Yesterday was National Drink Beer Day .
Fitting then that yesterday the SEC announced this administrative cease and desist order  against Anheuser-Busch InBev, a Belgium brewer with American Depository Receipts traded on the New York Stock Exchange. The conduct at issue involved improper payments by an Indian joint venture “to Indian government officials to obtain beer orders and to increase brewery hours.” AB InBev held a minority interest in the joint venture which marketed and distributed the beer of AB InBev’s wholly-owned Indian subsidiary.
The SEC found that AB InBev violated the FCPA’s books and records and internal controls provisions. Without admitting or denying the SEC’s findings, AB InBev agreed to pay approximately $6 million to resolve the matter. As highlighted below, the SEC also found that AB InBev entered into a separation agreement with a former employee that violated an SEC Rule implementing Dodd-Frank’s whistleblower provisions.
In summary fashion, the SEC’s order states:
“This matter concerns AB InBev’s violations of the books and records and internal controls provisions of the FCPA, which occurred at its Indian wholly owned subsidiary, Crown Beers India Private Limited (“Crown”). From 2009 to 2012, AB InBev held a 49% interest in an Indian joint venture, InBev India International Private Limited (“IIIPL”), which managed the marketing and distribution of Crown beer. During this period, IIIPL used third-party sales promoters to make improper payments to Indian government officials to obtain beer orders and to increase brewery hours for Crown in 2011. IIIPL invoiced Crown for reimbursement for certain of these expenses, and Crown paid or accrued them. In doing so, Crown recorded certain of these expenses in its books as legitimate promotional costs. During this period, Crown had inadequate internal accounting controls to detect and prevent these improper payments and to ensure that transactions involving these promoters were recorded properly in its books. As a result, Crown’s books, which were consolidated into AB InBev’s books and records, did not accurately and fairly reflect the nature of the promoters’ transactions.”
Crown is described in the order as a wholly-owned subsidiary of AB InBev headquartered in India whose financial results are consolidated into AB InBev’s financial statements filed with the SEC.
IIIPL is described as follows.
“[A] defunct company formerly based in Gurgaon, India, was a joint venture between AB InBev and RJ Corp, an Indian corporation. InBev (AB InBev’s predecessor) and RJ Corp formed IIIPL in 2007 to brew and sell beer in India and Nepal. Prior to its dissolution in early 2015, RJ Corp and AB InBev owned 51% and 49% of IIIPL, respectively. AB InBev and RJ Corp each had the right to appoint four IIIPL directors, with RJ Corp having the right to appoint the Chairman, who cast the tie-breaking vote on all but certain specified matters. RJ Corp appointed the IIIPL CEO, who had the power to appoint the other members of the IIIPL management team, except for the CFO, whom AB InBev appointed. Throughout the relevant period, the top financial officer at Crown acted as the top financial officer at IIIPL. From mid- 2011 through early 2014, Crown’s in-house counsel also acted as IIIPL’s in-house counsel.”
In terms of background, the order states:
“Pre-merger, Crown controlled the marketing, distribution, and sale of the beer it brewed. The Anheuser-Busch/InBev merger, however, triggered a provision in the IIIPL joint venture shareholders’ agreement that required IIIPL to manage the marketing, distribution, and sale of beer brewed by Crown. Thereafter, IIIPL controlled the third-party sales promoters that were used to facilitate the sale and marketing of Crown’s beers in both Andhra Pradesh and Tamil Nadu. Among other tasks, these promoters administered retail promotional programs and liaised with Indian state government authorities.
The sale of beer in India is predominantly regulated by individual states. In the state of Andhra Pradesh, the Andhra Pradesh Beverages Corporation Limited (“APBCL”), an instrumentality of the government of Andhra Pradesh, purchases beer directly from brewers and sells beer directly to private retailers. In the state of Tamil Nadu, the Tamil Nadu State Marketing Corporation (“TASMAC”), an instrumentality of the government of Tamil Nadu, controls both wholesale and retail beer sales, purchasing beer from brewers and selling to consumers through TASMAC retail outlets.”
Under the heading “Third-Party Promoters of AB InBev’s and IIIPL’s Beers Provided Improper Benefits and Payments to Indian Government Officials,” the order states:
“In early 2009, IIIPL’s CEO and his appointed executives formulated a plan to increase IIIPL’s market share in Andhra Pradesh by providing improper benefits and payments to government officials through third-party sales promoters.
Promoter Company A
In 2009, IIIPL hired a promoter for the state of Andhra Pradesh, Promoter Company A. Promoter Company A had no experience in the alcohol industry. Promoter Company A received excessive commissions and reimbursements for questionable promotional charges. For example, Promoter Company A sought reimbursement from IIIPL of certain “display” charges that had no substantiation and were billed on a “per case” basis rather than based on the actual amount spent on the display. Promoter Company A used these excessive commissions and reimbursements to make improper payments to government officials at APBCL.
