AVON PRODUCTS BRIBERY SCANDAL IN CHINA

Presented to
Dr. Mark Panos
Towson University

Prepared by
Kia Allen & Marie Claire Llareus
Towson University Students
English 317.20

May 8, 2012

TABLE OF CONTENTS

TRANSMITTAL LETTER.ii
ABSTRACT...iii
EXECUTIVE SUMMARY.v
INTRODUCTION...1
BACKGROUND.1
CASE STUDY.2
Ethical Issue.2
Avon vs. the U.S. Securities and Exchange Commission3
Monetary Effects..4
RELEVANT LAW..5
The Foreign Corrupt Practices Act..5
Liability5
The OECD Anti-Bribery Convention..6
PROPOSAL.6
The FCPA Definition of Foreign Official6
OECD Enlargement and Enhanced Engagement in the Fight against Foreign Bribery..8
Global Awareness of Foreign Bribery.8
FEASIBILITY STUDY...9
CONCLUSION & RECOMMENDATIONS..9
REFERENCES..11
LOGICAL FALLACIESiv
Statements....v
Logical Fallacy Chart......vi
APPENDIX...vii
Appendix A...viii
Appendix B.ix
COURT DOCUMENTS..x
Class Action Complaint..xi
Amended Complaint for Violations of the Federal Securities Law..xii

Allen & Llareus Solutions

317 West Aspen Road

Towson, MD 21252

kallen10@students.towson.edu
mllare1@students.towson.edu

May 8, 2012
Dr. Mark Panos
8000 York Road
Towson, MD 21252
Dear Dr. Panos:
The attached report, in which you requested a case study on an unethical issue in the workplace,
thoroughly describes the current bribery investigation on Avon Products. We believe you will find this
study to be quite interesting and useful in evaluating policies and procedures within a company.
This study was designed to examine the impact of corruption in three areas:

Current laws enforced at Avon and potential future laws

Direct effects on levels of management
Monetary changes within the company

Secondary research provided a substantial amount of information regarding the case study. These sources
included company financial reports, court documents, electronic databases, and online resources.
We would be pleased to further discuss this report and its conclusions with you at your request, along
with any questions you may have. We thank you for your interest in reviewing our report and hope that
you ultimately coincide with our suggestions.
Sincerely,

Kia Allen

Marie Claire Llareus

Abstract

Avon Products is an American personal care company that continues to reach high success
globally, catering to women and their beauty needs. In 2008, Avon encountered a bribery
scandal in which a whistleblower reported to Avon chief executive officer Andrea Jung that the
companys China unit was bribing government officials and misallocating funds equaling up to
several hundred thousands of dollars. The U.S. Securities and Exchange Commission (SEC)
immediately began to investigate the unethical act and suspect Avon to be in violation of the
Foreign Corrupt Practices Act (FCPA). While the court has not yet decided on a verdict, the
companys financial statements are being closely examined along with different levels of
management associated with the case.

EXECUTIVE SUMMARY

Beginning in June 2008, Avon Products Inc. has been under investigation for bribery allegations
in its China operations. The U.S. Securities and Exchange Commission (SEC) has been the main
investigator on the case. The scandal includes related financial findings dating back to a 2005
draft internal report displaying a number of questionable payments. As a result, Avon Products
has faced an array of changes.
Our conclusion that Avon Products Inc. is in violation of the Foreign Corrupt Practices Act
(FCPA) and did not establish the proper policies and procedures to adhere the acts provisions is
based on findings from online articles and electronic databases. In addition, the companys
financial reports along with court documents were reviewed.
Analysis of the data revealed effects on the company in three areas:

Laws & Regulations. Avon Products is expected to abide by the FCPA along with other
regulations the company itself has enforced. The Compliance Committee and senior
management are assigned to oversee that these regulations are enforced and associates
comply accordingly. In 2010, Avon established the Global Ethics and Compliance
Council which was designed to further evaluate day-to-day operations.

