines imposed. In all of these, often no explanation was offered for how the amounts were fixed.
This is where the tendency to ape foreign legislation can become problematic. Yes, Section 7 of the U.K. Bribery Act also only stipulates a fine to be imposed. But the U.K. has an entirely different sentencing regime to that of India. Not only are courts mandated to explain their reasons for awarding the sentence, but the Sentencing Council issues Guidelines for courts to follow in figuring out how to arrive at that sentence as well. In 2014, the Council published Guidelines for Fraud, Bribery and Money Laundering Offences that requires courts to consider ten different factors to fix a sentence for Section 7 offences, in which removing all gains from corruption is almost a pre-requisite.
By retaining the old system, the amendments have seriously missed out an opportunity of ushering in much-needed reforms. It means that the significant deterrent and regulatory force that anti-corruption legislation carries ends up lost on other bad actors in the field, undermining one of the main reasons for creating corporate criminal liability in the first place. Thus, despite having a broader scope for corporate liability, it might remain worryingly common that corporations brush off corruption charges and continue to engage in illegal acts.
Conclusions and Next Post
The PC Act amendments have ushered in a new regime for holding corporations criminally liable for engaging in corruption offences, one which theoretically renders it easier to prosecute corporations than before. Having moved to this legal theory in the corruption context, one wonders whether the Indian legal system will witness an en masse shift abandoning the old alter-ego theory altogether. As discussed in the post, once the amendments come into force, there is probably going to be immense lobbying as corporates try to create rules that gives them more benefits than merely a legal defence at trial after making costly outlays for installing a compliance regime to check bribery. In the long run, it might also result in disrupting how India regulators prosecute corporate bribery, encouraging more conversations between regulators and corporate defendants to keep a case away from court. Having now discussed two of the major new avenues explored by the PC Act, the next post returns to more familiar terrain for the law and discusses changes made by the 2018 amendments to prosecuting public servants for corruption.
No comments:
Post a Comment