On July 2, 2018, the Securities and Exchange Commission (Commission or SEC) settled an enforcement action against Beam Suntory Inc. (Beam), a worldwide beverage maker and distributor, over alleged violations of the Foreign Corrupt Practices Act (FCPA) related to improper payments by its Indian subsidiary, Beam Global Spirits & Wine (India) Private Limited (Beam India).1 Beam was required to disgorge over $5 million in profits and pay a $2 million civil penalty, for total sanctions of more than $8 million.
Beam is alleged to have made both direct and indirect improper payments to Indian government officials in connection with inspections, distribution, licenses and registrations, and to secure advantageous product placement and promotion of its products in government and retail stores. Indian management maintained a second set of financial records to track these payments and recorded the payments with descriptions intended to disguise the true nature of the payments such as “Customer Support” and “Off-Trade Promotions.”
Although the alleged improper payments appear to have been small individually, and the monetary penalties imposed by the Commission were relatively small by today’s FCPA standards, the case is notable in a number of respects. Among other things:
- In 2006, Beam, Inc., a US issuer and domestic concern, acquired Beam India. According to the Commission’s papers, Beam India regularly made direct and indirect payments to Indian government officials in connection with the manufacture and distribution of its products. After the acquisition, Beam retained Beam India’s management, who continued to orchestrate the alleged bribery scheme until 2012.
- Beam, Inc., was later acquired by Suntory Holdings Limited, a Japanese corporation, and Beam delisted from the New York Stock Exchange in 2014. However, the wrongful conduct occurred while Beam was still listed, so the Commission found it appropriate to bring an enforcement action against Beam pursuant to Section 12(b) of the Exchange Act.
- Despite numerous references to improper payments in the cease-and-desist order, the Commission charged only books and records and internal accounting controls violations. The Commission did not bring an anti-bribery charge, perhaps because there was no relevant connection to the United States.
- The Commission made repeated references to Beam’s failure to remediate red flags, noting that Beam had hired an accounting firm, a US law firm and an Indian law firm, all of which raised concerns. The Commission specifically noted a comment by a Beam lawyer that “I am concerned about [the Indian law firm] digging and finding information that we cannot impact, specifically, finding activities and practices by [promoters] that we cannot remediate or change.” The Commission also noted that its earlier enforcement action against Diageo plc, which also related to improper payments by a beverage maker in India, had been brought to the attention of Beam’s general counsel’s office. Despite receiving recommendations from its outside advisors that more testing and review should take place, Beam elected not to do so, and the Commission criticized Beam for the scope and timeliness of its response.
- Although the Commission stated that it considered Beam’s self-disclosure, cooperation and remediation, the Commission still imposed a civil monetary penalty of $2 million, in addition to the disgorgement of $5,264,340 and the prejudgment interest of $917,498.
- Since the publication of the Commission’s order, the company has stated that it continues to cooperate with the ongoing investigation by the Department of Justice (DOJ).
The Commission’s enforcement action shows again the risks inherent in making acquisitions of businesses in challenging jurisdictions. Here, a US company acquired an Indian company and did not detect or remediate conduct that subsequently created FCPA liability due to the ownership by a US issuer. A Japanese company later acquired that liability, even after delisting from the New York Stock Exchange (although presumably the Japanese acquirer was aware of the ongoing DOJ and SEC investigations when it purchased Beam in 2014). This action underscores how critical robust anti-corruption diligence and integration processes are in avoiding or mitigating corruption issues in acquired entities.
The enforcement action also shows the dangers in failing to conduct follow-up investigations and remediation when red flags are identified. While a failure to conduct audits and identify risks can create or exacerbate exposure in itself, the Commission’s order shows the potential repercussions of identifying red flags through audits and reviews and then failing to adequately remediate them. The order was particularly interesting in its references to the Commission’s prior enforcement action in a similar case, demonstrating the Commission’s view that it expects companies to be aware of the enforcement environment and industry risks that have been identified in prior actions.
The imposition of a civil penalty by the Commission of almost 50% of the disgorgement amount after voluntary disclosure, cooperation and remediation is also noteworthy. While the Commission encourages voluntary disclosures, it is not clear from this result what benefit Beam received from the Commission by making a disclosure.
Relatedly, it is interesting that Beam resolved the case with the Commission before resolving the DOJ investigation. While companies generally prefer to resolve SEC and DOJ investigations simultaneously to avoid multiple announcements, and the SEC and DOJ have historically accommodated this, we have seen a number of matters in recent years where SEC and DOJ resolutions have been announced separately. Here, it would seem that a DOJ declination would be likely, given the DOJ’s FCPA Corporate Enforcement Policy’s presumption of declinations in voluntarily disclosed cases, and the DOJ’s new “piling on” policy favoring taking into consideration penalties imposed by other US and foreign enforcement authorities. Because the Commission’s order was entered on a neither-admit-nor-deny basis (which the Commission typically does not do where there is a criminal resolution), and because the Commission imposed a civil penalty (which the Commission often does not do if there is a criminal fine), it seems more likely than not that the DOJ will decline to prosecute. If that determination were certain, however, it is odd that the DOJ matter would still be under investigation. Only time will tell.