Avon 2005 internal audit gets scrutiny: sources

WASHINGTON (Reuters) - Federal prosecutors are investigating a draft internal report from 2005 by Avon Products Inc (AVP.N) that flagged concern about the cosmetics seller's compliance with U.S. anti-bribery laws, two people familiar with the matter said on Monday.

Avon launched a full internal inquiry in 2008 into whether it violated U.S. anti-corruption laws through its business in China, but that earlier report suggests at least some employees at the company had previously raised similar concerns.

Prosecutors are examining what internal auditors found in 2005, and whether there was an effort at Avon headquarters to take any action based on the report, or if executives ignored or tried to bury the report, the people said.

A spokeswoman for Avon declined to comment.

A letter from a whistleblower to Avon Chief Executive Andrea Jung prompted the internal investigation, during which the draft report from 2005 surfaced, the sources said.

That initial report raised concerns about the company's compliance with the Foreign Corrupt Practices Act, a 1970s law that bars U.S.-linked companies from paying bribes to officials of foreign governments. The report suggested action to follow up.

Federal prosecutors in the Southern District of New York are investigating the case, people familiar with the matter have said, and prosecutors have presented evidence to a grand jury, the Wall Street Journal reported.

Avon in 2006 won the first-ever license given by China to a Western company to sell products door-to-door and was seen as a major coup by Jung.

While prosecutors have homed in on the 2005 internal report, the underlying conduct remains a focus of the investigation, the people said, since Avon continued to provide business dinners and entertainment for low-level Chinese ministers after 2005.

Prosecutors are also examining payments to third-party consultants, and whether the consultants provided services for the money or if the payments were used as conduits for bribes, the people said.

If anyone at Avon attempted to bury or hide the draft audit, it could help prosecutors show intent, a key element in obtaining criminal charges.

In December, Jung agreed to step down once Avon finds a new CEO, but she will stay on as executive chairman.

The New York Post on Monday said HSN Inc (HSNI.O) CEO Mindy Grossman and former Wal-Mart Stores Inc executive Brian Cornell were possibilities to replace Jung. Cornell could not immediately be reached for a comment, while Grossman did not immediately respond to an email seeking a comment. Avon declined to comment on the CEO succession process.

Avon's internal probe has led to a number of other dismissals and departures at the company in the past year.

Last month, Avon's former Chief Financial Officer Charles Cramb, who joined Avon in November 2005, left the company after stepping down as finance chief in November.

And in May 2011, the company disclosed it had fired three executives in Asia, including its head of finance there, and another in New York.

Avon has already poured tens of millions of dollars into its international investigation, which it started in China and then extended to other countries, which have not been named.

After disappointing financial results, Avon in October said it would assess long-range business plans and give an update during the first quarter of 2012.

Avon is due to report quarterly results on Tuesday morning.

Its shares were down more than 1 percent at $17.54 in afternoon trading on the New York Stock Exchange.

(Reporting by Aruna Viswanatha in Washington, Phil Wahba in New York and Sakthi Prasad in Bangalore; Editing by Tim Dobbyn and Maureen Bavdek)