Whiskey Sours Fair Competition in India, Thailand, S. Korea
July 28th, 2011
July 28th, 2011
On Wednesday, the SEC announced a $16 million settlement in an FCPA case filed against Diageo, Inc. The company, which dominates the global liquor market, was accused of spending at least $2.7 million on bribes through its Asian subsidiaries, and omitting or mislabeling those funds in SEC filings. These bribes were given to government and military officials in South Korea, India, and Thailand in order to gain a variety of advantages, from tax breaks to more beneficial policies in transfer pricing negotiations. Bribes included trips to Europe, while one Thai bureaucrat received $12,000 a month for helping Diageo, whose brands include Johnnie Walker and Windsor Scotch whiskeys, among others, get an advantage over its competitors.
This case was resolved with cooperation from Diageo, which complied with investigations and fired those responsible for the bribery, without admitting wrongdoing. Still, this case highlights both the important role the FCPA plays, and the importance of defending it from recent attacks.
The Foreign Corrupt Practices Act is a key tool for ensuring fair competition, and thus a more efficient market. In this case, Diageo’s bribery allowed it to reap at least $11 million in profits because of their corruption. These profits may otherwise have gone to more competitive companies, leading to better outcomes for consumers in those countries as well as for the law-abiding corporations that lack Diageo’s ill-gotten advantages.
But recently, the Act has been challenged by the U.S. Chamber of Commerce, attempting to weaken many of its most effective provisions, including some relevant to this case. Earlier this month investigations revealed a “crystal clear” link between the Chamber’s Board members/donors and corporations with a history of serious FCPA violations.
The Chamber’s proposed changes would not hold corporations liable for subsidiaries or for third parties acting on their behalf—as happened in this case—despite the benefits of those actions directly returning to the parent corporation. Corporations with anti-corruption programs would also be able to use the existence of those programs in order to defend themselves from legal action. Yet it is apparent that Diageo’s policies were ineffective, a fact proven by the simple fact that the bribery, and falsification of SEC filings to hide the bribery, occurred at all.
You can find out more about efforts to protect the FCPA from the Chamber here.
CLARIFICATION: Prof. Koehler is correct in noting below that “Diageo was not charged with violating the FCPA’s anti-bribery provisions;” Diageo was charged with violations of the “books and records” provisions of the FCPA and the settlement was not pursuant to any charge of bribery under the anti-bribery provisions. For those well-versed in FCPA terminology, however, we note the following excerpts from the “summary” portion of the SEC’s Cease and Desist and Civil Penalty order, dated July 27, 2011:
“Over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.”
“Separately, Diageo made hundreds of gift payments totaling over $230,000 to South Korean military officials in order to obtain and retain liquor business.”
As the SEC only has the power to bring charges under the “books and records” provisions, however, the violations identified by the SEC were that “Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials,” and that the company “failed to devise and maintain sufficient internal accounting controls.”
Do not hesitate to read the Cease and Desist order for yourself here [PDF].