Employment. Due to the type of ethical issue being faced in this case, several people
were involved and therefore, either terminated from their positions or demoted. CEO
Andrea Jung for example, was demoted and placed as executive chairman. Although
Jung was demoted during the investigation, she was demoted due to Avons financial
performance, not bribery allegations. Also, in May 2008, 4 executives were fired after
being suspended the previous year.

Finances. The company has faced descriptive changes within their financial statements.
Since 2009, Avon has incurred costs at roughly $250 million on the internal investigation
of possible FCPA violations. Avons sales revenue even dropped by 4% and net profits
dropped by 15%.

On the basis of these findings, it is recommended that Avon Products Inc. establish more
reasonable policies and procedures that have an extensive assurance on the business. It is also
recommended that the company make due diligence steps proposed by author Charles H.
Calhoun. This includes performing a risk evaluation on locations known for unethical business
practices, assessing internal controls to be assured that they are sufficient, and many more.

INTRODUCTION

Corruption within the workplace is a very common issue today but, in many cases it fails to
surface. This study was designed to analyze the direct and indirect impacts of bribery within
Avon Products Inc., in which employees were misallocating funds in order to obtain specific
governmental permission. Within this report, you will find highlights of the companys history, a
clear description of the case study and ethical issue, laws pertaining to the case study, and a
proposal to finding a solution. Specifically, we will attempt to answer the following questions:
How effective is current law in specifying what is considered bribery?
How has the investigation affected Avon Products monetary accounts?
What can be done to improve current law and reduce the number of foreign bribery
cases?
BACKGROUND

Avon stands as the worlds largest direct seller and one of many leading beauty companies.
Since David H. McConnell founded Avon in 1886, the company has been extremely successful.
With more than $11 billion in annual revenue, Avon meets the needs of women globally. Its
product line includes a wide range of beauty, fashion, and house products. By having growing
markets in more than 100 countries, Avon strives to be the company that best understands and
satisfies the product, service and self-fulfillment needs of women (Avon, 2012).
According to Avons company website, ethics and compliance are core priorities at Avon
(Avon, 2012). Ironically, Avon initially established the Compliance Committee to ensure the
effectiveness of ethical enhancements and the compliance of the law in day-to-day operations,

but is yet facing foreign bribery violations. Under the committee, senior management would
oversee the procedures of associates and enforce the policies.
The bribery investigation and potential disclosure violation could be a distraction for
management and could lead to fines and other regulatory actions against the company, S&P said
in a statement (Rubenfeld, 2012).
As the case unfolds more and more, there will be further information available and eventually a
verdict for the case.

CASE STUDY

Ethical Issue
The ethical issue that will be addressed in this case study is bribery. Bribery is the offering or
taking of something of value to influence persons or gain an unfair advantage. It is a form of
corruption that sometimes occurs in dealings of international business. Bribery is a serious issue
because it raises moral and political concerns, undermines good governance and economic
development, and distorts international competitive conditions (OECD, 1997).
It would seem that bribery is accepted in some countries more than others. But, according to the
Encyclopedia of Business Ethics and Society, it is all a matter of cultural relativism. In our
country, the exchange of gifts between business associates is considered unethical and, in some
cases, illegal. In other countries, business gift giving is a culturally expected part of doing
business and business relationship building. In China, for example, relationship-based business
is highly valued. An article by China Briefing states, Treating government officials to business

dinners and entertainment is a common way for businesses to manage their guanxi1 with local
authorities.
United States corporations are expected to uphold home ethical standards when conducting
business in other countries. However, some corporations unwisely follow the ancient adage of
when in Rome, do as the Romans do.

