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In A Highly Unusual Development, DOJ Brings A $19.6 Million Enforcement Action Against Beam Approximately 2.5 Years After The SEC’s Related Action

DOJ and SEC Foreign Corrupt Practices Act enforcement actions against issuers based on the same core conduct are relatively common. However, such actions are nearly always coordinated and announced on the same day.

In a highly unusual (although not unprecedented [1]) development, the DOJ announced [2] yesterday a $19.6 million FCPA enforcement action against Beam Suntory Inc. based on the same core conduct in India at issue in the SEC’s July 2018 FCPA enforcement action against the company (see here [3]).

Another unusual aspect of the Beam DOJ action was the DOJ’s position that the company did not voluntarily disclose. In contrast, in the 2018 SEC enforcement action the SEC said that the company voluntarily disclosed.

Yet another unusual aspect of the Beam DOJ action was the DOJ’s position that the company had “inconsistent and, at times, inadequate cooperation, including positions taken by the Company that were not consistent with full cooperation, as well as significant delays caused by the Company in reaching a timely resolution and its refusal to accept responsibility for several years. In contrast, in the 2018 SEC enforcement action the SEC acknowledged the company’s cooperation (i.e. “Beam also cooperated by voluntarily producing documents, summarizing its factual findings, translating numerous key documents, providing timely reports on witness interviews, and making current or former employees available to the Commission staff, including those that needed to travel to the United States or elsewhere for interviews).

Perhaps evidencing just how much its feelings were hurt, despite the DOJ having a non-piling policy (which states that the DOJ should “coordinate with and consider the amount of fines paid to other federal authorities that are seeking to resolve a case with a company for the same misconduct), the DOJ said that it was not “crediting the penalty [$2 million Beam] paid to the SEC because the Company did not seek to coordinate a parallel resolution with the” DOJ.

No doubt there are some interesting back stories relevant to the DOJ enforcement action and it sure would have been nice if the DOJ was more transparent and specific regarding several of the issues highlighted above.

In any event, this criminal information [4] under the heading “Overview of the Conspiracy and Bribery Scheme” alleges:

“The alcoholic beverage industry in India was highly regulated by government authorities. Beam India, and third parties acting on its behalf, regularly interacted with government officials in connection with Beam India’s importation of distilled mixes for spirit products; shipments to Beam India’s bottling facility in Behror, Rajasthan; inspections of the Behror plant; shipments from the facility in Behror to distribution warehouses in multiple states in India; label registrations required to distribute each brand of liquor in each state; licensing of warehouses in states prior to retail distribution; and sales to retail stores that were operated by the Indian government. The introduction of new spirit products and distribution warehouses required government approval of new label registrations and licensing of the warehouses in each state. Label registrations and warehouse licenses also required yearly renewal in Rajasthan and in the 26 Indian states where Beam India sold Beam products or had warehouses.

During the relevant time period, Beam, through its officers, employees and agents, knowingly and willfully conspired (1) to corruptly pay a bribe in the amount of one million Indian Rupees (approximately $18,000 at the then exchange rate) to Foreign Official 1 [described as a senior government official in a state Excise Ministry in India] with the intent to obtain an improper advantage and in exchange for Foreign Official 1’s approval of a license to bottle a new line of products that Beam sought to market and sell in India; (2) to fail to implement and maintain an adequate systems of internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and preparation of financial statements and that would have helped to detect and put an end to Beam India’s practice of making improper payments to government officials; and (3) to maintain false accounting records, by, among other things, recording falsified expenses that were consolidated into Beam’s books, records, and accounts and by maintaining false Sarbanes-Oxley sub-certifications, in an effort to conceal the improper payments made to Indian government officials.

From the time Beam acquired the Indian business in 2006 through the end of the third quarter of 2012, Beam India paid bribes and made other improper payments to various Indian government officials, including corrupt payments to obtain or retain business in the Indian market. Most of the corrupt payments were made through third-party sales promoters and distributors, who paid government officials to secure orders of Beam products at government controlled depots and retail stores, obtain prominent placement of Beam products in government retail stores, acquired and renew label registrations and licenses, and enable the distribution of Beam spirit products from Beam India’s Behror bottling facility to warehouses in other states throughout India. The payments to government officials were made with the knowledge, authorization, and complicity of Beam India’s management, including Beam India Executive 1 [described as a high-ranking executive of Beam India from 2006 to 2012]. One of those payments, a bribe of one million Indian Rupees (approximately $18,000) to Foreign Official 1, was authorized by APSA Executive 1 [described as a high-ranking executives of Beam’s APSA region from 2011 to 2013 and based in Australia] in connection with a project initiated and overseen by, and for the benefit of, Beam. Beam profited from the illicit payment scheme at Beam India.

