Last week, the U.S. Securities Exchange Commission (SEC) charged London-based Diageo plc with “widespread violations” of the Foreign Corrupt Practices Act (FCPA). In settlement of these charges, Diageo agreed to “cease and desist from further violations and pay $11,306,081 in disgorgement, prejudgment interest of $2,067,739, and a financial penalty of $3 million.”
For those who don’t go to the liquor store, Diageo is one of world’s largest producers of premium alcoholic beverages. Times must be tough for Diageo, as it appears government officials in some countries aren’t satisfied with just a case of Johnnie Walker or Ketel One.
The SEC claims Diageo made improper payments to government officials in India, Thailand and South Korea over a period of more than 6 years (and, one wonders, what took everyone — internally or externally — so long to figure this out?).
From 2004 to mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied other high-ranking Thai government officials extensively on Diageo’s behalf in connection with pending multi-million dollar tax and customs disputes, contributing to Diageo’s receipt of certain favorable decisions by the Thai government.
The SEC claims that Diageo, in South Korea, paid more than $86,000 to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Further, Diageo also improperly paid travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo routinely made hundreds of gift payments to South Korean military officials in order to obtain and retain liquor business.
In India, from 2003 through mid-2009, Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages.
Further, the SEC charged that Diageo engaged in lax oversight and maintained deficient controls. Its subsidiaries were alleged to have routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments. Sometimes, they failed to record the payments at all.
Indicating the penalties could have been more severe, the SEC noted that Diageo cooperated with the SEC’s investigation and implemented certain remedial measures, including the termination of employees involved in the misconduct and significant enhancements to its FCPA compliance program.
Clearly there are many lessons to be learned from “Diageo.” Among them:
- The SEC continues to target companies headquartered outside of the U.S. for FCPA enforcement;
- There should be an active, challenging and realistic dialogue with group and subsidiary management about any obstacles to doing business in various countries;
- South Korea, India, and Thailand should be added to the list of high risk countries, if not already on your radar;
- Not surprisingly, many of these payments were repeating — accounting and compliance should look for the frequency of payments made to individuals as well as considering the amounts and the purpose; and,
- It’s important to analyze payments to third parties, especially when vague services are described. Ask the important questions, including, what services are these third parties performing that would merit the size and frequency of the checks they receive from your corporation?
Disgorgement of profits is a tough remedy (though not as tough as China’s executions for receiving the bribe). Better to have the controls that can recognize the violations sooner, than later.
And, BTW, compliance training, compliance training, and compliance training with a lot of genuine tone from the top is a good start.