When charitable donations equal bribery

No good deed goes unpunished—especially if the intent of that deed is bribery.

Nu Skin Enterprises—a Provo, Utah-based developer and seller of personal care products and dietary supplements—learned this lesson the hard way when it became the target of a rare enforcement action for violations of the Foreign Corrupt Practices Act resulting solely from a charitable contribution intended to influence a foreign official.

The Securities and Exchange Commission charged Nu Skin with violating the internal controls and books and records provisions of the FCPA after Nu Skin’s Chinese subsidiary inaccurately recorded the payment as a “donation” in its books and records. On Sept. 20, Nu Skin agreed to pay $765,688 without admitting or denying the allegations.

“U.S. regulators are focusing more on charitable donations,” says Michael Edney, a partner at law firm Norton Rose. The Nu Skin enforcement action is a cautionary tale for all companies to be extra vigilant about the charitable contributions they make in foreign countries, performing due diligence on the charity itself and ensuring the payments have no connection to a foreign official.

The FCPA enforcement action resulted from an investigation that a provincial branch of China’s Administration of Industry and Commerce (AIC) conducted in 2013 into whether Nu Skin’s Chinese subsidiary violated local laws and regulations concerning direct selling restrictions. The AIC’s investigation ultimately found evidence of such violations and threatened to fine Nu Skin China RMB2.8 million (U.S. $431,088).

According to the SEC order, to avoid paying the fine, senior personnel at Nu Skin China requested the assistance of a local Communist party official—an acquaintance of a Nu Skin China employee and the former boss of the provincial head of the AIC investigating the company. In exchange, Nu Skin China made a one million RMB (U.S. $154,000) donation to a newly established charity, whose founder was “associated” with the party official.

One additional aggravating factor is that Nu Skin China additionally agreed to help expedite college recommendation letters to U.S. universities from “an influential U.S. person” for the government official’s child, according to the SEC order.

On the surface, Nu Skin’s parent corporation appeared to do everything right. “The case is alarming because you had a parent corporation that did seem on top of the issue,” Edney says.

After being alerted to the proposed donation by Nu Skin China, for example, Nu Skin U.S. immediately flagged the large donation as a potential FCPA risk, and so advised Nu Skin China to consult with outside U.S. legal counsel based in China to ensure that the donation complied with the FCPA, the SEC order states. Nu Skin China, however, from the beginning failed to disclose the relationship between the donation and the pending fine.

“In general, the adequacy of measures taken to prevent misuse of charitable donations will depend on a risk-based analysis and the specific facts at hand.”
FCPA Resource Guide

Even without this full disclosure, outside counsel recommended that Nu Skin China include anti-corruption language, including language regarding the unlawfulness of influencing government officials, in the written donation agreement with the charity. Unbeknownst to the parent company, which reviewed the draft of the anti-corruption provisions, Nu Skin China removed this language from the final version of the signed agreement.

Two days following the donation ceremony, Nu Skin received notice of the AIC’s final decision in which the company was neither charged nor fined.

Even though the payment at issue was, in fact, made to a legitimate charity, the purpose for that payment was “inaccurately and/or unfairly described” as a donation, the SEC said. “So in the SEC’s view, in order for it to be accurately booked, Nu Skin China apparently should have recorded the donation as a bribe,” says Jason Jones, a partner in the special matters and government investigations practice group at law firm King & Spalding.

The only other known FCPA enforcement action resulting solely from a charitable contribution intended to influence a foreign official occurred in 2004, when pharmaceutical company Schering-Plough paid a $500,000 civil penalty to the SEC for similar violations of the books and records and internal controls provisions of the FCPA.

According to the SEC, between 1999 and 2002, Schering-Plough’s Polish subsidiary made improper payments to the Chudow Castle Foundation, a charity headed by the then-director of the Silesian Health Fund—a Polish governmental body influential in the purchasing decisions for drugs by healthcare entities through the allocation of health fund resources. According to the complaint, Schering-Plough Poland paid 315,800 zlotys (approximately $76,000) to the Chudow Castle Foundation to induce the director to influence the health fund’s purchase of Schering-Plough’s drug products and then inaccurately reflected those payments on the subsidiary’s books and records.

