Avon Settles FCPA Charges with the DOJ and SEC
Travel, entertainment and gifts continue to be a central focus of FCPA enforcement. Earlier this month, and last month, the Commission filed settled FCPA actions centered on these items. Now the SEC and the DOJ have settled with Avon Products, Inc. in a case which again centers on these same items. SEC v. Avon Products, Inc., Civil Action No. 14 cv 9956 (S.D.N.Y. Filed December 17, 2014).
Avon Products is a global manufacturer and marketer of beauty products. The company sells product primarily through direct marketing by over 6 million active independent sales representatives. The firm is active in over 100 countries.
In the PRC company subsidiary Avon Products China began operations in 1989. In 1999 the firm hired an executive to bring Avon to the attention of relevant organizations and develop business. The executive became a vice president in the corporate affairs department of the China subsidiary.
In 1998 when China banned all direct selling the company had to alter its typical business model. By 2001, however, China agreed to permit direct selling as part of its admission to the WTO. Avon wanted to influence that process and obtain the first license. Employees in the corporate affairs department furnished government officials with gifts, entertainment and travel to influence the laws and the companies to be selected. In 2003 the company was told informally that when China opened its markets to direct selling Avon China would be the first to receive a test license.
The next year Avon China retained the services of a third-party consulting company to manage public relations related affairs with the government and others. The contract did not contractually bind the consulting company to comply with the FCPA. In April 2005 Avon China was the first to receive test approval to conduct direct selling in certain areas of China.
In April 2005 Avon’s global internal audit flagged gifts to government officials and inadequacies in related recordkeeping as an area of concern. Eventually a report was prepared noting that it was common for Avon China to offer gifts and meals to various government officials and that a majority of the government related activities at the subsidiary were not adequately documented. The legal department took over the inquiry. After additional field work, and consulting a major law firm, the legal and government affairs department told the law firm the company had “moved on.”
In December 2005 China’s new direct selling regulations became effective. For the company to obtain a license it was required to satisfy a number of conditions including “a good business reputation” requirement. At the same time the General Counsel decided to reform certain practices at Avon China. A policy was initiated which required the creation of a log listing government officials and entertainment and gifts. The reforms also required contracts to contain certain representations and warranties. The reforms did not require a description of the business purpose of any meeting with government officials. None of the measures were implemented.
In March 2006 Avon obtained the first direct sale license. In April the company provided over $100,000 in cash or items of value to government officials. At the same time the company implemented a “zero penalty” policy under which cash and items of value were given to government officials and media to reduce or eliminate potential fines and avoid negative news articles.
In May 2008 a terminated Avon China executive wrote to the CEO of the company alleging improper payment to Chinese government officials over several years. Eventually the letter was forwarded to the audit committee which launched an internal investigation and self-reported to the SEC and the DOJ.
Overall, Avon China provided about $8 million in cash and items of value to government officials between 2004 and 2008. Those included payments for meals and entertainment, tickets to events, travel, and to avoid fines. The Commission’s complaint alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
To resolve the matter with the SEC the company consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, the firm agreed to pay disgorgement of $52,850,000 and prejudgment interest. See Lit. Rel. No. 23159 (Dec. 17, 2014). The Commission considered the cooperation and remedial efforts of the company in the settlement.
To resolve the action with the DOJ the parent company entered into a deferred prosecution agreement after admitting responsibility. Avon China pleaded guilty to an information charging conspiracy to violate the accounting provisions of the FCPA. The Avon entities will also pay criminal penalties totaling $67,648,000. In total the firm agreed to pay $135,013,013 to resolve the actions.