In 2014, Avon resolved a Foreign Corrupt Practices Act enforcement based in large part on obtaining a direct selling permit in China. (See here for the prior post).
In 2016, Nu Skin Enterprises resolved an FCPA enforcement action based in large part on obtaining a direct selling permit in China. (See here for the prior post).
In 2017, Herbalife disclosed that it was under FCPA scrutiny concerning its conduct in China. With the company’s scrutiny still pending, yesterday the DOJ announced that 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) were criminally charged “for their roles in a scheme to violate the anti-bribery and the internal controls provisions of the FCPA.” Not surprisingly, the alleged conduct focused on obtaining a direct selling permit.
As summarized below, in an October 22nd criminal indictment Yang was charged with one count of conspiracy to violate the FCPA and Li was charged with one count of conspiracy to violate the FCPA, one count of perjury and one count of destruction of records in a federal investigation. In addition, in this civil complaint the SEC charged Li with violating the FCPA’s anti-bribery provisions and aiding and abetting books and records and internal controls violations.
Regarding the regulatory context in China, the indictment alleges:
“[M]ulti-level marketing was prohibited under Chinese law. Chinese law did, however, permit a company to engage in ‘direct selling’ selling a company’s products through independent sales representatives subject to certain requirements. In particular, as relevant here, before engaging in direct-selling in any Chinese province, Chinese law required a company to obtain a direct-selling license from national authorities and local authorities in that province.”
According to the indictment, the External Affairs (EA) department was responsible for interfacing with Chinese governmental agencies and Chinese government-owned media entities on behalf of Herbalife in China and that EA employees frequently entertained Chinese government officials at meals and other events and provided gifts to Chinese government officials. According to the indictment, between 2007 and 2016 “Chinese Subsidiary reimbursed EA employees more than $25 million for entertaining and gift giving to Chinese Government officials.”
The indictment alleges:
“[Defendants] participated in a scheme to pay bribes and to circumvent Herbalife’s internal accounting controls. The scheme involved, among other things, bribing Chinese government officials to obtain and retain business and other benefits for Herbalife; obtaining reimbursement from Herbalife relating to the illicit bribes through fraudulent reimbursement requests; and circumventing Herbalife’s internal accounting controls so that the bribery and the profits derived from it would continue.” […]
[Defendants] paid and agreed to pay bribes to Chinese government officials, including officers at employees [the Ministry of Commerce, the State Administration for Industry and Commerce – AIC] and China Economic Net [a media company in China that published articles about business and other issues that was owned and controlled by an agency or department of the Chinese government] for the purpose of obtaining, retaining, and increasing Herbalife’s business in China by, among other things: (1) obtaining and retaining Chinese subsidiary’s licenses to operate as a direct-selling enterprise in provinces throughout China; (2) corruptly influencing Chinese governmental investigations into China’s Subsidiary’s compliance with Chinese laws applicable to direct-selling enterprises; and (3) corruptly influencing Chinese state-owned and state-controlled media for the purpose of removing negative media reports about China Subsidiary.”
According to the indictment, the defendants “obtained reimbursements for the bribes from China Subsidiary through false expense claims designed to conceal the true nature of the expenditures at issue” and “circumvented Herbalife’s internal accounting controls related to EA’s expenditure on gifts and entertainment for Chinese government officials.”
The indictment states:
“These internal accounting controls, among other things, prohibited the payment of bribes; established limits on the value, frequency, and nature of expenditures on government officials; and required EA employees to provide receipts and other specific information, including the names of the government officials involved, to obtain approval and reimbursement for their expenditures.”
However, the DOJ alleged that the defendants submitted fraudulent reimbursement requests, obtained reimbursement for those fraudulent requests, and concealed their fraud from Herbalife’s Internal Audit department.
Among other things, the indictment refers to round-trip airline tickets for a senior AIC official and his wife; a shopping trip and spa visit for a senior AIC official, his daughter, and her classmates; an internship for a senior AIC official; receiving $772,433 in reimbursement for purportedly entertaining 4,312 government officials at 239 meals, or more than one meal per day; and providing fruits and vegetables for officials.
According to the indictment, Li “furthered the scheme and concealed the scheme by, among other things, routinely creating false records and certifications disclaiming any knowledge of fraud or circumvention of internal accounting controls.” The indictment further alleges that Li “made false statements in sworn investigative testimony to the SEC on or about October 20 and 21, 2016.”
