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Ding Dong, FCPA Investigation Calling

Beauty-products giant Avon said Monday it has launched an internal investigation into possible Foreign Corrupt Practices Act violations in China. The investigation may be linked to the payment of improper promotional expenses. Avon — with five and a half million independent sales representatives in more than 100 countries — is the world’s largest direct seller. The company’s FY2007 revenues were $9.9 billion.

China imposed restrictions on direct selling in the late 1990s that forced Avon to market its products through shops and boutiques. Two years ago, the company convinced China’s regulators to allow its traditional door-to-door sales model. Avon’s FCPA disclosure refers to “certain travel, entertainment and other expenses” but doesn’t say if the investigation involves promotional expenses for Chinese regulators involved in that decision.

Foreign companies often feel pressure to sponsor trips by Chinese regulators, who aren’t shy to ask for such perquisites. Last week we discussed the FCPA’s affirmative defense for payments to officials related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide.” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). That defense, as we said, is loaded with uncertainty and very difficult for companies to safely use.

Here’s the portion of the company’s release that deals with the FCPA investigation:

Avon Products, Inc. (NYSE: AVP) announced today, October 20, 2008, that it is voluntarily conducting an internal investigation of its China operations, focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”). The Company, under the oversight of the Audit Committee, commenced in June 2008 an internal investigation after it received an allegation that certain travel, entertainment and other expenses may have been improperly incurred in connection with the Company’s China operations. The company has voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. The internal investigation is in its early stage and no conclusion can be drawn at this time as to its outcome.

View Avon’s full “Statement on Voluntary Disclosure” (October 20, 2008) here.

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