Liquor Case Gins Up FCPA Lessons

Here’s something you don’t see every day: the Justice Department hit spirits manufacturer Beam Suntory with a $19.5 million fine on Tuesday for a bribery scheme in India — where the company got an extra punch in the pocketbook for failure to cooperate fully or to coordinate the Justice Department FCPA investigation with a separate SEC probe into the same conduct.

The scheme itself is old news, because the SEC hit Beam with an $8 million penalty in 2018. As outlined in court filings with both agencies, Beam’s India subsidiaries bribed government officials from 2006 to 2012 to secure various licenses and other business documents that liquor companies typically need. (Beam was headquartered in Chicago at the time; the company was subsequently acquired by Japanese conglomerate Suntory in 2014.) 

As usual with these matters, the accusations are that Beam’s India executives funneled bribes to government officials through third parties; typically people affiliated with liquor sales, promotions, distribution, and so forth. In exchange, Beam won the permissions it needed to sell its brands — Jim Beam, Maker’s Mark, and McClelland’s Single Malt among them — in retail stores, or to smooth distribution routes across India. 

The bribery was authorized by senior executives in Beam’s India operations, covered up via fake invoices, which were then recorded in a fake set of accounting records. Again, that’s nothing new for veterans of FCPA misconduct in emerging markets. 

By 2010, Beam’s management started to wonder about its FCPA exposure and hired an audit firm to review the India operations. Said audit firm did some interviews and said Beam India executives did indeed suspect corruption in their third parties. Beam then had a U.S. law firm review those conclusions, and the U.S. law firm recommended a closer review. 

So Beam had an Indian law firm follow up on the audit firm’s first investigation; and yes, that Indian law firm confirmed those findings. It also recommended enhanced FCPA training for managers and contract modifications with Beam’s third parties. The U.S. law firm then confirmed the Indian law firm’s confirmation of the audit firm’s original findings (OK now it’s just silly) — but, alas, Beam leadership at the time didn’t follow up on those recommendations. At least, not until a whistleblower alerted authorities in 2012, and here we are.

The Interesting FCPA Stuff

We seldom see an FCPA case where the SEC settles first and the Justice Department then follows up with its own criminal penalty further down the road. Much more often, the Justice Department declines to prosecute, while the SEC still hits the firm in question with disgorgement and interest for books-and-records violations of the law. (In the Beam case, that $8 million settlement with the SEC included $6 million in disgorgement and interest, plus a $2 million civil penalty.)

So what did Beam do to warrant this $19.5 million criminal penalty, plus a three-year deferred-prosecution agreement to boot? The Justice Department flagged several sore points:

• No timely self-disclosure, even though Beam executives had clear evidence of FCPA trouble. Instead, a former Beam employee emailed the company and copied law enforcement in both the United States and India, warning about “illegal cash transactions” with Beam’s third parties in India.
• Poor cooperation, which the Justice Department described as “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.”
• Failure to discipline certain individuals involved in the case — whom, alas, the DPA does not identify. 
• The egregious nature of the misconduct itself: falsified records, plus deliberate decisions by managers not to implement an effective system of internal controls. That included one member of Beam’s legal department who specifically tried to avoid uncovering information related to corruption risks with Beam’s third parties.

On the other hand, Beam did cooperate eventually, and has implemented several compliance program improvements. That allowed the company to avoid a compliance monitor and receive a 10 percent deduction off the bottom of the possible penalty according to the U.S. Sentencing Guidelines. So the damage could have been worse. 

Then again, Beam did not receive credit for that $8 million paid to the SEC two years ago “because Beam did not seek to coordinate a parallel resolution with the department.”

Beam Suntory’s current leaders were put out a statement in conjunction with the settlement, happy to put this action in the past.

“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,” said Todd Bloomquist, general counsel. “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.”

The company’s corrective actions, when they were finally undertaken, 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 ethical business.

To me, the lesson here is that, yes, the Justice Department’s FCPA Corporate Enforcement Policy can bite you in the corporate rear end if you ignore what the policy expects. Beam didn’t disclose its misconduct voluntarily, didn’t provide full cooperation until later in the process, and didn’t remediate its weak internal control program when it first had the chance. 

Those actions fail all three prongs of the policy. Here is the result.