When the government charges individuals with Foreign Corrupt Practices Act violations and then subsequently charges a business organization with FCPA violations based on the same core allegations one might expect the allegations to be consistent.
However, as highlighted below in connection with the DOJ/SEC’s individual enforcement action against former Herbalife China executives (see here for the prior post) and its subsequent enforcement against Herbalife (see here and here for prior posts), in the later enforcement action the government failed to present the “complete picture” regarding the company’s internal audit function (a key portion of the internal controls allegations against the company).
In the November 2019 enforcement action against 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) the DOJ alleged that the defendants “conceal[ed] their fraud from [Herbalife’s] Internal Audit department.”
Among other things, the DOJ alleged that Li “in order to prevent the scheme from being detected by [Herbalife’s] Internal Audit department, directed [a co-conspirator – CC-1] to provide certain instructions to another colleague, and added, “Don’t use the company’s email address. I’m afraid it won’t be good for you, right?
According to the DOJ:
“Li and CC-1 then agreed to conceal information from Internal Audit about their expense fraud. CC-1 said, “Of course, some stuff can’t be talked about … things like me switching receipts and so forth, no need to mention it. LI responded, “Right, no need to talk about that.”
Likewise, the SEC’s complaint against Li contains an entire section titled “Li Approved False Expenses and Deceived Internal Auditors at China Subsidiary.” Pertinent allegations include the following:
“In a September 1, 2010 recorded telephone call, Li and China Employee discussed giving advance warning to and coaching an External Affairs employee for an investigation by the China Subsidiary’s internal audit department (“IA”). An IA manager had learned that the External Affairs employee had submitted a fake hotel receipt, and the IA manager told Li and China Employee that the IA manager intended to confront the External Affairs employee about the fake receipt. Li told China Employee to warn the External Affairs employee but to avoid using company email when doing so. Li also told China Employee to coach the External Affairs employee to stick to his false story: “No matter what will happen to him, he should tell them it came from the hotel. If he gives in, then we will fall like a landslide…He should just tell them that he was given a wrong receipt.”
“In a January 9, 2012 recorded telephone call, Li and China Employee discussed other fake receipts that had been identified by IA, in this case phony restaurant receipts. Li told China Employee that she should try to get reissued receipts from the restaurants to avoid further investigation. Later that day, China Employee told an External Affairs colleague that Li was worried about “what’s going on between us and [Company A], especially the [Company A] auditing department…Jerry [Li] is afraid something may go wrong.” China Employee also said that Li did not want China Employee to go to the IA committee meeting, and that Li would “deal with them on [China Employee 1’s] behalf.”
According to the SEC:
“IA audited External Affairs’ expenses approximately twice a year, and IA issued a report (“EA Audit Report”) at the conclusion of each audit. The EA Audit Reports showed unreasonably large expenses and listed violations of China Subsidiary’s policies, including fake receipts and verbal approval of expenses.
For example, in 2014, Li received an EA Audit Report that found that, during one six-month period, China Employee 1 had spent over $1 million on restaurant meals with Chinese government officials. According to the report, China Employee 1 had attended 239 such meals, with a total of 4,312 participants, thus averaging $3,232 per meal. These numbers were implausibly 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 treated 30,076 Chinese government officials to meals and spent a total of approximately $3.7 million for meals, gifts, and entertainment of government officials.
After Li received the EA Audit Reports, he discussed the findings with IA. Li falsely assured IA that the abnormally high EA expenses were legitimate and necessary to conduct business in China. Li acknowledged the compliance problems identified in the reports, such as the use of fake receipts, and falsely assured IA that he would discipline and train employees to improve compliance of China Subsidiary’s policies. IA purported to rely on Li’s false assurances in sending the EA Audit Reports (including Li’s assurances) to [Herbalife’s] management and its Board of Directors, and in responding to the Board of Directors’ subsequent inquiries regarding the high EA spending.”
The subsequent FCPA enforcement action against Herbalife – based on the same core conduct in the Li and Yang enforcement action – is generally silent about the efforts the individuals took to conceal their fraud from the internal audit department and the false assurances they provided to internal audit.
Rather, the SEC’s order against Herbalife merely states:
“After receiving the March 2016 IA report, a member of Herbalife’s Board of Directors emailed the Audit Committee and IA Director asking whether the high spending by China EA was reasonable. Another Board member responded: “Please note I have questioned this every year I have been on the board, and the company has defended its position that these are reasonable within FCPA guidelines.” IA Director responded that “the findings are the typical issues in these audits” and are within “tolerance.”
The DOJ’s criminal information against Herbalife merely mentions:
“Herbalife … employees and executives, including Li, Herbalife Executive 1, and others, regularly received and reviewed reports from Herbalife’s Internal Audit department showing the purported expenditures by Yang and EA on entertaining government officials and media personnel, including these purported meals and gifts.”
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