Oh Johnnie!

Mumbai, July 28: Diageo, the world’s largest liquor maker, has been charged by the US market regulator with paying bribes worth more than $1.7 million (almost Rs 7.5 crore) to government officials in India between 2003 and 2009 to push sales of its famed Johnnie Walker Scotch whisky.

The Securities and Exchange Commission (SEC) said Diageo had made the illicit payments that led to an unjust enrichment of the London-based liquor giant by over $11 million through increased sales.

The charges levelled against Diageo, which was formed in 1997 through the merger of Guinness and Grand Metropolitan Plc, stemmed from widespread violations of the Foreign Corrupt Practices Act (FCPA).

The FCPA is a federal law enacted in 1977 that contains anti-bribery provisions designed to stop illicit payment to a foreign official, foreign political party or a candidate for political office in order to obtain an unfair advantage in the conduct of business.

The law has been invoked several times in the past to bust companies like Daimler AG, Siemens, Monsanto and BAE Systems for unfair practices.

The SEC investigators detected improper payments by Diageo worth more than $2.7 million to government officials in India, Thailand and South Korea — with more than 60 per cent of those illicit payments going to mostly small-time Indian babus.

In an order issued tonight to settle administrative proceedings against the liquor giant, the SEC said Diageo had made the payments to obtain lucrative sales and tax benefits relating to its Johnnie Walker and Windsor Scotch whiskies, among other brands. Johnnie Walker is the biggest-selling Scotch whisky brand in India.

Diageo has agreed to pay more than $16 million to settle the SEC’s charges.

Without admitting or denying the findings, Diageo agreed to cease and desist from further violations and pay $11,306,081 in disgorgement, a pre-judgment interest of $2,067,739, and a financial penalty of $3 million.

Diageo, which operates in 180 countries, has brands like Johnnie Walker, Smirnoff, J&B, Baileys, Captain Morgan, Tanqueray and Guinness in its product portfolio.

“For years, Diageo’s subsidiaries made hundreds of illicit payments to foreign government officials,” said Scott W. Friestad, associate director of the SEC’s division of enforcement. “As a result of Diageo’s lax oversight and deficient controls, the subsidiaries routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments.”

The SEC order says the Indian officials were responsible for purchasing or authorising the sale of alcoholic beverages in India.

The order said Diageo and its subsidiaries had failed properly to account for these illicit payments in their books and records. Instead, they concealed the payments to government officials by recording them as legitimate expenses for third-party vendors or private customers, or categorising them in false or overly vague terms.

In some instances, they failed to record them at all. Diageo lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting.

In India, the illicit payments were made through Diageo’s wholly owned indirect subsidiary called Diageo India Pvt Ltd, which is based in Mumbai.

The SEC investigators found that Diageo — through Diageo India — engaged in a “pervasive practice of making illicit direct and indirect payments to government officials through India to obtain and retain liquor sales”.

Between 2003 and June 2009, Diageo India paid an estimated $792,310 in improper cash payments through its third-party distributors to 900 or more employees of government liquor stores in and around Delhi.

Diageo India also paid an estimated $186,299 (about 23 per cent of the payments) in “cash service fees” to the distributors as compensation for advancing the funds. The payments were made to increase government sales orders for its products and to secure favourable product placement and promotion within the stores, the SEC said.

The illicit payments had continued for at least six years before Diageo India instructed its distributors to discontinue them in July 2009.

Diageo India reimbursed an estimated $530,955 and made plans to reimburse an additional $79,364 in improper cash payments made by third-party sales promoters to government employees of the Indian military’s Canteen Stores Department (CSD). Liquor accounts for a very big chunk of the sales from CSD canteens.

The payments to the CSD employees were designed to: (i) foster promotion of Diageo products in the CSD canteens; (ii) obtain initial listings and annual label registrations for Diageo brands, price revision approvals, and favourable factory inspection reports; (iii) secure the release of seized shipments of Diageo products; and (iv) promote goodwill through the distribution of Diwali and New Year’s holiday gifts.

Between 2003 and 2008, Diageo India reimbursed an estimated $98,310 in cash payments made by its third-party promoters and distributors to government officials in northern India and Assam. These payments were masked through debit notes that described the payments as special rebates or “incentive for reaching sales targets”.

Excise officials in northern India were also greased with an estimated payment of $ 78,662 that was labelled as extra commissions to its distributors. The payments were made to secure import permits and other administrative approvals.

The SEC found that from 2004 to mid-2008, Diageo paid approximately $12,000 per month --- totalling nearly $600,000 -- to retain the consulting services of a Thai government and political party official.