The payments to government officials on Beam India’s behalf were funded through the submission of fictitious and/or inflated invoices to Beam India by the third parties. Senior Beam India management directed the distribution of funds to those third parties in different markets to make payments to government officials in those states. Certain Beam India finance executives maintained off-the-books accounts that tracked amounts and uses of the funds provided to the third parties. For example, during the relevant period, Beam India overpaid its third party sales promoter in the state of Delhi more than $550,000 and overpaid its third party sales promoter in the sales channel for the India military’s Canteen Stores Department (CSD) more than $1.5 million; the promoters used those funds, in part, to make improper payments to government officials at government-controlled retail stores and depots in those markets.

Before its acquisition by Beam, the entity that subsequently became Beam India also made corrupt payments, directly and indirectly, to Indian government officials, including to secure and increase sales of spirit products and to facilitate distribution of the entity’s products. When Beam acquired the assets of the Indian entity, it also retained existing management of the entity, which continued the schemes at Beam India without interruption from the 2006 acquisition through the end of the third quarter of 2012. To conceal the scheme, Beam India management, which included Beam India Executive 1, maintained a second set of financial records that tracked the payments and disguised the scheme in the entity’s books and records to make it appear that the illicit payments were legitimate business expenses.

During the relevant time period, in its official books and records, Beam India falsely characterized the illicit payments made to government officials as legitimate business expenses, including for “Customer Support,” “Off-Trade Promotions,” “Commission to Distributor/Promoter,” and “Commercial Discount, Ongoing,” which disguised the true nature of these payments. Ultimately, the disguised expenses were consolidated in Beam’s general ledger system and coded as “Selling and Distribution Expenses.”

Beam India management also submitted false certifications to Beam regarding Beam India’s financial records, internal controls, and compliance with laws. As a wholly-owned subsidiary of Beam, Beam India was required to provide quarterly certifications, which included certification by Beam India management that they were “aware of their obligations under the [FCPA] and Anti-Bribery provisions. Starting on or about October 4, 2011, when Beam became a publicly traded company, Beam India began providing sub-certifications to Beam that Beam maintained in its books and records, and that Beam management relied upon in certifying the accuracy of the quarterly and annual financial statements that Beam filed with the SEC, in accordance with the Sarbanes-Oxley Act of 2002. From at least October 2011 through in or around July 2012, Beam India management, including Beam India Executive 1, submitted false Sarbenes-Oxley sub-certifications to Beam. These false sub-certifications, among other things, failed to report the direct and indirect payments to government officials and failed to report the falsified expenses that were consolidated into Beam’s books and records, even though Beam India management knew about the improper payments and false records.

Notwithstanding multiple red flags regarding Beam India’s practice of making improper payments to government officials, Beam knowingly and willfully failed to implement and maintain an adequate system of internal accounting controls, including failing to implement controls related to payments to third-parties in India, sufficient to provide reasonable assurances regarding the reliability of financial reporting and preparation of financial statements. For example, after being made aware of significant red flags indicating that Beam India was involved in making improper payments, Beam Employee 1 [a high-ranking employee in Beam’s legal department and based in Beam’s corporate offices in Illinois] sent an e-mail to Beam Executive 1 noting an intention to approach and upcoming compliance review “with the understanding that a U.S. regulatory regime should not be imposed” and in a way that would acknowledge “India customs and ways of doing business.”

According to the information, Foreign Official 1 solicited the bribe to approve the label registration for Beam India.

[5]

Under the heading “Failure to Implement and Maintain Adequate Internal Controls,” the information alleges:

“Beam also knowingly and wilfully failed to implement and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and preparation of financial statements and that would have helped to detect and put an end to Beam India’s practice of making improper payments to government officials. Beam was cautioned on numerous occasions regarding the need to implement sufficient compliance measures and internal accounting controls relating to risks associated with improper activities by third parties in India. Nevertheless, for several years, Beam failed to adopt significant recommended actions and failed to address the concerns those recommendations were meant to alleviate.

