Alcoholic-beverage maker Beam Suntory on July 2 reached an $8 million settlement with the Securities and Exchange Commission to resolve Foreign Corrupt Practices Act charges for improper payments by its Indian subsidiary.

Beam resolved the SEC’s civil charges without admitting or denying the allegations. According to the SEC’s administrative order, from at least 2006 through 2012, Beam’s Indian subsidiary, Beam India, made improper payments to various government officials to obtain or retain business in the Indian market.

“Senior executives at Beam India directed schemes using its third-party sales promoters, distributors, and other third parties in connection with sales, promotions, distribution, and other commercial activities,” the SEC order stated. Illicit payments were made to employees at “government-controlled depots and retail stores and various government offices to increase sales orders, get better positioning on store shelves, process and secure license and label registrations, and facilitate the distribution of Beam India’s spirit products from its bottling facility to warehouses in other states,” the SEC said.

“The third parties received funds, or were reimbursed, for the illicit payments by providing fabricated or inflated invoices to Beam India,” the SEC said. The expenses were falsely recorded at Beam India and consolidated into Beam’s books and records. “During this period, Beam also failed to maintain a sufficient system of internal accounting controls.”

Compliance failures

In 2010, Beam engaged a global accounting firm to conduct a compliance review of Beam India. The accounting firm interviewed executives at Beam India and conducted a limited sample testing of transactions. “In 2011, the firm reported that certain Beam India executives believed that ‘promoters are likely making grease payments’ to government officials in India and, as a result, recommended that Beam follow-up and ‘conduct and document due diligence to confirm activities undertaken’ by third parties, ‘investigate red flags,’ ‘discuss legal considerations of third party actions taken on Beam’s behalf,’ and ‘consider need to further review’ military outlet businesses,” according to the SEC order.

Beam then retained an Indian law firm to review and expand upon the work performed by the accounting firm, which “confirmed many of the accounting firm’s recommendations including additional FCPA training and revising contracts with third parties,” the SEC said. Beam further consulted a U.S. law firm with FCPA expertise to review the report and work done by the Indian law firm.

“In August 2011, the U.S. law firm reviewed the Indian law firm’s report and noted that the Indian law firm had not provided an analysis of Beam India’s books and records, internal controls or other issues related to its finance and accounting practices, that it had not conducted any substantial transactional testing, and that it 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 major accounting firm and the Indian law firm, the U.S. law firm proposed additional recommendations, including additional transactional testing—a recommendation Beam ignored. The company also did not conduct due diligence on third parties, as advised earlier in the year by the global accounting firm, the SEC said.

Remedial efforts

The SEC said it considered Beam’s self-disclosure, cooperation, and remedial efforts. “Beam voluntarily disclosed this misconduct to the Commission staff and timely shared the facts developed during the course of an internal investigation by a special committee of its board,” the SEC said. “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.”

Further, Beam’s remedial actions included:

Ceasing business operations at Beam India until Beam was satisfied it could operate Beam India compliantly;

Terminating certain Beam India employees who were involved in the misconduct; terminating third-party sales promoters in government markets in India;

Updating and expanding its anti-corruption policies and procedures on a global basis, including its relationship with third-party vendors and suppliers;

Enhancing its internal controls and compliance functions;

Developing and implementing FCPA compliance procedures, including expansion and implementation of policies and procedures such as the due diligence and contracting procedures for vendors and suppliers; and

Conducting extensive anti-corruption training throughout the Beam organization.

As part of the $8 million penalty, Beam must pay disgorgement of $5.26 million, prejudgment interest of about $917,495, and a civil penalty of $2 million.

In a quarterly report made in November 2012, Beam said that it had voluntarily notified the SEC and Department of Justice of its FCPA investigation. The SEC order did not mention the Justice Department investigation.

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