FCPA Compliance and Ethics Blog

December 31, 2014

The Avon FCPA Settlement – Part III

Geronimo's CadillacToday I conclude my 2014 blog posts with a final look at the Avon Foreign Corrupt Practices Act (FCPA) enforcement action. Before getting to the key lessons that a compliance practitioner may draw from this enforcement action, allow me to thank you for letting me be a part of your FCPA and greater compliance and ethics experience. This has been a memorable year in social media for me, both in blogging, publishing and podcasting. (If you have not listened to one of my podcasts please head over to the FCPA Compliance and Ethics Report on the web or on iTunes and check it out.) I have learned quite a bit this year, in writing, podcasting and listening. I hope that you will continue to follow me in 2015 through my blogs, podcasts and via some of the other sites and magazines that I write for. I plan to publish more books, in both print and electronic format, and pen more long form articles that will provide a deeper dive into various topics that I think will be of interest to the FCPA compliance and ethics practitioners out there. But I am getting a bit ahead of myself so back to today’s topic and where we are on the Avon FCPA enforcement action, and the big question of what does it all mean for the compliance practitioner and companies worldwide?

And The Money Kept Rolling Out

Unlike Eva Peron and the Foundacion Eva Peron, Avon had the opposite problem; the money never seemed to stop rolling out for Avon. As the FCPA Professor said in his blog post, entitled “Issues to Consider from the Avon Enforcement Action”, “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”. Even the Department of Justice (DOJ) questioned why the company’s investigative costs were so high.

In an article in Bloomberg News, entitled “Avon Bribe-Probe Clean-Up Neared $500 Million as Sales Cratered, Tom Schoenberg and David Voreacos reported, “In a 2010 meeting, government officials took the unusual step of questioning why Avon’s legal costs were so high at that point, according to two people familiar with the meeting who weren’t authorized to discuss it publicly. Avon said its legal bills had ballooned in part because the company operated in more than 100 countries without consolidated transaction records, according to one of the people.” The article quoted Matthew Axelrod, former senior Justice Department official, who said, “Though unusual, DOJ may call in company counsel to discuss when an outside law firm is going too far afield from what is necessary.” He added the “DOJ doesn’t want a company to have to spend unnecessary millions of dollars on an internal investigation any more than the company itself does”.

If there is one over-riding lesson for all companies to take away from this enforcement action it is that the cost can quickly spiral far out of control and beyond anything you might budget for. While the events at issue took place in 2003-08, the clear import is that it is much cheaper to spend the money to have a compliance program in place now rather than roll the dice and wait. This may mean you need to look at your internal financial accounting systems to determine if they can be monitored adequately and efficiently, yet in a cost-effective manner. While I have not reviewed the internal controls component of this FCPA enforcement action, it is also clear that internal controls need to be in place to detect, in a timely manner, when something goes askance. Of course, if it is in your corporate culture to lie, cheat and steal, it really does not matter what the standard of your internal controls is because the powers that be will find a way around them.

Will No One Rid Me of This Meddlesome Priest?

Henry II and his famous dictum surely seemed to exist at Avon corporate headquarters. If management wants sales accomplished in any way possible then that is the message that is communicated down the line to the troops in the field. Avon had a Code of Conduct that prohibited bribery and corruption, yet the company’s own internal investigation revealed that most company employees were not even aware such a document existed. There was no such thing as FCPA training at the time of the events in question. But more than simply the message of ‘Make Your Numbers; Make Your Numbers; (and then) Make Your Numbers’, Avon had a culture that actively hid criminal acts. For when credible information came to light that Avon China was violating the FCPA, the company went into full cover-up mode, even ordering the destruction of soft and hard copies of the Draft Audit Report. The cover-up was accomplished at the highest levels of the company, with the settlement documents noting the involvement of Avon Executive 1, Avon Executive 2 (believed to be the head of Avon’s Internal Audit function when he left the company), Avon Executive 3, another senior executive in Avon’s Internal Audit function, and two lawyers, Avon Attorney 1, who was identified as “a senior executive in the Office of the General Counsel at AVON” and Avon Attorney 2 who was identified as “an executive in the Office of the General Counsel at AVON”.

High Reward = High Risk

In their Bloomberg News article, Schoenberg and Voreacos reported that Avon was “among the first companies to obtain a license to sell products directly to consumers – the cornerstone of its business model – after Chinese authorities ended a ban on direct sales in 2006.” Further, “By July 2006, Avon had hired more than 114,000 door-to-door salespeople in China. [Then Avon CEO Andrea] Jung said at the time the company viewed the country as a potential $1 billion market. Sales in China surged 28 percent to $67.2 million in the company’s fourth quarter that year.” This means that in less than one year after receiving its license to do business in China, Avon China had one quarter of sales in excess of $60MM. That is quite a lot of Ding Dong, Avon Calling plus following up that doorbell ringing with some serious sales.

Here the lesson is that if there is a new business opportunity that results in an explosion of sales it is probably because of some high risk involved. That may be financial risk, it may be political instability risk, it may be weather-related risk, it may be currency fluctuations risk or it may be some other type of risk. When a business is regulated down from the national to the provincial to the municipality level, it probably means multiples of government interactions for permits and licenses to do business. The compliance function must be integrated into the business operations of a company well enough to be put on notice when such an opportunity presents itself, perform some type of risk assessment and then plan out and implement a strategy to manage those risks going forward. If the first time the compliance function hears about something askance from a FCPA perspective is when it is brought up by internal audit, it is already too late.

The Compliance Committee and Geronimo’s Cadillac

Just as Michael Murphy’s song Geronimo’s Cadillac was intended to show every irony he could ever think of about American culture in two words, the Avon Compliance Committee was about as ironic; although and admitted it is three words. For a corporate Compliance Committee is not simply a vehicle to bring and show off when someone might be around to take pictures. A corporate Compliance Committee has to function and be involved, actively, in an appropriate level of oversight. If a Compliance Committee is informed of credible allegations of a FCPA violation, it simply cannot accept information that it is ‘unsubstantiated’ at a later date. A Compliance Committee must be actively involved in the investigation, it must review the investigation protocol, review information and findings as they become known, direct outside counsel in the investigation and, finally, take charge to remediate the issues involved. It has to have real authority, real power and be taken seriously, not simply have a meaningless title of “Compliance Committee”.

As 2014 draws to a close, I for one am glad that the long Avon FCPA saga has at least come to this stage. For bribe payments totaling over $8MM, Avon has or will pay upwards of $750MM to get through the FCPA Professor’s “three buckets” of FCPA enforcement action costs. This staggering cost should be a clear lesson that now is the time to implement or enhance a compliance program. The number of persons effected by the fallout from this case start with the former head of the company, Andrea Jung, several high ranking executives, the company’s balance sheet and perhaps even some of the lawyers involved in the investigation of this matter. One of the first things that Jung’s replacement did was bring in new counsel to advise the company. After all, someone had to come up with the low-ball opening bid to the DOJ and Securities and Exchange Commission (SEC) of $11MM and then advise Avon to negotiate in public with them using that figure.

On that note, I wish everyone a safe New Year’s Eve and prosperous New Year.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

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