Jessica Sanderson, Partner at the Volkov Law Group rejoins us for a posting on the Herbalife FCPA settlement and lessons learned. Jessica can be reached at [email protected].

As we look past the Herbalife FCPA settlement with DOJ and the SEC for $123 million to resolve FCPA bribery and books and records violations, we are reminded of the variety of foreign government touchpoints and FCPA risks. 

Herbalife admitted in its DPA that the company made corrupt payments to Chinese government officials and falsely recorded and booked those payments as “travel and entertainment expenses” in order to (1) obtain and retain direct selling licenses for its wholly-owned subsidiaries in China (Herbalife China); (2) improperly influence certain Chinese governmental investigations into Herbalife China’s compliance with Chinese laws; and (3) improperly influence certain Chinese state-owned and state-controlled media entities to take down negative media reports about the company.

Why should every multinational company pay attention?  The overwhelming majority of FCPAenforcement actions stem from sales of goods or services to government agencies or state-owned enterprises (SOE’s).  As a result, salespeople and other employees, at consumer goods companies in particular, frequently have a false sense of security that the FCPA does not apply to their business; in training sessions we hear, “but we don’t sell to the government, why should we be concerned?” 

The Herbalife action reminds us that every multinational company has government touchpoints that present opportunities for corruption, including permitting and licensing authorities (as in the Herbalife action), customs agents, tax authorities and the judiciary. 

Typically, there are 1-2 FCPA enforcement actions resolved per year outside of the realm of public procurement or sales to SOE’s.  Below are a few other notable examples outside of direct sales: 

Before Herbalife, there were at least two other enforcement actions associated with direct sales licenses in China.  In 2016 and 2014, respectively, Nu Skin Enterprises, Inc. and Avon Products Inc. resolved FCPA actions based in part on obtaining direct selling licenses in China.  In Nu Skin, the company settled an SEC enforcement action for $766,000 based on making a $154,000 charitable donation to influence a high-ranking Chinese Communist party official to intervene and help avoid charges and fines in connection with an on-going provincial agency investigation into whether Nu Skin had violated China’s direct selling laws through unauthorized activities of its sales representatives.  In Avon, the company paid more than $135 Million and pleaded guilty to paying bribes to obtain and retain government approval and direct selling licenses.  Avon also admitted to bribing Chinese officials in order to avoid fines, negative judicial treatment and damaging media reports in connection with its direct selling activities.

At least three alcoholic beverage companies got into trouble in India for bribing government officials responsible for authorizing the regulation, production, sale and/or taxation of their beverages.  See Beam Suntory Inc. (paid $8 Million in 2018 to resolve allegations that it bribed Indian officials to increase sales, process license and label registrations, and facilitate the distribution of its products); Anheuser-Busch InBev SA/NV (paid $6 Million in 2016 to resolve allegations that it bribed Indian officials to secure authorization to extend brewing hours);  DIAGEO plc (paid 16.4 Million in 2011 to resolve allegations that it bribed government officials in India to secure the release of seized product shipments, secure label registrations, obtain import permits and other administrative approvals, and otherwise promote its products at government-controlled liquor stores; also resolved allegations that the company bribed South Korean officials to obtain tax rebates and Thai officials to obtain favorable resolution of tax disputes).

A few other recent notable examples outside of direct sales:  Just a few weeks ago, in July 2020, Alexion Pharmaceuticals Inc. agreed to pay more than $21 Million to resolve charges that it made payments to government officials in Turkey and Russia in part to secure favorable regulatory treatment for the company’s drug, Soliris. 

In June 2019, Walmart Inc. paid a total penalty of $137 Million and agreed to a 3-year independent compliance monitor to resolve a lengthy FCPA investigation into allegations that the company bribed officials in Mexico, India, Brazil and China to obtain licenses and permits required for construction and operation of its stores.  The $137 Million penalty pales in comparison, however, to the nearly $900 Million it cost Walmart to investigate and remediate.

A few months earlier, in February 2019, Cognizant Technology Solutions Corporation agreed to pay $25 Million to resolve charges that it bribed government officials in order to obtain construction-related permits and licenses linked to the development of an office park in India.

Lessons Learned:  Regulators judge the effectiveness of compliance programs, in part, on whether companies incorporate “lessons learned” from past incidents in-house and at other companies.  See, e.g., DOJ Evaluation of Corporate Compliance Programs (updated June 2020) (“Lessons Learned – Does the company have a process for tracking and incorporating into its periodic risk assessment lessons learned either from the company’s own prior issues or from those of other companies operating in the same industry and/or geographical region? … Does the company review and adapt its compliance program based upon lessons learned from its own misconduct and/or that of other companies facing similar risks?”); DOJ Justice Manual 9-28.800. 

One lesson learned from the Herbalife action and the similar enforcement actions discussed above is that even companies who never participate in public procurement and do not actively sell or market to government agencies and SOE’s have significant FCPA risks in other areas of their business with government touchpoints.  Compliance professionals should regularly assess those risks, ensure that their policies, procedures and internal controls are sufficiently designed to prevent and detect those risks, and should train relevant personnel to recognize and avoid those risks.