Just in time for National Beveridge Day comes the Foreign Corrupt Practices Act (FCPA) enforcement action involving Anheuser-Busch InBev (ABI), where the company paid $6 million to settle charges that it violated the FCPA and impeded a whistleblower who reported the misconduct. Given the information provided in the Securities and Exchange Commission (SEC) Cease and Desist Order (Order), one might reasonably wonder how the company got off so lightly. ABI agreed to “pay disgorgement of $2,712,955, prejudgment interest of $292,381, and a civil penalty of $3,002,955, for a total payment of $6,008,291” to the SEC.
The illegal conduct occurred in the company’s wholly owned Indian subsidiary, Crown Beers India Private Limited (Crown). ABI owned a 49% interest in the joint venture (JV) InBev India International Private Limited (IIIPL) which managed the marketing and distribution of Crown beer. The Order notes, “IIIPL used third-party sales promoters to make improper payments to Indian government officials to obtain beer orders and to increase brewery hours for Crown in 2011. IIIPL invoiced Crown for reimbursement for certain of these expenses, and Crown paid or accrued them. In doing so, Crown recorded certain of these expenses in its books as legitimate promotional costs. During this period, Crown had inadequate internal accounting controls to detect and prevent these improper payments and to ensure that transactions involving these promoters were recorded properly in its books.”
ABI made about every mistake possible in this matter and this case is therefore a very useful teaching tool for the FCPA compliance practitioner. As noted, the nefarious entity, IIILP was 49% owned by ABI (or its predecessor). The governance structure of the JV provided that ABI and its Indian partner “each had the right to appoint four IIIPL directors, with RJ Corp having the right to appoint the Chairman, who cast the tie-breaking vote on all but certain specified matters. RJ Corp appointed the IIIPL CEO, who had the power to appoint the other members of the IIIPL management team, except for the CFO, whom AB InBev appointed. Throughout the relevant period, the top financial officer at Crown acted as the top financial officer at IIIPL. From mid-2011 through early 2014, Crown’s in-house counsel also acted as IIIPL’s in-house counsel.”
The Order reports that in early 2009, the JV concocted a scheme to pay bribes to increase sales. It hired Promoter Company A, who had no industry experience, who charged excessive commissions and sought reimbursement for questionable promotions. There was no contract in place with Promoter A and no due diligence was obtained prior to the commercial relationship commencing. Later in 2009, an internal whistleblower brought forward information on the illegal activities of Promoter Company A.
In December 2009, ABI received an internal report on potential illegal activities at the JV and ABI expedited a previously scheduled audit of the JV. While “audit did not scrutinize Promoter Company A’s activities or expenses. Still, the 2010 audit identified various deficiencies at IIIPL, including (a) a lack of documented business policies and procedures for significant functions such as procurement, vendor selection, and expense reimbursement; (b) a lack of awareness about FCPA compliance; and (c) inadequate information technology controls regarding financial processes and expense payments. AB InBev did not rectify many of the issues identified in the audit until 2011 or early 2012.”
In 2011, IIILP began to work with Promoter Company B, which was owned by the son-in-law of the Provincial Excise Minister. Promoter Company B was the conduit through which bribes were paid to the Minister to allow the JV to brew after hours and later bribes were paid to generate sales. The was no due diligence performed on Promoter Company B and there was no written contract in place, although one was later surreptitiously created and magically back-dated to give the appearance of following the law.
As you might well guess, for his (or her) trouble the internal whistleblower was terminated. In settling his (or her) claim, the Separation Agreement claimed to prevent the whistleblower from reporting the illegal conduct. It is not clear if ABI attempted to enforce this provision but the Order did note the whistleblower, who had been cooperating with the SEC, ceased doing so and only resumed such cooperation, “Only after the Commission issued an administrative subpoena for testimony and documents did the Crown Employee resume communicating directly with the Commission staff.”
In addition to not self-disclosing the clear FCPA violations, ABI not only did not cooperate but actively resisted the SEC’s investigation. The Order reported, “During the investigation, AB InBev did not respond to subpoenas in a timely manner, and made broad assertions of privilege that required significant resources from the Commission staff to address and delayed the production of responsive, non-privileged documents.”
Worse, the JV engaged in plans to destroy or hide documents. Here the Order reflected, “In or about May 2013, Commission staff learned of IIIPL’s plans to destroy or hide documents. The Commission staff informed AB InBev immediately thereafter, but the company took no immediate corrective action. In September 2013, AB InBev notified the Commission staff of a meeting in which several IIIPL managers instructed top IIIPL employees to remove potentially inculpatory data from their offices and computers. Crown and IIIPL’s in-house counsel attended the meeting, but never alerted AB InBev management to the document removal instructions. Other IIIPL employees reported that they had helped or observed IIIPL managers take several binders out of the building to destroy or move to a “secret location.””
ABI did make some efforts at remediation, most notably shutting down the JV and operating directly out of India now. It also conducted “extensive FCPA training for Crown’s staff, and implemented improved compliance policies and controls at Crown, including policies and controls relating to third-party due diligence and contracts. AB InBev also has hired a dedicated India compliance manager who reports to a new India Legal Counsel and Head of Compliance.”
ABI was found to have violated the FCPA and the Dodd-Frank Whistleblower provisions in the Order. The FCPA violations included violations of both prongs of the Accounting Provisions; books and records and internal controls. The Dodd-Frank violations centered on not only trying to illegally muzzle the un-named whistleblower but indeed all employees terminated when the JV was dissolved. It was not spelled out in the Order which part of the penalty of $3MM+ related to the FCPA violations and which part related to the Dodd-Frank violations.
This enforcement action drives home several points on basic FCPA compliance. The first centers around JVs. Companies must take their FCPA and Dodd-Frank obligations seriously as they apply to foreign JVs. ABI clearly did not. Not only did it put forward a less than rigorous audit of the JV after having been put on notice, it did not follow through to ensure that audit recommendations were followed. ABI allowed the illegal conduct to continue long after it was put on notice.
Next, the role of the in-house counsel must be raised as the lawyers for the company have not come out of this looking too good. Not only were the Indian subsidiary, Crown’s in-house counsel, the counsel for the JV involved, they were a large part of the problem. The Order specifically called out these lawyers for being in attendance at meetings where document destruction and hiding was discussed but did not inform the corporate parent or anyone else. Someone in the legal department had to have drafted or at least approved the illegal language of the Separation Agreement. I hope that ABI sent its in-house counsel to some strong legal ethics training. Some FCPA training would also seem appropriate.
ABI may well thank its lucky stars that it got off so lightly based on these underlying facts.Click to tweet
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© Thomas R. Fox, 2016