Conquering the Chaos: Win in India, Win Everywhere (15 page)

India has a lot of vitality, but an equal dose of volatility. It’s not for the fainthearted.

—D. SHIVAKUMAR, SENIOR VICE PRESIDENT (INDIA, MIDDLE EAST, AND AFRICA), NOKIA

Corruption is a feature of most emerging markets, where institutions are young and
fragile. As a result, these countries are unable to deal with the greed unleashed
by sudden economic growth, resulting in rampant corruption and oligarchic capitalism.
Historians point to America’s Gilded Age between 1877 and 1893, when economic growth
hid serious social problems, and hold out the hope that runaway corruption is but
a temporary phase. However, in the short term, multinational companies have to develop
the capabilities to do business in developing countries without violating home country
laws or company policies and codes of conduct.

India has recently been grabbing headlines because of corruption, but it is far from
being the most terrible country in the world in which to do business. Ranked 95 by
Transparency International’s Corruption Index, it may be more corrupt than Brazil
(73) and China (75) are, but India is less so than other emerging markets like Indonesia
and Mexico (both tied at 100). In fact, according to Transparency International, India
is in the middle of the pack of emerging markets.

That said, corruption in India is high, all-pervasive, and may be increasing. According
to Ernst & Young India’s 2012 Fraud Survey, three-quarters of respondents in India
believe that fraud has increased over the past year, and 60 percent said that their
companies had fallen victim to it. For companies and managers, the threat isn’t a
big scam, such as the 2G Telecom Scam in 2010—(which
Time
rated the second-worst abuse of power ever, behind Watergate)—or Coalgate in 2012
(a scandal where the government allegedly handed several coal blocks to private miners
without an auction, causing a large loss of revenue). What’s more problematic is retail
corruption, the almost inescapable web of corruption in the country, with a price
list for almost every service the government provides. In 2012, for instance, the
tariff ran something like this: Rs. 500 to Rs. 2,000 for a marriage certificate; Rs.
1,000 to pass a driving test; Rs. 1,500 to Rs. 2,500 to get an electricity connection;
Rs. 5,000 for a truck to pass a tax checkpoint; Rs. 5,000 to Rs. 10,000 to speed up
government services, and so on. Incidentally, pricing is changing from a fixed amount
to a percentage of the transaction.

According to the Indian anticorruption website,
www.ipaidabribe.com
, 45 percent of Indians have paid bribes to the judiciary, 64 percent to the police,
61 percent to obtain registry services and permits, and 62 percent have paid off officials
in connection with buying, selling, and renting land. Respondents to a recent World
Economic Forum survey rated corruption as the second most problematic factor for doing
business in India, with 78 percent frankly stating that their companies are highly
vulnerable to corruption. According to another survey by KPMG of nearly three hundred
CXOs of Indian and multinational companies (KPMG’s India Fraud Survey 2012), 71 percent
of companies felt that fraud is “an inevitable cost of business” and 55 percent had
experienced fraud (up from 45 percent in 2010).
¹

India’s environment of pervasive bribery and corruption is difficult for multinational
companies because of the consequences of violating laws at home, such as the US Foreign
Corrupt Practices Act (FCPA) or the UK Bribery Act.
²
Companies are increasingly liable not just for the conduct of their employees but
also for bribes paid by intermediaries like consultants, agents, and JV partners.
Operating in corrupt markets is therefore a rapidly rising risk. Is it possible to
operate in a country like India without being corrupt? How can companies safeguard
themselves? The answer lies in understanding the different types of corruption and
fraud and inoculating themselves against each. Warning—some of what I have to say
could be unpalatable and controversial for readers who may prefer to close their eyes
rather than embrace a tough reality.

There are many kinds of fraudulent and corrupt practices, such as intellectual property
(IP) infringement and data theft, regulatory noncompliance, procurement fraud, and
asset misappropriation and theft, but a few of these are critical risks for a company
operating in India.

