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Thursday
Aug012013

Feds reject Avon settlement offer

Avon Products Inc. said in a quarterly filing Thursday that the DOJ and SEC rejected an offer in June to settle an ongoing FCPA investigation for $12 million and have not yet made any counter offers.

The beauty-products maker said it is 'unable to reasonably estimate the amount of any additional loss above the [$12 million] accrued to date; however it is reasonably possible that such additional loss will be material.'

Avon launched an internal investigation in 2008 linked to the payment of improper promotional expenses.

A shareholder lawsuit filed in 2012 accused Avon of paying a big severance to a former head of internal audit in 2006 to buy his silence about bribes in China.

By the end of last year, Avon had spent about $300 million on its internal FCPA investigation, according to Bloomberg.

The Wall Street Journal reported in February 2012 that the DOJ had gone to a grand jury with evidence of FCPA violations against U.S. executives at Avon.

The story said the focus of the grand jury was a '2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials.'

Former chief executive Andrea Jung left the company in 2012. She joined Avon in 1994 and became CEO in 1999.

Avon fired vice chairman Charles Cramb in early 2012. He held the post less than a year. An earlier report in the Wall Street Journal linked him to compliance issues in China known since 2005.

In Thursday's SEC filing, Avon said it has 'substantially completed [its] internal investigation and compliance reviews regarding the FCPA and related U.S. and foreign laws in China and additional countries.'

Remedial actions already taken, the company said, include 'termination of employment of certain senior members of management.'

Avon said it has improved 'FCPA compliance-related training [and its] FCPA third-party due diligence program.'

Avon's June offer of settlement to the DOJ and SEC for $12 million was rejected, the filing said. But Avon expects the agencies to make a counterproposal, according to the filing.

'Our discussions with the DOJ and the SEC are ongoing,' Avon said.

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Here's the full FCPA disclosure from the Form 10-Q filed by Avon Products Inc. with the SEC on August 1, 2013:

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We have substantially completed our internal investigation and compliance reviews regarding the FCPA and related U.S. and foreign laws in China and additional countries. We have conducted these compliance reviews in a number of countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews have focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. In connection with the internal investigation and compliance reviews, certain personnel actions, including termination of employment of certain senior members of management, have been taken, and additional personnel actions may be taken in the future. In connection with the internal investigation and compliance reviews, we continue to enhance our ethics and compliance program, including our policies and procedures, FCPA compliance-related training, FCPA third-party due diligence program and other compliance-related resources.

In connection with our internal investigation and compliance reviews focused on compliance with the FCPA and related U.S. and foreign laws, and related discussions with the SEC and the DOJ regarding resolving their investigations of these matters, we accrued $12 million for our offer of settlement. Based on our most recent discussions with the SEC and the DOJ, we believe it is probable that we will incur a loss upon settlement that is higher than our $12 million offer. We are unable to reasonably estimate the amount of any additional loss above the amount accrued to date; however, it is reasonably possible that such additional loss will be material.

[emphasis in original]

We have substantially completed our internal investigation and compliance reviews regarding the FCPA and related U.S. and foreign laws in China and additional countries. We have conducted these compliance reviews in a number of countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews have focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. In connection with the internal investigation and compliance reviews, certain personnel actions, including termination of employment of certain senior members of management, have been taken, and additional personnel actions may be taken in the future. In connection with the internal investigation and compliance reviews, we continue to enhance our ethics and compliance program, including our policies and procedures, FCPA compliance-related training, FCPA third-party due diligence program and other compliance-related resources.

As previously reported in October 2008, we voluntarily contacted the SEC and the DOJ to advise both agencies of our internal investigation. We have cooperated and continue to cooperate with investigations of these matters by the SEC and the DOJ. We have, among other things, signed tolling agreements, responded to inquiries, translated and produced documents, assisted with interviews, and provided information on our internal investigation and compliance reviews, personnel actions taken and steps taken to enhance our ethics and compliance program. As previously reported in August 2012, we are in discussions with the SEC and the DOJ regarding resolving the government investigations. Our factual presentations as part of these discussions are substantially complete. In June 2013, we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12 [million]. The DOJ and the SEC have rejected the terms of our offer. Although we expect that the DOJ and the SEC will make a counterproposal to our offer, they have not yet done so. Our discussions with the DOJ and the SEC are ongoing.

There can be no assurance that a settlement with the SEC and the DOJ will be reached or, if a settlement is reached, the timing of any such settlement or the terms of any such settlement. We expect any such settlement will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlement with the SEC and the DOJ. Under certain circumstances, we may also be required to advance significant professional fees and expenses to certain current and former Company employees in connection with these matters. Until any settlement or other resolution of these matters, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations.

At this point we are unable to predict the developments in, outcome of, and economic and other consequences of the government investigations or their impact on our earnings, cash flow, liquidity, financial condition and ongoing business. However, based on our most recent discussions with the DOJ and the SEC, the Company believes that it is probable that the Company will incur a loss upon settlement that is higher than the offer made by the Company of approximately $12 [million], which was accrued by the Company as of June 30, 2013. We are unable to reasonably estimate the amount of any additional loss above the amount accrued to date; however it is reasonably possible that such additional loss will be material.

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Richard L. Cassin is the Publisher and Editor of the FCPA Blog. He can be contacted here.