Numerous Foreign Corrupt Practices Act enforcement actions (Bristol Myers, Eli Lilly, PTC, FLIR Sytems, Sanofi, Novartis, and Avon to name a few) have involved abuse of employee reimbursements.
The most recent example involved the Herbalife enforcement action (see here  and here  for prior posts) which largely focused on former Herbalife China executives Yanliang Li (a citizen of China and former Managing Director of a Chinese division of Herbalife) and Hongwei Yang (a citizen of China and former head the External Affairs Department of a Chinese division of Herbalife).
As discussed below, the abuse of employee reimbursements in the Herbalife matter is in a league of its own and represents employee reimbursements gone wild as the culpable employees allegedly entertained thousands of Chinese officials including expensive meals, alcohol, karaoke, and luxury gifts and also involved a purported purchase of hundreds of pounds of fruits and vegetables. Further, the government alleged that the culpable employees discussed using fake meal invoices or fake gift invoices to avoid internal audit oversight
As alleged by the DOJ:
“Yang and other External Affairs (EA) employees routinely falsified expense reports and receipts. For example, in the six-month period between in or about July 2012 and in or about December 2012, Yang received approximately (a) $772,433 in reimbursement for purportedly entertaining 4,312 government officials and media personnel at 239 meals, or more than one meal per day, and (b) $248,622 in reimbursement for purported gifts to Chinese officials and media personnel.”
“In another example, between in or about September 2015 and in or about October 2016, Li, Yang, and others approved reimbursement of 920,000 yuan for the purported purchase of gifts from a particular vendor. These gifts, which were purportedly for Chinese government officials and media personnel, were fruits and vegetables from a farm near the city where Li and Yang were from. Li, and in some instances Yang, approved reimbursement to Yang and other EA employees for receipts showing more than 30 tons of purported produce purchases—without any documentation indicating that any produce was actually shipped.”
Between in or about 2007 and in or about 2016, Herbalife’s books reflected that Herbalife China reimbursed EA employees more than $25 million for purportedly entertaining and giving gifts to Chinese government officials and Chinese media personnel, including Chinese state-owned media personnel, some of which was used for improper purposes.”
Likewise, the SEC’s order found:
“Herbalife China continued to influence Chinese government officials with improper gifts of meals and entertainment. An Herbalife China External Affairs manager (“EA Manager”) developed a relationship with a municipal government official (“Official 3”). During telephone conversations, EA Manager and Official 3 discussed treating Chinese government officials to expensive meals, alcohol, karaoke, and luxury gifts. For example, on January 11, 2012, EA Manager told Official 3 that EA Manager had entertained several government officials with dinners, karaoke, and alcohol.”
“On March 31, 2012, EA Manager told Official 3 that EA Manager treated Chinese government officials to expensive meals with alcohol. EA Manager said that one evening was “so expensive, my hands were shaky.” Later, EA Manager asked Official 3 for names of government officials that EA Manager could write on his expense reports because he spent so much money that he needed to add names to get under the company’s per head spending limitation.”
“Other Herbalife China External Affairs employees also falsified expense reports to collect reimbursement for purported gifts and meals to Chinese government officials. For example, on January 11, 2012, an External Affairs employee spoke with the External Affairs assistant manager responsible for processing expense reimbursement requests (“EA Assistant Manager”). EA Assistant Manager asked the employee to submit falsified reimbursement requests supported by false meal and gift invoices totaling 577,000 yuan (approximately $91,000).”
“External Affairs employees submitted fake invoices and false expense reports to get reimbursed for improper benefits they provided to government officials. For example, on January 31, 2012, EA Manager asked Official 3 for names of government officials that EA Manager could list on a falsified expense report. EA manager told Official 3 that a local government official had called EA Manager to ask EA Manager to pay for a meal for the official and his family during a family road trip. EA Manager explained that the official “knows that [EA Manager] can arrange for any place all over the country.” EA Manager said that the official “has helped [EA Manager] a lot before.” EA Manager asked for names of officials that he could list on the expense report because “it’s not appropriate for [EA Manager] to write down [the official’s] name too many times.”
“During a telephone call on April 6, 2012, EA Manager told Official 3 that he went to buy fake receipts “to cover the gifts” for government officials, bags that were “very expensive by Prada.” During a call on August 1, 2013, EA Manager and EA Director discussed whether to purchase fake meal invoices or fake gift invoices to best avoid internal audit oversight. They also discussed how EA Manager’s usual fake invoice supplier was no longer available and his other sources could not provide enough fake invoices.”
“During a telephone call on March 21, 2014, two External Affairs employees discussed how to submit falsified expense reports for 20,000 yuan for claimed expenses regarding gifts to government officials. The two employees discussed splitting the gift expenses into two 7 applications and revising the list of purported participants because the original list of 20 supposed deputy directors was not realistic.”
“In 2015 and 2016, Managing Director approved several expense applications submitted by an External Affairs employee for a reimbursement of approximately $150,000 claimed to have been paid to a farm, purportedly for shipping fruit and vegetable gifts to Chinese government officials and media, including state-owned media officials. The amount of produce purportedly purchased at the farm would have weighed approximately 34.5 metric tons, or 135 pounds per purported gift recipient, and, thus, could not have been the actual purpose of the $150,000 reimbursed. The expense applications and attached invoices were false, and the expenditures was improperly recorded in Herbalife’s financial records.”
“[I]n 2014, an EA Audit Report covering expenses for the last six months of 2012 found that, during this six-month period, EA Director had been reimbursed over $1 million on claimed meals and gifts for Chinese government officials and media, including stateowned media officials. According to the report, EA Director submitted expenses claiming to have attended 239 such meals, with a total of 4,312 participants, averaging $3,232 per meal. These numbers were extraordinarily high, as there were only 184 days (including weekends) during those six months. According to the EA Audit Report, during those six months, External Affairs, as a whole, submitted expenses claiming to have treated 30,076 Chinese government officials and media members to meals, and was reimbursed, as a whole, a total of approximately $3.7 million for claimed meals, gifts, and entertainment of government officials and media, including state-owned media officials.”
“In March 2016, another EA Audit Report covering expenses for the first six months of 2015 stated that EA Director submitted expenses claiming to have attended 115 restaurant meals with Chinese government officials and media, including state-owned media officials, during that six-month period. The average cost per meal was $1,472. During that same period, according to the EA Audit Report, EA Director submitted expenses claiming to have provided gifts to 828 government officials and media, including state-owned media officials, totaling $146,485. The report stated that “vendor receipts were replaced when problems were found,” highlighting Herbalife China’s practice of allowing External Affairs to replace problematic receipts, and failing to highlight those problems on the final reports. Despite this practice of replacing problematic receipts, the report still found violations, such as restaurant receipts submitted by different employees with very close transaction times in the same restaurant. The report also found that External Affairs had expended a total of $811,465 without the corporate approvals required for those particular expenses, and that seven External Affairs employees (including EA Director) had relied solely upon verbal approvals for more than 50% of their expense applications, despite Herbalife China’s internal policy that such verbal approval could be used only for emergency expenditures.”
“Between 2012 and 2016, Herbalife reimbursed External Affairs employees for over $7.2 million in questionable External Affairs meal and gift expenditures in connection with Chinese officials and media, including state-owned media officials.”
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