CHARITABLE CONTRIBUTIONS

Below is an excerpt from the FCPA Resource Guide addressing FCPA compliance concerning charitable contributions.
Proper due diligence and controls are critical for charitable giving. In general, the adequacy of measures taken to prevent misuse of charitable donations will depend on a risk-based analysis and the specific facts at hand. In Opinion Procedure Release No. 10-02, DOJ described the due diligence and controls that can minimize the likelihood of an FCPA violation. In that matter, a Eurasian-based subsidiary of a U.S. non-governmental organization was asked by an agency of a foreign government to make a grant to a local micro-finance institution (MFI) as a prerequisite to the subsidiary’s transformation to bank status.
The subsidiary proposed contributing $1.42 million to a local MFI to satisfy the request. The subsidiary undertook an extensive, three-stage due diligence process to select the proposed grantee and imposed significant controls on the proposed grant, including ongoing monitoring and auditing, earmarking funds for capacity building, prohibiting compensation of board members, and implementing anti-corruption compliance provisions. DOJ explained that it would not take any enforcement action because the company’s due diligence and the controls it planned to put in place sufficed to prevent an FCPA violation.
Other opinion releases also address charitable-type grants or donations. Under the facts presented in those releases, DOJ approved the proposed grant or donation, based on due diligence measures and controls such as:
Certifications by the recipient regarding compliance with the FCPA;
Due diligence to confirm that none of the recipient’s officers were affiliated with the foreign government at issue;
A requirement that the recipient provide audited financial statements;
A written agreement with the recipient restricting the use of funds;
Steps to ensure that the funds were transferred to a valid bank account;
Confirmation that the charity’s commitments were met before funds were disbursed; and
On-going monitoring of the efficacy of the program.
Legitimate charitable giving does not violate the FCPA. Compliance with the FCPA merely requires that charitable giving not be used as a vehicle to conceal payments made to corruptly influence foreign officials.
Source: FCPA Resource Guide

Unlike the Nu Skin case, the facts described in Schering-Plough’s complaint were “much more egregious,” Jones says, involving more than a dozen donations to a charitable foundation over the course of four years. Some payments were structured just below the limit that would have triggered management approval, but the sheer number of donations alone should have raised concerns at the parent company, he says.

Furthermore, Schering-Plough’s documents included false medical justifications for most of the payments submitted to the company’s finance department. “The inaccuracy of the documentation was much more brazen,” Jones says, whereas no bogus documents were present in the Nu Skin case.

Due diligence

Both enforcement actions are stark warnings for all legal, compliance, and internal audit teams that regulators will hold U.S. parent companies liable for their subsidiaries’ actions, authorized or not. The only misstep for which Nu Skin U.S. could be faltered is that it “didn’t triple and quadruple check its work, essentially following up with its subsidiary to make sure that it followed through on the U.S. legal advice,” Edney says.

Legal, compliance, and audit teams need to be especially vigilant about any charitable donations they make in high-risk regions of the world, like China. “[G]iven the well-known corruption risks in China, Nu Skin U.S. did not ensure that adequate due diligence was conducted by Nu Skin China with respect to charitable donations to identify links to government or political party officials and to prevent payments intended to improperly influence such persons in violation of the company’s anti-corruption policy and the FCPA,” the SEC order states.

The importance of proper due diligence and internal controls for charitable giving are described in further detail in the FCPA Resource Guide. “In general, the adequacy of measures taken to prevent misuse of charitable donations will depend on a risk-based analysis and the specific facts at hand,” the guide states.

When making charitable payments in a foreign country, companies should carefully consider the following questions recommended in the FCPA Resource Guide:

What is the purpose of the payment?

Is the payment consistent with the company’s internal guidelines on charitable giving?

Is the payment at the request of a foreign official?

Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding your business in that country?

Is the payment conditioned upon receiving business or other benefits?

If such a connection does exist between the charity and a government official, that should raise real questions within the company as to whether or not the donation should be made at all, Jones says. In addition to conducting due diligence, companies also should have in place a “clear sets of rules at the parent level that the subsidiary must follow in order to get approval for a charitable donation, and then how to properly document the charitable donation in its books and records,” he says.

Companies cannot wash their hands of any follow-up once they find out the charitable contribution is going to a bona fide charity. Rather, companies need to give charitable donations the same level of scrutiny as they do to other third-party risks, says Mark Srere, a partner with law firm Bryan Cave.

That requires conducting some pretty thorough due diligence, even beyond the five questions listed in the FCPA Resource Guide: Who is the president of the charity? Who sits on its board? Are any of those people government or politically connected officials? If so, what potential influence might they have over the company?

Srere says the other lesson raised by the Nu Skin case is the importance of having a holistic view as to whether the company and its subsidiaries are in compliance with all laws and regulations—being kept in the loop about a pending enforcement action against a Chinese subsidiary, for example.

“Look at the whole picture,” Srere says. If that pending enforcement action was resolved favorably for the company, dig deeper to understand how officials came to that resolution, he says.

FCPA enforcement actions resulting from charitable donations should not chill companies from charitable giving; that’s not the intended message of the SEC and Department of Justice. Instead, companies should heed the message stated in the FCPA Resource Guide: “Legitimate charitable giving does not violate the FCPA. Compliance with the FCPA merely requires that charitable giving not be used as a vehicle to conceal payments made to corruptly influence foreign officials.”