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Michael Volkov, author of 'Corruption Crime and Compliance.' https://www.amazon.fr/Corruption-Crime-Compliance-Michael-Volkov/dp/9810898452 |
To anyone with a detailed understanding of how 'Multi-Level Marketing' cults have functioned, the article below is a fascinating document, in that it is an (apparently-independent) American attorney's legalistic, but (by definition) restricted, description of the 'Herbalife/MLM' China bribery scandal. With exquisite irony, though the term 'cult' has lately been regularly employed by an increasing number of media commentators, and even by some legislators, to describe the unquestioning followers of Donald Trump, according to the law, there is still no such thing as a cult in the USA.
Whether US law recognises the fact of the cult phenomenon or not, apart from its use in the sense of ‘a popular fashion especially followed by a specific section of society’ or ‘a person or thing popularised in this way,’ the traditional definition of the English noun, cult (Latin cultus worship), has been ‘a system of religious worship (Latin religiosus obligation, bondage) especially as expressed in ritual,’ or ‘devotion or homage to a person or thing.’ However, the word is now also used as shorthand for what is more-accurately described as a pernicious cult. This ongoing historic, and criminogenic, phenomenon can be briefly described as:
any self-perpetuating, non-rational, ritual belief system established or perverted for the clandestine purpose of human exploitation by deception.
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| Michael Volkov (right) Alexander Vindman (centre) |
It is interesting to note that the Washington-based author of this 'Herbalife' article, Michael Volkov (a former federal prosecutor who recently represented Lt. Col. Alexander Vindman during Donald Trump's impeachment hearing ), does not speculate on whether the two middle-aged Chinese nationals who are known to have conspired to commit, and to obstruct the investigation of, a catalogue of US federal crimes (in China) on behalf of (and at the direction of) 'Herbalife's' bosses (in the USA) are facing, or have faced, any criminal investigation/prosecution in China. The pair, Li Yanliang (a.k.a. Jerry Li) and Yang Hongwei (a.k.a. Mary Yang), cannot be held to account in the USA, but they have previously been described by the media (deriving from their federal indictments) merely as, 'remaining at large,' and Michael Volkov repeats the same statement. This omission is all the more remarkable, when one knows that, in practice, persons convicted of paying, or accepting, high-value bribes, can face the death penalty in China. Nor does Michael Volkov speculate on how US federal agents/prosecutors obtained the evidence of these highly-organised crimes (which date back to 2006) or why it took so long before charges could be brought in the USA, and only under the Foreign Corrupt Practices Act: not also under the Racketeer Influenced and Corrupt Organizations Act.
Furthermore, in his piece, Michael Volkov implies (probably inadvertently) that MLM schemes are allowed in China and that 'Herbalife' was openly operating as an MLM scheme there - albeit with illegally-obtained direct sales licenses. Strangely, however, he seems not to know (or refuses to say) what the term 'MLM' has been hiding, or that, in 2005, China introduced a law entitled: 'Regulation of Direct Sales and Regulation on Prohibition of Chuanxiao' (Chuanxiao = 'Multi-Level Marketing').
Yet just a few minutes of research, and informed-analysis, would have revealed that this attempt at common-sense legislation in China was (supposedly) designed to establish a clear and unambiguous legal distinction between traditional, single level, sustainable direct selling and economically-unviable, endless-chain/infinite level, pay-to-play recruitment frauds disguised as 'direct selling.'
According to certain reports, during the drafting of the 2005 legislation, representatives of some of the largest US-based 'MLM' companies (including 'Herbalife') were closely-consulted by Chinese government officials, but I have not bothered to verify this claim. For even if this was true and these particular officials were not corrupt, once you know how 'MLM' rackets function, it becomes immediately obvious that one of the devious tactics pursued by their bosses has been to agree to comply with any form of legislation proposed by trade regulators (including attempts to ban 'MLM' rackets) in order to establish their corporate Trojan Horses around the globe.
Thus, according to the 2005 law, traditional direct sales schemes in which participants can reasonably expect to earn commission by regularly selling goods/services externally to the general public (based on value and demand) are permitted in China, but (intrinsically-fraudulent) so-called 'Multi-Level Marketing income opportunity' schemes which, by design, can generate no significant, or sustainable, revenue other than that deriving mostly from their own ill-informed participants' internal purchases of goods/services (based on the false-expectation of future reward), and on the internal purchases of further ill-informed recruits (based on the false-expectation of future reward), etc., are absolutely banned.