Avon vs. the U.S. Securities and Exchange Commission

In June 2008, an investigation began regarding allegations of bribery in Avons China division.
Avon employees paid some hundreds of thousands of dollars to Chinese government officials
and third-party consultant agencies in order to obtain governmental permission to conduct direct
sales in China. The bribery allegations consisted of improper expenses for items like travel and
entertainment. Eventually, the allegations extended to other countries such as Brazil, Mexico,
Argentina, India, and Japan. Federal prosecutors found the questionable payments in a
September 2005 draft internal report by the company. It raised concern over Avons compliance
with U.S. anti-bribery laws that bar U.S. companies from paying bribes to foreign officials.
Please refer to Appendix A for a timeline of events.
Currently, the U.S. Securities and Exchange Commission are investigating the case along with
the Federal Bureau of Investigation (FBI) and the Southern District of New Yorks Complex
Frauds Unit in Manhattan. Throughout the investigation, the mentioned prosecutors have
evaluated personnel from different levels of management. As a result, they have either been
terminated from their positions or demoted. Charles Cramb, now former vice chairman at Avon,

1 Guanxi is a Mandarin Chinese word for relationships. It describes the system

of social networks that facilitate business dealings in China.

was demoted to chief finance and strategy officer. Chinas Avon President S.K. Kao was
terminated along with Jimmy Beh, China CFO; C.Q. Sun, head of corporate affairs at China; and
Ian Rossetter, head of global internal audit and security in New York. Even CEO Andrea Jung
was demoted during the investigation but, was demoted due to Avons financial performance and
not based on bribery allegations. Please refer to Appendix B for a diagram of significant figures
in the case.
Monetary Effects
The Avon bribery scandal has caused drastic changes in the companys monetary accounts. By
combining investigation costs, drops in earnings, and losses in revenue, Avon has incurred costs
totaling to almost $250 million since 2009, displayed in Figure 1. The companys sales revenue
dropped by 4 percent and net profits dropped by 15 percent (Anderson, 2012).
Figure 1

Investigation Costs
$93.

2011
Year

2010

$95

2009
0

$59

10

20

30

40

50

60

70

80

90

100

Costs (million)

Since 2012, Avon has reported that the companys stock is down by 7 percent since their last
quarterly earnings report. In addition, sales have dropped 40 percent since last year.

RELEVANT LAW

The Foreign Corrupt Practices Act

The United States was the first country in the world to make the bribing of foreign officials
illegal. The Foreign Corrupt Practices Act (FCPA) was enacted in1977, prohibiting individuals
and corporations from bribing or paying foreign officials with the intention of obtaining business
contracts. The FCPA applies to all United States publicly traded companies filing with the U.S.
Securities and Exchange Commission (SEC). It mandates that these companies maintain records
and file financial statements that accurately reflect their transactions. The FCPA divides
enforcement authority between the SEC and the Department of Justice. One of the unintended
consequences of the FCPA is that it puts United States corporations at a disadvantage to
competitors from other countries that do not have comparable legislation. Nonetheless, federal
prosecutors have been aggressively pursuing violations of the FCPA in recent years.

Liability
Both corporations and individuals may be held liable for violating the FCPA. An article from the
Wall Street Journal states executives can be liable in overseas bribery cases even if they didnt
authorize illegal payments or try to hide evidence of bribes. The article is referring to a legal
concept known as willful blindness. Under willful blindness, a person can be found guilty
of simply taking steps to avoid learning of wrongdoing.
The Foreign Business Bribery Prohibition Act of 2011 is a bill currently pending in Congress. In
December, the bill was referred to the Subcommittee on Courts, Commercial and Administrative
Law. The bill was created to amend the Foreign Corrupt Practices Act of 1977, to make a

foreign concern liable for up to treble damages to any issuer, domestic concern, or U.S. person as
a result of violating certain anti-bribery prohibitions (Thomas, 2011).

