U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23159 / December 17, 2014
Accounting and Auditing Enforcement Release No. AAER-3616 / December 17, 2014
Securities and Exchange Commission v. Avon Products, Inc., Civil Action No. 14-cv-9956 (KPF) (S.D.N.Y.)
SEC Charges Avon Products, Inc. with Fcpa Violations
The Securities and Exchange Commission today charged Avon Products, Inc. (Avon), a global beauty products manufacturer and seller, with failing to put in place controls that could have detected and prevented payments made to Chinese government officials by employees and consultants at an Avon Chinese subsidiary from 2004 through the third quarter of 2008. In addition, Avon's books and records failed to accurately record the details and purpose of the payments. The SEC alleged that the conduct violated the Foreign Corrupt Practices Act (FCPA). Avon has agreed to pay more than $67 million in disgorgement and prejudgment interest to settle the SEC's charges.
The SEC's complaint alleges that the Chinese subsidiary made $8 million worth of payments in cash, gifts, travel, and entertainment to various Chinese officials to gain access to officials drafting and implementing direct selling regulations in China, to be among the first allowed to test the regulations, to be the first to receive a direct selling license, and, subsequently to keep the clean corporate image required to retain the license. Avon received approval to test direct selling in China in 2005, and in March 2006, it received the first direct selling business license.
Through an internal audit report, Avon management learned in late 2005 of potential FCPA problems in China. Management consulted an outside law firm, directed that reforms be instituted, and sent internal audit back to follow up. However, ultimately, no such reforms were instituted at the Chinese subsidiary. Avon began a full-blown internal investigation in 2008, after its CEO received a letter from a whistleblower in China.
Some examples of payments alleged in the complaint include payments for travel within China or to the United States or Europe, corporate box tickets to the China Open tennis tournament, gifts of Louis Vuitton merchandise, Gucci bags, and Tiffany pens, and $1.65 million for meals and entertainment. The complaint also alleges payments made to avoid fines or negative news articles that might have impacted Avon's corporate image and affected the Chinese subsidiary's direct selling license. In some instances, the payments were concealed by falsely recording the transactions as employee business expenses or as re-imbursement of a third-party vendor. In other instances, the records for the payments set forth almost no detail at all. The resulting books and records did not allow a reviewer to ascertain the government official or state-owned entities that received the payments or the purpose for which the payments were made.
The SEC's complaint charges Avon with violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 -- the books and records and internal controls provisions of the FCPA. Avon consented to the entry of a proposed final judgment ordering the company to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct, plus prejudgment interest of $14,515,013.13, permanently enjoining the company from violating Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), and requiring the company to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts. The settlement is subject to the approval of the U.S. District Court for the Southern District of New York.
In reaching the proposed settlement, the SEC took into account Avon's cooperation and significant remedial measures, including its implementation of an enhanced compliance program and worldwide FCPA training.
In related criminal proceedings, the U.S. Department of Justice and the United States Attorney's Office for the Southern District of New York today announced a deferred prosecution agreement with Avon and criminal charges against Avon's Chinese subsidiary. Avon entities agreed to pay over $67 million in criminal penalties in connection with those proceedings.
The SEC appreciates the assistance of the Fraud Section of the Department of Justice, the United States Attorney's Office for the Southern District of New York, and the Federal Bureau of Investigation.