BRIBES
. Multinational companies are governed by the Prevention of Corruption Act of India,
as well as home laws like the FCPA in the United States or the UK Bribery Act. Those
laws prohibit managers from offering anything of value to a government official, political
party, or party official with the intent to influence that person, or to secure an
improper advantage in obtaining or retaining business. However, numerous global companies—De-Nocil
Corporation, an Indian affiliate of Dow Chemical; AT Kearney India; Westinghouse Air
Brake Technologies; Xerox Modicorp, the Indian affiliate of Xerox; Baker-Hughes; Pride
International; and Diageo—have been caught paying bribes in India. In most cases,
managers made improper payments to seek an advantage, such as getting a business contract,
winning regulatory approval of a product, reduction of taxes, or the avoidance of
customs duties.

Companies seldom make payments directly; the payments usually involve practices such
as:

• Using agents or dealers to make payments
  
• Tapping unaccounted pools of cash, or slush funds created by payments to fictitious
  vendors, subcontractors, false expense reports, or price inflations to intermediaries
  that flow back to the company
  
• Sponsorship of foreign travel, extravagant gifts, and entertainment
  
• Charitable contributions to nongovernmental organizations recommended by government
  officials and politicians
  

Despite widespread corruption in India, I strongly believe that, barring a few sectors
such as mining, telecom, infrastructure, or real estate, which are highly regulated
or where the government controls access to resources, it is absolutely possible for
companies to function without paying bribes. In the consumer (B2C) and industrial
(B2B) businesses that most MNCs are in, bribery is far from a necessity; when it occurs,
it often simply reflects bad judgment.

Paradoxically, it may actually be easier for a foreign company to be ethical than
it is for an Indian business. A lot of multinational companies have channel-driven
business models that legitimately route sales through distributors, dealers, and other
value-added resellers. Many companies believe that this model offers a natural firewall
against corruption. The low levels of empowerment in multinationals also offer a plausible
excuse for local leaders to say that they can’t do anything illegal for fear of losing
their jobs. By and large, people realize that top management teams in India are mere
agents with limited authority. Executives can therefore persuade them to turn their
attention to easier targets. Moreover, a company that is uncompromising in its ethics
over time develops a reputation that serves as a shield against corruption.

SPEED MONEY OR GREASE PAYMENTS.
The distinction between bribes and speed money is simple: a bribe is a payment to
a government officer for doing something he should not do; speed money is a payment
for doing something he should.

Every company encounters endless demands for speed money, especially from government
officials. They often create circumstances where, for routine issues such as clearing
shipments, getting permits or licenses, or registering land deals, companies must
make a facilitation payment or suffer inordinate delays. “From the time a businessman
thinks of starting a venture, every step is paved with red tape and demands for bribes.
The system makes it impossible for people to function legally. There is no time limit
to issue a license or renew a permit. If I do not pay my way through, the authorities
can make me wait indefinitely before processing my application. The license-permit
raj may be over but the
chaipani
culture [literally, demanding money to cover the cost of buying a cup of tea] continues,”
says a well-known Indian businessperson.

Paying speed money is illegal in India and not permitted by the law in many countries
like the United Kingdom; companies must resist the temptation to be expedient and
give in to demands. However, the uncomfortable reality is that there are times when
it may be difficult to avoid—think for instance of perishable goods awaiting customs
clearance. This is where firms may be compelled to use intermediaries such as clearing
agents who handle the whole process. The use of such agencies and intermediaries is
a troubling decision and the key in these circumstances is to ensure that the transaction
involved is a routine, nondiscretionary action and the company isn’t seeking an improper
benefit. The agency or intermediary the company uses should be reputable and provide
a real value-added service. Every payment to such an agency must have the approval
of legal experts at the global headquarters and be accounted for explicitly.

