Lessons From Avon's China Bribery Scandal

Even for a company that made US$606.3 million in profit last year, blowing US$95 million on something that it should not have needed to spend on at all is infuriating.

 
So it is with beauty products global enterprise Avon. Its net earnings last year could have been 15.6% higher, in theory, had it not paid “professional and related fees” for an internal inquiry seeking to discover whether some of its executives paid bribes to government officials in China and other emerging markets.
 
It had previously paid US$59 million on the same probe in 2009, putting the total cost of the inquiry so far at US$154 million. The outside lawyers the company hired are still running up the tab, and the company may have to pay much more in government fines and court action by disgruntled shareholders and other parties..
 
Avon’s suspected breaches of the U.S. Foreign Corrupt Practices Act (FCPA) have already spawned five legal suits against the company, "alleging breach of fiduciary duty, and, in certain complaints, abuse of control, waste of corporate assets, unjust enrichment and/or proxy disclosure violations,” according to the company's May 3 filing with the U.S. Securities and Exchange Commission.
 
In an earlier filing, Avon warned: “Any determination that our operations or activities . . . are not in compliance with existing laws or regulations could result in the imposition of substantial fines, civil and criminal penalties, interruptions of business, modification of business practices and compliance programs, equitable remedies, including disgorgement, injunctive relief and other sanctions.”
 
A Big Mess
The investigation may be coming to a head. Last week, the company said it had fired four unnamed executives in China (newspaper reports identified one of them as CFO Jimmy Beh). Ben Gallina, Avon’s Senior Vice President for operations in Western Europe, Middle East & Africa, Asia Pacific and China, has been placed on administrative leave. “Additional personnel actions may be taken in the future,” says Avon.
 
It’s a big mess and one that may snare other multinationals in China and other emerging markets. As law firm Orrick, Herrington & Sutcliffe wrote in CFO Innovation in January this year: “There has been an increasing focus on anti-corruption in Asia particularly due to the UK’s Bribery Act . . . and more high-profile US Foreign Corrupt Practices Act (FCPA) investigations being conducted in 2010.”
 
The Bribery Act will enter into force on 1 July 2011. The FCPA has been on the books since 1977, but enforcement has been lackadaisical until recently. The number of FCPA cases filed by the U.S. Department of Justice has surged in the past five years, reaching more than 60 – exceeding the total number of cases in the previous 28 years.
 
The penalties can sometimes be dramatic, such as the US$1.6 billion in fines, penalties, and profit disgorgement that Siemens paid in 2008 for FCPA and bribery violations,” notes Jeffrey Cramer, Managing Director at risk management company Kroll.
 
CFOs and other executives in China and elsewhere in Asia are understandably unsettled. Practices that had seemed standard operating procedure in the recent past, and winked at, if not actively abetted by headquarters, are now punishable by termination. Some analysts speculate that the firing of Beh and others is designed to pave the way for Avon to strike a deal with the U.S. Department of Justice  and avoid criminal prosecution.
 
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