FCPA Compliance Considerations for the Fashion and Beauty Industry

by Sheppard Mullin Richter & Hampton LLP
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In recent years, the U.S. government has vigorously enforced the Foreign Corrupt Practices Act ("FCPA") against individuals and companies representing a variety of industries. Recent press reports suggest that entertainment companies may be the target of current SEC enforcement efforts, and the government is in the midst of a long-running investigation of Avon Products, Inc. Other companies in the fashion and beauty industry should consider how best to protect against violations.

There are a variety of FCPA compliance best practices that companies should follow, regardless of industry. Based on recent enforcement actions, however, and the unique nature of companies in the fashion and beauty industry, several key anti-bribery basics should be considered by any company in the industry:

Set the Tone at the Top. This is probably the single most important element of a successful FCPA compliance program. This is of particular importance in the fashion and beauty industry given that senior managers may be well known and appear publicly on a regular basis. When senior management consistently demonstrates its commitment to compliance, the commitment tends to permeate the enterprise.

Tailored Compliance Policies. It is a basic truth that an effective compliance program must be appropriately tailored to the organization. It needs to work. For companies in the fashion and beauty industry, especially when operating in China and other parts of the world where many companies are owned or controlled by the government, this means there need to be specific procedures related to entertaining government officials and properly recording for such expenses. It is important that those procedures reflect the fact that even small hospitality expenses, such as private fashion shows, may be enough to create potential FCPA liability.

Joint Ventures. Companies in the fashion and beauty industry should have specific procedures on the formation of joint ventures. Prospective partners should be reviewed through detailed due diligence, and obligations and responsibilities under any venture agreement should make clear that an anti-corruption violation constitutes a material breach of the agreement and grounds for termination. It may also make sense to train certain personnel of the venture partner on their obligations under applicable anti-corruption laws.

Third Party Representatives. As in many other industries, agents and other third party representatives for fashion and beauty companies can pose a significant compliance risk. Representatives typically are from the foreign jurisdiction in which business is being conducted, and may be more accustomed to local business practices, which may be questionable under the FCPA. Representatives also may feel detached from the company's compliance culture and program. In addition, even well-meaning representatives may not fully understand their obligations under applicable law.

An agent or other representative can present a significant challenge because of how frequently the representative is likely to interact with foreign officials, whether customers or regulators. To protect against liability, before engaging any representative, it is essential to conduct and document appropriate compliance due diligence. All compliance "red flags" related to a prospective (or existing) representative need to be addressed. Service and other agreements with representatives should include detailed compliance provisions to which the representative is bound. The company should maintain audit rights over the representative's books and records, and commission amounts should be set as low as possible – at the least, in line with local rates. In addition, compliance training should be provided to representatives whenever warranted.

Government Regulation. Certain aspects of the fashion and beauty industry are often highly regulated. This creates ample opportunity for officials to seek bribes or other improper fees in exchange for granting approvals that a company may need to operate successfully.

It is therefore important to be vigilant when dealing with regulators, including tracking representatives' dealings with regulators, to protect against improper payments made to navigate the regulatory process. For any payment made to a regulator, an official receipt from the official's department or agency should be obtained as proof that the payment was authorized under local law. To the extent a regulator requests a particular payment, no payment should be made without proof that the fee or charge being requested is in accordance with local law.

Training. Unless personnel are aware of the law and the company's compliance policies, even the best compliance program will not succeed. Training is essential. All relevant personnel should receive training in some form; personnel who encounter potential FCPA matters on a regular basis should receive in-person training. All personnel attending training should be expected, after training is complete, to have a basic understanding of the law and know about internal company resources, e.g., the general counsel or the chief compliance officer, to whom questions or concerns can be addressed.

In certain circumstances business people, after receiving in person training, should be expected to lead subsequent trainings in their offices. This is a way to invest the business side of the operation in the compliance process.

Monitoring. The goal of a successful compliance program is to both prevent and detect possible violations. While there will hopefully be far more of the former, the latter – possible violations – is almost inevitable at least on occasion. It is therefore important to have an effective means of monitoring. In particular, personnel should be expected to watch for possible compliance "red flags" and be obligated to report any such issues to the chief compliance officer, general counsel, or other senior compliance official. To the extent there are violations, mitigation steps will be necessary to minimize whatever damage was done and to protect against similar action in the future.

In addition to regular monitoring – a responsibility of all company personnel – the audit or legal department of the company should periodically engage outside counsel or other service providers to help develop and implement a more broad-based compliance audit. This will check both for specific problems and for deficiencies in the systems or policies that should be addressed.

In the current era of aggressive enforcement, a pro-active compliance strategy is an effective defense against potential problems. No compliance program is perfect, but ensuring steps such as those above are incorporated into your compliance program will help protect against violations and may mitigate them if – and when – they do occur.

 

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