The Avon FCPA Settlement, Part II

by Thomas Fox
Contact

Bad ConductI am back from my holiday break and am looking forward to many good ideas for blogs in the coming year. However before we get to 2015, I have to finish out some matters from 2014. Today I continue my look at the Avon Foreign Corrupt Practices Act (FCPA) enforcement action, which was announced earlier this month. In today’s post I will look at the bribery scheme and cover-up that Avon employed. Tomorrow I will conclude with some final lessons to be gleaned from the Avon enforcement action for both the compliance practitioner and greater corporate world. Avon Products (China) Co. Ltd. is referred to as ‘Avon China’ and Avon Products, Inc. (the US parent) is referred to as ‘Avon’.

With a sustained plan that one can only say was well thought out, Avon set out to conquer the Chinese market for door-to-door sales. To do so, Avon had to navigate a bureaucratic maze. This maze began with a Test License obtained in 2005 and later a national direct selling license together with approvals from each province and municipality where the company wanted to sell its products. To obtain the required licenses, the company set a bribery scheme which worked at all levels of the company’s China subsidiary, Avon China, and reached back to the home office in the US, Avon Products. Both of these entities were the subject of the FCPA enforcement action concluded earlier this month. The bribery scheme itself paid out over $8MM in bribes before it was concluded.

To facilitate this process Avon China set up a business unit entitled the Corporate Affairs Group and later a more focused sub-group as part of the scheme called the Direct Selling Special Task Force. These two groups led the company’s efforts to bribe its way into the China market. They did so through a variety of means, as set out in the settlement documents. Unless cited otherwise, the quotes below are from the Avon China Criminal Information.

Gifts

Avon was fond of giving very high priced gifts to various Chinese government officials. Inevitably, Avon China employees would falsely describe the gift itself in the company’s books and record. To add to this deception, Avon China would omit from the books and records not only who the gift was provided to but also the purpose of the gift. This part of the bribery scheme allowed the gifts of Louis Vuitton products to be described as a “public relations expense” and “Public Relations Business Entertainment”; while the gift of a Gucci bag was described as “business entertainment”.

Meals and Entertainment

This part of the bribery scheme was a clear favorite of Avon China. The aforementioned Direct Selling Special Task Force was ubiquitous in the meals and entertainment arena where its members simply used the term “relations” to refer to “things of value provided to government officials or goodwill that had been obtained by giving such things, including non-business meals and entertainment.” Specifically noted in this part of the bribery scheme were payments of approximately $8,100 described as “sales-business entertainment” provided to a government official so he would approve a product that did not meet Chinese government standards. Other false excuses provided were describing such payments as “business entertainment” and “employee ‘accommodation’ expenses”.

Non-Business Travel

Avon China doled out a huge amount of bribes through the mechanism of phony travel for alleged business purposes. Avon China would claim they were bringing various Chinese government officials (also Wives, Girlfriends and other family members) to locations for business-related travel but in reality the trips were mostly sight-seeing excursions, gambling junkets, a beach vacation and other entertainment which had nothing to do with business purposes. So a trip alleged to be a “site visit/study visit” to the corporate headquarters in New York City and the company’s research and development (R&D) facility in upstate New York became a $90,000, 18-day travel extravaganza to “Vancouver, Montreal, Ottawa, Toronto, Philadelphia, Seattle, Las Vegas, Los Angeles and Washington DC.” (Oh, and one half-day at the company’s upstate New York R&D facility.) Other favorite venues for Chinese government officials and their families were the gambling mecca of Macau, Hong Kong, Hainan Island, Guangzhou, Shenzhen and Sanya. Needless to say, none of these locations had any Avon corporate offices, manufacturing or R&D facilities.

Cash

Always a favorite of bribers everywhere, Avon did not neglect to lay out large amounts of cash. Avon China used a variety of orchestrations to hide these payments including simply stealing it from a (apparently) huge petty cash fund, directing Avon China employees to charge for non-existent expenses and keep the reimbursements from corporate, lying in the books and records by calling such bribe payments as “management expenses-government relations expenses” and even submitting “a handwritten certificate, purportedly from a Chinese government agency, falsely stating that the official would give the funds to the government bureau.”

Payment Through Third Parties

Using an entity identified as “Consulting Company A”, Avon China paid a large number of bribes throughout the period in question. Initially it should be noted that this entity raised numerous red flags that were never investigated or cleared. These began with the fact that it was a Chinese government official who recommended the retention of Consulting Company A to perform ‘lobbying’ services for Avon China. Thereafter the company performed no background investigation into the ownership structure of the company, did not include any compliance terms and conditions in the contract, did not even communicate to this third party of Avon’s Code of Conduct prohibition against bribery of government officials. Beyond these issues, in large part Consulting Company A never performed any legitimate services for Avon China. What Consulting Company A did provide to Avon China was a way to funnel bribe payments to Chinese government officials.

Corporate Connivance in Scheme (AKA The Cover-Up)

While all of the above was bad, one thing which catapulted the Avon FCPA bribery scandal into the realm of seriously bad was the company’s discovery of the bribery scheme and resulting cover-up. According to the Criminal Information for Avon Products, in 2005 a senior auditor in Avon’s internal audit group, “reported to Avon’s Compliance Committee, which was comprised of several senior Avon executives, that Avon China executives and employees were not maintaining proper records of entertainment for government officials” and that an Avon China executive had explained the practice “was intentional because information regarding that entertainment was ‘quite sensitive.’” This led to a Draft Audit Report, reviewed at the highest levels of Avon China and Avon in the US, which concluded that Avon China’s Corporate Affairs Group’s expenses included: “(1) high value gifts and meals that were offered to Chinese government officials; (2) the majority of expenses relating to gifts, meals, sponsorship and travel of substantial monetary value was to maintain relationships with government officials; (3) a third party was paid large amounts of money to interact with Chinese government officials but was not contractually required to follow the FCPA, was not monitored by Avon China, and was paid for vague and unknown services; and (4) the payments, and the lack of accurate, detailed records may violate the FCPA or other anti-corruption laws.”

So what was the company’s response to this information? The internal auditors who prepared the report were required to remove the above language and whitewash the report. Evidence of reviewed misconduct was reduced to two hand-written pages, which were then taken out of China and hand-carried to Avon’s corporate headquarters. All copies of the Draft Audit Report were ordered to be retrieved and destroyed. Finally, as noted in the Criminal Information of Avon China, in January 2007, an Avon executive reported to the Avon Compliance Committee “that the matter reported in 2005 regarding the potential FCPA violations by AVON CHINA executives and employees had been closed as “unsubstantiated” which terminated Avon’s investigation into AVON CHINA’s corrupt conduct.”

Tomorrow we take a look at some of the key lessons to be learned from Avon FCPA enforcement action.

 

 

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.
Custom Email Digest
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.