This  recent post dived deep into the Avon FCPA enforcement action.
This post continues the analysis by highlighting various issues to consider associated with the enforcement action.
The Gray Cloud of FCPA Scrutiny Lasted A Long Time And Was Very Expensive
Avon disclosed its FCPA scrutiny in China in October 2008. In other words, it was 6 years and 2 months from the time of disclosure to the actual enforcement action. While FCPA scrutiny typically lasts between 2-4 years, Avon’s FCPA scrutiny was extraordinarily long. (For additional reading see this  prior post “The Gray Cloud of FCPA Scrutiny Simply Lasts Too Long”).
Avon’s FCPA scrutiny was also very expensive. For years, the whisper in the FCPA community was how expensive – and dragged out – FCPA’s internal investigation and pre-enforcement professional fees and expenses were. Not all companies disclose pre-enforcement action professional fees and expenses, but Avon did and those figures were approximately $500 million (see here ).
Avon’s FCPA scrutiny thus supported the claim in my article “Foreign Corrupt Practices Act Ripples ” that settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era. Indeed, the broader effects of Avon’s FCPA scrutiny (including pre-enforcement action professional fees and expenses and an impact on bond ratings) is discussed in the article.
Given the above-mentioned whispers, one of the most interesting portions of the DOJ’s DPA was the following.
“The Department also considered that the Company, taking into account its own business interests, expended considerable resources on a company wide review of and enhancements to its compliance program and internal controls. While the Company’s efforts in this regard were taken without Department request or guidance, and at times caused unintended delays in the progress of the Department’s narrower investigations, the Department recognizes that the Company’s efforts resulted in important compliance and internal controls improvements.”
It has been highlighted numerous times on these pages (see here  for instance).
The root cause of many FCPA enforcement actions are foreign trade barriers and distortions. The narrative is rather simple.
- Trade barriers and distortions create bureaucracy.
- Bureaucracy creates points of contact with foreign officials.
- Points of contact with foreign officials create discretion.
- Discretion creates the opportunity for a foreign official to misuse their position by making bribe demands.
The following is not meant to excuse Avon’s conduct, only to put it in the proper perspective.
The root cause of Avon’s FCPA scrutiny was that China had significant trade barriers and distortions applicable to direct selling of products. As highlighted in the resolution documents, “under China’s newly promulgated direct selling regulations, to conduct direct sales, a company was required to obtain a national direct selling license and approvals from each province and municipality in which it sought to conduct direct sales.”
As I have long argued, the way to reduce bribery is not just to bring more corporate enforcement actions. It is to address the root causes of bribery by seeking a reduction in trade barriers and distortions.
Two Enforcement Actions In One
The Avon enforcement action was really two distinct enforcement actions in terms of conduct.
On one level, Avon’s indirect China subsidiary intentionally disguised certain payments of things of value (individually small, but in the aggregate large) from Avon during the general time period in which they were occurring.
Yet, the second prong of the enforcement action, more problematic from a corporate governance standpoint, is that once Avon learned of the improper conduct in 2005/2006, Avon failed to take steps to stop and remedy the situation.
Much like the developing story around Wal-Mart’s FCPA scrutiny, Avon appears to be more of a corporate governance sandwich with the FCPA as a mere condiment. Based on the conduct alleged by the DOJ and SEC, Avon (the parent company) appeared to fail to take ownership of the issues at its indirect China subsidiary on a real-time basis. (For additional details on this aspect of the enforcement action see this  prior post).
If “only” the alleged improper payments by Avon China had taken place, it stands to reason that the settlement amount would have been much lower.
Based on Avon’s pre-enforcement action disclosures, many were expecting that the Avon FCPA enforcement would be broader than just China. After all, Avon disclosed that it was conducting an internal review in a “number of countries selected to represent each of the Company’s international geographic segments” and according to its  website the company does business in over 100 countries.
That the Avon enforcement action was limited to China highlights an issue that can be highlighted in most FCPA enforcement actions. While it is easy in hindsight to fault a company for internal control failures as to the specific payments alleged, that the company conducted an internal review in many other countries and found nothing (at least nothing serious enough to be alleged in an FCPA enforcement action) does suggests that the company’s overall internal controls were reasonable and adequate.