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Wednesday
Sep212016

Nu Skin violates FCPA with China charitable donation 

For just the second time in the Foreign Corrupt Practices Act's 39-year history, a company was charged with FCPA offenses based solely on a charitable contribution that was intended to buy the influence of a foreign official.

Provo, Utah-based Nu Skin Enterprises, Inc. paid almost $766,000 Tuesday to settle SEC charges that it violated the internal controls and books-and-records provisions of the FCPA.

The FCPA violations arose from a $150,000 payment Nu Skin's China subsidiary made to a charity so that a high-ranking Chinese Communist party official would intervene in an on-going provincial agency investigation.

The SEC settled the enforcement action with an internal administrative order and didn't go to court.

Nu Skin agreed to the settlement without admitting or denying the SEC's findings.

The company disgorged $431,088, prejudgment interest of $34,600, and a civil penalty of $300,000.

In 2013, Nu Skin's China unit was investigated by a provincial branch of the Administration of Industry and Commerce (AIC) about non-compliance with laws and local rules for direct selling.

The AIC found evidence of violations and threatened to impose a fine of RMB 2.8 million fine (about $431,088).

Personnel from Nu Skin China decided to ask a party official to intervene with the AIC. In return, Nu Skin China would donate RMB 1 million (about $150,000) to a charity identified by the party official.

The party official had set up the charity in the province.

The head of the AIC in the province had previously reported to the party official.

The SEC said,

Nu Skin China personnel had alerted Nu Skin US of the proposed donation, but failed to disclose the relationship between the donation and the AIC investigation, or the relationship between the request for recommendation letters and the AIC investigation.

Nu Skin US identified that a large donation in China could pose FCPA risks. It advised Nu Skin China to consult with outside U.S. legal counsel based in China to ensure that the donation complied with the FCPA.

Outside counsel recommended that Nu Skin China include anti-corruption language, which included language regarding the illegality of influencing government officials, in the written donation agreement with the charity.

That language was inserted into a draft of the donation agreement between Nu Skin China and the charity. But the anti-corruption language was removed from the final version of the donation agreement that Nu Skin China executed.

Nu Skin US didn't know the language had been removed, the SEC said.

Two days after a donation ceremony, Nu Skin China received notice from the AIC that the company wouldn't be charged or fined.

The SEC said,

In Nu Skin China’s expenditure authorization form, the “[d]etailed [p]urpose” for the payment to the charity was inaccurately and/or unfairly described as a donation rather than a payment to influence the Party Official to favorably impact the outcome of the AIC investigation.

Nu Skin also failed to devise and maintain a reasonable system of internal accounting controls over its subsidiary’s operations in China to prevent illegal charitable contributions.

The SEC said.

[G]iven the well-known corruption risks in China, Nu Skin US 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 said Nu Skin cooperated in the investigation and took remedial action.

The Nu Skin enforcement action is only the second FCPA case based entirely on a charitable donation.

The other case involved Schering-Plough in 2004.

The SEC said the pharma violated the FCPA when its subsidiary in Poland made improper payments of about $76,000 to a charitable organization called the Chudow Castle Foundation. The director of the foundation was a government official who could influence buying decisions for drugs.

Schering-Plough settled the FCPA offenses by paying the SEC a civil penalty of $500,000.

*     *     *

The SEC's order as Securities Exchange Act of 1934 Release No. 78884 and Administrative Proceeding File No. 3-17556 In the Matter of  Nu Skin Enterprises, Inc. (dated September 20, 2016) is here (pdf).

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Richard L. Cassin is the publisher and editor of the FCPA Blog. He'll be the keynote speaker at the FCPA Blog NYC Conference 2016.

Reader Comments (1)

"Given the well-known corruption risks in China, Nu Skin US did not ensure that adequate due diligence was conducted by Nu Skin China."

Should the SEC tell us which countries trigger an obligation to conduct more due diligence?

Per Transparency International, China is not particularly well-known for corruption (ranked 63 out of 168).
September 24, 2016 | Unregistered CommenterJRay
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