DOJ Charges Two Herbalife Executives with Criminal FCPA Violations
Last week, DOJ announced the indictment of two former Herbalife executives in China for participating in a bribery scheme over a ten-year period.
Herbalife, a multi-level marketing company, was not charged and its investigation is ongoing.
The criminal; indictment, which was returned in the Southern Dustrict of New York, charges Yangling Li, aka Jerry Li, and Hongwei Yang, aka Mary Yang. Li was the former head of Herbalife’s Chinese operation, and Yang headed Herbalife’s external affairs department.
The indictment charges both defendants with conspiracy to violate the FCPA. Prosecutors also charged Li with perjury for lying under oath for false statements he made during an SEC deposition and for destruction of evidence. The SEC also filed civil charges against Li. Both defendants remain at large.
Two months ago, Herbalife settled SEC civil charges that it mislead investors from 2012 to 2018 concerning its Chinese business operations.
Herbalife’s China Business
Over a ten-year period, Herbalife built a multi-level sales operation in China, which eventually generated approximately 20 percent of Herbalife’s global annual sales of $4 billion.
China’s external affairs unit was responsible for interacting with Chinese government agencies and media operations. External affairs employees entertained Chinese officials, provided meals, hospitality and gifts. Over a ten-year period, external affairs employees were reimbursed for roughly $25 million in expenses for meals, hospitality and gifts.
Herbalife’s business depended on securing licenses for direct selling operations from central and provincial governments connected to the Ministry of Commerce (“MOFCOM”). The regulation and oversight of direct selling operations was conducted by central and provincial entities as part of the Administration for Industry and Commerce. China Economic Net is a state-owned media company that published artciles about business issues in China.
The bribery scheme was executed by these two executives with the assistance of an unnamed co-conspirator to ensure that Herbalife secured direct selling licenses, avoided government scrutiny and oversight, and suppressed negative coverage by government-owned media outlets.
To carry out the bribery scheme, Li and Yang submitted false reimbursement requests for expenditures used to pay bribes to key government officials. As an example, Li and Yang submitted false reimbursement requests to obtain cash needed to make payments to AIC government officials in “red envelopes.”
In 2007, Li and Yang made a bribery payment to a MOFCOM official to secure a license for direct selling operations in a specific province. In that same year, the defendants made various bribery payments to AIC officials to reduce the risk of regulatory reviews of Herbalife business operations. Li and Yang also paid for an AIC official and his wife to travel in China and advised employees to ensure that they were not caught for paying for this trip. In September 2012, Li and Yang paid for an AIC official in Shanghai for a shopping spree and spa visit for the official, his daughter and her classmates. The defendants, Li and Yang, also provided a false internship review for a child of a government official.
Over a six-month period in 2012, Yang received approximately $772,433 in reimbursement for entertaining 4,312 government officials at 239 meals, or more than one meal per day. Li and Yang regularly paid China Economic Net journalists by providing meals and hospitality to protect Herbalife from negative press reports. Between September 2015 and October 2016, Li and Yang spent approximately $150,000 on gifts of fresh fruits and vegetables for government and media officials.
Perjury and Destruction of Records
The perjury charge against Li focused on false statements made during an SEC deposition concerning his knowledge and participation in bribery payments. The indictment cites the fact that Li was presented with audio recordings confirming his involvement in bribery payments and his denial of any involvement in bribery.
In particular, the indictment recites specific questions and answers during the deposition concerning (1) Li’s use of specific email accounts; (2) Li’s involvement in making illegal payments to AIC and MOFCOM officials. In addition, Li is charged with destruction of records for attempting to “wipe” clean his company laptop by erasing more than 200 files.