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Law360 (July 9, 2020, 6:45 PM EDT) --
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| Vasu Muthyala |
It's important to contextualize these good deeds: Over the past several years, India has been increasing its efforts to replace China as the world's factory and thereby increasing foreign direct investment, principally from the U.S. As part of these efforts, Modi and Trump have engaged in their own mutual charm offensive, most recently with Trump's inaugural visit to India at the end of February.
Despite these public gestures of cooperation and goodwill, it is important to recognize that behind the rosiness of the Modi-Trump relationship lies an increasingly complex bilateral relationship. For watchers of U.S.-Asia policy in the 21st century, China offers a cautionary tale for India.
Individuals and businesses in India should look at the souring U.S.-China relationship as a model for how things could go wrong, and how to plan for them in terms of mitigating any legal and commercial risks.
Once Bitten: The Decline of U.S.-China Relations in the Late 2010s
In 2018, the U.S. Department of Justice launched its China initiative with the intention of countering perceived national security threats from China. In the months and years that followed, the initiative has led to increased rates of U.S. prosecution and enforcement actions against Chinese companies and individuals that the DOJ perceives as engaging in economic espionage and threatening U.S. national interests.
Huawei Technologies Co. Ltd. is the stand-out example of U.S. enforcement against foreign — let alone Chinese — entities, with multiple charges of conspiracy to steal trade secrets and racketeering, not to mention the company's Chief Financial Officer Meng Wanzhou being personally charged and held in Canada.
Another lesser-known example is of Herbalife Ltd.'s executives in China, Yanliang Li and Hongwei Yang, having the full force of the Foreign Corrupt Practices Act brought against them for an alleged scheme to pay foreign bribes and circumvent internal accounting controls.
As the DOJ targets high-level executives and economic entities, the U.S. Federal Bureau of Investigation has had its sights set on academic circles, most prominently displayed with the January 2020 arrest of Harvard University chemistry department chair Charles Lieber on allegations of aiding China's efforts to steal scientific research.
The arrest of Lieber and two others rides on the coattails of numerous investigations against ethnically Chinese scientists based in the U.S., all in the name of snuffing out economic espionage and threats to U.S. intellectual property.
The decline of Sino-U.S. relations throughout the 2010's shows what can happen on a legal enforcement level when two superpowers that are equally fiercely protective of national interests refuse to compromise. For the increasingly protectionist Modi administration, the China story is evidence that the U.S. isn't going to let any international partner, including India, do as it pleases.
Should India also fall out of U.S. favor, it could end up being on the wrong end of a U.S. enforcement regime that utilizes all tools to advance the country's political, legal and commercial interests.
Twice Shy: Lessons for an Increasingly Protectionist India
Interestingly, while posturing to appear on good terms with the U.S., Modi has also been focusing on implementing an increasingly protectionist approach to business, even coining the term "be vocal for local." This might lead some to think that India wants to have it both ways — it wants the spoils of increased foreign direct investment and manufacturing agreements, while putting up protectionist walls to protect its own businesses.
Ultimately, this increasingly pro-India stance could end up creating significant legal issues impacting both individuals and businesses in the way China did when it took a similar road. One example of a potentially greater trend is the Indian Enforcement Directorate's investigation against both Amazon.com Inc. and Flipkart Internet Pvt. Ltd., partly owned by Wal-Mart Stores Inc., for alleged violations of the Foreign Exchange Management Act.
The allegations of offering popular products at cheaper rates through proxy sellers, which in turn hurts domestic small businesses and brick-and-mortar retailers, flags the potential legal risks for major U.S. companies looking to answer India's call for increased foreign direct investment.
Should there be a rise in the number of cross-border enforcement and commercial disputes similar to the Amazon/Flipkart investigation that impact U.S. companies, it would not be unreasonable to suspect that U.S. regulators would bite back as they are with China. Under the current administration, the U.S. has pursued an America-first approach in its handling of trade abroad and India should expect this continue without exception — no matter how many so-called Namaste Trump rallies India chooses to host.
Preparing For a Wave of U.S. All-Tools Enforcement
The increased levels of U.S. investment in India over the past decade have in turn brought increased regulatory scrutiny, thus amplifying the risk of U.S. enforcement against both multinationals in India as well as Indian companies investing abroad.
Relations between India and the U.S. have already begun to experience a number of setbacks, including the U.S. trade representative's plan to terminate India's preferential trading status, as well as the U.S.' decision to stop reissuing sanctions waivers to India for Iranian oil imports.
At the same time, the U.S. continues to flex its enforcement muscles. Last year the U.S. Securities and Exchange Commission reached a settlement with a U.S. information technology services company for alleged violations of the FCPA occurring in India, and earlier with companies in the retail and alcoholic beverage industries. These enforcement actions highlight the risks of multinational businesses operating in India.
It is imperative for those at risk to understand that further actions from the U.S. could come from a number of directions, First, the U.S. could transform trade issues into criminal ones through mechanisms such as economic sanctions against Iran or Russia, bribery and corruption, or fraud.
Second, the U.S. could arrest Indian citizens in any nation where it can secure extradition, as has happened to 25 Indian individuals over the last 17 years, many of them under allegations of financial fraud.
Third, the U.S. is able to seize any assets it claims are related to criminal action, as it did in connection with USA v. Jho, the U.S.' largest-ever asset forfeiture, coming against an Asia-based foreign business executive to the tune of more than $700 million.
There are several actions companies investing in India — and Indian companies investing internationally — can take on either a reactive or proactive level to minimize risks of being on the wrong end of a U.S. enforcement action.
- If members of your team are detained in the U.S., India or another foreign jurisdiction, particularly one with an extradition treaty to the U.S., it is critical to immediately open communications channels with local authorities as well as their consulate or embassy. Within the first 24 hours, prepare for a battle in court to decide whether the executive should be held pending the next hearing.
- If your company learns of a problem or an investigation, immediately ensure that employees don't destroy evidence or "make up a story." This preservation of data should be done swiftly by notifying all employees that they should continue to abide by usual policies, working closely with one's IT department to ensure no loss of data, whether deliberate or accidental, and conducting a scoped internal investigation to promptly stop the problems, take correct remedial actions and decide a way forward.
- If you believe your assets to be at risk of seizure, conduct an asset vulnerability assessment — otherwise referred to as a stress test — which includes reviewing your asset portfolio, analyzing your asset structures and testing them against common methods of seizure, and assessing potential lawful defensive measures.
Conclusion
While increased foreign direct investment into India is a good thing, it should be approached with the expectation that increased closeness in trade relations comes with increased scrutiny by U.S. enforcement agencies. In order to take full advantage of the increased investment, as well as any opportunities that come with it, individuals and companies must be proactive to mitigate the risks of investigation or enforcement.
The rise in both protectionism and corporate fraud that will likely follow the COVID-19 pandemic should also be firmly placed on parties' radars. To best position themselves, individuals and companies should take a cross-border approach that proactively addresses and mitigates the potential issues discussed above, and be ready to respond to actions that may arrive simultaneously both inside and outside the U.S.
Vasu B. Muthyala is a lawyer at Kobre & Kim LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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