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SEC fines Avon for corruption failures

06 January 2015

SEC fines Avon for corruption failures - Read more

The US Securities and Exchanges Commission (SEC) has fined Avon for corruption failures relating to its subsidiary in China.

The cosmetics giant’s conduct in China was found to be in violation of the Foreign Corrupt Practices Act (FCPA). According to the SEC, Avon failed to put controls in place to detect and prevent payments and gifts to Chinese government officials from employees and consultants.

Avon entities have agreed to pay a total of $135 million to settle the SEC’s charges - 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 implementing and 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 impacted Avon’s clean corporate image required to retain the license. Examples of improper payments alleged in the SEC’s complaint include paid travel for Chinese government officials within China or to the US or Europe as well as such gifts as Louis Vuitton merchandise, Gucci bags, Tiffany pens, and corporate box tickets to the China Open tennis tournament.

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, upon which it consulted an outside law firm. Avon was directed that reforms be instituted at the subsidiary, and sent an internal audit team to follow up.

Ultimately, however, no such reforms were instituted at the Chinese subsidiary. Avon finally began a full-blown internal investigation in 2008 after its CEO received a letter from a whistleblower.

Scott W Friestad, an Associate Director in the SEC’s Division of Enforcement said: ‘Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.’

A parallel case was also announced in December 2014 by the U.S. Department of Justice and the U.S. Attorney’s Office for the Southern District of New York.

Avon agreed to pay a disgorgement of $52.85 million in benefits resulting from the alleged misconduct plus prejudgment interest of $14.51 million for a total of more than $67.36 million. In the parallel criminal matter, Avon entities agreed to pay $67.65 million in penalties.

Avon is required to 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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