In a rare enforcement action, the SEC settled an FCPA enforcement action for $766,000 for a charitable donation of $154,000 to improperly influence a high-ranking Chiese Communist party official to prevent a provincial agency investigation of Nu-Skin’s Chinese subsidiary.
Nu-Skin China was being investigated in China for violating provincial direct sale restrictions. The Chinese Administration of Industry and Commerce investigated the matter and proposed to impose a fine of approximately $431,000. To avoid the fine, Nu-Skin proposed to donate money to a charity that the Party Official was interested in starting in the province. Nu Skin proposed to “donate some money instead of [paying] a fine.” In addition to the donation, Nu Skin also agreed to expedite getting college recommendation letters for the Party Official’s child. This became a “top priority” given the pending enforcement penalty against Nu Skin.
Nu Skin’s Chinese subsidiary requested approval from the US parent company to make the charitable donation. Nu Skin’s US staff enlisted Chinese outside counsel to assist in the review of the proposed donation. Nu Skin China personnel did not disclose any 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 ion the charitable donation agreement. This provision was removed from the final version of the signed agreement. Nu Skin’s US staff never knew that the provision was removed.
Nu Skin’s China staff completed an expenditure authorization form but omitted any reference to the true purpose of the donation to enlist the Party Official to intervene in the AIC investigation. The transaction also was unfavorably recorded in Nu Skin China’s books.
Nu Skin made the charitable donation and within days the AIC informed Nu Skin that it had made a final decision not to charge Nu Skin for violating the direct selling requirement.
The Nu Skin enforcement action includes three key takeaways:
Single Transaction Violation: The Nu Skin enforcement action is interesting because it involved only one improper transaction. While the size of the transaction is large, $154,000, the SEC’s action is an important reminder that even a single course of action can result in an enforcement action.
Charitable Donations: Global businesses are often involved in charitable giving and corporate social responsibility projects. Both of these activities create serious risks, especially when they involve large donations. In the Nu Skin case the connection between the donation and a specific improper benefit from the AIC was clearly established in the evidence. In many cases, the link between the donation and the improper action may be less tenuous.
Importance of Due Diligence Verification: Nu Skin took the proper initial steps to review the proposed donation. Unfortunately, outside counsel and other Nu Skin staff were not closely involved in the transaction, nor did they take affirmative steps to verify information or that the donation agreement included appropriate FCPA compliance provisions.
Like the VimpelCom case earlier this year, a company agreed to a settlement action when the company’s due diligence process was deficient and suffered from incomplete or inaccurate information from internal employees. The Nu Skin enforcement action raises significant questions as to what procedures and verification controls need to be put in place to ensure that employees follow internal controls and provide accurate information to legal and compliance staff.