This is the second installment of our three part series on
the Top 3 Foreign Corrupt Practices Act (FCPA) matters of 2010 to date and
their significance for the FCPA compliance professional. In Part I we focused
on the Gun
Sting matter. Now we turn our attention to the Avon bribery scandal in
As early as October 2008, Avon reported, in a Statement of Voluntary Disclosure, that it was
investigating an internally reported allegation by an undisclosed whistleblower
that corrupt payments had been made in its China operations. These allegations
claimed that certain travel, entertainment and other expenses may have been
improperly incurred. Although the details of the Avon case have not been
disclosed, direct selling was not allowed in China under a law passed in 1998.
The National Law Review reported that Avon was able to secure
permission in late 2005 to begin direct selling on a limited basis. Later the
Chinese government issued direct-selling regulations and granted Avon a broader
license in February 2006 to make such sales.
In its 2009 Annual Report, Avon noted that the internal
investigation and compliance reviews, which started in China, had now expanded
to its operations in at least 12 other countries and was focusing 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 FCPA
Professor, citing the Wall Street Journal, reported that Avon suspended
four employees, including the President, Chief Financial Officer and top government
affairs executive of Avon's China unit as well as a senior executive in New
York who was Avon's head of Internal Audit.
One of the significant pieces of information to come
out of the Avon matter is the reported costs as reported in the 2009 Annual
Report the following costs have been incurred and are anticipated to be
incurred in 2010:
Investigate Cost, Revenue or Earnings Loss
Investigative Cost (2009)
Investigative Cost (anticipated-2010)
Drop in Q1 Earnings
Loss in Revenue from China Operations
Marketwatch also reported that after these additional
investigations were made public Avon's stock prices fell by 8%. Lastly, in
addition to the above direct and anticipated costs and drop in stock value, the
ratings agency Fitch has speculated about the possibility of a drop in
Avon's credit ratings. In a June 1 Press Release, Fitch noted that not only
could the above listed investigative costs come out of Avon's ordinary cash
flow, thereby putting a strain on the company, but that Fitch would expect
companies such as Avon to make every effort to comply during an agreed upon
deferred prosecution period with the Department Of Justice (DOJ) given the
severity of an indictment.
An indictment for FCPA violation(s) would be viewed as
'Event Risk', a term used by Fitch to describe the risk of a typically
unforeseen event to the analyst which, until the event is explicit and defined,
is excluded from existing ratings. An indictment would be an externally
triggered event that would generate a rating review based on materiality and impact.
But what does all of this mean for the Chief Compliance
Officer sitting in his office in the US? It should mean quite a bit. There are
several lessons from which you can learn and immediately implement in your FCPA
compliance program if you have not previously done so.
1. Who is a "foreign governmental
official"? China poses a major challenge for US companies trying to comply
with the law. The DOJ has consistently interpreted the FCPA as extending to any
employee working for a state-owned business. Further, in a communist country,
the DOJ has taken this interpretation a step further by opining that all
employees are state employees and therefore a foreign governmental official.
This means that from top to bottom, all persons in China are covered by the
proscriptions of the FCPA. This interpretation has never been tested in a US
court but it puts the broad swaths of the Chinese economy directly under the
FCPA. Couple this with the pressure felt by foreign companies to sponsor trips
by Chinese regulators, who do not seem to be shy in asking for perquisites, and
you have a situation which is ripe for a FCPA violation.
2. Travel, Gifts and
Entertainment under the FCPA. The FCPA includes an affirmative defense for
payments to officials related directly to "the promotion, demonstration, or
explanation of products or services" that are "reasonable and bona fide" 15
U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). That defense is loaded with
uncertainty and very difficult for companies to safely use. It may well be that
Avon provided trips to the US for the Chinese Regulators with regulatory
oversight for Avon's China operations, or gifts and entertainment which did not
fall under the FCPA exemption. If so, the FCPA compliance professional should
review the company policy on such matters.
3. Internal Enforcement of
Company FCPA Compliance Policy. One of the employees suspended was the
(former) head of Internal Audit. In addition to a strong FCPA compliance
policy, a company should continually monitor its compliance program, through a
strong internal audit program, to use as a first line of defense to not
only prevent FCPA violations before they occur but also detect FCPA compliance
A key 'best practices' FCPA compliance program component is
to utilize internal audit to monitor for FCPA compliance issues on a regular
basis to not only assess compliance but to also identify anything which
warrants further investigation. Taken a step further, a continuous controls
monitoring program can assist a company to identify unusual expenses, budgeted
items, or any other event which is outside an established norm and Red
Flag such expense, item or event for further investigation.
All of the facts of the Avon matter should be carefully
studied by the Chief Compliance Officer of any company doing business in China.
The case stands for the proposition that a company should not only have a
robust FCPA compliance policy in place but that it must continually monitor the
policy to ensure compliance.
Visit the FCPA Compliance and Ethics Blog, hosted by Thomas Fox, for more commentary on FCPA
compliance, indemnities and other forms of risk management for a worldwide
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© Thomas R. Fox, 2010