Herbalife Nutrition Ltd (Herbalife) recently concluded a long running Foreign Corrupt Practices Act (FCPA) enforcement action with both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Herbalife settled with the DOJ via a Deferred Prosecution Agreement (DPA) and Information and with the SEC via a Cease and Desist Order (Order). The documents all help to more fully fill out the picture of the corruption at the organization which went for some 10 years between at least 2006 and 2016 and was originally disclosed in the Indictments of Jerry Li and Mary Yang in November 2019. The SEC also brought civil charges against Li at the time of his Indictment, via a Civil Complaint.

With the lengthy and extensive bribery schemes laid out in some detail, which apparently went to the very top of the organization, we now consider how Herbalife was able obtain the truly superior result in its FCPA resolution. To recap, a fine and penalty of just over $133 million, three-year DPA and no monitorship. Before this case, if I had been asked who I thought one of the top FCPA defense counsels was for a very serious case, I would have said Pat Stokes from Gibson, Dunn & Crutcher LLP. Now let me echo that in double stereo. Stokes and his team obtained a truly superior result. Remember the bribery scheme was in play for at least ten years, from 2006 to 2016, and the recalcitrant China business unit executives were with the company until 2017.

According to the DPA, the company did not self-disclose. I still wonder if the short seller imbroglio involving Herbalife did not somehow lead to a government inquiry. Even with the lack of self-disclosure the company “received full credit for its cooperation with the United States’ independent investigation, which has included: making regular factual presentations to the United States and, after taking steps that the Company and its affiliates determined complied with applicable foreign data privacy, confidentiality, and discovery laws, voluntarily making employees available for interviews in the United States; producing documents and information located outside of the United States; providing translations of foreign language materials; proactively disclosing certain conduct of which the United States was previously unaware; and providing to the United States all relevant facts known to it”.

The company engaged in extensive remediation “including taking disciplinary actions against, and separating from, employees involved in the misconduct; enhancing its anti-corruption compliance program by, among other things, significantly increasing the personnel and resources devoted to compliance; bolstering the Company’s annual risk assessment process; strengthening accounting controls for various forms of expenditures; implementing additional testing, monitoring, and auditing procedures; and improving policies related to entertaining and giving gifts to foreign officials”.

Under the FCPA Corporate Enforcement Policy, “If a company did not voluntarily disclose its misconduct to the Department of Justice (the Department) in accordance with the standards set forth above, but later fully cooperated and timely and appropriately remediated in accordance with the standards set forth above, the company will receive, or the Department will recommend to a sentencing court, up to a 25% reduction off of the low end of the U.S.S.G. fine range.” All of this led to a 25% discount of the low end of the range from the US Sentencing Guidelines.

However, that is not the end of the story. Under the US Sentencing Guidelines, a company can receive a reduction of 2 points on the base multiple “If the organization fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct”; which Herbalife received. However, the company could have received up to a reduction of 5 points if it had self-disclosed so its failure to do so cost the company somewhere around an additional $25 million in fines and penalties.

Also, of note in this settlement is the lack of a mandated monitor. Once again, one can only state the Herbalife’s defense counsel did a superior job in convincing the DOJ that a monitor was not needed for the company to complete its compliance program obligations under its DPA. The criteria for a monitorship is set out in the Benczkowski Memo. There are two broad criteria for the evaluation of the need for a Monitor, “(1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation.”

These two criteria are to be further evaluated by the following:

  • whether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems;
  • whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management;
  • whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems; and
  • whether remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future.

Additional considerations include:

  1. Whether the changes in corporate culture and/or leadership are adequate to safeguard against a recurrence of misconduct.
  2. Whether adequate remedial measures were taken to address problem behavior by employees, management, or third-party agents, including, the termination of business relationships and practices that contributed to the misconduct.
  3. In assessing the adequacy of a business organization’s remediation efforts and the effectiveness and resources of its compliance program, Criminal Division attorneys should consider the unique risks and compliance challenges the company faces, including the particular region(s) and industry in which the company operates and the nature of the company’s clientele.

In reading through these criteria, it would seem that Herbalife executives both manipulated the company’s books and records and exploited a non-existent compliance program. Senior management was clearly involved. However, this appears to have been tempered by a truly superior remedial program including investments in a new compliance regime. While it is not clear how much of senior management is still around perhaps there has been “high turnover” both at the Board and senior management. Unfortunately, there is no analysis in the DPA of why a monitor was not required so at this point we can only speculate and tip our compliance hats to Stokes and his team.