Under the circumstances of Beam’s acquisition of its Indian business, Beam did not conduct thorough due diligence on Beam India before it acquired that business in 2006. Beam conducted internal audits of the Indian business in or around 2008 and 2009, but those audits did not focus on anti-corruption issues. The audits identified deficiencies in the accounting controls in India and a lack of supporting documentation for credit notes, promotional expenses, and vendor discounts. Beam did not take steps sufficient to resolve these issues in Beam India until after the fall of 2012.

In or around November 2010, Beam engaged a global accounting firm to conduct a compliance review of Beam India, which included transaction testing and interviews with employees. In or around early January 2011, the accounting firm issued a report on its findings that raised several red flags, including that Beam India did ‘not have many anti-corruption policies’ and its employees had not received anticorruption training; Beam India management believed Beam India was not liable from a compliance standpoint for the conduct of its vendors and third-party sales promoters; Beam India management maintained it was ‘very difficult” to conduct business in India without making “grease/facilitation payments’ while certain Beam India employees believed that ‘promoters are likely making grease payments’ to government officials in India; certain vendors engaged by Beam India presented a significant risk of corruption; and Beam India ‘did not perform monitoring relative to corruption risks.’  The report found that the military-run CSD sales channel presented a ‘high risk area in terms of anti-corruption compliance.’ The global accounting firm recommended that Beam ‘conduct and document due diligence to confirm activities undertake’ by third parties, ‘investigate red flags,’ ‘discuss legal considerations of third party actions taken on Beam’s behalf,’ and ‘consider the need to further review’ the CSD and other military outlet business in India. Beam did not take these steps in India at the time, and Beam did not implement many of the global accounting firm’s recommendations until fall 2012.

In or around January 2011, Beam consulted a U.S. law firm which advised that the issues identified by the global accounting firm required follow up. Beam did not take steps to enhance its controls in India regarding payments to third parties at this time.

In or around February 2011, Beam retained an Indian law firm to review and expand upon the compliance work performed by the accounting firm and to assess Beam India’s compliance with Indian laws and regulations applicable to the spirits industry. Beam Employee 1 was tasked with managing the Indian law firm’s review of Beam India’s business. At that time, Beam Employee 1 did not have any experience with, and had not received any training on, the FCPA or anti-corruption compliance issues.

In or around early February 2011, Beam Employee 1 and Beam Executive 1 [described as a senior executive in Beam’s legal department from 2001 to 2018 and based in Beam’s corporate offices in Illinois] had a conference call with APSA Executive 1 and APSA Executive 2 to explain the upcoming review by the Indian law firm. APSA Executive 1 and APSA Executive 2 expressed concern that, if the review uncovered improper activities by third parties, Beam India might have to stop doing business with those third parties, which could disrupt the Indian business. An APSA executive further stated at the meeting that if Beam continued digging into the Indian business, it likely would find improper activities.

On or about February 4, 2011, Beam Employee 1 emailed Beam India Executive 1, stating: ‘Beam Legal believes it is critical to approach a compliance review with the understanding that a U.S. regulatory regime should not be imposed on our Indian business and that acknowledges India customs and ways of doing business.’ Beam Employee 1 discussed the messages conveyed in this e-mail, but not the exact wording, with Beam Executive 1 before it was sent.

The Indian law firm interviewed Beam India senior management to determine whether improper payments were being made to Indian government officials. The Indian law firm reported, among other things, that Beam India managers believed that third parties in India may make payments to customs officials and government employees in the CSD channel. The Indian law firm confirmed and reiterated many of the accounting firm’s recommendations, including the need for Beam India employees to receive training on the FCPA and liability for third-party conduct; to conduct due diligence on high-risk vendors; to create policies and implement appropriate accounting controls for gifts, petty cash, and reimbursement claims; and to revise its contracts with third parties to include anti-corruption clauses and audit rights.

