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The Long Arm of the Law

The law in developed countries is being stretched a bit and so is its reach, writes DK Singh, an international lawyer.

india Updated: Jun 04, 2003 15:19 IST

Consider the grant of a concession to a multinational to build a power station in a developing country.

Consider the fact the multinational has managed to get a very good deal and stands to make a lot of money as do the banks and other investors, riding pillion with it.

There are dark whispers that there were virtually no negotiations and that the government authorities simply signed on the dotted line. There are also darker whispers that money changed hands.

Soon after commencement of power production by the company, people realise that they have been led up the garden path by the multinational and the amenable functionaries of the government. In normal circumstances, if it emerged that dishonest practices played a part, then the prosecuting agency within the developing country would have to make out a case within the terms of the relevant law of the developing country. In many countries, there are no explicit laws on corruption and in any event there is no comprehensive or consistent definition of what is corruption. Further, the authorities would have to risk a negative public campaign against victimisation of foreign investors.

It now appears things may change a bit for the better.

The Old and the New

Traditionally, the growth of the nation state and the concept of sovereign sanction had one limitation, the principle of territoriality. The power and influence of legislative fiat did not extend beyond the boundaries of the state. In the early stages, a criminal could make good his escape by leaving his criminality trailing behind him, if he managed to cross the territorial boundaries of the state.

The early part of the twenty first century has witnessed several significant events, principally in the US and the developed world, which has led to important derogations from the principles of territorial sovereignty. The collapse of Enron and the traumatic incident of September 11 have been important catalysts for a change in the approach to corporate and individual crimes. These changes are also symptomatic reactions to the erosion of physical boundaries as a limitation to any criminal activity and corporate fraud in the globalised world.

At this juncture, the motivation for effecting these changes within their national laws is the strongest amongst the developed states. No doubt they will create a momentum over time for other countries to follow suit, if the changes are seen to assist elimination of threat perception and economic harm arising out these cross border crimes to their constituents.

In the corporate sphere the Sarbannes Oxley Act in the US, which has been passed with some haste, has created ripples across the Atlantic and the Pacific and everything in between. Anybody who seeks to engage in the capital markets of the USA do so at the peril of being hauled into US courts for penal sanctions even if their actions were legal within the laws of their own state where they committed them.

The Act gives the Securities Exchange Commission of the United States unprecedented powers to make accountable company directors, financial and legal advisors from any part of the world, if their actions are responsible for misleading or damaging investors in the US. This "drag-in" law drags the offender into the penal regime of the US law. However, an unintended benefit is protection that this would have for punters from all over the world who engage the US stock markets.

In the sphere of individual criminality corruption has long been accepted in all societies as a pervasive and pernicious evil. The latest example of the law extending beyond the territory is the proposed Corruption Act 2003 in the United Kingdom. It is an example of a "tag-along" law which attaches itself to any UK citizen, corporate or individual, wherever in the world he commits the offences specified under the Act. It is no defence that the punishable action is legal in the country where it is committed.

The objective of the law in is to eradicate an evil which in Lord Falconer's words "weakens democracy, harms economies, impedes sustainable development and can undermine respect for human rights by supporting corrupt governments with widespread destabilising consequences".

The proposed bill in the UK for the first time attempts to define the concept of corrupt activity. The definition is very wide and exhaustive: It covers activities which confer an advantage corruptly, obtaining of an advantage corruptly and performing of functions corruptly. Exceptions have been carved out only to ensure that legitimate activities in an agent-principal relationship are not hit.

Another important development is that proceedings in Parliament will not be subject to parliamentary privilege, if they are evidence in respect of an offence under the proposed Act. Further, it catches in its net persons who are guilty of aiding, abetting, counselling or procuring of an offence under the Act and also an attempt, conspiracy or incitement to commit such an offence.

Nonetheless, the laws which extend territoriality have one serious drawback: They do not carry the teeth which derive from supporting procedural laws like the criminal procedure code or the law of evidence. For example, what will the English Courts or the prosecution do if on the basis of a complaint by a non-citizen of the UK against a citizen of the UK, a prima facie case of corruption is made out but needs to be corroborated by evidence from witnesses who are reluctant or unable to depose before English Courts?

The dynamics of corruption in developing economies cannot be resolved by extra-territorial legislation alone, however, there is no doubt that corporate boards in UK will indeed have to rely on the ingenuity of their lawyers to find a way which will allow them to pay "facilitation payments" which would enhance their capability to secure business in competitive tenders.

It is well known that the competitive tender process advocated by the multilateral agencies and other aid institutions have spawned more corruption that was intended.

Earlier attempts
Technically, US has been in the vanguard of enacting such a legislation, the Foreign Corrupt Practices Act 1977 has been around for more than two decades, although no prosecution under it has made headline news across the world. Presumably, the exclusion from its regime of various payments intended for facilitating grant of permits and licences and a variety of other services provided a loophole large enough for businesses to carry on with their aggressive market practices without much concern.

Prior to its collapse, Enron was talked about in board rooms across the world not without a tinge of envy laced by a lurking suspicion about its business ethics. Then the pack of cards collapsed in the USA with some significant disclosures about its liabilities and financial misdemeanours. In the USA, the company has been hounded by the prosecuting agency with considerable vigour. There has not been a similar investigation into its business abroad.

It would, indeed, be a unique proposition that Enron and its officers were honest abroad and dishonest at home. The primary focus of the prosecutors in the Enron case is the failure of compliance with securities regulation and internationally accepted accounting standards. There is no public knowledge of any investigation having been conducted of its business ethics abroad and whether the documents available to the prosecutors makes out a case for prosecution under the 1977 Act.

The reason is simple, the constituency that needs to be protected for electoral gains is not the one which resides in some far away developing or underdeveloped country, it is the powerful voice of the middle class investors which needs the soothing balm of the prosecutor's zeal.

Similarly, the United Nations and the OECD countries have resolutions and conventions which call upon member countries to enact legislation to combat bribery and corruption in international business transactions. The government of the United Kingdom also seeks to sponsor an UN Convention on Corruption. It is ironical that UN should even be considered as an appropriate agency, when its relevance as a repository of international norms and law is fast being relegated to the dustbins of history. In the capitals of many a developing country such a move would be seen as no more than a case of "too little too late".

The long arm of the law may indeed be long but its effectiveness has no political expedience, unless it has the capacity to hurt the voters.

First Published: May 24, 2003 19:42 IST