On September 20, 2016, Nu Skin Enterprises, Inc., a Utah-based skincare products manufacturer, agreed to pay $765,688 to settle SEC charges that the company violated the Foreign Corrupt Practices Act (“FCPA”). In short, the FCPA prohibits U.S. companies from bribing foreign officials to secure an improper business advantage. As I have written about in prior articles, the DOJ and SEC have been expanding the definition of what constitutes a bribe, or, in the parlance of the statute, “something of value” offered or paid to the foreign official.
What is interesting about the Nu Skin settlement is that it is only the second time in the nearly 40-year history of the FCPA that a company has been charged based on a charitable donation. According to the SEC Order, Nu Skin’s subsidiary in China transferred over $150,000 to a charity affiliated with a high-ranking Chinese Communist Party (“CCP”) official to favorably impact an ongoing investigation into the subsidiary.
In 2013, Nu Skin China had held an unauthorized promotional meeting without the requisite direct selling license and as a result the Administration of Industry and Commerce (“AIC”) launched an investigation into Nu Skin China’s activities. Internal documents show that Nu Skin China’s employees hurriedly arranged for the charitable donation and a public ceremony at which the CCP official gave a speech praising Nu Skin China. Shortly thereafter, Nu Skin China received notice that the AIC had decided to close its investigation without charging or fining the company.
As a U.S.-based company, Nu Skin is liable for any FCPA violations committed by its overseas subsidiaries. The SEC did not charge Nu Skin under the anti-corruption provisions, but rather under Section 13(b)(2) of the Exchange Act, which requires that issuers maintain proper internal controls and accounting procedures (the so-called “Books and Records Provision” of the FCPA). The SEC Order does not allege that Nu Skin directed or even knew about the bribe by its Chinese subsidiary. Rather, Nu Skin violated the FCPA when it included in its books and records the subsidiary’s inaccurate expenditure authorization form describing the expense as a charitable donation. (Of course, had the expense authorization form contained a $150,000 line-item for “pretextual charitable donation to induce a Chinese official to halt a government investigation,” it is safe to say that Nu Skin would have had problems beyond inaccurate bookkeeping.)
Nu Skin also appeared blind to at least one bright red flag. When the Chinese subsidiary notified its parent company that it planned to make the charitable donation, the parent advised Nu Skin China to consult with outside U.S. legal counsel based in China. The lawyers recommended that the subsidiary include anti-corruption language in the donation agreement, but the language was removed from the final version before signing. Whenever a subsidiary or counter-party affirmatively removes anti-corruption language from a contract, a company should recognize that something is wrong.
The key take-away is that not all bribes come in the form of a sack full of cash with a dollar sign on the bag. Companies operating overseas must use a wide-angle lens to determine whether their subsidiaries or third-party intermediaries are providing something of value to foreign officials beyond a prototypical bribe. There is a lot of gray area in the application of the FCPA. At corporate FCPA training sessions I am most often asked about what types of travel and entertainment expenses might constitute “something of value” under the statute, but bribes can come in many different forms.
The facts of Nu Skin are admittedly rare. In 2004, Schering-Plough paid $500,000 to the SEC to settle similar allegations involving improper payments to a Polish charity called the Chudow Castle Foundation, which at the time was directed by a Polish government health official who influenced the purchase of the company’s pharmaceuticals.
One wonders whether the Nu Skin settlement is the second aberrant spike or whether the SEC and DOJ are looking to bring more cases involving donations to charitable organizations affiliated with foreign officials. What’s clear, however, is that a company needn’t line a foreign official’s pockets to be charged under the FCPA.