Beam asked U.S. Law Firm to review the report and work done by the Indian law firm. On or about August 19, 2011, U.S. Law Firm issued a memorandum to Beam noting that no significant analysis of Beam India’s books and records, internal controls or other issues related to its finance and accounting practices, and no substantial transaction testing, had been conducted by the Indian law firm. The U.S. Law Firm memorandum also noted that the Indian law firm had raised issues concerning Beam’s oversight of third parties and the potential conduct of those third parties. In addition to confirming the advice given by the accounting firm and the Indian law firm, U.S. Law Firm made additional recommendations with respect to compliance and internal accounting controls, including that Beam ‘should strongly consider undertaking a financial review of past invoices and debit notes received from Beam India’s third-party business partners that interact with government officials.’ Because it believed there was a ‘high likelihood that the results of this type of financial review may uncover evidence of potentially improper payments,’ U.S. Law Firm recommended that Beam ‘should consider structuring the review so that in-house our outside counsel engages an outside forensic investigator to conduct the review.”

Beam did not conduct a further review of the Indian business or enhance its internal accounting controls over payments to third parties at that time.

On or about August 30, 2011, Beam Employee 1 wrote to Beam compliance and finance personnel, copying APSA Executive 2, to discuss concluding the review in India, and stated, in relevant part: “I would like to discuss with you the results of the legal compliance review conducted by [the Indian law firm] as well as notes from the [the U.S. Law Firm] with an eye toward making this a case closed within the next four weeks.’

On or about August 31, 2011, Beam Employee 1 wrote to the Indian law firm, copying APSA Executive 2 and others, stating, in relevant part: “As Beam prepares to become a listed company in one month, executive management directed me yesterday to ensure that the compliance review in India come to a close before then.” Beam Employee 1 later added: “Compliance review will be an ongoing process, but hopefully, upon completion of this legal compliance review, Beam India will not have to undergo another compliance review by any department for a long time.”

The Indian law firm recommended conducting additional interviews in India, this time with Beam India operational employees who interacted with the third-party sales promoters in the CSD channel. This recommendation was based on further conversations that the Indian law firm had with Beam India management, which raised concerns about third-party sales promoters in the CSD channel.

Beam declined to follow the Indian law firm’s recommendations. Beam Employee 1 explained to APSA Executive 2 and others in a September 8, 2011 e-mail, “I am concerned about [the Indian law firm] digging and finding information that we cannot impact, specifically, finding activities and practices by our [third parties] that we cannot remediate or change. The risk may be ultimately having to choose whether to continue to conduct business with any [third parties] that create [FCPA] risks for us/Beam India.’ Later in the e-mail, Beam Employee 1 referenced an SEC enforcement matter concerning one of Beam’s competitors and noted that, if Beam was doing anything in the same manner as the competitor, Beam should change and do things in a more compliant manner. Beam Employee 1 noted further that it would be “beneficial” to conduct the review ‘in house’ and involve external advisors in they felt it necessary.

Beam decided to conclude the review being conducted by the Indian law firm, and did not conduct additional interviews in India until September 2012, after further allegations of corrupt conduct in Beam India were raised. Beam also knowingly and wilfully failed to maintain an adequate system of internal accounting controls, including failing to implement controls related to payments to third parties in India, sufficient to provide reasonable assurances regarding the reliability of financial reporting and preparation of financial statements until at least September 2012.”

Based on the above, the information charges one count of conspiracy to violate the FCPA’s anti-bribery, books and records, and internal controls provisions.

The criminal charge was resolved through this three year deferred prosecution agreement [6]. The DPA was based on the following relevant considerations:

a. the Company did not receive voluntary disclosure credit … because it did not timely disclose to the DOJ … and because prior to the Company’s disclosure, a former Company employee sent an e-mail to the Company, copying the U.S. and Indian governments, alerting them to “illegal cash transactions” associated with the Company’s distributors in India;

b. the Company received partial credit for its cooperation … including making factual presentations to the DOJ, making foreign-based employees available for interviews in the U.S., and producing documents to the DOJ from foreign countries;

c. the Company did not receive full credit for its cooperation due to its inconsistent and, at times, inadequate cooperation, including positions taken by the Company that were not consistent with full cooperation, as well as significant delays caused by the Company in reaching a timely resolution and its refusal to accept responsibility for several years;

d. the Company provided to the DOJ all relevant facts known to it, including information about the individuals involved in the conduct …

e. the Company engaged in remedial measures, including: suspending operations in India for a period of time, implementing enhanced controls, including additional controls over disbursements and interactions with government officials, requiring in-person compliance training for employees, hiring a dedicated Chief Compliance Office and an APSA regional compliance officer, and hiring new management in India;

