WSJ: Grand Jury Hears Avon Case

Joe Palazzolo and Emily Glazer at the Wall Street Journal reported today that the DOJ has gone to a grand jury with evidence of FCPA violations against U.S. executives at Avon Products.

The story, based on at least three unnamed sources, said the focus is a '2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials.'

Avon disclosed the potential violations in 2008.

Late last month, the beauty-products giant fired vice chairman Charles Cramb. He held the post for less than a year. An earlier report in the Wall Street Journal linked him to reports that the China compliance issues were known since 2005.

In May last year, Avon suspended four executives allegedly involved in the bribery in China. Three were in China and one was in New York.

CEO Andrea Jong said in December she would resign. Her departure apparently was due to Avon's financial performance. She hasn't been linked to the bribery allegations.

Avon's internal investigation launched in October 2008 apparently targeted the payment of improper promotional expenses that benefited Chinese officials.

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Avon's original FCPA disclosure said:

Avon Products, Inc. (NYSE: AVP) announced today, October 20, 2008, that it is voluntarily conducting an internal investigation of its China operations, focusing on compliance with the Foreign Corrupt Practices Act ("FCPA"). The Company, under the oversight of the Audit Committee, commenced in June 2008 an internal investigation after it received an allegation that certain travel, entertainment and other expenses may have been improperly incurred in connection with the Company's China operations. The Company has voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. The internal investigation is in its early stage and no conclusion can be drawn at this time as to its outcome.

Solving The Problem of Gifts, Meals, and Entertainment Expenses

By Michael Volkov

Last week on Corruption, Crime & Compllance, I wrote that the increase in FCPA enforcement has led to 'mass hysteria,' whipped up by lawyers and others.

But there's a shortage of practical solutions, especially when it comes to gifts, meals and entertainment expenses.

In my post, I suggested an approach that is less technical and more common-sense based. 'Negligent conduct,' I said, 'does not mean criminal conduct. Mistakes are not criminal.'

I hope readers of the FCPA Blog will find the post useful.

It can be found here.

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Michael Volkov is the primary contributor to Corruption, Crime & Compliance. He's a former federal prosecutor and now a partner at Mayer Brown LLP in Washington, D.C. He regularly counsels and represents clients on FCPA and UK Anti-Bribery Act issues. He can be contacted here.

Avon Discloses SEC Investigation

Avon Products confirmed Thursday that the SEC has issued a formal order of investigation into possible violations of the Foreign Corrupt Practices Act.

Avon's disclosure appeared in its quarterly report filed with the SEC.

The company, which first disclosed an internal investigation in October 2008, said it has turned over evidence to the SEC and DOJ from 'compliance reviews.'

The investigation, the company said, focused on expenses and accounting for '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.'

The Wall Street Journal said in May the internal investigation uncovered millions of dollars of questionable payments to government officials in China, Brazil, Mexico, Argentina, India, and Japan.

The company's legal fees and costs for outside counsel conducting the investigation were $59 million in 2009, $95 million in 2010, and $22.5 for the first quarter of this year.

Last year, Avon reportedly suspended four employees pending its internal bribery investigation -- three in China and one in New York.

China imposed restrictions on direct selling in the late 1990s that forced Avon to market its products through shops and boutiques. But in 2006, the company convinced China's regulators to allow its traditional door-to-door sales model.

Avon appeared on our 2011 watch list.

Avon Products, Inc. trades on the NYSE under the symbol AVP.

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Avon's FCPA disclosure in its Form 10-Q (pdf) filed October 27, 2011 said:

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As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act (“FCPA”) and related U.S. and foreign laws in China and additional countries. The internal investigation, which is being conducted under the oversight of our Audit Committee, began in June 2008. As we reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation. We are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.

As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We are conducting these compliance reviews in a number of other countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews are 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 ongoing internal investigation and compliance reviews, certain personnel actions have been taken and additional personnel actions may be taken in the future.

For additional information, see Note 5 to our consolidated financial statements contained in our Form 10-Q for the quarter ended March 31, 2011 and “Risk Factors” contained in our Form 10-K for the year ended December 31, 2010. The internal investigation and compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. 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.

On October 26, 2011, the Company received a subpoena from the United States Securities and Exchange Commission (“SEC”) requesting documents and information in connection with a Regulation FD investigation of the Company's contacts and communications with certain financial analysts and other representatives of the financial community during 2010 and 2011. The Company was also advised that a formal order of investigation was issued by the SEC relating to the FCPA matters described above and the Regulation FD matters that are referenced in the subpoena. The Company intends to cooperate fully with the SEC's investigation.

At this point we are unable to predict the duration, scope, developments in, results of, or consequences of the internal investigation and compliance reviews and the SEC's investigation.

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Scholarship That Rocked The Boat

A few years ago, after a dozen or so enterprising law students asked me what FCPA-related topics were ripe for research, I answered with a post on the FCPA Blog.

My suggestions included: (1) respondeat superior—the legal doctrine imputing to corporate employers the criminal acts of employees; (2) the sad state of the Department of Justice’s Opinion Procedure Releases; and (3) the confusing condition of the FCPA’s promotional-expenses affirmative defense.

