Avon: A Pound Of Cure

Avon Products Inc. on Friday said its expenses for an internal FCPA investigation that started two years ago have increased enough to impact results. Main Justice reported the costs to be $18 million for the last quarter.

In a release, the company said it incurred “significant professional fees associated with the company’s internal investigation resulting from an allegation of Foreign Corrupt Practices Act (“FCPA”) violations in China.”

Last month Avon suspended four employees pending its internal bribery investigation. It put three executives in China and another in New York on administrative leave.

CEO Andrea Jung on Friday said during a conference call that the initial corruption allegations were contained in a letter written to her by an undisclosed whistleblower. The allegations concerned only China and related to travel, entertainment and other expenses. She said the company immediately “began an internal investigation under the oversight of our audit committee and conducted by outside counsel. Most importantly we voluntarily self-reported the allegations to the U.S. Securities and Exchange Commission as well as the Department of Justice.”

The investigation has now expanded to at least “four international business units outside of China,” she said.

Explaining the wider scope, she said: “I also want to emphasize again the allegation that triggered our investigation was in China only. Conducting compliance reviews in these additional markets is the appropriate thing to do in investigations of this type, and as we stated we’ve been cooperating with both governmental agencies.”

Avon’s investigation is following a typical path. Companies that self-report sensitive payments to the DOJ and SEC are always in a hurry to resolve any potential violations. The problem is that the feds need convincing there aren’t more payments still left to be uncovered. Before the DOJ and SEC will settle a case, they want to be sure all the cards are on the table.

Siemens, for example, needed about a year more than it hoped to reach a deal with the U.S. government. The company’s internal investigation kept uncovering more corrupt payments. So it had to do more and more to convince prosecutors they were seeing all the dirty laundry. In the end, according to some with knowledge of the investigation, Siemens’ total costs topped $1 billion. But without the enormous effort, it couldn’t have convinced U.S. agencies the case was ripe for resolution.

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Avon’s FCPA disclosure in its 2009 annual report (available here) said:

We are investigating Foreign Corrupt Practices Act (FCPA) and related U.S. and foreign law matters, and from time to time we may conduct other internal investigations and compliance reviews, the consequences of which could negatively impact our business. From time to time, we may conduct internal investigations and compliance reviews, the consequences of which could negatively impact our business.

Any determination that our operations or activities are not in compliance with existing United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, termination of necessary licenses and permits, and other legal or equitable sanctions. Other legal or regulatory proceedings, as well as government investigations, which often involve complex legal issues and are subject to uncertainties, may also follow as a consequence. It is our policy to cooperate with U.S. and foreign government agencies and regulators, as appropriate, in connection with our investigations and compliance reviews.

As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the FCPA and related U.S. and foreign laws in China and additional countries. The internal investigation and compliance reviews, which are being conducted under the oversight of our Audit Committee, began in June 2008. We voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation and compliance reviews and we are, as we have done from the beginning of the internal investigation, continuing to cooperate with both agencies and have signed tolling agreements with them.

The internal investigation and compliance reviews, which started in China, are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing.

At this point we are unable to predict the duration, scope or results of the internal investigation and compliance reviews.

Any determination that our operations or activities are not in compliance with existing laws or regulations could result in the imposition of substantial fines, civil and criminal penalties, equitable remedies, including disgorgement, injunctive relief and other sanctions against us or our personnel. In addition, other countries in which we do business may initiate their own investigations and impose similar sanctions. Because the internal investigation and compliance reviews are ongoing, there can be no assurance as to how the resulting consequences, if any, may impact our internal controls, business, reputation, results of operations or financial condition.