Dietary supplement maker Herbalife will pay $123 million to settle charges of violating the Foreign Corrupt Practices Act (FCPA) brought by the Securities and Exchange Commission and Department of Justice.

Herbalife had disclosed in May that it had set aside the $123 million in accrued liability regarding the investigations, which focused on violations of the books-and-records and internal accounting controls provisions of the FCPA in China. As part of its settlement with the Justice Department, Herbalife admitted to the charges and entered a deferred prosecution agreement (DPA) for a period of three years.

“As admitted in the deferred prosecution agreement entered into today, Herbalife approved the extensive and systematic corrupt payments to Chinese government officials over a 10-year period to promote and expand Herbalife’s business in China,” said acting U.S. Attorney Audrey Strauss of the Southern District of New York in a press release. “… This case signifies this Office’s commitment to ensuring that companies operating in the U.S. do not gain an unfair advantage through corruption and illegal bribes of foreign officials.”

In resolving the matter, Herbalife agreed to pay to the SEC disgorgement and prejudgment interest totaling approximately $67.3 million. The company will pay a criminal fine of approximately $55.7 million to the DOJ, which reflects a 25 percent reduction off the bottom of the U.S. Sentencing Guidelines fine range based on its “full cooperation with the government’s investigation.”

Herbalife first revealed the investigations by U.S. regulators in 2017, which “mainly focused on the company’s China external affairs expenditures relating to its China business activities and the adequacy of, and compliance with, the company’s internal controls relating to such expenditures,” according to a regulatory filing by the company. Herbalife said it had also launched its own review and “taken remedial and improvement measures based upon this review, including but not limited to replacement of a number of employees and enhancements of company policies and procedures in China.”

The investigations focused on actions by the company’s Chinese subsidiaries that took place from at least 2007 through 2016, according to the DOJ. In November 2019, the DOJ brought charges against “Jerry Li,” the former head and managing director of Herbalife’s China subsidiary, and “Mary Yang,” who formerly ran the external affairs department of Herbalife’s China subsidiary, for FCPA violations regarding bribes to Chinese government officials to obtain and retain business and other benefits for the company, and then trying to cover up the illicit payments by maintaining false accounting records. Li, who also faces FCPA charges from the SEC, and Yang remain at large.

“Herbalife’s inadequate internal accounting controls allowed an environment of corruption to exist in its Chinese subsidiaries for more than a decade,” stated Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “A strong system of internal controls is vital for issuers, especially those with operations around the globe.”

Compliance terms of the DPA

As mitigating factors in laying out the DPA, the DOJ noted Herbalife’s cooperation with the FCPA investigations and enhancements to its compliance program in the areas of anti-corruption, annual risk assessment, accounting controls, audit procedures, and policies related to giving gifts to foreign officials. As a result of these enhancements, the DOJ did not consider an independent corporate monitor necessary.

Herbalife will, however, report to the DOJ annually during the three-year DPA term regarding its remediation and implementation of its enhanced compliance measures.

“The Company will ensure that its directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anticorruption laws and its compliance codes, and demonstrate rigorous adherence by example,” the DPA reads. “The Company will also ensure that middle management, in turn, reinforce those standards and C-2 encourage employees to abide by them. The Company will create and foster a culture of ethics and compliance with the law in its day-to-day operations at all levels of the company.”

If Herbalife remains in compliance with the DPA during its three-year term, the deferred charge against the company would be dismissed with prejudice.