f. the Company did not receive full credit for its remediation because it failed to discipline certain individuals involved in the conduct …;

g. although the Company had inadequate anti-corruption controls and an inadequate anti-corruption compliance program during the period of the conduct …, the Company has enhanced and has committed to continuing to enhance its compliance program and internal controls, including that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement (Corporate Compliance Program);

h. based on the Company’s remediation and the state of its compliance program, and the Company’s agreement to report to the DOJ as set forth in Attachment D to this Agreement (Corporate Compliance Reporting), the DOJ determined that an independent compliance monitor was unnecessary;

i. the nature and seriousness of the offense conduct … including making corrupt payments in India, the falsification of books and records to conceal improper payments, and the willful failure to implement an adequate system of internal controls, which included efforts by a then-member of Beam’s Legal Department to affirmatively avoid uncovering information related to improper activities and practices by third-parties engaged by the Company in India that presented corruption risks, as well as the duration of the misconduct;

j. the Company has no prior criminal history;

k. the Company resolved with the SEC through a cease and desist proceeding relating to the conduct … but the DOJ are not crediting the penalty paid to the SEC because the Company did not seek to coordinate a parallel resolution with the DOJ;

l. the Company has agreed to continue to cooperate with the DOJ.”

The DPA sets forth an advisory guidelines range of $21.7 to $43.5 million while noting that there was uncertainty regarding the calculation of the value of the benefits obtained from the bribery conduct.

Pursuant to the DPA, Beam agreed to pay a criminal penalty amount of $19.572 million – which reflects a 10% discount off the bottom of the fine range.

In the DOJ release, Acting Assistant Attorney General Brian Rabbitt stated:

“Beam and its Indian subsidiary not only paid bribes to Indian government officials, they intentionally failed to implement internal controls to prevent bribery and falsified their books and records to conceal the corrupt activity. Companies that use corrupt influence instead of competing in a fair, ethical, and honest manner should take note of today’s agreement: paying bribes to obtain and retain business is not business as usual, it is a crime.”

U.S. Attorney John Lausch Jr. for the Northern District of Illinois stated:

“U.S. companies that attempt to gain the upper hand in foreign business ventures by engaging in corruption must be held accountable. The Foreign Corrupt Practices Act has a long reach, and for good reason.  It is critical that our global economy remain on a fair playing field.”

Special Agent in Charge Emmerson Buie Jr. of the FBI’s Chicago Office stated:

“Bribery undermines the public’s trust in our markets, and the FBI will never stop fighting to hold corrupt companies accountable whenever and wherever they abuse that trust.”

The following attorneys represented Beam: Richard Dean, Nancy Rosenfeld, and Adam Scott (Baker & McKenzie), Joan Meyer (Thompson Hine), and Daniel Rubinstein and Libby Deshaies (Winston & Strawn).

In a release, Beam stated:

“In 2018, the company announced an agreement to resolve issues related to the same conduct with the U.S. Securities & Exchange Commission (SEC), and the SEC publicly recognized the company’s self-disclosure, cooperation and remedial efforts. The agreement with DOJ, together with the SEC resolution, finally resolves the U.S. government’s investigations into conduct of the company and the India subsidiary that was disclosed in 2012. The DOJ agreement requires the company to pay a fine of approximately $19.6 million and recognizes the company’s cooperation with DOJ’s investigation.”

Todd Bloomquist, (general counsel of Beam Suntory) noted:

“We are pleased to move past this matter. Our company is committed to doing business the right way, and we take pride in our approach to resolving these issues, with integrity and transparency at every step of the process. Our company in 2012 initiated and publicly disclosed a thorough and independent investigation in cooperation with the U.S. government and took decisive corrective action. We’re confident in our ambitious growth plans in India, which are built on a business that has become a model example of success through sustainable and compliant business practices.”

The company’s statement further noted:

“The company’s corrective actions included terminating employees who violated the company’s code of business conduct and ethics, suspending all commercial activity in India until satisfied the business could be conducted compliantly, implementing stringent controls, and strengthening its global compliance function to identify issues sooner and reinforce the company’s commitment to doing business the right way. The matter at issue predates the acquisition of the company by Suntory Holdings in 2014. The India business was acquired by the company in 2006.”

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