CHICAGO/HONG KONG (Reuters) - Avon Products Inc, the world’s top direct seller of cosmetics, suspended four executives pending an internal investigation of bribery allegations in China, sending its shares down 8 percent.
Avon asked three executives in Asia and another in New York to take an administrative leave of absence pending the probe’s outcome, company officials confirmed on Tuesday.
The company’s investigation focuses on compliance with the U.S. Foreign Corrupt Practices Act (FCPA), a law that outlaws bribery of foreign officials.
In June 2008, Avon began an investigation into its China operations over an allegation of improper expenses for items like travel and entertainment on behalf of a Chinese government official.
In July 2009, the company said it had widened the probe to review its practices related to FCPA and related U.S. and foreign laws in additional countries.
The company has cooperated with the U.S. Department of Justice and the U.S. Securities and Exchange Commission since the probe began.
Whether the company resolves the matter with the U.S. agencies or not “it will be expensive, not only in relation to the fines, but the cost of the investigation,” said James Tillen, the FCPA Practice Group Coordinator at Miller & Chevalier, based in Washington, D.C., who is not involved with Avon’s case.
The company has not said how many countries it is reviewing. The Wall Street Journal reported that the probe involves a dozen or more countries, including in Latin America, citing a source familiar with the investigation.
Avon confirmed the suspensions but gave no details. At this point, the investigation is still ongoing and no conclusions have been made, a New York-based spokeswoman said.
The executives, Avon confirmed, are: S.K. Kao, general manager of Avon China; Jimmy Beh, a former head of finance for Avon China who was most recently in a sales development role in Malaysia; C.Q. Sun, head of corporate affairs for Avon China and Ian Rossetter, who was most recently vice president of finance and tax.
Previously, Rossetter had been responsible for global internal audit and vice president for finance of Asia Pacific.
“If these reports are true it certainly brings into question the company’s control on either employees or their own finances,” said Sanford Bernstein analyst Ali Dibadj. “It certainly does not add to the credibility of the company, which has already been under some pressure recently.”
In February, Avon said it could face substantial fines, civil and criminal penalties and other sanctions, depending on how the FCPA matter is resolved.
Fines vary widely and can be “incredibly high” particularly if numerous countries choose to prosecute, Tillen said. BAE Systems, for instance, agreed to pay about $450 million to the United States and Britain to settle allegations related to questionable payments earlier this year.
Avon is already working to save money through two restructuring plans and efforts like cutting back on the types of bottles used for skin creams. The company is trying to drive growth in Latin America, its largest market, and in expanding markets such as China while U.S. sales are under pressure.
China poses a major challenge for U.S. companies trying to comply with the law. The DOJ interprets the FCPA as extending to any employee working for a state-owned business.
In China, where broad swaths of the economy remain in state hands, that can include even a low-level purchasing manager at a medical clinic.
Several Western companies, including Daimler, Avery Dennison Corp and telecommunications company UTStarcom, have become ensnared in China-related FCPA probes over the past year.
In a separate case that brought corruption issues to the fore in China, a Shanghai court convicted four employees of mining firm Rio Tinto of taking bribes and stealing commercial secrets, handing out sentences ranging between seven and 14 years in prison last month.
After Beijing shut the door on direct sales in a blanket ban aimed domestic pyramid schemes in 1998, Avon was forced to start selling its products through beauty boutiques. In 2006, Avon won approval to return to its favored direct-selling model in China. It still operates some beauty boutiques there.
In the fourth quarter of 2009, Avon’s China business posted an 8 percent drop in revenue and an operating loss of $3 million. Revenue from direct sales jumped 19 percent while revenue from beauty boutiques plunged 66 percent as the company focuses more on direct selling through representatives.
Avon declined to say whether the suspended executives are still being paid during their absence.
Shares of Avon ended Tuesday’s trading session down $2.77, or 8 percent, to $31.99 after falling as low as $31.68.