Diageo: Cash for Officials, Commissions on the Books

Diageo agreed to a $3 million civil penalty and to return $11,306,081 in profits in the Diageo FCPA case over alleged payments for liquor sales and tax benefits in India, Thailand and South Korea. Under the Foreign Corrupt Practices Act settlement, the penalty was smaller than the profits the Securities and Exchange Commission attributed to the Indian payments alone.

The allegations reached into the everyday work of selling alcohol: distributor commissions, product registrations, shelf placement and tax negotiations. For someone who approved the reimbursement or knew what a consultant actually did, the telling detail was the gap between the expense label and the person the money reached.

The Commission’s July 27, 2011 settlement order alleged that Diageo’s subsidiaries paid more than $2.7 million to government officials. Diageo, a London-based producer and distributor of spirits, beer and wine, included the Indian, Thai and South Korean businesses in its consolidated financial statements. Local payments therefore reached the accounts of a company whose shares traded in New York.

India Paid for Orders, Shelf Space and Approvals

The Securities and Exchange Commission alleged that Diageo paid more than $1.7 million to Indian government officials from 2003 through mid-2009 to obtain or retain liquor sales. The officials could purchase the beverages, authorize their sale or influence their treatment inside government stores. That put the public employee on both sides of the alleged arrangement: deciding how the product sold and receiving money from the business selling it.

Around New Delhi, the order described cash payments through distributors to employees of government liquor stores. The alleged objectives were larger orders, favorable placement and promotion inside the stores. The order alleged that Diageo India also paid the distributors a fee of 23% of those payments for advancing the cash. The alleged bribe had its own financing charge.

According to the order, distributors recovered the money through debit notes or increases in their commission per case of liquor. The debit notes called the payments incentives, promotions or market scheme settlements. Diageo India then recorded the reimbursements in promotion and trade-incentive accounts, or recorded the increased commissions without revealing the government employees who received the cash.

That is why a distributor’s commission and promotional budget can matter as much as a direct payment to an official. Here, the Commission alleged that Diageo India paid the distributor back after the distributor advanced the money. A finance employee who knew why the commission increased would see something the ledger description concealed.

Military Stores and Label Registrations

The Indian military’s Canteen Stores Department controlled another route to customers. The order alleged that Diageo India knowingly authorized and reimbursed payments through sales promoters to secure product listings, annual label registrations and price approvals. The payments also covered holiday gifts to government employees.

The accounting labels changed while the alleged purpose continued. According to the order, promoters first submitted debit notes describing business promotion and other expenses. After June 2007, Diageo India reimbursed the payments through increased commissions per case. Elsewhere in India, the order described payments for label registrations recorded as special rebates or trade incentives, and payments for import permits hidden in selling commissions.

Thailand Put an Official on a Consulting Retainer

In Thailand, the Securities and Exchange Commission alleged that Diageo’s joint venture paid $599,322 through a political consulting firm for a government and political party official’s lobbying services. The engagement ran from April 2004 through July 2008 and concerned tax and customs disputes. The order said senior local management knew the consultant was a government official and that he was the brother of a senior officer at the joint venture.

The commercial stakes were specific. According to the order, the official arranged meetings over whether excise taxes should depend on the quantity of liquor or its price. He also lobbied over transfer pricing, the price companies within a multinational group charge one another, as it affected imported Scotch whiskey. The Commission alleged that his efforts contributed to favorable decisions in those disputes.

The order alleged that the monthly retainer went through accounts labeled outside services, corporate social responsibility, corporate communications and stakeholder engagement. The joint venture would charge payments to one account for a time, then switch to another without a discernible reason. According to the order, the official’s services continued while the accounting description moved around.

We call that buying influence, whatever the corporate social responsibility account said. The Commission’s allegations connect the consulting firm, the official’s public role, management’s knowledge and the tax decisions he sought. An invoice saying advisory services captured only one part of that relationship.

South Korea Turned a Broker’s Invoice Into Cash

The South Korean allegations included an inflated customs-broker invoice used to fund a payment to an official after tax negotiations. Diageo Korea had sought a more favorable transfer-pricing formula for imported whiskey and rebates for earlier overpayments. In April 2004, the South Korean government granted a rebate of approximately $50 million.

