Word from our man in New York that Federal prosecutors are looking into allegations that employees of Avon Products, the door-to-door direct-marketing company, bribed Chinese officials. According to a regulatory filing by the company, four employees–three of them from the company’s senior management in China–were fired last month following an internal investigation that has lasted almost three years into travel, entertainment, gifts and other expenses “in connection with our business dealings, directly or indirectly, with foreign governments and their employees.”
The prosecutors are investigating whether there have been violations of the U.S.’s Foreign Corrupt Practices Act. It was the company that turned the case over to Federal authorities and while the focus of the criminal investigation is now China, the internal investigation has expanded to turn up similar alleged practices by employees in Latin America, India and Japan with what are being described as “improperly incurred” expenses dating back to 2004.
What is intriguing about the timing of all this as far as the China part is concerned is that the internal audit started in 2008, two years after the company acquired the first license to conduct door-to-door selling in China, and the same year two officials in the commerce ministry, Deng Zhan and Guo Jingyi, both of whom between 2003 and 2008 dealt with drafting approvals on foreign investment regulations and applications, were arrested and removed from office for taking bribes. At the time, it was reported that Deng’s daughter, who lived in the U.S. had her expenses taken care of by foreign enterprises, though there was no suggestion then they included Avon. We won’t find out whether they did or not until the company’s auditors and the prosecutors have finished their work.
Meanwhile, Avon is struggling commercially in China. In its first quarter report, the company says:
Constant $ revenue in China declined 35% due to significant revenue declines in both direct selling and Beauty Boutiques. The fundamental challenges in our complex hybrid business model in China, including conflicting needs of retail and direct selling, impacted both businesses, resulting in a 55% reduction in Active Representatives. Our continued transition away from our complex hybrid business model in China to one which focuses on direct selling and updating our service center model includes realigning the field compensation structure and recalibrating merchandising and campaign management strategies to support direct selling. We anticipate that this will position us to expand our direct selling penetration and coverage. However, this transition is resulting in attrition in our Beauty Boutiques over time. The transition will continue to negatively impact our near-term outlook in China. We remain positive about our long-term revenue and operating profit opportunities in China.