How Avon’s professionals neglected and avoided China compliance

For good reason, Shearman & Sterling’s Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act is often called the most useful annual resource available for compliance professionals.

Editor in chief Philip Urofsky and his team cover every DOJ and SEC FCPA enforcement action, along with related U.S. and overseas prosecutions. And they use the cases to explain what’s really happening today in anti-bribery enforcement.

For example, the 2015 edition of Recent Trends describes the compliance failures in China that led to Avon’s enforcement action. It’s a small but fascinating part of the 25-page publication.

In December, Avon paid $135 million for its FCPA offenses. Here’s the background:

Avon sells beauty products door to door. In China, it needed a special license to do that. In March 2006, Avon became one of the first companies to receive a direct selling license.

Avon management had learned in late 2005 of potential FCPA problems. It didn’t start a full-blown internal investigation until 2008, after its CEO received a letter from a whistleblower in China.

The DOJ and SEC found that the China subsidiary had made $8 million worth of payments in cash, gifts, travel, and entertainment to various Chinese officials who had a say in awarding the direct selling license.

U.S. Attorney Preet Bharara said, “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.”

Here’s what Shearman & Sterling said about Avon’s China compliance:

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Failure of Legal and Compliance Departments. In light of the discovery of certain potential FCPA violations, Avon’s legal and compliance departments allegedly took certain actions to try to investigate and remedy the conduct; however, according to the DOJ and SEC, none of these actions were done in earnest. For example, although Avon eventually consulted an outside law firm concerning the Avon China issues, Avon’s Vice President of Legal & Government Affairs sent the law firm a short email after only two telephone conferences indicating that the company had “moved on” from the FCPA issues.

In other instances, Avon’s General Counsel, its Vice President of Legal & Government Affairs, and its Regional Counsel – Asia-Pacific decided to implement certain remedial measures at Avon China, including the creation of a log which would list the government officials who Avon entertained or provided with gifts. However, the log did not require a description of the business purpose of any meeting with the government officials, and Avon China was allowed to keep the log off-premises — essentially enabling Avon China to continue to conceal the improper payments.

The deficient remedial measures were made worse by the fact that Avon China never actually implemented them. According to the SEC’s complaint against Avon, the Commission cited multiple instances where the company declined to implement reforms aimed at improving the company’s FCPA compliance program. For example, in 2005, roughly around or after the company discovered various potential FCPA violations, Avon’s internal audit department recommended providing FCPA training for the Asia-Pacific region.

Despite such recommendations, the company declined to provide the FCPA trainings citing deficient budgetary resources. As a result of the inability of Avon’s legal and compliance departments to take the evidence of improper payments to address the clear indications of misconduct at Avon China, the conduct continued for several years.

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 The 2015 edition of Shearman & Sterling’s Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act is here (pdf).

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Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.