avon-logoShedding light on what the MLM industry gets up to in China, comes news today that Avon has plead guilty to conspiring to violate the Foreign Corrupt Practices Act (FCPA) and the Securities Exchange Act.

Two separate cases were filed by US regulators, one by the SEC and another the result of joint-investigation by the US Attorney’s Office, the Department of Justice and the FBI.

For those unfamiliar with the Foreign Corrupt Practices Act, it

was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.

In the SEC’s case, the regulator alleged that Avon first became aware of potential breaches of the FCPA in late 2005.

That same year

Avon received approval to test direct selling in China in 2005, and in March 2006, it received the first direct selling business license.

Upon learning off the potential breaches, Avon

management consulted an outside law firm, directed that reforms be instituted, and sent internal audit back to follow up.

Those reforms however were never instituted. Instead, Avon management swept the matter under the rug.

In 2008 a Chinese whistleblower contacted the company, and it was only then that Avon launched an investigation into the potential breaches.

As to the breaches themselves,

The SEC’s complaint alleges that the Chinese subsidiary made $8 million worth of payments in cash, gifts, travel, and entertainment to various Chinese officials to gain access to officials drafting and implementing direct selling regulations in China, to be among the first allowed to test the regulations, to be the first to receive a direct selling license, and, subsequently to keep the clean corporate image required to retain the license.

Oh Avon…

Bribing officials for access to those writing Chinese MLM laws, jumping to the front of the license list and “clean corporate image” license? I’m not a lawyer but that sounds like exactly the sort of stuff FCPA was passed into law to prevent.

Some examples of payments alleged in the complaint include payments for travel within China or to the United States or Europe, corporate box tickets to the China Open tennis tournament, gifts of Louis Vuitton merchandise, Gucci bags, and Tiffany pens, and $1.65 million for meals and entertainment.

The complaint also alleges payments made to avoid fines or negative news articles that might have impacted Avon’s corporate image and affected the Chinese subsidiary’s direct selling license.

And it gets worse. Not only were Avon engaged in all of the above, they were also actively working to conceal their crimes.

In some instances, the payments were concealed by falsely recording the transactions as employee business expenses or as re-imbursement of a third-party vendor.

In other instances, the records for the payments set forth almost no detail at all.

The resulting books and records did not allow a reviewer to ascertain the government official or state-owned entities that received the payments or the purpose for which the payments were made.

For their efforts to bribe their way into the Chinese MLM market, Avon agreed to a proposed final judgement

ordering the company to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct, plus prejudgment interest of $14,515,013.13.

Avon has also been ordered

to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts.

Whereas the SEC’s case against Avon was of a civil nature, the case filed by the US Attorney’s Office, DOJ and FBI was that of a criminal matter.

Preet Bharara, the United States Attorney for the Southern District of New York, Leslie R. Caldwell, the Assistant Attorney General for the Criminal Division of the Department of Justice (“DOJ”), and Andrew G. McCabe, Assistant Director-in-Charge of the Washington Field Office of the Federal Bureau of Investigation (“FBI”), announced today the guilty plea of Avon Products (China) Co. Ltd. (“Avon China”), a wholly owned subsidiary of the New York-based cosmetics company, Avon Products, Inc. (“Avon”), to a criminal Information charging Avon China with conspiring to violate the accounting provisions of the Foreign Corrupt Practices Act (“FCPA”) by concealing and disguising gifts, cash, non-business meals, travel, and entertainment it gave to Chinese government officials in order to obtain and retain certain business benefits for Avon China.

Additionally a deferred prosecution agreement was also entered to, specifically relating to Avon’s “role in the conspiracy” and “failure to implement internal controls”.

Pursuant to the DPA with Avon, a criminal Information has been filed charging Avon with conspiring to violate the books and records provisions of the FCPA and with violating the internal controls provisions of the FCPA.

In a proceeding today before United States District Judge George B. Daniels, the criminal Informations were filed against Avon and Avon China, and Avon China entered its guilty plea and was sentenced.

In total, Avon and Avon China have agreed to pay $67,648,000 in criminal penalties.

All up Avon are in the hole for $135 million.

Manhattan U.S. Attorney Preet Bharara said: “For years in China it was ‘Avon calling,’ as Avon bestowed millions of dollars in gifts and other things on Chinese government officials in return for business benefits.

Avon China was in the door-to-door influence-peddling business, and for years its corporate parent, rather than putting an end to the practice, conspired to cover it up.

Assistant Attorney General Leslie R. Caldwell said: “Companies that cook their books to hide improper payments will face criminal penalties, as Avon China’s guilty plea demonstrates.

Public companies that discover bribes paid to foreign officials, fail to stop them, and cover them up do so at their own peril.”

FBI Assistant Director-In-Charge Andrew G. McCabe said: “When corporations knowingly engage in bribery in order to obtain and retain contracts, it disrupts the level playing field to which all businesses are entitled.

Companies who attempt to advance their businesses through foreign bribery should be on notice.

The FBI, with our law enforcement partners, is continuing to push this unacceptable practice out of the business playbook by investigating companies that ignore the law.”

The message conveyed in both lawsuits is that Avon’s bribery practices in China finally came to a halt in 2008.

Avon has since cooperated with the Government, including by conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, translating, and organizing voluminous evidence.

Avon has also undertaken extensive anti-corruption remedial efforts, including taking appropriate disciplinary action against culpable employees, and continuing to enhance Avon’s internal accounting, reporting, and compliance functions.

Sounds good to me, but it also raises the question of what the other MLM companies who were looking to break into the Chinese market got up to. The Chinese government doesn’t appear to have any problem with taking bribes from US MLM companies, and failing adequate US regulation, if Avon’s anything to go by, they’re tripping over themselves to splash cash around to get what they want.

The recent case of China fining Nu Skin comes to mind.

Back in January Chinese regulators suspected Nu Skin might be operating a pyramid scheme. China fined Nu Skin a paltry $540,000, with Nu Skin briefly suspending Chinese business operations before going back to whatever they were doing before the fine.

Was the fine actually the result of a legitimate regulatory investigation, or did Nu Skin just forget to pay their annual fee “to avoid fines or negative news articles that might have impacted Avon’s Nu Skin’s corporate image and affected the Chinese subsidiary’s direct selling license”?

What with government officials likely wisening up to taking MLM bribes in a more covert manner since 2005, one can only wonder what the true cost of operating an MLM company in China is today.

At the time of publication, China is Nu Skin’s largest market (approximately 30% of company-wide revenue). China was also Herbalife’s fastest growing market in 2013.

Avon’s Chinese market-share meanwhile has slumped in recent years.

Co-incidence? Or is that just what happens in China once you stop greasing those wheels…