That was in the summer of 2008, six months before the blockbuster Siemens enforcement action and before the general explosion of FCPA enforcement. But law students, especially those editing and writing for law reviews, are always ahead of the curve. They can somehow sniff out the next big practice area. This time they were right again.

By the end of 2010, FCPA enforcement had increased tenfold and criminal penalties in FCPA-related cases amounted to half of all criminal penalties collected by the DOJ that year. . . .

-- From Courageous Correspondents: Recent Foreign Corrupt Practices Act-Related Scholarship that Rocked the Boat by Richard L. Cassin, 46 New Eng. L. Rev. On Remand 21 (2011), © 2011 New England School of Law, Boston, Massachusetts, available here.

Year's First DOJ Opinion Deals With Promotional Expenses

In its first FCPA Opinion Procedure Release of 2011, the DOJ confirmed what should be obvious -- that the promotional expenses affirmative defense can be used to pay travel expenses of government officials who are being shown a company's products.

The defense appears in the FCPA. But companies have been reluctant to rely on it because of its ambiguous wording.

Last year, Kyle Sheahen said in a guest post that "while the promotional expenses defense is a useful (albeit flawed) compliance tool, it offers little protection for FCPA defendants facing an enforcement action. . . . how would a defense permitting only 'reasonable and bona fide' payments help FCPA defendants when the government must allege that the payments were made corruptly? Or as one commenter put it, 'it is a non-sequitur to say that defenses ‘work’ – just not ‘at trial.’ Defenses that do not work ‘at trial’ are not defenses at all."'

Opinion Procedure Release 11-01 has the virtue of brevity, not seen in most recent Releases. All of them can be found here.

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Here's the full text of Release 11-01:

U.S. Department of Justice
Criminal Division
Washington, D.C. 20530

No.: 11-01

Date: June 30, 2011

Foreign Corrupt Practices Act Review
Opinion Procedure Release

The Department has reviewed the FCPA Opinion Procedure request of a U.S. adoption service provider (the “Requestor”) that was submitted on May 25, 2011. The company is a “domestic concern” under 15 U.S.C. § 78dd-2(h)(1)(B) of the FCPA and therefore is eligible to submit an opinion procedure request.

The Requestor proposes to pay certain expenses for a trip to the United States by one official from each of two foreign government agencies to learn more about the services provided by the Requestor. The two officials will be selected by their agencies, without the involvement of the Requestor, to travel to the United States.

The Requestor has no non-routine business pending before the foreign government agencies that employ these officials. The sponsored program will last for approximately two days (not including travel time). The Requestor intends to pay for economy class air fare, domestic lodging, local transport, and meals. The Requestor has asked for a determination of the Department’s present enforcement intention under the FCPA.

The Requestor has represented, among other things, that:

• The Requestor has no non-routine business (e.g., licensing or accreditation) under consideration by the relevant foreign government agencies.

• The Requestor’s routine business before the relevant foreign government agencies consists primarily of seeking approval of pending adoptions. Such routine business is guided by international treaty and administrative rules with identified standards.

• The Requestor will not select the particular officials who will travel. That decision will be made solely by the foreign government agencies.

• The Requestor will host only the designated officials, and not their spouses or family members.

• The Requestor intends to pay all costs directly to the providers. No cash will beprovided directly to the officials.

• Any souvenirs that the Requestor gives the visiting officials would reflect Requestor’s business and/or logo and would be of nominal value.

• Apart from the expenses identified above, the Requestor will not compensate the foreign government agencies or the officials for their visit, nor will it fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.

• The visit will be for a two-day period (exclusive of travel time), and costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operations and services of U.S. adoption service providers.

• The Requestor has invited another adoption service provider to participate in the visit.

In the following instances, with appropriate protections, the Department has recently issued favorable Opinion Releases with respect to sponsoring travel and related expenses for foreign officials:

• In FCPA Opinion Release 07-02, the Department issued an opinion in response to a private insurance company in the United States, declining to take enforcement action if the company proceeded with sponsoring domestic expenses for a trip by six officials from an Asian government for an educational program at the company’s U.S. headquarters. The company represented that the purpose of the visit would be to
familiarize the officials with the operation of a U.S. insurance company; that it would not select the officials who would participate; that it would pay costs directly to providers; and that it has no non-routine business pending before the agency that employs the officials.

• In FCPA Opinion Release 07-01, the Department issued an opinion in response to a private company in the United States, declining to take enforcement action if the company proceeded with sponsoring domestic expenses for a trip by a six-person delegation from an Asian government. The company represented that the purpose of the visit would be to familiarize the delegates with the nature and extent of the company’s
business operations; that it would not select the delegates; it would pay all costs directly to providers; and it did not currently conduct operations in the foreign country at issue.

Based upon all of the facts and circumstances, as represented by the Requestor, and consistent with these prior opinions, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the Requestor’s] products or services.” 15 U.S.C. § 78dd-2(c)(2)(A). Therefore, the Department does not presently intend to take any enforcement action with respect to the planned program and proposed payments described in this request. The FCPA Opinion Release has no binding application to any party which did not join in the request, and can be relied upon by the Requestor only to the extent that the disclosure of facts and circumstances in its request is accurate and complete and continues to accurately and completely reflect such facts and circumstances. Additionally, this Opinion Release does not purport to endorse the adequacy of the Requestor's anti-corruption policies and procedures.