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Corporate Character and Lack of Corporate Will

The right way is not always the popular and easy way. Standing for right when it is unpopular is a true test of moral character. Margaret Chase Smith

Corporations experience numerous tests of character.  Perhaps one of the most important is how the company responds when facing potential misconduct.  Too often we read enforcement action factual statements where companies veer off the track and ignore indications of wrongdoing.  This is when a corporation’s will is tested.  It is the difference between a positive and a negative ethical culture.

It is easy to boil all of this down to “doing the right thing.”  A simple phrase with powerful implications – companies face important choices all the time, just like each individual whose behaviors together are reflected in corporate conduct.

Let’s consider one recent example where the lack of corporate will was evident.

Beam Suntory paid $8 million to settle with the SEC FCPA violations in India.  In calculating the appropriate penalty, the SEC declined to credit Beam for remediation of its compliance program.  In the settlement order, the SEC outlined in detail how Beam failed to respond to potential bribery conduct despite numerous early warning signs of such conduct.  Beam’s failure to act exemplified its lack of courage or its lack of corporate will.

Beam’s bribery conduct in India occurred during the period 2006 to 2012.

In 2010, Beam engaged a global accounting firm to conduct a compliance review of Beam India.  In early 2011, the accounting firm reported that Beam India executives believed that third-party promoters were making bribery payments to government officials and recommended that Beam conduct and document due diligence to confirm activities by third parties, investigate red flags and discuss legal consideration of third party actions taken on Beam’s behalf.  After receiving this report, Beam consulted a U.S. law firm, which advised Beam to follow up on these issues.

Beam then retained an Indian law firm to review and expand the work conducted by the accounting firm.  The Indian law firm interviewed Beam senior managers who believed that third parties in India may make payments and provide gifts to customs officials.  In the end, the Indian law firm confirmed many of the accounting firm recommendations.

Beam then requested its U.S. law firm to review and report on the work done by the Indian law firm.  In August 2011, the U.S. law firm reviewed the Indian law firm’s report and noted that the Indian law firm did not review Beam’s books and records, internal controls or other issues related to accounting practices.  In sum, the U.S. law firm confirmed the advice given by the global accounting firm, and the Indian law firm, and proposed additional steps including a financial review, and hiring of a forensic auditor.  Beam did not follow any of the recommendations.

In September 2011, the Indian law firm recommended that Beam interview operational employees involved in high risk transactions with third party promoters.  Beam again declined to do so.

In November 2011, a former Beam India employee alleged a scheme through which a manager was using false invoices to generate cash.  A review completed in March 2012 concluded that the manager was using the funds to pay bribes over a two year period for approval of label registrations.  Despite reaching this conclusion, Beam did not expand its review to examine other third party practices.

In July 2012, a former Beam accountant raised similar compliance issues that eventually resulted in the uncovering the full range of conduct that was the subject of the enforcement action.

Beam’s course of conduct over nearly two years revealed its unwillingness to investigate and uncover misconduct – no wonder that Beam eventually settled for $8 million.  Beam failed the true test of corporate character.

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1 Response

  1. July 27, 2018

    […] Mike Volkov considers corporate culture, values and the ostrich in his exploration of the Beam FCPA enforcement action on Crime, Corruption and Complinace. […]