In January this year, US-based Mondelēz International, Inc (‘Mondelēz’) settled a five-year long investigation by the US Securities and Exchange Commission (‘SEC’) for alleged bribery, without agreeing with or denying the allegations, for a civil penalty of $13 million. The investigation was regarding certain business activities related to setting up a new manufacturing plant in India by the Indian subsidiary (‘Cadbury India’) of UK-based Cadbury plc, which was acquired by Mondelēz in 2010.

The SEC order identified two possible violations of the Securities Exchange Act, 1934 (‘Exchange Act’) while referring to the possibility of Mondelēz violating the Foreign Corrupt Practices Act, 1977 (‘FCPA’). First, Cadbury India, in a violation of Section 13(b)(2)(A) of the Exchange Act, did not keep books, records, and accounts, in reasonable detail, accurately and that fairly reflected the transactions and disposition of the assets of the company. Second, Cadbury India, in violation of Section 13(b)(2)(B) of the Exchange Act, did not devise and maintain an appropriate system of internal accounting controls. Pursuant to Section 21C of the Exchange Act, the SEC ordered Mondelēz to ‘cease-and-desist’ from any activities that had violated, were violating, or would in the future violate the provisions of the Exchange Act and the FCPA.

This case highlights the likely censure that US-registered companies will face for the possible mishandling of their affairs on foreign soil.

  • This case was in relation to compliances arising from certain transactions at a foreign subsidiary, Cadbury India. Companies need to set up, across all their subsidiaries, a standard compliance system, which ensures that the access to company assets and funds is in accordance with the general or specific authorization given by the management. The system should also be able to detect and prevent improper or unauthorized payments.
  • Cadbury India had hired agents to help with required government licensing and approvals for the new plant. The activities undertaken by one of the agents led to the suspicion for bribery. When retaining third-party agents, companies should draw up and sign proper contracts. These contracts should clearly proscribe certain transactions and promote ethical behavior by the agents. They should also include mechanisms to monitor and audit the activities of the agents. 
  • The SEC order stated that the records maintained by Cadbury India did not accurately reflect the nature of the services rendered by the agent. To reduce the possibility of corruption, companies need to maintain sufficiently detailed records of accounts and collect supporting documents of transactions carried out by employees, contractors and retained third-party agents.
  • The incident happened before Mondelēz had acquired Cadbury plc in February 2010. However, Mondelēz was held liable for the pre-acquisition violations. This is indicative of standards that acquiring companies need to uphold in the pre-acquisition and post-acquisition due diligence of the target company and its subsidiaries.
  • Mondelēz cooperated with the SEC and undertook large-scale remedial measures in the process. Such cooperation and extensive corrective actions show the constructive intent of the involved company and usually reduce the civil penalty. They also elicit positive response from the regulatory agencies towards a settlement and avoiding a lengthy and costly litigation.

For more information and detailed analysis, read our full article here.

Niyati Gandhi is Associate in the International Litigation and Dispute Resolution team, M.S. Ananth is Co-Head of the Regulatory and Litigation Practice, and Mihir A. Parikh is Strategic Thought Leader, all at Nishith Desai Associates.