Bribery: USA penalties for UK company Diageo

The SEC says that Diageo's "defects in its FCPA compliance programs" were contributed to by the company's "rapid multinational expansion through mergers and acquisitions."

Diageowas formed in 1997 when Grand Metropolitan and Guinness merged. Three relevant subsidiaries came within the new group: Diageo India Pvt Ltd, Diageo Moet Hennessy Thailand and Diageo Korea Co. Ltd (DI, DT and DK respectively). DT is a joint venture: DI and DK are wholly owned indirect subsidiaries. DK was added in 2001 with the acquisition of The Seagram Company Ltd.

The case against Diageo is that it paid bribes in India, Thailand and Korea. However, the SEC has no direct authority in relation to those activities.

Where it does have power is in relation to the financial statements of a company. Several years ago, the SEC formed a unit to identify possible accounting irregularities relating to the payments of bribery and corruption.

The SEC says that Diageo recognised that there were weaknesses in the systems and controls within the three subsidiaries but that it failed to fix those weaknesses until 2008.

The SEC specifically found that :

DI paid an estimated USD792,310 to "900 or more employees of government liquor stores in and around New Delhi" and "an estimated USD186299" in so-called "cash service fees." This was to "increase government sales orders of its products and to secure favourable product placement and promotion within the stores."

The SEC says "although the improper payments continued for at least six years, it was not until July 2009 that DI instructed its distributors to discontinue them."

The SEC says "DI failed to properly account for either its reimbursement of the illicit payments or the associated "cash service fees." DI's distributors sought recommpense by either submitting debit notes or requesting increases in their pre-case commissions. Each of the debit notes obscured the nature of the payments by purporting to be for "market scheme settlement," "deposits with the Delhi Excise" and generic terms such as "marketing promotion." "

The SEC says that Diageo was "unjustly enriched by USD11,306,081 from increased sales" in India.

In Thailand, the SEC says, "from April 2004 through July 2008, Diageo, through DT, retained the services of a Thai government and foreign political party official (the “Thai Official”) to lobby other Thai officials to adopt Diageo’s position in several multi-million dollar tax and customs disputes. For this retainer DT paid approximately USD12,000 per month for 49 months, for a total of USD599,322. DT compensated the Thai Official through 49 direct payments to a political consulting firm (the “Consulting Firm”) for which the Thai Official acted as a principal. Most, if not all, of the USD599,322 paid to the Consulting Firm was for the Thai Official’s services and accrued to his benefit. The Thai Official served as a Thai government and/or political party official throughout the relevant period (April 2004 – July 2008) in which he received compensation from DT."

DT improperly accounted for the monthly retainer that it paid to the Thai Official through his Consulting Firm. The bulk of the payments assumed the form of monthly disbursements of $11,989 to the Consulting Firm for advisory fees and out-of-pocket expenditures. Approximately $15,169 of the payments was for reimbursement of entertainment expenses, including those incurred on behalf of government officials. DT recorded the payments under one of the following generically-labeled accounts: (i) “Outside Services”; (ii) Corporate Social Responsibility”; (iii) Corporate Communications”; (iv) “EA [External Affairs] Project”; or (v) “Stakeholder Engagement.”

In South Korea, the SEC says, "Diageo had significant tax and customs issues in South Korea. In April 2003, DK, under Diageo’s direction, requested from South Korea a more advantageous formula for calculating the transfer pricing, for tax purposes, of Windsor Scotch whiskey that DK was importing into South Korea. As part of those negotiations, DK also sought tens of millions of dollars in tax rebates based on a claim that DK had overpaid under the then existing transfer pricing formula." That, the SEC says, resulted in "a rebate of approximately USD50 million."

There were also substantial claims for entertainment and for gifts to military officials.

The SEC claims it jurisdiction by saying "Section 13(b)(2)(A) of the Exchange Act requires public companies to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the issuer’s assets. Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials."

Diageo co-operated with the investigation, has sacked employees and made "significant enhancements to its compliance program."

And it made an offer to settle the SEC allegations. In the light of the company's conduct, the SEC was minded to accept the offer of payment of the sum of USD3 million and to consent to a "cease and desist" order under which it undertakes not to commit further breaches of the FCPA.

However, it has to be noted that the SEC order is in relation to accounting matters and does not relate, directly, to FCPA breaches with the consequence that other agencies may investigate and bring proceedings in relation to the same conduct.