The Securities and Exchange Commission has charged Avon, a global beauty products company, with violating the Foreign Corrupt Practices Act by failing to put controls in place to detect and prevent payments and gifts to Chinese government officials from employees and consultants at a subsidiary.
Avon agreed to pay a total of $135 million to settle the SEC’s charges and a parallel case announced on Wednesday by the Department of Justice and the U.S. Attorney’s Office for the Southern District of New York.
The SEC alleges that Avon’s subsidiary in China made $8 million worth of payments in cash, gifts, travel, and entertainment to gain access to Chinese officials overseeing direct selling regulations in China. Avon sought to be among the first allowed to test the regulations, and eventually received the first direct selling business license in China in March 2006. The improper payments also were made to avoid fines or negative news articles that could have affected “Avon’s clean corporate image required to retain the license,” the Commission says.
Examples of improper payments alleged in the SEC’s complaint include paid travel for Chinese government officials and gifts that included Louis Vuitton merchandise, Gucci bags, Tiffany pens, and luxury box tickets to the China Open tennis tournament.
“Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided,” Scott Friestad, an associate director in the SEC’s Division of Enforcement, said in a statement.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the improper payments occurred from 2004 to 2008. Avon management learned about potential FCPA problems at the subsidiary through an internal audit report in late 2005, consulted an outside law firm, directed that reforms be instituted at the subsidiary, and sent an internal audit team to follow up. Ultimately, however, no such reforms were instituted. Avon finally began a full-blown internal investigation in 2008 after its CEO received a letter from a whistleblower.
The SEC alleges that Avon’s books and records failed to accurately record the details and purpose of the payments. In some instances, payments were concealed by falsely recording the transactions as employee business expenses or as reimbursement of a third-party vendor. In other instances, records for the payments provided almost no detail at all.
Avon, which neither admitted nor denied the allegations, agreed to pay $67.36 million in disgorgement and interest on financial benefits resulting from the misconduct. Avon also agreed to pay $67.7 million in penalties and settle with the Justice Department. Avon also agreedto 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.
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