The Securities and Exchange Commission alleged that a manager paid an apparent reward of $86,339 to a customs official three months later. With the local chief financial officer’s approval, the manager obtained an inflated invoice from the customs broker that had worked on the negotiations. Diageo Korea paid the invoice, and the broker returned cash to the manager. The manager added personal funds and delivered the payment to the official in bank checks.

According to the order, the company booked the broker’s invoice as professional services and consulting fees relating to the transfer-pricing work. The entry concealed the cash returned to the manager and the broker’s failure to perform all the billed services. The person reading only the invoice would see a customs consultant getting paid for a tax project. The person who knew about the cash return would see the alleged payment route.

Factory Visits and Military Gifts

The Commission alleged that travel for Korean officials during the tax negotiations included a recreational side trip during a visit to Scotch production facilities in Scotland. According to the order, Diageo Korea recorded related expenses as customer entertainment, obscuring the officials’ identities, and left some entertainment expenses off the books altogether.

In separate military sales, the order alleged payments of cash and gift certificates described as traditional holiday and vacation gifts, along with other gifts tied to purchasing decisions. The Commission alleged that Diageo Korea used fake vendor invoices to produce cash for some gifts and recorded later payments as sales, promotion or customer-entertainment expenses. The alleged purpose was to obtain or keep liquor business with the military.

What the Payment Labels Concealed

The books-and-records allegations under the Foreign Corrupt Practices Act concerned what the accounts said about the payments. The Commission alleged that descriptions such as promotions, commissions and consulting fees hid payments to government officials. The three country accounts show different ways of separating the expense from its beneficiary: reimbursing a distributor, paying an official’s consulting firm and turning a broker’s bill into cash.

A 2015 Securities and Exchange Commission enforcement speech about pharmaceutical compliance described a related mechanism in another industry. The enforcement director explained that distributors could use their margin to create a cash fund for bribes, adding:

The Diageo allegations give that extra layer a concrete form: a distributor advances the cash and later recovers it as a commission or promotional reimbursement. Understanding the distributor’s actual work lets an insider explain why an expense that looks ordinary in the parent’s accounts deserves a closer look.

The same commercial disguise appeared in the Commission’s allegations concerning Anheuser-Busch InBev‘s Indian operations. Its settlement order described unsupported display charges billed per case of beer, rather than against the actual cost of a display, and excessive commissions used to pay officials. In that account, the bill grew with sales volume while the supposed promotional work lacked support.

When Compliance Approved the Practice

The Commission also alleged that Diageo failed to put accounting checks in place that could detect and prevent the payments. According to the order, Diageo recognized weak controls in businesses it acquired but failed to make sufficient improvements until mid-2008, after discovering the improper payments. Its account also described approval from inside the compliance function itself.

The order called the Korean holiday gifts rice cake payments and referred to Diageo Korea as DK:

We expect compliance to stop improper payments. In the Commission’s account, it approved continuing because the business said it would lose ground if it stopped paying. For an employee who saw the request and the approval, those records explain how the practice survived beyond the local sales team.

What Diageo Agreed to Pay

The settlement required Diageo to return the profits the Commission attributed to increased Indian sales from the alleged payments. The penalty came on top of that repayment. The Commission said it took the company’s cooperation, employee terminations and significant improvements to its compliance program into account when accepting the settlement.

The Records Behind the Expense

For someone in sales, tax, distribution or finance, the useful connection is between the official decision and the expense approved inside the company. Diageo’s alleged routes left different records: distributor debit notes and commission changes in India, a consulting retainer and shifting ledger accounts in Thailand, and a broker’s inflated invoice and returned cash in South Korea. The payment trail connects the business reason given for spending the money to its ultimate recipient.

Your knowledge may sit at the point where those records stop telling the same story. Knowing what a promoter delivered, why a fee increased or who approved a gift can explain a transaction that the accounting label alone makes difficult to understand.

SEC whistleblower awards can pay 10% to 30% of qualifying money collected, shared among eligible whistleblowers, where the SEC action imposes more than $1 million in monetary sanctions. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The programs are separate, and we work through which applies to your information with you.

You Know Why the Payment Was Approved

If you know whose payment became a commission, a consulting fee or a promotion expense, bring that account to our whistleblower experts. We connect your knowledge of the business with the payment and approval records, and bring in FCPA whistleblower lawyers who understand overseas distribution and accounting schemes. We stay at your side from the first call, working with you and whistleblower counsel to build your strongest case.