Avon Products Bribery Scandal in China

By Kia Allen & Marie Claire Llareus

Ethical Issue: Bribery

Bribery: the offering or taking of something of value to influence persons or gain an unfair advantage

Bribery raises moral and political concerns, undermines good governance and economic development, and distorts international competitive conditions.

In other countries, bribery is a culturally expected part of doing business and business relationship building. In China, a relationship-based business is highly valued.

Case Study

Avon Products Inc. vs. U.S. Securities & Exchange Commission

In June 2008, there were bribery allegations in Avon’s China division. An Avon employer paid thousands of dollars to Chinese government officials and third-party consultant agencies in order to obtain governmental permission to conduct door-to-door sales in China.

The allegations later extended to Avon’s Brazil, Mexico, Argentina, India, and Japan division.

Federal prosecutors found questionable payments dating back to a September 2005 draft internal report.

Timeline

2007 2008 2009 2010 2011 2012

U.S. sales hit $2.62 billion,only to start shrinking in

the following years.

OCT- AVON launched an internalinvestigation into possible

foreign Corrupt Practices Act (FCPA)violations in China (appeared to

be linked to the payment of improper promotional expense).

JUNE- An investigation began regarding allegations of bribery in the China division which extended to

other countries (an allegation of improper expenses for items like travel and entertainment

on behalf of a Chinese government official.

4th quarter sales of AVON’s China business

posted an 8 percent drop in revenue andan operating loss of

$3 million. AVON spent $122.5 million on legal fees and costs related to the

investigationsince 2009.

At least 4 AVONexecutives weresuspended (inboth Asia and

U.S.)

AVON reports the number of NorthAmerican “reps” fell 8 percent in

2011 and says it is planning job cuts.

MAY 5- AVON announced

firing 4 executives.

DEC 13- AVON announcedit initiated a search for a

new chief executive. CEOAndrea Jung announced

stepping down and staying onas executive chairman.

FEB 24- AVON filed a report withThe Securities and Exchange

Commission (SEC) highlighting theevent as a corporate risk factorthat could cause investor loss.

AVON won adirect selling

license and wasapproved to return

to China.

2006

Organizational Chart

Andrea Jung

(Former CEO; current executive chairman)

S.K. Kao

(Former China Avon President)

Jimmy Beh

(Former China CFO)

C.Q. Sun

(Former head of corporate affairs for

China)

Ian Rossetter

(Former head of global internal audit and

security in New York)

Charles Cramb

(Former Vice Chairman; Chief Finance and Strategy Officer)

Avon Products Inc.

Organizational Chart (cont.)

Prosecutors U.S. Securities and Exchange Commission (SEC)

Federal Bureau of Investigation (FBI)

The Southern District of New York’s Complex Frauds Unit in Manhattan

Proposal