SEC SETTLES FCPA CASE WITH LIQUOR GIANT DIAGEO

The SEC concluded an FCPA investigation with Diageo, plc, in a settled administrative proceeding. In the Mater of Diageo plc, Adm. Proc. File No. 3-14490 (July 27, 2011).

Diago is a leading producer and distributor of premium branded spirits, beer and wine including Johnnie Walker, Simiroff, Guinnes and others. Its ADRs are registered with the Commission and traded on the New York Stock Exchange.

The company is the product of a 1997 merger in which it acquired a subsidiary in India, Diageo India Pvt. Ltd. or DI. At the time Diago also acquired an indirect majority economic interest in and operational control over a joint venture which operated in Thailand, Diageo Moet Hennessy Thailand or DI. The company recognized that its “new subsidiaries had weak compliance policies, procedures, and controls” according to the Order. Both are involved in the action along with Diageo Korea Co. Ltd. or DK.

The proceeding centers on hundreds of small payments made by the three subsidiaries over a period of years to government liquor store operators to secure good product placement, to secure label registrations for its products, as lobbying fees to secure certain tax rulings, to military officials to promote its products and for travel and entertainment. Specifically, in India the following payments were made from 2003 to 2009:

• Liquor store operators: DI made $792,310 in “improper” cash through third party distributors to 900 or more employees of government liquor stores for favorable product placement. Another $186,299 in “cash service fees” was paid to distributors as compensation for advancing the funds. The payments were not properly recorded.

• Canteen stores: DI reimbursed about $530,955 in “improper” cash payments made by third party sales promoters to government employees of Indian Military’s Canteen Stores Department. The payments were made to secure: the release of seized shipments of product; obtain initial listings and annual label registrations for product; secure price revision approvals and favorable factory inspection reports; and to promote the products and good will. The payments were not properly booked.

• Label registrations: DI reimbursed $98,310 in cash payments made by third party promoters and distributors to government officials to secure label registration for products. The payments were not properly booked.

• Import permits: DI paid $78,622 in extra commissions to distributors to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals for product.

In Thailand the following payments were made:

• Lobbying: From April 2004 through July 2008 Diageo, through DT, retained the services of a Thai government and foreign political party official. The purpose was to lobby the government primarily regarding transfer pricing tax issues. During the period the company was involved in active disputes with the government relating to these issues. Senior Diageo officials attended meetings with the Thai lobbyist who was also the brother of a DT executive. As a result of these efforts the Thai government accepted important aspects of the proposed transfer pricing methodology. DT paid about $12,000 per month for 49 months for these services for a total of $599,322 to a political consulting firm. “Most, if not all . .” of that sum was paid to the Thai lobbyist. The payments were not properly accounted for. About $15,169 was for the reimbursement of entertainment expenses “including those incurred on behalf of government officials.” Typically the payments were recorded under “generic” labels.

In South Korea the following payments were made:

• Tax issues: In April 2003 DK, “under Diageo’s direction,” requested a more advantageous transfer tax pricing formula. As part of the negotiations the company sought a large tax rebate. Following intense negotiations in 2004 the government paid a $50 million refund. Subsequently, DK paid a Korean Customs Service official who had been instrumental in the negotiations about $86,339, apparently as a reward. The sum was channeled out of the company using false invoices and was booked by Diageo, through DK, improperly.

• Entertainment costs: During the transfer pricing negotiations about $109,253 in travel and entertainment costs for Korean customs and other government officials was expended. In part these were for a trip to Scotland with DK employees to visit Diageo’s Windsor Scotch production facilities. “During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side- trip to Prague and Budapest.” The costs were not properly recorded.

• Gifts: From 2002 through 2006 Diageo, through DK, routinely made hundreds of small payments to South Korean military officers who were responsible for procuring liquor. During the time period about 400 such payments were made totaling $64,184. In addition, another $165,287 was spent for non-traditional and non-seasonal gifts and entertainment for the military. These payments were not properly recorded.

The proceeding was resolved with the company consenting to the entry of a cease and desist order based on Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Diageo also agreed to pay disgorgement of $11,306,081 along with prejudgment interest and a $3 million civil penalty. The Commission acknowledged the cooperation of the company which included certain remedial efforts, employee termination and significant enhancements to its FCPA compliance program.

Two upcoming programs on the FCPA:
Program: Is FCPA Enforcement To Aggressive? August 5, 2011, ABA Annual Meeting Toronto.
Is FCPA Enforcement Overly Aggressive? The program links are here and here.

Program: Current Trends in FCPA Enforcement, August 17, 2011, Live in Menlo Park, CA, and webcast nationally. The program link is here.