On pain of arrest or forfeiture of assets, the same Chinese law (theoretically) requires:
- all traditional direct sales companies, and their non-salaried sales agents, to operate under license.
- all traditional direct sales companies to pay-out commissions to one level only of non-salaried sales agents, and these commissions must be limited to a maximum of 30%.
- all traditional direct sales companies to provide extensive, ongoing free training for their non-salaried sales agents.
- all Chinese non-salaried direct sales agents not only to carry a license as proof of training and compliance with the law, but also to wear an identification badge whilst attempting to conduct sales.
In practice, unlicensed agents of 'MLM' rackets have been able to enter China from the neighbouring legal jurisdictions of Taiwan and Hong Kong (where no common-sense banning-law has been introduced); whilst Chinese citizens have easily dodged the law by giving Taiwanese or Hong Kong addresses on their 'MLM' contracts, and by using Taiwanese or Hong Kong banks.
It is common-knowledge that China is one of, if not the most corrupt countries on Earth. Furthermore, 'MLM' racketeers have evidently long-since realised that the introduction of any law, which is then not enforced, has the effect of authorising the very crime which the same law apparently sought to prohibit. Thus, although the article below is not without merit, it does not attempt to explain:
- the underlying reasons why (after 2005) the American bosses of 'MLM' front companies found it necessary to risk the lives of their agents (and those of their agents' families) in China by directing them, and supplying them with the funds, to pay multi-million dollar bribes to corrupt Chinese trade officials over a ten year period.
- that these extensive criminal acts in China enabled the American bosses of 'Herbalife' to inflate grossly their publicly-traded front-company's declared revenues - boosting its share value its on Wall St. - and, thus, maintain a monopoly of information concerning a dissimulated criminal (and therefore, ultimately-valueless) enterprise.
- that these extensive criminal acts in China, directed from the USA, fit into an overall global pattern of ongoing major racketeering activity.
David Brear (copyright 2020)
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Herbalife Settles FCPA Charges and Agrees to Pay $123 Million
Herbalife’s China Bribery Scheme
Herbalife’s FCPA Settlement: Lessons Learned
https://www.jdsupra.com/legalnews/herbalife-s-fcpa-settlement-lessons-97702/
DOJ and the SEC settled concluded its long-pending FCPA investigation of Herbalife Nutrition Ltd (“Herbalife”).
Herbalife entered into a 3-year deferred prosecution agreement (“DPA”) with DOJ and an administrative order with the SEC, and agreed to pay $55 million in criminal penalties and $67 million in disgorgement and prejudgment interest to the SEC. In light of the criminal penalties, the SEC declined to impose any civil penalties.
The government filed a one-count Information charging Herbalife with conspiracy to violate the books and records provisions of the FCPA.
In November 2019, DOJ indicted Yangling Li, aka Jerry Li, and Hongwei Yang, aka Mary Yang, two former Herbalife executives in China for participating in a ten-year bribery scheme. Li was the former head of Herbalife’s Chinese operation, and Yang headed Herbalife’s external affairs department. Both defendants were charged with conspiracy to violate the FCPA. Yangling Li was also charged with perjury for lying under oath for false statements made during an SEC deposition and destruction of evidence. Both defendants remain at large.
Herbalife Bribery Scheme
Over a ten-year period, Herbalife built a multi-level sales operation in China, which accounted for approximately 20 percent of Herbalife’s global annual sales of $4 billion.
Herbalife’s external affairs unit in China was responsible for interacting with Chinese government agencies and media operations. External affairs employees entertained Chinese officials, provided meals, hospitality and gifts. Over a ten-year period, external affairs employees were reimbursed for roughly $25 million in expenses for meals, hospitality and gifts.
Herbalife’s China business also depended on securing licenses for direct selling operations from central and provincial governments connected to the Ministry of Commerce (“MOFCOM”). The regulation and oversight of direct selling operations was conducted by central and provincial entities as part of the Administration for Industry and Commerce. China Economic Net is a state-owned media company that published articles about business issues in China.