The OECD Anti-Bribery Convention

Internationally, legislation similar to the FCPA has been developed to help combat bribery of
foreign officials. In 1997, the Organization for Economic Cooperation and Development
(OECD) adopted the Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions (Anti-Bribery Convention). Thirty-nine countries are parties
to the convention and have made the bribery of foreign officials a criminal offence. In addition,
the countries have agreed to put in place measures reinforcing their efforts to prevent, detect, and
investigate foreign bribery. China is not currently a member party to the OECD Anti-Bribery
Convention.

PROPOSAL

To reduce the probability of recurrence of this type of problem, we propose the following:
1. Clarify the FCPAs definition of foreign official;
2. Enlarge and enhance OECD engagement in the fight against foreign bribery and;
3. Raise global awareness of foreign bribery.

The FCPA Definition of Foreign Official

We believe a large part of why international bribery occurs is due to uncertainty regarding the
FCPA definition of foreign official. In the Journal of Business Ethics, Longenecker describes

FCPA provisions as so vague that business executives, fearing its sanctions, have become
unnecessarily cautious in their international operations.
The Institute for Legal Reform published a paper, titled Restoring Balance: Proposed
Amendments to the Foreign Corrupt Practices Act, by Andrew Weissmann and Alixandra Smith.
According to the publication, clarifying the definition of foreign official will improve the
FCPA. The statute defines a foreign official as:
any officer or employee of a foreign government or any department, agency, or
instrumentality thereof, or of a public international organization, or any person acting in
an official capacity for or on behalf of any such government or department, agency, or
instrumentality, or for or on behalf of any such public international organization.
However, the FCPA does not provide any definition of the word instrumentality. Without a
clear understanding of what companies are considered instrumentalities, other companies are
left with no way of knowing whether the FCPA applies to a particular transaction or business.
Weissmann and Smith wrote that the governments interpretation of instrumentality is meant to
encompass companies that are partially owned or controlled by a foreign government. They add
that the uncertainty is particularly discerning in China, where most if not all companies are
either partially or entirely owned or controlled by the state.
To clarify who is considered a foreign official, Weissmann and Smith suggest modifying the
FCPA to provide a clear definition of instrumentality. Such a definition would indicate:

the percentage ownership by a foreign government that will qualify a corporation as an

instrumentality

whether ownership by a foreign official necessarily qualifies a company as an

instrumentality and, if so, whether the foreign official must be of a particular rank or the
ownership must reach a certain percentage threshold

to what extent control by a foreign government or official will qualify a company as an

instrumentality

Perhaps Avon executives were dealing with an instrumentality, and were therefore uncertain as
to who is considered a foreign official. We believe answering the above questions about the
definition of instrumentality would reduce uncertainty, and in effect, decrease the likelihood of
FCPA violations.

OECD Enlargement and Enhanced Engagement in the Fight against Foreign Bribery
The OECD should invite non-member countries that are not yet parties to the Anti-Bribery
Convention to open discussions for membership of the organization. Encouraging these nonmembers to participate in the fight against bribery may lead to enhanced engagement and
enlargement of the organization. The discussion would cover how the non-members can meet
OECD anti-bribery standards. For example, non-members would be informed about compliance
with the Anti-Bribery Convention and the legal framework for combating bribery. If all
countries become parties to the Anti-Bribery Convention, the U.S. disadvantage would be
eliminated because all competitors would then play by the same rules.

Global Awareness of Foreign Bribery

The OECD launched an Initiative to Raise Global Awareness of Foreign Bribery, however we
believe further awareness is needed. In addition to raising awareness, the OECD Initiative aims
to illustrate the negative impact of foreign bribery and increase interest in anti-bribery measures

for every country. The more people know about this crime, the less likely companies are to offer
bribes, the less likely public officials are to receive or solicit them, and the more likely law
enforcement authorities are to investigate foreign bribery allegations.

FEASIBILITY STUDY

We believe our proposal should be implemented because it will help to prevent bribery in
international business. Modifying the FCPA to include a clear definition of instrumentality is
an easy way to reduce uncertainty of United States companies conducting business
internationally. Encouraging OECD membership will support the international fight against
foreign bribery. Promoting efforts to raise awareness and increase knowledge of the issue will
reduce the occurrence of foreign bribery.

