The world’s largest spirits group, Diageo Plc. (DEO), has come to a settlement with the U.S. Securities and Exchange Commission (SEC) under which it has agreed to pay about $10 million to $20 million for closing down a prolonged bribery investigation.
Diageo was under scrutiny of SEC to figure out whether its employees or contractors paid bribes to government officials in South Korea, India and Thailand.
The probe was triggered in 2007, when two employees of the U.K based spirit producer and owner of drinks like Smirnoff Vodka and Guinness Beer, were alleged of paying bribes to South Korean custom officials.
Moreover, a former and two current Diageo Korea employees were convicted on various counts for tax evasion. The firm was also found guilty of selling alcohol to unlicensed suppliers and eventually was fined with $313,000. In June 2007 Diageo lost its license to import alcohol into South Korea.
The SEC follows the US Foreign Corrupt Practices Act (FCPA) for the trail of global companies who allegedly bribe non-US government officials. The FCPA prohibits companies with US stock listings from paying, or offering to pay, foreign officials or employees of state-owned companies to gain a business advantage.
In 2009, Korea Customs Service (KCS) imposed a record retroactive tax of $150 million on the local distributor of Diageo — Diageo Korea, alleging it of having intentionally avoided taxes through manipulating “transfer prices'' (the pricing of various transactions within an organization). This type of price system does not recognize the normal price-setting mechanism of the market doesn't apply.
Diageo sells the Windsor, Dimple and Johnnie Walker brands in South Korea, the world's fourth largest whisky market. It has a 35% share in this part of the Asia Pacific region. It trails Ballantines and Pernod Ricard which sells Imperial, the most popular brand in the region.
The recent economic downturn deterred Diageo and the stiff competition faced from Pernod Ricard and Fortune Brands Inc. (FO) in the spirits business and Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP) in the beer business steal its value in the eyes of the investors.
Diageo holds a Zacks #4 Rank, which translates into a short-term Sell rating.
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