AVON Anti Corruption: Failed Ostrich Policy

Do you pretend that you don't know the bribery behavior of the agency?

After nearly three years of internal investigation, the world's largest cosmetics direct selling enterprise Avon Co (NYSE:AVON) has recently decided to remove four senior executives suspected of bribing in China.

The top four executives are Gao Shoukang, former president of China, Jimmy Beh, former China's chief financial officer, Sun Changqing, former head of China regional affairs, and Ian Rossett (Ian Rossetter), global head of internal audit and security department.

These four names

So far, the US judiciary and the SEC have not yet initiated a lawsuit against AVON's alleged breach of the FCPA. Bribery details have not been made public.

However, AVON said in a statement submitted to the US Securities Regulatory Commission on 3 May, "we do not rule out further personnel punishment in the future."

Billions of dollars in costs

AVON's internal investigation began in June 2008.

At that time, AVON global CEO Zhong Junxian received a letter from an employee who reported that the company had "improper spending on Chinese official travel" in China.

AVON immediately launched an internal investigation, hired third party law firm Arnold & Porter LLP, and took the initiative to notify the US Department of justice and the securities and Futures Commission.

In a message to the US judiciary, AVON said the alleged unfair payment practices in China included "travel, entertainment and other expenses", but did not mention whether the investigation involved AVON's possible PR costs for obtaining a direct sale license in China.

Chinese media have generally linked AVON's self inspection and direct sale licences.

After months of self inspection, AVON inspector Guo Jingyi, former deputy director of the Ministry of Commerce and law, Deng Zhan, deputy director of the Ministry of foreign investment, and Liu Wei, deputy director of the registration bureau of foreign investment enterprises of the State Administration for Industry and commerce, have been sacked.

Media quoted industry sources that AVON's bribery is directly related to Deng Zhan's case.

In February 9, 2004, Deng Zhan, deputy director of the Ministry of foreign affairs of the former Ministry of Commerce, revealed publicly that China will formulate laws related to the direct selling industry within the year.

Two years later, in February 22nd, AVON obtained its first direct selling license before other enterprises.

However, from beginning to end, AVON did not specify whether the internal investigation involved PR fees in direct selling licences.

AVON said, "we will not comment on the ongoing investigation, nor will we respond to rumours or guesses, no matter whether it is true or not."

AVON has invested hundreds of millions of dollars in internal investigation and compliance construction.

The documents submitted by AVON to the SFC showed that AVON paid $59 million for it in 2009 and increased to $95 million in 2010.

The survey is not limited to China.

In February this year, AVON also appointed a senior vice president in charge of Western Europe, the Middle East, Africa, Asia Pacific and China.

Gao Shoukang, former president of China's region, was last year's executive leave in April. His successor was Oddone Azee, Rene Ordonez, who was formerly responsible for South Latin America.

Gao Shoukang, a manager who has been promoted from Taiwan, joined Avon Co in 1986.

In 1995, Gao became the first local general manager of AVON Taiwan in 13 years.

In 1998, AVON Taiwan, led by Gao Sheng Kang, made a turnover of NT $3 billion.

The following year, he was promoted to be president of AVON Greater China and President of Singapore and South Korea.

Gao Sheng Kang, who was the first president of the Greater China, faced the challenge of a comprehensive ban on pyramid marketing in China.

He introduced Taiwan's retail access to the mainland and once reversed a severe downturn in performance, which expanded to 6000 in 2004, with sales of 2 billion 400 million yuan in 2003.

AVON got the top spot in the subsequent opening up of China's direct selling market.

In reviewing his experience of obtaining a licence, Gao Sheng Kang once told the media that "no matter whether the enterprise has direct selling experience, we must not be too greedy" according to the state regulations.

However, a few years later, Gao was forced to leave his employer for nearly 15 years on suspicion of offering bribes to Chinese government officials.

Those who had business contacts with AVON told reporters that the new century (19.15, -0.03, -0.16%) of Caixin revealed that since AVON started the internal investigation and compliance construction, journalists who participated in AVON activities could not get the "red envelope".

Stop pretending not to know.

AVON's self inspection and disposal of its executives again highlight the power of the US anti corruption law.

