I recently completed a series of lectures on screenwriting, from The Great Courses with Professor Angus Fletcher as the lecturer. In his section on surrealism, he pointed to the movie Pulp Fiction as a prime example and one of the leaders of the indie movie revolution of the 1990s. It became the first independent film to gross over $100 million at the American box office and it went on to earn an Oscar for its two screenwriters, Quentin Tarantino and Roger Avary. Fletcher noted, “The film has its own clear cognitive purpose and its core story techniques are derived from a clearly defined artistic tradition that stretches back to the early 20th century.” Moreover, the story arc and structure clearly draw from surrealism and the surrealist tradition.

Surrealism (in both story arc and structure) informs today topic of the recent Securities and Exchange Commission (SEC) enforcement action involving Beam Inc. k/n/a Beam Suntory Inc. (Beam) for bribery and corruption and violating the Foreign Corrupt Practices Act (FCPA) involving its Indian subsidiary, Beam India. The parties entered into an agreed Cease and Desist Order (Order) and the company agreed to “pay disgorgement of $5,264,340, prejudgment interest of $917,498, and a civil monetary penalty of $2,000,000 to the” SEC.

I. Background

The fine and penalty were for Beam India’s actions from 2006-2012, of making “improper payments to various government officials in connection with obtaining or retaining business in the Indian market”; “using its third-party sales promoters, distributors and other third parties in connection with sales, promotions, distribution, and other commercial activities. The promoters, distributors, and other third parties made illicit payments 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 third parties received funds, or were reimbursed, for the illicit payments by providing fabricated or inflated invoices to Beam India.” Beam India also falsely recorded these corrupt payments into its books and records and the parent, Beam “also failed to maintain a sufficient system of internal accounting controls.”

While the overall fine and penalty were small by FCPA standards, the enforcement action was very instructive for the depth and scope of the bribery scheme. It also re-emphasizes the need for companies to place greater risk management strategies in country’s which are known as high-risk locations for their business products or business model. Such is certainly the case for spirits in the country of India.

II. The Bribery Schemes 

A. Sales Channels

As you might guess the production, distribution and sales of hard liquor spirits in India is heavily regulated at all levels. In any business which competes in a heavily regulated area, there is greater opportunity for low level government functionaries to have their hands out demanding bribes for the basic right to do business. Such is certainly the case in India.

Not unlike several states in America, the Indian states of Delhi, Tamil Nadu, Andaman and Nicobar, Orissa and Karnataka and the military’s Canteen Stores Department regulated the distribution and sale of liquor. Beam India used third-party promoters to market its products in states where the government controlled distribution through its own retail stores. With the knowledge and approval of senior executives of Beam India, third-party promoters made payments so the government stores would not only carry Beam products but also provide superior placement of the products in their stores. Beam India maintained off the book accounts for some corrupt payments and falsely characterized others by using such terms “as “Customer Support,” “Off-Trade Promotions,” “Commission to Distributor/Promoter,” and “Commercial Discount, Ongoing” which disguised the true nature of these payments.”

B. Excise Payments

A second type of bribery scheme involved excise payments “to Indian government officials in fourteen states to secure and expedite the processing of annual label registrations for distribution of Beam’s products from Rajasthan to other Indian states where the liquor was to be sold, and for warehouse licenses in several states that served as depots for Beam India’s products.” There were payments to low level functionaries as well as senior government officials.

These payments were highlighted by one incident discussed in the Order where a senior government official demanded a bribe payment equivalent to one year’s salary, about $18,000 to approve a new liquor product Beam India desired to bring to market.

Apparently, the amount of the bribe payment was so large that it exceeded the authority of local Beam India management and they had to seek the approval of the regional management, APSA, which was located in Australia. The Order noted, “The payment was approved and certain APSA senior management discussed how to disguise the payment by having the third-party bottler pay it to the Excise official, and then submit false invoices to be reimbursed for the illicit payment. After an APSA senior manager communicated the authorization, a Beam India senior manager implemented the scheme whereby the third-party bottler made the illicit payment.”

III.        Surrealism and Compliance

This is the point where things began to get surreal. (Or as Hunter S. Thompson might say “When the going gets weird; the weird turn pro.”) Although Beam acquired Beam India in 2006, it did not engage an international accounting firm to look at the Indian subsidiary from the compliance perspective until 2010. One of the finds was that “promoters are likely making grease payments”. Beam consulted with a US law firm with FCPA experience which led to Beam retaining an Indian law firm to “review and expand on upon the work performed by the accounting firm.” Through interviews only, the Indian law firm agreed with “many of the accounting firm’s recommendations including additional FCPA training and revising contracts with third parties” and also noted “Beam India managers believed that third parties in India may make payments and/or provide gifts to customs officials and government employees”.

During this time period the August 2011 FCPA enforcement action involving Diageo plc was released. Diageo plc was a direct competitor of Beam India. Beam used the opportunity to send a lawyer from the corporate office to ask senior Beam India management if “similar conduct was occurring at Beam India”? The response led to additional FCPA training and revising contract templates for third-party agreements in India.

In August 2011, the US 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.” The US law firm also recommended Beam undertake a full forensic review of its Beam India operations, which Beam declined to do.

In September 2011, the Indian law firm asked Beam if it could interview the third-party promoters. Beam declined but here is where the surrealism is, Quentin Tarantino and Pulp Fiction come into the story. The Beam lawyer did not want the Indian law firm interviewing third-party promoters because “I am concerned about [the Indian law firm] digging and finding information”.

It was only a year later, when two whistleblowers came forward with evidence of bribery schemes, that the company commenced a full internal investigation and uncovered the extent of the bribery schemes.

IV. Lessons Learned

There are several lessons to be learned from the Beam FCPA enforcement action. The first is that all grease payments (facilitation payments in FCPA-speak) must be properly recorded as facilitation payments. To call them something else is a FCPA violation. Second, you must be aware of high-risk jurisdictions, high-risk products and high-risk sales models. Even if it is not is not high risk in one country it may be in another country. If there is a FCPA enforcement action involving a direct competitor, you need to immediately determine if your similarly situated business unit is engaging in similar conduct. Next what might seem like a small amount of money to a US company could well be a fortune in a developing country as the $18,000 bribe was one full year’s salary for the bribe-demanding Indian government official. Further, shelf position is a business advantage and if you pay a bribe for it, you must properly record it in your books and records. Finally, if you suspect your company is engaging in bribery and corruption, you must not bury your head in the sand because a law firm might dig and find untoward information. If you do, not someone might well Bring out the Gimp.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018