Herbalife to pay $122 million to resolve FCPA actions

Sep 02, 2020
SEC and DoJ allege improper payments by Chinese subsidiary

Herbalife Nutrition has agreed to pay a total of roughly $122 million to settle allegations that it violated the books and records and internal accounting controls provisions of the FCPA.

The company will pay the SEC more than $67 million in disgorgement and interest. In a parallel action, the US Department of Justice (DoJ) and the US Attorney’s Office for the Southern District of New York said Herbalife will pay a criminal fine of more than $55 million. Under that action, Herbalife has entered into a three-year deferred prosecution agreement (DPA) with the DoJ.

‘As admitted in the [DPA], Herbalife approved the extensive and systematic corrupt payments to Chinese government officials over a 10-year period to promote and expand Herbalife’s business in China,’ acting US Attorney Audrey Strauss of the Southern District of New York says in a statement. 

The SEC states in its administrative filing that Herbalife’s Chinese subsidiaries between 2006 and 2016 ‘engaged in a scheme to offer corrupt payments and other improper benefits to Chinese government officials.’

From 2012 to 2016, Herbalife China employees provided improper benefits of cash, gifts, travel, alcohol, meals and entertainment to Chinese government officials, the SEC says. They did so in connection with licenses and to ‘delete negative media coverage of Herbalife China,’ the agency says.

Certain Herbalife executives received reports of high travel and entertainment spending in China and violations of the company’s FCPA policies but failed to detect and prevent improper payments and benefits and falsifications of expense reports, according to the agency. 

By 2016, the SEC says, Herbalife China was responsible for roughly 20 percent of the overall company’s global net sales. The improper benefits provided by Herbalife China were not accurately reflected in Herbalife’s books and records, and Herbalife failed to devise and maintain a sufficient system of internal accounting controls, the commission says. 

‘Herbalife’s inadequate internal accounting controls allowed an environment of corruption to exist in its Chinese subsidiaries for more than a decade,’ Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, says in a statement. ‘A strong system of internal controls is vital for issuers, especially those with operations around the globe.’

According to the SEC’s filing, in reaching the settlement it took into consideration remedial acts promptly undertaken by Herbalife and its co-operation with SEC officials. The company’s remediation included firing employees involved in the conduct at issue, hiring a dedicated CFO, improving internal accounting controls and compliance functions, and adopting a new compliance structure. 

As part of the settlement, Herbalife has agreed to report to the SEC periodically over a three-year period on the status of its remediation and implementation of compliance measures, particularly with regard to conducting due diligence on prospective and existing third-party consultants and vendors, FCPA training and the testing of relevant controls including the collection and analysis of compliance data.

The company acknowledges the SEC settlement and DPA in a securities filing. It notes that the company conducted its own review, implemented remedial and improvement measures based on that review and co-operated with the SEC and DoJ.

‘The company previously recognized an estimated aggregate accrued liability for these matters of approximately $123 million, which has been recognized in other current liabilities within its condensed consolidated balance sheet as of June 30, 2020,’ Herbalife states. ‘Accordingly, there will not be any additional impact on the company’s results of operations.’

A Herbalife official did not return a request for further comment.

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