## Facts

- Diageo plc, a U.K.-based global alcoholic beverages issuer, operated through subsidiaries in multiple countries and consolidated their results into its financial reporting.
- Over more than six years, subsidiaries paid more than $2.7 million to government officials in India, Thailand, and South Korea to obtain sales growth and tax/customs benefits.
- India (2003–mid-2009): Indian subsidiaries made over $1.7 million in payments to hundreds of government officials involved in purchasing decisions or authorizing sales, generating more than $11 million in profits tied to increased sales.
- Thailand (2004–mid-2008): A Thai subsidiary paid about $12,000 per month (nearly $600,000 total) to a government and political party official retained as a “consultant” who lobbied on Diageo’s behalf in significant tax and customs disputes.
- South Korea (2002–2006 and 2004): A Korean subsidiary made (i) a KRW 100 million (over $86,000) “reward” payment to a customs official connected to tax rebates, (ii) over $100,000 in travel and entertainment for officials involved in tax negotiations, and (iii) over $220,000 in gifts to military officers, including hundreds of small cash or gift-certificate “rice cake” payments and other nonseasonal gifts.
- The subsidiaries recorded payments inaccurately, including through false vendor invoices or by booking them under generic expense accounts rather than reflecting their true nature.
- The SEC found Diageo’s internal accounting controls were insufficient, citing rapid acquisition-driven growth and delayed efforts to strengthen subsidiary compliance until after discovering misconduct in 2008.

## Issues

1. Whether Diageo violated Exchange Act § 13(b)(2)(A) by failing to make and keep books, records, and accounts that accurately and fairly reflected transactions and dispositions of assets involving payments to foreign officials.
2. Whether Diageo violated Exchange Act § 13(b)(2)(B) by failing to devise and maintain internal accounting controls sufficient to provide reasonable assurances that improper payments would be prevented or detected at subsidiaries.
3. Whether an issuer is responsible, for FCPA accounting purposes, for inaccurate records and weak controls at consolidated foreign subsidiaries that made the improper payments.

## Decision

- The SEC instituted cease-and-desist proceedings under Exchange Act § 21C and accepted Diageo’s settlement offer without admissions or denials (except as to jurisdiction).
- The SEC found Diageo violated Exchange Act §§ 13(b)(2)(A) (books and records) and 13(b)(2)(B) (internal accounting controls).
- The SEC ordered Diageo to cease and desist from committing or causing future violations of the cited provisions.
- The SEC ordered monetary relief: disgorgement of $11,306,081, prejudgment interest of $2,067,739, and a civil penalty of $3,000,000 (with the penalty amount reflecting, in part, cooperation).

## Legal Principles

- An issuer violates Exchange Act § 13(b)(2)(A) when improper payments are mischaracterized or concealed through inaccurate entries, including use of false invoices or generic expense classifications that do not fairly reflect the transactions.
- Exchange Act § 13(b)(2)(B) requires internal accounting controls reasonably designed to prevent and detect improper payments; recurring payments across jurisdictions over extended periods support a finding that controls were inadequate.
- SEC FCPA enforcement may proceed solely under the accounting provisions even when the conduct involves payments to foreign officials intended to influence governmental action.
- Issuers with consolidated subsidiaries bear responsibility to maintain accurate subsidiary books and records and to implement effective controls and compliance integration, including following acquisitions and during international expansion.

## Conclusion

The SEC resolved the matter through a settled administrative cease-and-desist order, finding that Diageo’s subsidiaries’ payments to foreign officials were inaccurately recorded and enabled by insufficient internal controls, and imposing disgorgement, interest, and a civil penalty under the FCPA’s accounting provisions.


In re Diageo plc, Exchange Act Release No. 64978, AAER No. 3307 (July 27, 2011)