EXTORTION
. Politicians and bureaucrats in India sometimes seek to extract money by making wrongful
but credible threats. Ambiguous and arcane laws, officials with discretionary powers,
and an inefficient judiciary have created a system that is perfect for extortion.
For instance, according to the Indian Packaged Commodity Act, companies that use improper
price labels may have their warehouses sealed and are liable for imprisonment for
a second offense. Given the ambiguity in what a proper price label is, the arbitrariness
of officials, and the seriousness of the consequences, many companies find it easier
to pay up than be held hostage by inspectors. This is just one small example; similar
gray areas exist in many areas, especially around taxation, creating possibilities
for subjectivity and therefore extortion.

Sometimes, extortion can be more than a financial matter; it may threaten lives and
livelihoods. A powerful local politician once threatened to start a labor problem
in one of the factories of a company I worked for unless he was paid off. His reputation
and past actions suggested that the threat was credible. Such situations are defining
moments. It is easy to be moralistic and righteous until one is in the middle of a
real problem; there are no easy or right answers since there are multiple considerations
involved, including employee safety. Country managers need judgment and courage to
tackle them. It’s important not to deal with the problem alone but to discuss the
matter with the global CEO and general counsel. This is a situation in which having
a powerful local network and an effective advisory board can be a great help. Tense
as such situations may be, extortionists are often solo rogue actors without institutional
backing. It is therefore usually possible to call the extortionist’s bluff, which,
in my experience, helps the company cultivate a reputation for honesty that acts as
a shield against future demands.

SENIOR MANAGEMENT FRAUD
. Both Ernst & Young and KPMG have called attention to the growing problem of fraud
by senior executives of multinational companies in India. Partly that’s because of
the rising pressure on financial performance; the temptation to cook the books, stuff
the channel with inventory, and make side agreements with customers and partners is
great. Ernst & Young’s 2012 Global Fraud Survey points out a particularly disturbing
trend: 15 percent of CFOs around the world are willing to pay cash payments and bribes
to win business, up from 9 percent the previous year.
³

Envy and temptation caused by rising affluence and comparisons with the compensation
and lifestyles of CEOs of Indian companies may be driving more senior management fraud
at multinational companies in India. Says the CEO of KPMG India, “India is growing
fast, and people want to become richer faster. This leads to fraud, and governance
is a real challenge today.” Accepting kickbacks from advertising and media partners,
commissions on real estate transactions or machinery purchases, a deposit in an overseas
bank on the successful acquisition or sale of a company—these are becoming more common.
In 2012, a massive fraud was uncovered at Reebok India, involving allegations of channel
stuffing, secret warehouses, stolen goods, rigged books, and kickbacks. They point
to the damage that arises when the gamekeeper turns poacher.
⁴

VENDOR KICKBACKS AND PROCUREMENT FRAUDS
. Kickbacks and fraud are quite prevalent in India and manifest themselves in several
ways, according to KPMG India.
⁵

• Phantom vendors or other manipulation of the vendor master file
  . By creating a record in the vendor master file that directs payment to a fictitious
  company or a legitimate company that does not provide services to the organization,
  money flows to a recipient controlled by an employee or a third party in collusion
  with procurement personnel. Detection may be difficult because small payments fly
  under the radar of senior approval authorities.
  
• Fictitious invoicing and inflated billing rates
  . An employee may generate an invoice payable to a vendor using the latter’s home
  address. Or a vendor that is regularly providing legitimate services may submit an
  invoice for services that were not provided or at rates above those agreed on.
  
• Conflicts of interest
  . If procurement personnel have a financial interest in the success of a supplier,
  their purchase decisions will be biased toward that entity to the detriment of the
  organization.
  
• Vendor kickbacks
  . Vendors may send expensive gifts to procurement personnel because of long-term relationships.
  Less innocently, vendors may collude with procurement staff to work around controls.
  Suppliers may bribe a buyer in the organization to rig bids or to purchase from them
  at above-market rates. They will offer bribes or kickbacks to managers to approve
  fictitious charges.