I know I got carried away this week but I promise to try to finish up in tomorrow’s blog post.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020

Herbalife Nutrition Ltd (Herbalife) recently concluded a long running Foreign Corrupt Practices Act (FCPA) enforcement action with both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Herbalife settled with the DOJ via a Deferred Prosecution Agreement (DPA) and Information and with the SEC via a Cease and Desist Order (Order). The documents all help to more fully fill out the picture of the corruption at the organization which went for some 10 years between at least 2006 and 2016 and was originally disclosed in the Indictments of Jerry Li and Mary Yang in November 2019. The SEC also brought civil charges against Li at the time of his Indictment, via a Civil Complaint.

All in all, these documents provide a sordid tale of a company which did not give one whit about compliance, doing business ethically or even in a non-criminal manner. As for the reason, it was quite simple. According to the Information, by 2016, the Chinese business unit brought in some 20% of the company’s worldwide sales or approximately $860 million. Over the next few blogs posts, I will be exploring the Herbalife enforcement action in depth, data mining it for lessons learned and seeing what, if anything, it might say about where FCPA enforcement might be headed if there is a second term to the Trump Administration.

According to the DOJ Press Release, the company “agreed to pay total penalties of more than $122 million to resolve the government’s investigation into violations of the Foreign Corrupt Practices Act (FCPA).  The resolution arises out of Herbalife’s scheme to falsify books and records and provide corrupt payments and benefits to Chinese government officials for the purpose of obtaining, retaining, and increasing Herbalife’s business in China.  This includes a criminal penalty of over $55 million and approximately $67 million to be paid to the U.S. Securities and Exchange Commission (SEC) in a related matter.”

Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division, said in the Press Release, “By engaging in a decade-long scheme to falsify its books and records to conceal corrupt and other improper payments to Chinese officials and state-owned entities, Herbalife misrepresented important information made available to investors.” He went on to note, “The integrity of our financial markets depends on the timely and accurate disclosure of material information about companies’ operations. Today’s resolution reflects the department’s ongoing commitment to combating international corruption and ensuring that investors can trust the accuracy of the financial statements of publicly traded companies.”

According to Acting US Attorney Audrey Strauss of the Southern District of New York, “As admitted in the deferred prosecution agreement entered into today, Herbalife approved the extensive and systematic corrupt payments to Chinese government officials over a 10-year period to promote and expand Herbalife’s business in China. Moreover, in an effort to conceal this widespread corruption scheme, Herbalife maintained false accounting records to mischaracterize these improper payments as permissible business expenses. In addition to admitting its criminal conduct, Herbalife has agreed to pay combined penalties of more than $123 million. This case signifies this Office’s commitment to ensuring that companies operating in the United States do not gain an unfair advantage through corruption and illegal bribes of foreign officials.”

There is no doubt Herbalife was engaged in a fraud on the market and US investors as the company falsified its Sarbanes-Oxley (SOX) sub-certifications in connection with the company’s quarterly and annual filings from at least 2008 until 2017. Furthermore, knowledge of the company’s illegal action went right up to the top of the organization, including senior management.

The bribery scheme itself was incredibly straight-forward. According to the DOJ Press Release, “between 2007 and 2016, Herbalife knowingly and willfully conspired with others in a scheme to falsify its books and records and provide corrupt payments and benefits to Chinese government officials. Herbalife carried out the scheme for the purpose of obtaining, retaining, and increasing Herbalife’s business in China by, among other things, (1) obtaining and retaining certain direct selling licenses for its wholly-owned subsidiaries in China (Herbalife China); (2) improperly influencing certain Chinese governmental investigations into Herbalife China’s compliance with Chinese laws; and (3) improperly influencing certain Chinese state-owned and state-controlled media for the purpose of removing negative media reports about Herbalife China.”

Many of the numbers cited in the Information and Order are eye-popping. Per the Order, “Between 2012 and 2016, Herbalife reimbursed External Affairs employees for over $7.2 million in questionable External Affairs meal and gift expenditures in connection with Chinese officials and media, including state-owned media officials. Herbalife obtained approximately $58.7 million in benefit based on the conduct described above.” When a Board member questioned this amount of spend, he was informed by the Head of Internal Audit “that “the findings are the typical issues in these audits” and are within “tolerance.””

Most interestingly, Herbalife was not required to sustain a monitor. You must give credit to Herbalife’s FCPA counsel for getting them one heck of deal. The most important thing in any negotiation with the DOJ is credibility. One can only surmise that Herbalife’s FCPA counsel brought credibility through its interactions with the DOJ to bring the company the superior result it achieved.

Hedge fund guru Bill Ackman made a notoriously famous short selling bet against Herbalife. He accused the company of being a pyramid scheme. Herbalife fought back ferociously saying it was a legal multi-level marketing company. Pyramid schemes are illegal, while legal multi-level marketing is, well, legal. Ackman also said that Herbalife was the most well-run pyramid scheme in the world, implying that the fraud they perpetrated was far-reaching and extremely deceptive. It turns out Ackerman was right that an illegal scheme was underlying Herbalife, but that illegal scheme was an entire business unit based on bribery and corruption in China.

