For just the second time in the Foreign Corrupt Practices Act’s (FCPA) history, a company was charged with FCPA offenses based solely on a charitable contribution that was intended to buy the influence of a foreign official.
On September 20, 2016, Utah-based Nu Skin Enterprises, Inc. paid almost $766,000 to settle SEC charges that it violated the internal controls and books-and-records provisions of the FCPA when Nu Skin’s China subsidiary (the “Subsidiary”) made a $154,000 payment to a charity. The SEC alleged that the charitable donation was to improperly influence a high-ranking Chinese Communist party official to prevent a provincial agency investigation of the Subsidiary.
The SEC alleged that in 2013, a provincial branch of the Administration of Industry and Commerce (AIC) investigated the Subsidiary about non-compliance with laws and local rules for direct selling. The AIC found evidence of violations and threatened to impose a fine of about $431,088. To avoid imposition of the fine, the Subsidiary proposed to donate money to a charity that a party official was interested in starting in the province. In addition to the donation, the Subsidiary agreed to help expedite college recommendation letters for the party official’s child.
The Subsidiary requested approval of the charitable donation from its U.S. parent, which sought assistance from Chinese outside counsel in its review of the proposed donation. In its request, the Subsidiary failed to disclose the connection between the donation and the pending enforcement action. Nu Skin’s Chinese counsel approved the donation but required the insertion of an FCPA compliance certification in the charitable donation agreement that ultimately was removed from the final version of the signed agreement without the parent company’s knowledge. Two days after a donation ceremony, AIC notified the Subsidiary that it would not be charged or fined.
The SEC found that the “[d]etailed [p]urpose” given in the expenditure authorization form was inaccurately and/or unfairly described as a donation rather than a payment to influence the Party Official to favorably impact the outcome of the AIC investigation.
According to the SEC Nu Skin also failed to devise and maintain a reasonable system of internal accounting controls over its subsidiary’s operations in China to prevent illegal charitable contributions. It stated, “[G]iven 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 anti-corruption policy and the FCPA.”
In deciding to accept this particular settlement, the SEC noted that it considered Nu Skin US’s cooperation with SEC staff and the company’s remedial acts. Nu Skin agreed to the settlement without admitting or denying the SEC’s allegations and disgorged $431,088, prejudgment interest of $34,600, and a civil penalty of $300,000.
The only other time an enforcement action has been made in an FCPA case based entirely on a charitable donation was in 2004, in a case that involved Schering-Plough. In that case, the SEC said the pharmaceutical company violated the FCPA when its subsidiary in Poland made improper payments of about $76,000 to a charitable organization called the Chudow Castle Foundation. The director of the foundation was a government official who could influence buying decisions for drugs. Schering-Plough settled the FCPA offenses by paying the SEC a civil penalty of $500,000.
Although the settlement is not particularly large, it does indicate that the SEC is taking a closer look at how companies use and record charitable donations in the context of FCPA compliance. Whenever making a charitable donation, it is important to follow the due diligence suggested by the U.S. government in its FCPA Guidance issued in the Fall of 2012. That Guidance suggests answering five questions before making a charitable contribution in a foreign country:
- What is the purpose of the payment?
- Is the payment consistent with the company’s internal guidelines on charitable giving?
- Is the payment at the request of a foreign official?
- Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding your business in that country?
- Is the payment conditioned upon receiving business or other benefits?
The responses to those questions should help you make the right decision in terms of avoiding an FCPA violation.
In addition, this SEC action and settlement illustrates the importance of keeping accurate books and records, and ensuring that subsidiaries do the same. It also emphasizes the importance of due diligence in high-risk areas and the significance of having an adequate FCPA compliance policy and training protocol. Finally, if an issue is discovered, it is important to investigate and remediate the problem, including determining whether it is beneficial to make a voluntary disclosure.