It has become a sharp sword hanging on the head of American multinational corporations.

Over the past ten years, the US government has obviously strengthened the implementation of the law.

After Obama came to power, the US Department of justice dealt with corruption and bribery as one of its priorities.

The SFC has also stepped up its efforts to enforce laws and resources, and has set up a new internal panel dedicated to the overseas anti corruption law to strengthen law enforcement.

On the third anti corruption Summit Forum held in Shanghai in June last year, Nathaniel Edmonds, director of the fraud Department of the Department of criminal justice of the US Department of justice, revealed to the participants that the US Department of justice is showing several trends in strengthening the implementation of the anti corruption law of the Ed Menz.

For instance, law enforcement will be more stringent; more companies and individuals (executives and people involved) will face criminal proceedings; the US Department of justice will devote more resources to the implementation of the law; more international cooperation and cross border investigations will lead to more countries' efforts to strengthen anti-corruption and criminal proceedings.

The United States Department of justice will enforce the overseas anti corruption law more strictly, including expanding the scope of criminal responsibility.

For example, in other countries, providing entertainment and gift giving partners to private enterprises may not be illegal; but in China, if similar services are provided to partners of state-owned enterprises, it is possible to violate the overseas anti corruption law.

In addition, the US Department of justice has also made a more rigorous definition of the legal liability of American enterprises for corruption caused by third party agents.

If an American enterprise knowingly adopts the "ostrich policy" for the corruption of the third party agents, it will also be regarded as illegal.

All along, the overseas anti corruption law has not quantified the standard of how to define whether an enterprise has known "third party agents", which is often difficult to confirm in practice.

Many foreign enterprises have signed a simple sales agreement with agents, trying to get rid of the legal relationship with agents, and avoid "legal risks" by using the "ostrich policy" pretending to be ignorant.

But Ed Menz made it clear that this practice is no longer effective.

In a draft solicitation published by the US Department of justice in 2008, Chinese state media workers were also included in the definition of "foreign officials" in the overseas anti corruption law.

Strengthening personal legal responsibility is an important new trend in the enforcement of the US Department of justice.

In the past, the overseas anti corruption law mainly dealt with company fines, but only punished companies instead of criminal penalties for relevant personnel and responsible executives. Those who were considered to be hurt would be innocent shareholders and could not play enough deterrent effect.

It is reported that since 2004, the US Department of justice has instituted criminal proceedings against at least 80 individuals.

Waiting for them is not only economic heavy penalties, but also the possibility of imprisonment.

Unlike China's anti-corruption emphasis on bribery officials, the United States' overseas anti-corruption act focuses on bribes, because the object of overseas bribery is not in the jurisdiction of the United States.

But Ed Menz stressed that in the criminal responsibility of individuals, foreign bribe personnel who are suspected of laundering in the United States will also face criminal penalties.

On the other hand, the global anti-corruption storm launched by the United States has also pushed other developed countries to take action.

Britain was the first to take legislative action.

In April 8, 2010, the British Parliament passed a new bill, UK Bribery Act 2010.

This means that the United Kingdom has also extended its blade to crack down on commercial corruption from abroad.

The new bribe act of the United Kingdom will "give, promise or take bribes voluntarily, and request, agree to accept or accept bribes, whether domestic or overseas, as criminal offences".

This measure includes bribery against government officials.

Like the United States' overseas anti corruption act, the jurisdiction of the British bribery act is not limited to British companies, including all foreign companies listed in the UK, and any company or partner who has business in the UK, no matter where the company's registered and main business is.

In some cases, the bribe act is even more stringent than the US anti corruption act.

For example, the United States "overseas anti corruption act" has some side effects on certain behaviors, such as the application of business licenses and other non arbitrariness (Non-discretionary) purposes, and pays a small amount to the officials or government agencies to pay a small amount (called Facilitation Payment).

Whether the US judiciary and the SFC will sue for AVON's alleged violation of the overseas anti corruption law is still inconclusive.

In general, the US judiciary will follow up the information on the voluntary disclosure of the enterprise, and cooperate with the third party investigation institutions to decide the action depending on the circumstances and the findings.