The Beam Suntory case is yet another example of a failure of internal and external auditors, and legal and compliance professionals.  Reviewing cases involves a focus on how and why a compliance failure occurred.  In many cases, legal, compliance and internal auditors are being shunned, ignored, or subjected to pressure to keep their mouths shut or agree to go forward with otherwise problematic transactions or conduct.

Let’s add Beam Suntory to the recent examples of situations where CCOs are not independent nor do they exercise adequate authority in the organization.

As set out in the Statement of Facts, Beam Suntory failed to respond and otherwise delayed acknowledgment of the illegal bribery activity.  In many cases, Beam Suntory executives and senior officials sought to downplay, ignore or delay responding to indications of misconduct.  For several years, Beam failed to adopt significant recommended actions and failed to address the underlying concerns these measures were intended to address. 

As part of its initial audit of the India company that Beam acquired in 2006, Beam identified deficiencies in accounting controls, including lack of supporting documentation for credit notes, promotional expenses and vendor discounts.  Beam failed to conduct any anti-corruption audit.  All of these deficiencies were not addressed until 2012.

2011 Global Accounting Report

In 2010, Beam engaged a global accounting firm to conduct a compliance review of Beam India.  In January 2011. The accounting firm issued a report that raised several red flags, including that Beam India did not have any anti-corruption policies; its employees had not received anticorruption training; Beam India management did not believe it was liable for the conduct of its third parties and readily acknowledged that it had to employ “facilitation” payments; certain vendors presented a significant risk of corruption; and the military-run sales channels posed a “high risk area in terms of anti-corruption compliance.”

The accounting firm recommended that Beam “conduct and document due diligence to confirm activities undertaken” by third parties, “investigate red flags,” “discuss legal considerations of third party actions taken on Beam’s behalf,” and “consider the need to further review” the military sales channel in India. 

Beam did not implement any of the global accounting firm’s recommendations. 

US and India Law Firms

In January 2011, Beam retained a US law firm to review the global accounting firm recommendations.  The US law firm agreed that the issues required follow up.

In February 2011, Beam retained an Indian law firm to review and expand on the compliance issues identified by the accounting firm.  In discussions among Beam’s regional management, it was agreed that, if the review uncovered improper activities by third parties, Beam’s business may be harmed and disrupted.

In a contemporaneous email in February 2011, a Beam legal staff member wrote to a Beam India executive “it is critical to approach a compliance review with the understanding that a US regulatory regime should not be imposed on our Indian business and that acknowledges India customs and ways of doing business.”

The Indian law firm reported that Beam India managers believed that third parties may be making payments for customs officials and government employees in the military sales channel.  The Indian law firm confirmed many of the global accounting firm findings.

Beam asked the US law firm to review the India law firm report.  On August 19, 2011, the US law firm issued a memorandum to Beam noting that the Indian law firm failed to conduct a significant review of Beam’s financial practices or any transaction testing.  In addition, the US law firm identified the India law firm’s findings relating to deficiencies in oversight of third parties and improper payments made by third parties.  Finally, the US law firm made additional recommendations that Beam should review of past invoices and debit notes because there was “a high likelihood that the results of this type of financial review may uncover evidence of potentially improper payments.”

Beam Response

After receiving the US law firm report, Beam employees wrote to Beam finance seeking to close the case.  A Beam employee wrote to the Indian law firm to confirm that the compliance review come to a close.  The Indian law firm recommended conducting additional interviews of Beam employees who interact with third parties.  Beam declined to follow that recommendation recognizing the risk of uncovering third party misconduct “risks for us/Beam India.”  Beam decided to close the review until further allegations of corrupt conduct were raised in September 2012.