A recent enforcement action by the U.S. Government serves as a reminder that charitable donations can raise anti-bribery compliance risks, particularly where government officials are involved. In September 2016, the Securities and Exchange Commission (SEC) charged Utah-based Nu Skin Enterprises, Inc. (“Nu Skin U.S.”) with violating the record-keeping and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA) in connection with a charitable donation made by the company’s Chinese subsidiary to avoid paying a fine to local authorities. Nu Skin U.S. paid almost $766,000 in penalties and disgorgement to settle the charges.
This is the second time – and the first time in over a decade – that the SEC has charged a company under the FCPA solely for its inadequate record-keeping and internal accounting controls surrounding a charitable donation made to influence a foreign official. This enforcement action highlights non-traditional areas of risk that companies subject to the FCPA must manage, particularly the importance of developing and maintaining adequate compliance oversight of interactions between non-U.S. subsidiaries and foreign officials.
The Action Against Nu Skin
According to the settlement documents, the charges stemmed from a charitable donation that Nu Skin’s wholly-owned Chinese subsidiary, Nu Skin (China) Daily Use & Health Products Co. Ltd. (“Nu Skin China”), made in 2013 to avoid paying a fine of approximately $430,000 to a provincial branch of the Chinese Administration of Industry and Commerce (“AIC”) for violations of local licensing laws. Worried that the fine would hurt Nu Skin China’s future business development, Nu Skin China employees requested assistance from a high-ranking Chinese Communist party official (the “Party Official”) to whom the provincial head of the AIC had previously reported. At the direction of the Party Official, Nu Skin China agreed to (i) donate approximately $154,000 to a charity selected by the Party Official and (ii) expedite the Party Official’s prior request for help with securing college recommendation letters for his child. Two days after the donation was made, the AIC notified Nu Skin China that no penalties would be levied against the company.
Although Nu Skin China informed Nu Skin U.S. of the proposed donation, it did not inform Nu Skin U.S. about the donation’s connection to either the AIC fine or the recommendation letter request. Likewise, notwithstanding advice from outside U.S. legal counsel (whom Nu Skin U.S. had recommended to Nu Skin China) to include anti-corruption language in the donation agreement, Nu Skin China removed the recommended language from the final agreement. (Given the motive behind the donation, it does not appear that inclusion of such language would have had a meaningful impact on the flow of funds or the resulting enforcement action.) Finally, in its expenditure authorization form, Nu Skin China described the transaction’s purpose as a donation, without any mention of the AIC investigation and proposed penalty – a description that the SEC charged was inaccurate and/or unfair.
Based on these actions of Nu Skin China, the SEC charged that Nu Skin U.S. violated the FCPA by:
- Failing to maintain a system of internal accounting controls over its subsidiary that would have caught the inaccuracies on Nu Skin China’s expenditure authorization form;
- Failing to ensure that its subsidiary conducted the due diligence necessary (in light of the well-known risk of corruption in China) to prevent violations of the company’s own anti-corruption policy and the FCPA; and
- Failing to ensure that its subsidiary kept accurate books, records and accounts.
The action against Nu Skin is the first of its kind as it involves a donation to a bona fide charity in order to avoid penalties from a government agency. The only other time that the SEC has brought an FCPA enforcement action for inadequate record-keeping and inadequate internal accounting controls surrounding a donation made to a bona fide charity was in 2004, when Schering-Plough Corporation agreed to pay $500,000 in connection with a series of charitable donations made by its Polish subsidiary to a Polish historical foundation. That enforcement action involved donations made in order to obtain business from a regional government health authority,1 while the Nu Skin enforcement action involved a donation made to avoid paying an enforcement penalty.
This enforcement action demonstrates the importance of monitoring the activities of non-U.S. subsidiaries in order to ensure compliance with anti-bribery laws. In particular, companies subject to the FCPA and other anti-bribery laws should:
- Implement processes designed to ensure that non-U.S. subsidiaries comply with the FCPA in all interactions with non-U.S. officials.
- Ensure that non-U.S. subsidiaries comply with all local laws and regulations. In many jurisdictions there are local laws that make the payment of bribes an offense; these laws often are broader in scope than the FCPA. For example, in China commercial bribery is an offense under both the Anti-Unfair Competition Law and the Criminal Law, and local authorities are particularly active in enforcing the commercial bribery laws. A one-size-fits-all approach to compliance therefore does not work; companies should tailor anti-bribery compliance policies and programs to the jurisdictions in which they operate.
- Carefully monitor the activities of their non-U.S. subsidiaries, particularly when red flags are raised. Merely advising subsidiaries to consult with legal counsel may not suffice; steps should be taken to ensure that legal advice is actually followed.
- Ensure that charitable donations proposed by non-U.S. subsidiaries will be made:
a. to a proper recipient – the recipient should be a bona fide charity and in any event not be tied to a government official or to a business partner of the subsidiary; and
b. for a proper purpose – the charitable purpose of the donation should be clearly identified in the relevant supporting documents and should not be related to any business objective of the subsidiary.
Donations that do not satisfy the above could constitute FCPA violations and could be considered official or commercial bribery in China, in particular if the recipient and/or the purpose of the donation can be linked directly to business objectives. Should a donation be found to have violated applicable Chinese laws, penalties for the Chinese subsidiary could include administrative fines and disgorgement of illegal gains under the Anti-Unfair Competition Law, and penalties for the responsible officers of the subsidiary could include fines as well as prison sentences under the Criminal Law.