Avon Bribery Case May Face U.S. Grand Jury Investigation

February 14, 2012 Posted by China Briefing Reading Time: 3 minutes

Feb. 14 – Avon Products Inc., the world’s largest door-to-door cosmetics merchant, is still in the midst of bribery rumors four years after the U.S. company started an internal anti-corruption investigation.

Federal prosecutors are now probing a 2005 draft internal report by the company which raised concern over Avon’s compliance with U.S. anti-bribery laws, and have presented evidence to a U.S. grand jury, according to both Reuters and the Wall Street Journal (WSJ).

The 2005 report, which found several hundred thousand dollars in questionable payments to Chinese officials and third-party consultants during that year, warned Avon’s actions may in violation of the Foreign Corrupt Practices Act (FCPA), a U.S. law promulgated in 1977 and used to bar U.S. companies from paying bribes to foreign officials. The report also suggested steps to follow up on the case.

Prosecutors are investigating what internal auditors actually found during the initial investigation, and whether or not the Avon headquarters had taken any actions based on the report. If anyone at the U.S. company is proved to have shown the intent to hide or bury the draft report, the person could potentially face criminal charges.

The 2005 audit surfaced during Avon’s internal enquiry in 2008, which put a focus on entertainment and gift expenses “in connection with our business dealings, directly or indirectly, with foreign governments,” according to one of Avon’s regulatory filings. The internal investigation resulted in the firing of four executives, including the general manager and finance chief of the China unit. They were all suspected to have paid bribes to officials in China, but were not accused of wrongdoing.

The internal probe has been extended to other countries and has led to the resignation of even more Avon executives. Charles Cramb, vice chairman of the company’s developed market group, left the company in January after stepping down as chief financial officer in November last year.

The U.S. Securities and Exchange Commission also started an investigation in October last year, with a focus on Avon’s payments as well as its New York-based unit’s contact with financial analysts.

FCPA compliance has become a tricky issue for U.S.-linked businesses in China. While treating government officials to business dinners and entertainment could be regarded as FCPA noncompliance, in China it is often seen as a common way for businesses to manage their “guanxi” with local authorities. Without building up a strong relationship with the government, it could have been more difficult for Avon to obtain its official license in China that allows it to sell products door-to-door, especially during a time when China still held a very cautious attitude towards developing its direct sales market.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam. The firm specializes in assisting foreign enterprises with their tax obligations. For further advice, please email china@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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The Foreign Corrupt Practices Act and its Impact on China Subsidiaries
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