Diageo’s ‘Rice Cake’ Payments

There’s always a danger that an unhealthy corporate practice, even an illegal one, will gain internal acceptance and legitimacy simply because it happens all the time.

Take Diageo’s gift giving in Asia. Although illegal, the behavior was so common that it eventually became a familiar corporate routine. The result? Not sanitization by repetition, but an inevitable compounding of the wrong.

Lots of FCPA enforcement actions have involved a main course of bribery in Asia with a side dish of gift-giving — among them IBM, Universal Corporation and Alliance One, Veraz Networks, UTStarcom, Avery Dennison Corporation, GE InVision, and Monsanto.

But in Diageo’s settlement with the SEC last year for more than $16 million, gift giving took center stage.

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Here’s part of the SEC’s description of the company’s behavior:

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From at least 2002 through at least 2006, Diageo, through DK [Diageo Korea], routinely made hundreds of small payments to South Korean military officers for the purpose of obtaining or maintaining business and securing a competitive business advantage. The payments assumed two forms: (i) holiday and vacation gifts known as “rice cake” payments; and (ii) business development gifts, called “Mokjuksaupbi” payments.

Rice cake payments were customary and traditional presents that Diageo, through DK, provided to scores of military officers – many of whom were responsible for procuring liquor – several times each year during holidays and vacations. From 2002 through 2006, DK made approximately 400 rice cake payments, totaling at least $64,184, in the form of cash or gift certificates ranging in value between $100 and $300 per recipient. In October 2004, a senior officer within Diageo’s global compliance department explicitly approved the practice of making rice cake payments after a DK employee explained that the company would face a competitive disadvantage if it refrained.

Over the same four-year period, Diageo, through DK, also spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the military. Of these so-called “Mokjuksaupbi” payments (a term that was broadly intended by DK to refer to “payments for relationships with customers”), approximately $106,051 were for the purpose of influencing specific purchasing decisions. For example, in 2003, DK personnel requested approval of approximately $2,600 to entertain army personnel “for their cooperation” in connection with the re-selection of Windsor Scotch.

Diageo failed to ensure that DK properly accounted for the rice cake and Mokjuksaupbi payments. During 2002 and 2003, DK used fake vendor invoices to generate cash for the rice cake payments and, in 2002, failed to record any of the rice cake payments on its general ledger. DK incorrectly recorded subsequent rice cake payments, and all of the Mokjuksaupbi payments, under general ledger accounts for expenses such as sales, promotion, or customer entertainment. Diageo thereby concealed the fact that it was providing gifts to military personnel from South Korean government auditors.

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