China continues to be a high-risk location for US companies to do business. While the current administration has laid numerous tariffs on Chinese goods, the fact that it holds 6 billion potential consumers will continue to draw western companies to its shore to do business. Yet the latest US company to run afoul of the Foreign Corrupt Practices Act (FCPA) in China is Herbalife Nutrition Ltd. While the company has not yet been hit with a FCPA violation, it is under FCPA scrutiny.

In 2017, Herbalife disclosed that the Securities and Exchange Commission (SEC) had requested information about the company’s anti-corruption program in China. Yesterday, the Department of Justice (DOJ), in a Press Release, announced that charges have filed an Indictment against two former Herbalife employees for allegations of paying bribes to Chinese government officials for over 10 years and also lying to the SEC about their dealings in China. As reported by Dick Cassin, on the FCPA Blog, Jerry Li, the former head of Herbalife’s China subsidiary, was charged with one count of conspiracy to violate the FCPA’s internal control provisions, one count of perjury and one count of destruction of records in a federal investigation. Also charged was Mary Yang, the former head of the external affairs department of Herbalife’s China subsidiary. She was charged with one count of conspiracy to violate the FCPA’s internal control provisions. The charges of internal control violations are some of the most serious that can be brought against an individual as each charge has the potential of a 20-year prison sentence.

According to Geoffrey Berman, US Attorney for the Southern District of New York, the two allegedly “approved the extensive and systematic payments of bribes to Chinese government officials over a 10-year period to promote and expand the company’s business in China. Moreover, in an effort to obstruct the government’s investigation into the widespread corruption scheme, Li lied under oath about the bribe payments when interviewed by the SEC and also destroyed evidence.”

The bribery scheme was both audacious and bold. The two submitted false expense accounts on an astronomical basis, “according to the indictment, during just six months in 2012, Mary Yang allegedly collected $772,000 in reimbursements for purportedly entertaining 4312 government officials at 239 meals, or more than one meal per day.” I should note this included weekends. Over the 10-year period from 2007 to 2016, “Herbalife’s external affairs department in China reimbursed its employees more than $25 million for entertaining and gift giving to Chinese officials.”

Clearly something very wrong was going on in China. At this point it is not clear if there was a failure of internal controls, an override of internal controls or simply no internal controls in place. However you slice it, the fraudulent reimbursement scheme was running at approximately $2.5 million per year and the $772,000 for six months in 2012 is not even half of the fraudulent reimbursements under this calculus.

But there was much more for Li as not only was he charged with lying under oath, the Indictment actually quoted from his interview with the SEC where he was asked directly if (1) he offered any payments to Chinese governments officials. Answer – No; and (2) if was aware of any such payment. Answer – No. But his recalcitrant conduct did not end with simply lying to investigators. He had installed “a wiping application on his company computer…that allowed him to erase 200 files from the laptop in a manner that would render the deleted files unrecoverable.” There was no word on whether the DOJ or SEC was able to recover these deleted files.

All of these allegations (and at this point, they are still allegations) point to not only a company culture completely out of control in terms of criminal violations but also a failure of internal controls. It could be quite serious for Herbalife as it is under DOJ scrutiny for an entire series of fraudulent business practices. In 2016, Herbalife agreed to pay “$200 million to settle FTC [Federal Trade Commission] charges that it deceived customers about how much money they could make selling Herbalife products. The company also agreed to restructure its U.S. operations.” Obviously, the company’s business practices left a lot to be desired.

For the compliance practitioner, these two indictments provide solid reminders why ongoing monitoring is such an important tool. Any review or oversight into the reimbursement requests coming out of the China business unit would have immediately flagged the high employee reimbursement requests, particularly when viewed over a multi-year period. This should have immediately triggered an internal investigation. Evidently it did not. Moreover, the six-month period where Yang had over 239 meal requests should also have triggered a deep dive investigation. When your meal reimbursement request is over one meal per day for any time period over a week (or perhaps two when traveling) a tickler system should be activated.

Finally, by 2016 the country of China generated 20% of Herbalife’s total business revenue, exceeding $4 billion. When you have that high a percentage of your sales generated in a known high-risk region for corruption venue, such as China, special care must be taken to manage that risk. It does not mean that risk should forestall your business effort because with high-risk can come high reward. It simply means there must be a higher risk management solution.

At this point, it is not clear what the responsibility, if any, will be of Herbalife. However, they currently are under government scrutiny for their FTC violations. Further, the announcement of the FCPA investigation did not come until after the FTC violations had been settled which might lead to some speculation that the monitor uncovered the FCPA violations. If so, the company might not have self-disclosed these potential FCPA violations, raising the stakes for a corporate FCPA violation.

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