Beam Suntory FCPA Settlement Highlights Corruption Risks in India

Conducting business in India continues to represent significant corruption and compliance risk to U.S. and foreign companies as evidenced by yet another multi-million dollar settlement announced by the Department of Justice over violations of the Foreign Corrupt Practices Act (FCPA).

In October, Chicago-based spirits manufacturer Beam Suntory Inc. entered into a three-year deferred prosecution agreement (DPA) with the DOJ and agreed to pay a $19.6 million fine to settle charges that the company had conspired to violate the anti-bribery, internal controls, and accounting provisions of the FCPA.

According to the DOJ, Beam paid bribes to Indian government officials over a six-year period beginning in 2012 via third-party sales promoters and distributors. In exchange, Beam obtained lucrative government orders of Beam products, guaranteed favorable placement of Beam spirits at government depots and retail stores, and secured license and label acquisitions and renewals.

The DOJ further accused the company of falsifying Sarbanes-Oxley Act certifications and improperly recording expenses to conceal the bribery scheme, which also implicated three high-level Beam executives, including one from the legal department. The DOJ predictably cited Beam’s failure to implement and maintain adequate internal controls as a factor shaping the DPA.

The DOJ’s settlement comes more than two years after the Securities and Exchange Commission announced an $8.2 million settlement with Beam in July 2018 to resolve civil charges stemming from the same underlying misconduct.

The reasons behind why the DOJ and SEC broke with past practice and did not coordinate parallel settlements despite the same core conduct motivating both the criminal and civil charges remain unclear. Moreover, the contrast between the findings underlying the DOJ and SEC’s respective settlements is significant.

The SEC found Beam had voluntarily disclosed the company’s violations in India and praised Beam’s cooperation with its investigation, factors it cited in its settlement terms with the spirits manufacturer.

By contrast, the DOJ found that Beam had failed to disclose voluntarily, and characterized the company’s cooperation as “inconsistent and, at times, inadequate” and blamed Beam for “significant delays” in “reaching a timely resolution and its refusal to accept responsibility for several years.”

The DOJ also declined to credit Beam the amount it had already paid to the SEC two years prior, despite official department policy discouraging “piling on” penalties from different enforcement authorities.

Although experts have begun floating theories seeking to account for the ostensible inconsistency, official guidance or explanation has yet to be issued.

India Continues to Represent a Serious Corruption, Compliance Risk

Beam’s settlement with the DOJ is a sobering reminder of the significant corruption and compliance risks India continues to pose to companies operating there.

Multinationals with even the most superficial experience operating in the country have likely confronted India’s convoluted bureaucracy, complex regulatory landscape, and extensive overregulation of key industries, which together help contribute to the endemic corruption problem. India ranked a dismal 80th out of 198 countries surveyed by Transparency International’s “Corruption Perceptions Index” in 2019.

Unsurprisingly, India has emerged as a common situs for FCPA violations. In fact, Beam’s recent settlement with the DOJ makes it the third foreign spirits manufacturer alone to face enforcement action in recent years by U.S. regulators for FCPA violations in India.

Implications of India’s 2013 ‘Companies Act’

Further complicating the picture for companies operating in India are Indian disclosure obligations applicable to private and listed companies. Under India’s “Companies Act of 2013,” directors and auditors of companies incorporated in India (whether private or listed), are required to “report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.”

Meanwhile, if an auditor “has reason to believe that an offence of fraud involving [certain prescribed amounts, set separately at INR 1 crore or USD $140,000 crore] is being, or has been committed against the company by officers or employees of the company, the auditor shall immediately report the matter to the Central Government within [sixty days.]” Such instances of fraud involving less than Rs. 1 crore need not be reported to the central government, but must be reported to the company’s board or audit committee.

Similar regulations promulgated by the Securities and Exchange Board of India (SEBI) since 2015 have required a company’s CEO and CFO to internally report “instances of significant fraud…or an employee having a significant role in the company’s internal control system over financial reporting.”

In October, SEBI amended its regulations to require that listed companies report to stock exchanges—without regard to any determinations of materiality—whenever such companies initiate a “forensic audit” and supply to the exchanges any such forensic audits’ final reports.

Unfortunately, neither Indian law nor SEBI regulations appear to contain an applicable definition of the term “forensic audit,” so companies’ interpretations of these new regulations remain fluid. As of this writing, SEBI is reportedly accepting feedback from stakeholders and is expected to clarify the application of this new regulation, including defining what constitutes a “forensic audit” and whether it will exclude internal investigations and monitoring activities.

Compliance Program Steps

Companies operating in India should implement compliance programs featuring the following three elements, at a minimum.

Auditing and Risk-Assessment

This requires robust due diligence of any intermediaries acting on behalf of the company. This includes customs brokers, freight forwarders and even external counsel. Obtaining certifications from third parties that they have not rendered payments to government officials is paramount.

A sufficiently robust detection system capable of identifying potential FCPA violations also includes features like global hotlines with multilingual operators to receive anonymous tips about possible misconduct, whistleblower protections, email monitoring and periodic, unannounced audits.

Enforcement and Discipline

Violations of compliance policies and procedures must be addressed promptly, consistently, and thoroughly. Lack of enforcement serves to undermine the efficacy of the very compliance program aimed at minimizing potential FCPA violations.

Detection and Remediation

The need for periodic, focused on-site FCPA compliance examinations should be explored. There is no substitute for being on the ground examining records and talking directly to employees, although companies will have to rely increasingly on local compliance resources given Covid-19-related travel restrictions. Doing so is central to uncovering fraud, detecting weak controls, and demonstrating to employees that strict compliance is a company priority.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Tara K. Giunta, a litigation partner at Paul Hastings LLP and a vice chair of the firm’s Investigations and White Collar Defense practice, advises companies in global risk assessments, internal investigations and due diligence to identify and mitigate risk. She has extensive experience in India representing and advising companies across industries, including particularly with regard to highly regulated and sensitive industries with extensive government touchpoints.

Ronak D. Desai is an international investigations, enforcement defense, and compliance attorney at Paul Hastings LLP. He focuses on conducting FCPA, white collar, and other cross-border investigations in high-risk jurisdictions, particularly in Asia. He formerly served as vice chair of the India practice of a prominent international law firm.