John Fogarty Rocks-Nu Skin Informs Oversight

by Thomas Fox
Contact

I recently saw John Fogerty in concert. For those you are not aware, he was a founding member and the driving force behind Creedence Clearwater Revival (CCR), one of the very top American groups from the 1960s and early 1970s. After the band’s disintegration, Fogerty continued on as a solo artist. CCR was distinctive in that its rock and roll roots were Stephen Foster as much as anyone and in the middle of the British invasion brought a uniquely American sound with a very hard edge. From the anthem of Vietnam vets, Who’ll Stop the Rain, to the greatest Halloween song Bad Moon Rising (that is – after Boris Karloff’s version of the Monster Mash); CCR brought serious American root chops to rock.

Fogerty continues to rock out and played a 2.5 hour set straight through from his opening song of Proud Mary to his encore performances of Travelin’ Band, Bad Moon Rising and Fortunate Son; it was one great night of rock and roll for any who listened to music in the 60s or 70s. His son played lead guitar for him and it was very obvious that Fogerty had a father’s joy in working with his son. If he comes to your town, I suggest you run, don’t walk, to the show.

Fogerty’s performance informs today’s blog post about the recent Foreign Corrupt Practices Act (FCPA) enforcement action brought by the Securities and Exchange Commission (SEC) against Nu Skin Enterprises Inc. (Nu Skin) and its Chinese subsidiary, Nu Skin (China) Daily Use & Health Products Co. Ltd. (Nu Skin China). Nu Skin is a Utah based entity, which, according to the SEC Cease and Desist Order (Order), is “in the business of manufacturing and marketing cosmetic and nutritional products primarily through direct selling, or multi-level marketing [MLM], channels.”

Although it was a relatively small enforcement action with a civil money penalty in the amount of $300,000, coupled with a disgorgement profits in the amount of $431,088, plus prejudgment interest of $34,600, the matter has several interesting aspects for the Chief Compliance Officer (CCO) or compliance practitioner to consider. First, although it might seem somewhat unusual for such an entity to become embroiled in a FCPA enforcement action it is the uniqueness of it that points to several lessons to be garnered by any company doing business under a MLM sales model. Next the case involved corruption around a charitable donation and it, therefore, serves as a stark reminder of the high-risk of charitable donations under the FCPA. Finally, the matter reminds everyone of the strict liability nature of violations of the Accounting Provisions of the FCPA including both internal control provisions and books and records provisions of the Act.

The allegations are that Nu Skin China made a donation which totaled approximately $154,000 to a charity in China to secure the intercession of a Chinese Communist Party (CCP) official to stop an ongoing investigation of the company. Nu Skin China had engaged in direct selling in China, in violation of Chinese domestic law, and was under investigation by the Administration of Industry and Commerce.

Nu Skin China decided, rather than comply with the law, it would seek to influence the investigation through corrupt means. According to the Order, “A Nu Skin China employee contacted the Party Official, who was his acquaintance, to suggest a charity located in the province. The Party Official had a pending request to Nu Skin China to facilitate obtaining college recommendation letters to U.S. universities from an influential U.S. person for his child. The Party Official proposed a charity, although at the time a branch of the charity had not yet been established in the province and it had no operations there. The Party Official, however, was associated with the entity that was responsible for establishing the charity in the province. Further, the provincial head of the AIC had previously reported to the Party Official.” Not only was a donation to the Party officials suggested charity made by but “the request for the recommendation letters was elevated to “top priority” as it was “becoming increasingly important” for Nu Skin China. Nu Skin US subsequently reported to Nu Skin China that it had secured an agreement from an influential U.S. person to write the college recommendation letters for the Party Official’s child.”

Nu Skin China did not inform its US parent of the true nature of the donation; to wit, to corruptly influence the AIC investigation and proposed fine of approximately $485K. Because of the size of the donation, the US parent had to approve and advised its Chinese subsidiary that such a “large donation in China could pose FCPA risks, so it advised Nu Skin China to consult with outside U.S. legal counsel based in China to ensure that the donation complied with the FCPA. Outside counsel, in turn, recommended that Nu Skin China include anti-corruption language, which included language regarding the illegality of influencing government officials, in the written donation agreement with the charity. That language was inserted into a draft of the donation agreement between Nu Skin China and the charity. The anticorruption language, however, was removed from the final version of the donation agreement that Nu Skin China executed. Nu Skin US was not aware that the language had been removed.”

All of this presents several significant and important lessons for the CCO and compliance practitioner. There was no evidence that Nu Skin self-reported so it is not clear how the SEC was made aware of the FCPA violation. However, it is not too far a stretch to opine that the Chinese government could have tipped off the SEC. The case also demonstrates that it is every transaction that matters as this enforcement action was for a one-time transaction. Ongoing due diligence, compliance terms and conditions in contracts and monitoring the relationship after the contract is signed are mandatory for any high-risk transaction. This donation had been flagged by the US entity as high-risk yet there was no oversight by the US entity to make sure that the compliance mandates were followed.

This enforcement action also reinforces the need for robust management of FCPA high-risk charitable donations. As was noted in the Order, “given the well-known corruption risks in China, Nu Skin US did not ensure that adequate due diligence was conducted by Nu Skin China with respect to charitable donations to identify links to government or political party officials and to prevent payments intended to improperly influence such persons in violation of the company’s anticorruption policy and the FCPA.” The reason there are levels of oversight in any best practices compliance program is to prevent just this type of FCPA violation from occurring. It really does not matter if the China subsidiary misrepresented to the US parent both what it was doing and then failed to follow specific instructions. Oversight is there to make sure that internal rules and procedures are followed. That is the responsibility of the US parent.

Finally, companies need to understand the strict liability nature of enforcement actions involving Accounting Provision violations of the FCPA. The statute itself refers to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances” as the SEC had interpreted this portion of the FCPA to set a reasonableness standard. If there are payments which violate the FCPA, there were not sufficient internal controls to prevent them. It may sound like very backward logic but that is the reality of SEC enforcement actions and it points directly to the need for companies to have functioning internal compliance controls in place.

John Fogerty took me back many years to some great music I listened to and indeed loved as a teenager. The Nu Skin FCPA should remind every CCO and compliance professional that vigilance must be maintained in any high-risk country or high-risk transaction, even if you are selling through MLM. Failure to follow through with all required compliance program steps, including oversight from the home corporate office, can lead to serious consequences.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

Written by:

Thomas Fox
Contact
more
less

Compliance Evangelist on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.