CONCLUSION & RECOMMENDATIONS

Analysis of the statements, journal articles, and relevant law leads to the following conclusions
and recommendations regarding Avon Products Inc. We believe Avon is guilty of bribing foreign
officials in China, and therefore, has violated the Foreign Corrupt Practices Act (FCPA). Avon
failed to establish policies and procedures that provided reasonable assurance that the business
was adhering to FCPA provisions.
The Organization for Economic Cooperation and Development (OECD) adopted the
Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in
International Business Transactions. Within this recommendation, the OECD Council gives

Good practice Guidance to companies on establishing effective internal controls, ethics, and
compliance programs or measures for preventing and detecting foreign bribery. The guide states
that companies should develop these practices on the basis of foreign bribery risks facing the
company. To ensure the continued effectiveness of the company, such circumstances and risks
should be regularly monitored, re-assessed, and adapted as necessary.
We suggest that companies conducting business internationally create a strong FCPA compliance
program. A strong compliance program should be able to detect and deter improper conduct.
The following guidance principles were provided by the U.S. Chamber Institute for Legal
Reform. Six principles constitute a strong compliance program:
1

Risk Assessment the regular and comprehensive assessment of bribery-related risks to

an organization

Top-Level Commitment - a commitment to preventing bribery clearly communicated by

top-level management

Due Diligence - due diligence policies and procedures covering all parties to a business
relationship

Clear, Practical and Accessible Policies and Procedures - ensuring that policies and
procedures are readily accessible and enforceable throughout the organization

Effective Implementation - ensuring that the policies and procedures are embedded
throughout the organization

Monitoring and Review mechanisms to ensure compliance with relevant policies and
procedures, and implementation of improvements where appropriate

Companies that adhere to these principles will be less likely to encounter FCPA noncompliance.

References:

About Avon (2012). Avon Products, Inc. Web page. Retrieved 30 Apr. 2012 from,
http://www.avoncompany.com/aboutavon/index.html
Anderson, Mae, and Michelle Chapman. "Avon Posts 4th-quarter Loss as Sales Slump, Costs
Rise; Doesn't Expect 2012 Improvement." - Winnipeg Free Press. 14 Feb. 2012. Web.
Retrieved 30 Apr. 2012 from http://www.winnipegfreepress.com/business/avon-posts4th-qtr-loss-as-sales-slump-costs-rise-doesnt-expect-margins-to-improve-in-2012139282148.html
Calhoun, Charles H. "Foreign Corrupt Practices Act of 1977." Encyclopedia of Business and
Finance. Ed. Burton S. Kaliski. Vol. 1. New York: Macmillan Reference USA, 2001.
397-399. Gale Virtual Reference Library. Web. 16 Apr. 2012.
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of Business Ethics 7.5 (1988): 341-46. Web.
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2012. Retrieved from http://www.justice.gov/criminal/fraud/fcpa/intlagree/
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The Wall Street Journal, 16 Mar. 2012. Web. 30 Apr. 2012. Retrieved from
http://blogs.wsj.com/corruption-currents/2012/03/16/sp-downgrades-avon-debt-overbribery-probe-weak-results/
Shichor, David. "Foreign Corrupt Practices Act." Encyclopedia of White-Collar & Corporate
Crime. Ed. Thousand Oaks, CA: SAGE, 2004. 330-31. SAGE Reference Online. Web. 14
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Weissmann, Andrew, and Alixandra Smith. "Restoring Balance: Proposed Amendments to the
Foreign Corrupt Practices Act." Homepage. U.S. Chamber Institute for Legal Reform,
Oct. 2010. Web. 06 May 2012. Retrieved from
http://www.instituteforlegalreform.com/doc/restoring-balance-proposed-amendments-tothe-foreign-corrupt-practices-act