Last month, the Indian legislature passed sweeping amendments to the Prevention of Corruption Act. If accepted in their present form, those amendments portend a major shift in India’s antiquated legal regime pursuing corporate criminal liability, making it much easier to go after corporations on corruption charges. (The amendments make other changes as well, which I have discussed elsewhere. Here, I only focus on the changes that would pertain to corporate liability for corruption offenses.) The amendments do make some welcome changes, but they do not go far enough to update India’s antiquated legal regime for corporate criminal liability. I’ll touch on three features of this regime and discuss how the new amendments do or do not effect significant changes.
- Legal Basis of Liability. When can criminal wrongdoing by a corporation’s employees or agents be attributed to the corporation itself? Countries vary in their answer to this fundamental question. In the United States, misconduct by any employee can be imputed to the corporation, and this broad rule has an even broader variant in the “collective knowledge” model, under which liability may be imputed to the corporation by drawing upon the collective conduct of several officers. India, by contrast, had traditionally adhered to a much narrower doctrine commonly called the “directing mind” theory, which it borrowed from the United Kingdom. Under this rule, the corporation is only liable if the wrongful acts were directed or endorsed by senior management. But this makes it too easy for corporations to escape liability, especially given the increasing decentralization of corporate decision-making. On this point, the recent amendments do indeed effect a major change: Under the new Section 9 of the Prevention of Corruption Act, India (in a move that has also been made by other countries like Argentina and Malaysia) has introduced a different rule for corruption offenses, one that more closely resembles the US model than the traditional UK model. This is a welcome change. A directing-mind test can prove too limiting in a corporate context where decision-making authority is increasingly decentralized. Not only this, it also offers an easy escape hatch to avoid corporate liability by concentrating focus on a select corps of officers.
- Sentencing—What happens if a corporation is found guilty of corruption in India? Not much. Under India’s 1988 Prevention of Corruption Act, a fine may be imposed on a corporation, but the size of the fine is not linked to the wrongful gains from the corrupt acts. Rather, the fine depends entirely on the judge’s discretion. In my own experience as a white-collar defense attorney, in most cases involving corporate defendants the judge either levied no separate fine on the corporation; or imposed on the corporation a fine that was equal to (or occasionally double) the fine imposed on the guilty individual. In no case did I see or read the judge explain how the fine was determined. Moreover, there is no clear legal authority to revoke a convicted corporation’s licenses (though such powers do exist for charitable organizations). As a result, many big corporations in India brush off criminal cases without any long-term harm to their business. (For example, many of the big telecom providers embroiled in the 2G Telecom Scam are still operating.) None of this has been changed by the 2018 amendments: these amendments would hike penalties for human beings but do not address penalties for corporations. Indian legislators must reform sentencing provisions to ensure serious punishment for corporations found guilty of corruption, in order to guarantee effective deterrence and to create incentives for corporations to strengthen their internal compliance systems.
- Absence of Statutory Guidance. As argued above, the Indian legislature has taken a welcome step in making it easier to penalize corporations by abandoning the “directing mind” approach in favor of a U.S.-style corporate liability system, and the legislature should go further by adopting more robust penalties for corporations convicted of corruption. However, these desirable changes would in turn require additional measures to ensure fairness and to protect corporate defendants against potential abuse. The 2018 amendments address this problem by creating an affirmative defense to corporate liability if the corporate defendant can show that it had effective compliance procedures in place at the time of the corrupt act (a change that Rick discussed in his recent post). One difficulty, though, is that even as amended, India’s legal and regulatory framework would only allow the corporate defendant to point to its effective compliance program as a defense at trial. There is no clear administrative guidance for prosecutors about what sorts of cases they should approach corporate corruption prosecutions, and when they should decline to press charges against the corporate defendants—that is, India currently lacks anything similar to what the U.S. Department of Justice provides in its “Principles of Federal Prosecution for Business Organizations”. A number of other countries (including the above-mentioned examples of the U.K., Argentina, and Malaysia) have promulgated these sorts of guidance documents, in order to constrain and channel prosecutorial discretion. By contrast, in India the absence of any statutory or policy guidance renders enforcement of laws against corporations opaque. Thus statutory amendments will need to be complemented by appropriate regulations and guidance.
Many big corporate defendants embroiled in corruption allegations in India have dusted them off with little trouble over the years, and there’s no reason to expect this will change any time soon. But the legal framework is changing for the better. Under the 2018 amendments, it will be harder for corporations to escape liability altogether. Yet there is much more that needs to be done to serve the (sometimes competing) concerns about deterrence and fairness. The penalties for corporations that commit corrupt acts need to be stronger and more certain, but at the same time the agencies responsible for prosecuting corporate corruption cases need to be much clearer – both to their own employees and to potential defendants – about when a corporation has made sufficient efforts to prevent corruption that it should escape punishment even when it could technically be held liable.