I recently saw John Fogerty in concert. For those you are not aware, he was a founding member and the driving force behind Creedence Clearwater Revival (CCR), one of the very top American groups from the 1960s and early 1970s. After the band’s disintegration, Fogerty continued on as a solo artist. CCR was distinctive in that its rock and roll roots were Stephen Foster as much as anyone and in the middle of the British invasion brought a uniquely American sound with a very hard edge. From the anthem of Vietnam vets, Who’ll Stop the Rain, to the greatest Halloween song Bad Moon Rising (that is – after Boris Karloff’s version of the Monster Mash); CCR brought serious American root chops to rock.
Fogerty continues to rock out and played a 2.5 hour set straight through from his opening song of Proud Mary to his encore performances of Travelin’ Band, Bad Moon Rising and Fortunate Son; it was one great night of rock and roll for any who listened to music in the 60s or 70s. His son played lead guitar for him and it was very obvious that Fogerty had a father’s joy in working with his son. If he comes to your town, I suggest you run, don’t walk, to the show.
Fogerty’s performance informs today’s blog post about the recent Foreign Corrupt Practices Act (FCPA) enforcement action brought by the Securities and Exchange Commission (SEC) against Nu Skin Enterprises Inc. (Nu Skin) and its Chinese subsidiary, Nu Skin (China) Daily Use & Health Products Co. Ltd. (Nu Skin China). Nu Skin is a Utah based entity, which, according to the SEC Cease and Desist Order (Order), is “in the business of manufacturing and marketing cosmetic and nutritional products primarily through direct selling, or multi-level marketing [MLM], channels.”
Although it was a relatively small enforcement action with a civil money penalty in the amount of $300,000, coupled with a disgorgement profits in the amount of $431,088, plus prejudgment interest of $34,600, the matter has several interesting aspects for the Chief Compliance Officer (CCO) or compliance practitioner to consider. First, although it might seem somewhat unusual for such an entity to become embroiled in a FCPA enforcement action it is the uniqueness of it that points to several lessons to be garnered by any company doing business under a MLM sales model. Next the case involved corruption around a charitable donation and it, therefore, serves as a stark reminder of the high-risk of charitable donations under the FCPA. Finally, the matter reminds everyone of the strict liability nature of violations of the Accounting Provisions of the FCPA including both internal control provisions and books and records provisions of the Act.
The allegations are that Nu Skin China made a donation which totaled approximately $154,000 to a charity in China to secure the intercession of a Chinese Communist Party (CCP) official to stop an ongoing investigation of the company. Nu Skin China had engaged in direct selling in China, in violation of Chinese domestic law, and was under investigation by the Administration of Industry and Commerce.
Nu Skin China decided, rather than comply with the law, it would seek to influence the investigation through corrupt means. According to the Order, “A Nu Skin China employee contacted the Party Official, who was his acquaintance, to suggest a charity located in the province. The Party Official had a pending request to Nu Skin China to facilitate obtaining college recommendation letters to U.S. universities from an influential U.S. person for his child. The Party Official proposed a charity, although at the time a branch of the charity had not yet been established in the province and it had no operations there. The Party Official, however, was associated with the entity that was responsible for establishing the charity in the province. Further, the provincial head of the AIC had previously reported to the Party Official.” Not only was a donation to the Party officials suggested charity made by but “the request for the recommendation letters was elevated to “top priority” as it was “becoming increasingly important” for Nu Skin China. Nu Skin US subsequently reported to Nu Skin China that it had secured an agreement from an influential U.S. person to write the college recommendation letters for the Party Official’s child.”
Nu Skin China did not inform its US parent of the true nature of the donation; to wit, to corruptly influence the AIC investigation and proposed fine of approximately $485K. Because of the size of the donation, the US parent had to approve and advised its Chinese subsidiary that such a “large donation in China could pose FCPA risks, so it advised Nu Skin China to consult with outside U.S. legal counsel based in China to ensure that the donation complied with the FCPA. Outside counsel, in turn, recommended that Nu Skin China include anti-corruption language, which included language regarding the illegality of influencing government officials, in the written donation agreement with the charity. That language was inserted into a draft of the donation agreement between Nu Skin China and the charity. The anticorruption language, however, was removed from the final version of the donation agreement that Nu Skin China executed. Nu Skin US was not aware that the language had been removed.”
All of this presents several significant and important lessons for the CCO and compliance practitioner. There was no evidence that Nu Skin self-reported so it is not clear how the SEC was made aware of the FCPA violation. However, it is not too far a stretch to opine that the Chinese government could have tipped off the SEC. The case also demonstrates that it is every transaction that matters as this enforcement action was for a one-time transaction. Ongoing due diligence, compliance terms and conditions in contracts and monitoring the relationship after the contract is signed are mandatory for any high-risk transaction. This donation had been flagged by the US entity as high-risk yet there was no oversight by the US entity to make sure that the compliance mandates were followed.
This enforcement action also reinforces the need for robust management of FCPA high-risk charitable donations. As was noted in the Order, “given the well-known corruption risks in China, Nu Skin US did not ensure that adequate due diligence was conducted by Nu Skin China with respect to charitable donations to identify links to government or political party officials and to prevent payments intended to improperly influence such persons in violation of the company’s anticorruption policy and the FCPA.” The reason there are levels of oversight in any best practices compliance program is to prevent just this type of FCPA violation from occurring. It really does not matter if the China subsidiary misrepresented to the US parent both what it was doing and then failed to follow specific instructions. Oversight is there to make sure that internal rules and procedures are followed. That is the responsibility of the US parent.
Finally, companies need to understand the strict liability nature of enforcement actions involving Accounting Provision violations of the FCPA. The statute itself refers to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances” as the SEC had interpreted this portion of the FCPA to set a reasonableness standard. If there are payments which violate the FCPA, there were not sufficient internal controls to prevent them. It may sound like very backward logic but that is the reality of SEC enforcement actions and it points directly to the need for companies to have functioning internal compliance controls in place.
John Fogerty took me back many years to some great music I listened to and indeed loved as a teenager. The Nu Skin FCPA should remind every CCO and compliance professional that vigilance must be maintained in any high-risk country or high-risk transaction, even if you are selling through MLM. Failure to follow through with all required compliance program steps, including oversight from the home corporate office, can lead to serious consequences.
Nu Skin reminds us that a second set of eyes is a part of any best practices compliance program.Click to tweet
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© Thomas R. Fox, 2016