There was no executed contract in place to govern the relationship between Promoter Company A and IIIPL. Neither IIIPL nor Crown conducted any due diligence on Promoter Company A. Instead, the contractual terms of IIIPL’s agreement with Promoter Company A were documented only in two short internal emails between IIIPL employees. Promoter Company A was replaced by a successor entity in April 2012, but neither IIIPL nor Crown conducted any due diligence on the successor entity at that time. Even though Crown’s inhouse counsel forwarded AB InBev’s FCPA due diligence forms to IIIPL staff and offered to help complete them, the due diligence forms were never completed. Neither company executed a written contract with the successor entity until September 2012.
In December 2009, AB InBev received an internal complaint regarding compliance and internal control issues at IIIPL, including potential FCPA issues related to Promoter Company A. In response, AB InBev expedited an already-planned internal audit of IIIPL, which AB InBev staff conducted in early 2010. This audit did not scrutinize Promoter Company A’s activities or expenses. Still, the 2010 audit identified various deficiencies at IIIPL, including (a) a lack of documented business policies and procedures for significant functions such as procurement, vendor selection, and expense reimbursement; (b) a lack of awareness about FCPA compliance; and (c) inadequate information technology controls regarding financial processes and expense payments. AB InBev did not rectify many of the issues identified in the audit until 2011 or early 2012.
From April 2009 until March 2012, IIIPL generally incurred the initial costs of marketing and selling Crown’s beer and then sent invoices to Crown for reimbursement. Crown, in turn, recorded certain of these costs as expenses on its books and records. Crown thus either incurred or accrued certain of Promoter Company A’s expenses and recorded them as legitimate commissions or promotional costs, even though some of those amounts included improper payments to government officials.
Despite the internal complaint and the 2010 audit results, Crown personnel did not verify that a contract was in place with Promoter Company A and did not ensure that IIIPL personnel had performed due diligence on Promoter Company A. As a result, Crown recorded certain Promoter Company A expenses on its books in a manner that failed to accurately and fairly reflect their true nature and purpose.
Promoter Company B
In or about 2011, IIIPL began working with an individual (the “Principal”) who had connections in Andhra Pradesh, including to the son-in-law of the Andhra Pradesh Excise Minister. The Principal used his local connections to secure extra brewing hours for Crown after the Andhra Pradesh Excise Commissioner limited Crown’s production time to 8 hours per day. On April 1, 2011, before the Principal was hired in any capacity by IIIPL or Crown, and before the Principal had entered into any contract, the Principal emailed IIIPL a signed order from the Andhra Pradesh Excise Commissioner that gave Crown an additional 7.5 brewing hours per day. The Principal helped IIIPL obtain further authorizations from the Andhra Pradesh Excise Commissioner to operate for an additional 7.5 hours per day in May 2011, and an additional 7 hours per day in June 2011. Neither IIIPL nor Crown held any contractual relationship with, or had performed any due diligence on, the Principal when he helped secure the additional brewing hours.
Around the same time, IIIPL engaged the Principal to assist in generating beer orders from TASMAC in Tamil Nadu. In April 2011, the Principal secured orders of more than 534,000 cases of beer in Tamil Nadu, resulting in gross profits of approximately $637,000 to Crown. This was the first and only time that IIIPL ever sold Crown beer in Tamil Nadu.
IIIPL utilized the Principal’s company, Promoter Company B, to promote beer in Tamil Nadu despite the fact that Promoter Company B had no experience, staff, or infrastructure in Tamil Nadu.
IIIPL personnel did not conduct due diligence on the Principal or Promoter Company B before they began performing work for IIIPL. To conceal this fact, IIIPL employees subsequently completed and backdated Promoter Company B’s due diligence forms to make it appear as though they were completed in April 2011, when IIIPL initially engaged Promoter Company B. In addition, IIIPL employees allowed the Principal to complete the due diligence forms in the first instance, and then altered his responses to make them more suitable.
Neither Crown nor IIIPL had a written agreement in place with the Principal or Promoter Company B. Rather, the basic terms of the engagement were first set out in an internal email between IIIPL employees in June 2011, several months after IIIPL had begun to sell beer in Tamil Nadu and after Promoter Company B had already invoiced IIIPL for its services. The terms included an inflated commission rate, which Promoter Company B used to make improper payments to TASMAC officials. IIIPL employees subsequently drafted and backdated a contract with Promoter Company B to create the appearance that the contract had been executed on the date that IIIPL initially engaged Promoter Company B. In reality, IIIPL did not execute a formal contract with Promoter Company B until approximately January 2012.
Although they were on notice of internal controls issues at IIIPL and had received a complaint about the Principal and Promoter Company B, Crown personnel did not verify the existence of a written contract with Promoter Company B and did not confirm that IIIPL personnel performed due diligence on Promoter Company B.”
Based on the above findings, the SEC found that AB InBev violated the FCPA’s books and records and internal controls provisions.