Tomorrow, the bribery schemes and numbers.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020

On this 19th anniversary of 9/11 Tom and Jay ask you to consider all that has changed for America in the past 19 years. Most importantly, remember there was a time when we were united as a country. We can do so again.

We continue to brave the surge in Covid cases by staying safe at home. We are back to look at top compliance articles and stories which caught their eye this week.

  1. Lebanon, Corruption and a Bomb. NYT reporters: Ben Hubbard, Maria Abi-Habib, Mona El-Naggar, Allison McCann, Anjali Singhvi, James Glanz and Jeremy White.
  2. Are today’s CCO ‘Super Execs’? Dick Cassin explores in the FCPA Blog.
  3. Time for a compliance housecleaning? Dylan Tokar in the WSJ Risk and Compliance Journal.
  4. A turning point in AML enforcement? Jack Hagel in the WSJ Risk and Compliance Journal.
  5. HerabLife settles long standing FCPA matter. Mike Volkov goes deep in a 3-part series. Part 1, Part 2and Part 3.
  6. Does HerbalLife portend the end of monitors? Robert Anello in com.
  7. DOJ charges former Uber CISO for lying about data breach. Lawyers from Cleary Gottlieb in NYU’s Compliance and Enforcement Blog.
  8. Deutsche Bank fined yet again (twice). Matt Kelly reports in Radical Compliance.
  9. This month on The Compliance Life, I am joined by Deanna Nwankwo. She came to the CCO chair after a stint at QA in NASA. In this week’s Part 1, the message ‘The good news is you’re the new CCO. The bad news is you’re the new CCO.’
  10. On the Compliance Podcast Network, on 31 Days to a More Effective Compliance Program, this month focuses on internal controls. This week saw the following offerings: Tuesday– Assessing internal controls in international operations; Wednesday-risk assessments and internals controls; Thursday– mapping internal controls; and Friday– Implementing internal controls. The month of September is being sponsored by Affiliated Monitors. Note 31 Days to a More Effective Compliance Program now has its own iTunes channel. If you want to binge out and listen to only these episodes, click here.
  11. Join Jay and Tom at Converge20. Convercent’s top compliance conference is going virtual this year. Check at the agenda and register here.
  12. Two great K2 Intelligence FIN webinars upcoming. 1. Kevin Mullins and Yomi Peirce on procurement fraud during Covid-19, September 16, 2020; 1:00 PM ET. Registration and information here. 2. Robin Henry on how investigators can use social media, Thursday, 9-24 at 1600 GMT. Registation and information here.

Tom Fox is the Compliance Evangelist and can be reached at tfox@tfoxlaw.com. Jay Rosen is Mr. Monitor and can be reached at jrosen@affiliatedmonitors.com.

The FCPA Compliance Report is the longest running podcast in compliance, airing on July 31, 2015. This week begins a series of podcasts leading up to the 500th anniversary episode of the FCPA Compliance Report, which will post on Monday, August 31. Over the next five episodes, I will post podcasts of 5 top FCPA and compliance commentators. Over this week, I will be joined by Mike Volkov, Matt Kelly, Jonathan Armstrong, Jay Rosen and Jonathan Marks. Each will speak about the evolution of  FCPA enforcement and compliance from their own unique perspective. In this episode, I visit with Mike Volkov, founder and principal of the Volkov Law Group. We take a look back at the evolution of FCPA enforcement over the past 10 years.

Some of the highlights include:

  • Volkov looks all the way back to the Father of the FCPA, Judge Stanley Sporkin to see the beginnings of cooperation credit under the current FCPA Corporate Enforcement Policy.
  • Why was the Parker Drilling enforcement action a seminal moment in FCPA enforcement?
  • Why the 2012 version of the FCPA Resource Guide was such an important step forward in FCPA compliance. Why the 2020 FCPA Resource Guide, 2nd edition was so welcomed.
  • The continued evolution of the DOJ on both FCPA enforcement and best practices compliance.
  • From reading the tea leaves to the 2020 Update to the Evaluation of Corporate Compliance Programs.

The Lineup

I hope you will listen in to each episode over this week. The lineup will be:

Tuesday, August 25- Episode 496-Matt Kelly in changes he has observed in compliance from the business journalist perspective.

Wednesday 26, August Episode 497-Jonathan Armstrong in changes in data protection/data privacy compliance.

Thursday August 27-, August Episode 498-Jay Rosen in changes in compliance from the business development perspective.

Friday August 28-, August Episode 499-Joanthan Marks on changes compliance mirroring those from internal audit.

Monday, August Episode 500-the Anniversary Episode.