The indictment states that “during the time period relevant” to the indictment, the defendants “each participated in more than ten in-person and online trainings related to Herbalife’s anti-fraud and anti-corruption policies. Furthermore, Li and Yang both certified repeatedly that they understood and would adhere to Herbalife’s Code of Business Conduct and Ethics, which, among other things, required compliance with the FCPA.”
In terms of jurisdiction, the overt acts section of the indictment concerning the FCPA offenses states that Li caused a false statement to be sent by e-mail to Herbalife personnel in Los Angeles and that Li in sworn testimony before the SEC in New York falsely denied having knowledge of China Subsidiary’s employees paying bribes or circumventing Herbalife’s internal controls.
In the DOJ’s release, Assistant Attorney General Brian Benczkowski stated:
“Li and Yang allegedly led a brazen, decade-long corruption scheme, bribing foreign Chinese officials and then covering it up by providing false sworn testimony to the SEC and wiping clean computer files. The Department of Justice will continue to hold individuals accountable who undermine the integrity of our financial markets by participating in these corrupt bribery schemes.”
U.S. Attorney for the S.D. of N.Y. Geoffrey Berman stated:
“Li and Yang, both former top executives of a global multi-level marketing company headquartered in Los Angeles, allegedly approved the extensive and systematic payments of bribes to Chinese government officials over a 10-year period to promote and expand the company’s business in China and to avoid regulatory scrutiny in China. Moreover, in an effort to obstruct the government’s investigation into this widespread corruption scheme, Li lied under oath about the bribe payments when interviewed by the SEC and also destroyed evidence. This case signifies this office’s commitment to ensuring that companies operating in the U.S. do not gain an unfair advantage through corruption and illegal bribes of foreign officials.”
In this October 30th quarterly report, Herbalife stated:
“As previously disclosed, the SEC and the Department of Justice, or DOJ, have been conducting investigations into the Company’s compliance with the Foreign Corrupt Practices Act, or FCPA, in China, which are mainly focused on the Company’s China external affairs expenditures relating to its China business activities and the adequacy of and compliance with the Company’s internal controls relating to such expenditures. These investigations are proceeding, the government is continuing to request documents and other information relating to these matters, and the Company is continuing to discuss with the government possible resolution of these matters. The Company has conducted its own review and has taken remedial and improvement measures based upon this review, including but not limited to replacement of a number of employees and enhancements of Company policies and procedures in China. The Company is continuing to cooperate with the SEC and DOJ. Although a likely outcome could include resolutions or government actions, the Company cannot predict the eventual scope, duration, or outcome of the government investigations at this time, including potential monetary payments, injunctions, or other relief, the results of which may be materially adverse to the Company, its financial condition, its results of operations, and its operations. At the present time, the Company is unable to reasonably estimate the amount of loss relating to these matters.”
In the Li civil complaint, the SEC alleges in summary fashion:
“This action arises from violations of the FCPA by defendant Li, the former Managing Director of a direct selling company in China (“China Subsidiary”), which is made up of wholly owned subsidiaries of a U.S. based direct selling company (“Company A”).
From 2006 to 2016, Li orchestrated a bribery scheme in China, bribing local, provincial, and national government officials to obtain direct selling licenses and curtail government investigations of China Subsidiary’s business practices.
As China Subsidiary’s Director of Sales in 2006 and 2007, and as its Managing Director from December 2007 until 2016, Li directed a scheme to: (i) bribe officials through payments of cash, gifts, travel, meals, and entertainment; (ii) falsify expense reports for those payments; and (iii) circumvent Company A’s internal accounting controls to conceal the bribes.”
As to jurisdiction, the SEC alleges:
“[Li] , directly or indirectly, made use of the means or instrumentality of interstate commerce in connection with the transactions, acts, practices and courses of business alleged in this Complaint, including travel, the mails, telephonic communications, and electronic messaging. Among other things, Defendant communicated telephonically and via email with officers and employees of Company A in the United States regarding obtaining approvals for entertaining of Chinese media and Government officials that the Defendant used to bribe the officials. The Defendant also emailed false internal certifications to Company A management in connection with Company A’s Commission filings in the United States …”.
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