A separate set of findings in the Order related to AB InBev’s separation agreement with a former Crown employee. According to the Order:
“[I]n December 2012, AB InBev entered into a separation agreement with a former Crown employee containing language that impeded the employee from communicating directly with the Commission staff about possible securities law violations. AB InBev had also used the same or similar language in other separation agreements in the past.”
According to the order:
“After signing the Separation Agreement, the Crown Employee, who was previously voluntarily communicating directly with the Commission staff, stopped doing so. The Crown Employee stopped doing so because he believed that he was prohibited by the recently executed Separation Agreement and any violation of the Separation Agreement would risk triggering the Separation Agreement’s liquidated damages provision. Only after the Commission issued an administrative subpoena for testimony and documents did the Crown Employee resume communicating directly with the Commission staff.
AB InBev has used the same or similar language in other agreements in the past.”
Based on these findings, the SEC found that AB InBev violated Dodd-Frank, specifically Rule 21F-17 which provides that “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
Under the heading “Document Destruction at IIIPL,” the order states:
“In or about May 2013, Commission staff learned of IIIPL’s plans to destroy or hide documents. The Commission staff informed AB InBev immediately thereafter, but the company took no immediate corrective action. In September 2013, AB InBev notified the Commission staff of a meeting in which several IIIPL managers instructed top IIIPL employees to remove potentially inculpatory data from their offices and computers. Crown and IIIPL’s in-house counsel attended the meeting, but never alerted AB InBev management to the document removal instructions. Other IIIPL employees reported that they had helped or observed IIIPL managers take several binders out of the building to destroy or move to a “secret location.”
Under the heading “AB InBev’s Investigation and Remedial Efforts, the order states:
“AB InBev did not report the 2009 and 2011 complaints to the Commission staff before the Commission first contacted AB InBev in October 2011. During the investigation, AB InBev did not respond to subpoenas in a timely manner, and made broad assertions of privilege that required significant resources from the Commission staff to address and delayed the production of responsive, non-privileged documents. The timeliness of AB InBev’s responses to the Commission’s requests for documents and information improved over time.
After the 2010 internal audit, AB InBev did improve some internal controls at Crown and IIIPL, including by adopting AB InBev’s own policies, due diligence questionnaires, and checklists; more sound controls over expenses and cash; and tighter controls over IIIPL’s accounting software, and the eventual replacement in 2012 of a flawed accounting system with a more sophisticated system. However, IIIPL employees were still able to circumvent many of these controls between 2010 and 2012. AB InBev also conducted FCPA training at both IIIPL and Crown, albeit over a year and a half after it received the first complaint regarding potential FCPA violations.
Additionally, AB InBev and RJ Corp terminated their joint venture and dissolved IIIPL in early 2015. AB InBev now operates in India solely through its wholly owned subsidiary, Crown, and has consolidated its Indian production, sales, and marketing functions at Crown. Following the dissolution of IIIPL in 2015, AB InBev conducted extensive FCPA training for Crown’s staff, and implemented improved compliance policies and controls at Crown, including policies and controls relating to third-party due diligence and contracts. AB InBev also has hired a dedicated India compliance manager who reports to a new India Legal Counsel and Head of Compliance.
In September 2015, AB InBev amended its separation agreements that impose confidentiality restrictions on departing employees of its United States entities to make clear that they do not prohibit the employees from reporting possible violations of law to governmental agencies. Those separation agreements now include the following language: “I understand and acknowledge that notwithstanding any other provision in this Agreement, I am not prohibited or in any way restricted from reporting possible violations of law to a governmental agency or entity, and I am not required to inform the Company if I make such reports.”
As noted in the SEC’s release :
“Anheuser-Busch agreed to pay $2,712,955 in disgorgement plus interest of $292,381 and a penalty of $3,002,955. For a two-year period, the company must cooperate with the SEC and report its FCPA compliance efforts while making reasonable efforts to notify certain former employees that Anheuser-Busch does not prohibit employees from contacting the SEC about possible law violations.”
The SEC’s order does not state what portion of the overall settlement amount was for the FCPA violations vs. the Dodd-Frank violations. By way of background, the prior whistleblower severance agreement cases were resolved for $130,000; $265,000; and $340,000.
In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:
“Anheuser-Busch recorded improper payments by its sales promoters in India as legitimate expenses in its financial accounting, and then exacerbated the problem by including language in a separation agreement that chilled an employee from communicating with the SEC.”
Jane Norberg (Acting Chief of the SEC’s Whistleblower Office) added:
“Threat of financial punishment for whistleblowing is unacceptable. We will continue to take a hard look at these types of provisions and fact patterns.”
The SEC’s order requires AB InBev, for a two-year period, to report to the SEC on the “operation of AB InBev’s FCPA and anti-corruption compliance program. In addition, AB InBev agreed to “make reasonable efforts to contact former employees … and provide them a copy of this Order and a statement that AB InBev does not prohibit former employees from contacting the Commission regarding possible violations of federal law or regulation.
Steven Fagell  (Covington & Burling) represented AB InBev.