The bribery scheme was executed by Herbalife executives to ensure that Herbalife secured direct selling licenses, avoided government investigations and oversight, and suppressed negative coverage by government-owned media outlets.
As an example, DOJ cited the fact that, in late 2006 through early 2007, while Herbalife’s initial application for direct selling license was pending, Herbalife made various payments and benefits to Chinese government officials responsible for review and approval of its license application. A Herbalife executive suggested to a China executive that they falsify expense reimbursement documents in connection with the entertainment of Chinese government officials.
Continuing thereafter, Herbalife continued to provide illegal payments and benefits to Chinese government officials, make false records regarding these expenses as travel and entertainment expenses,” and execute false Sarbanes-Oxley false certification letters.
DOJ Settlement
In reaching this settlement, DOJ applied its Corporate Enforcement Policy factors. Herbalife did not voluntarily disclose the matter. Herbalife’s conduct was persistent and lasted for approximately a decade. The bribery scheme was carried out by senior level executives. Herbalife did not maintain an effective compliance program.
Herbalife was credited with cooperation with the investigation and for its remediation efforts. Herbalife terminated and disciplined individuals involved in the misconduct, enhancing its compliance program and increasing the resources dedicated to compliance.
Based on all of these factors, DOJ was awarded a 25 percent reduction from the bottom of the applicable U.S. Sentencing Guidelines range.
Herbalife’s bribery scheme in China stretched across the 28 provinces of China and even involved an Herbalife senior executive in its headquarters in Los Angeles, California. DOJ has indicted Yangling Li, aka Jerry Li, and Hongwei Yang, aka Mary Yang, two Chinese nationals who carried out the scheme.
The Statement of Facts provides some important details about the scheme. Herbalife’s business in China depended on its ability to secure direct selling licenses at the national and local level, including China’s 28 provinces. During the period March 2007 through March 2016, Herbalife secured and maintained direct selling licenses nationally and in the 28 provinces.
In addition to the government agencies responsible for licensing (collectively, “Chinese Government Agency 1”), various provincial and central levels of a Chinese government agency (collectively, “Chinese Government Agency 2”) were responsible for enforcing compliance with Chinese laws applicable to direct selling companies. The bribery scheme extended to a State-Owned Media Outlet, a media company that published articles about business and other issues in China.
Jerry Li eventually became the most senior executive at Herbalife in China. Mary Yang was a high-level executive at Herbalife China and the head of Herbalife’s External Affairs Department during 2006 to 2017. Li and Yang, along with two other China Executives, 1 and 2, carried out the bribery scheme in China.
Initial Direct Selling License and Investigations
Starting in 2006, Herbalife China applied for its first direct selling license for two cities in one province. In conducting its review of the license application and associated investigation, Chinese Government Agencies 1 and 2 worked together to determine whether to grant Herbalife’s initial application.
During a four-month period, ending in March 2007, Herbalife paid bribes and benefits to officials of the two Chinese Government Agencies.
For example, in 2006, Herbalife China was subject to a fine for operating a store in a provincial capital for violating regulations. Two sales managers, in coordination with Mary Yang, negotiated with government officials to pay bribes to lower the potential bribe.
Later in the same year, Li approved Yang’s payments of “red envelopes” (“cash payments”) to Chinese Government Agency 2 officials and seeking reimbursement from Herbalife China for these cash payments through false reimbursement requests.
In January 2007, Li and Yang discussed that Yang had “taken care of” a Chinese Government Agency 1 official before Yang had to address questions relating to Herbalife China’s pending direct selling license application for the province. Li stated, “The money works well on him!”
In March 2007, Li and Yang orchestrated payments to various Chinese Government Agency 2 officials to minimize future penalties against Herbalife China.
During the same month, Yang told an employee to distribute gift cards (approximately $10,000) to Chinese government officials involved in Herbalife’s pending direct selling license application in the province, and a non-government official (approximately $30,000). Li and a China Executive discussed the same day payments already made to secure the direct selling license.
The next day China Executive spoke to an Herbalife Executive in Los Angeles. China Executive described how Herbalife China had obtained a license for two cities and plan to obtain licenses in other provinces. The China Executive raised concerns about compliance with a recent policy change that restricted entertainment expenses to no more than six times in one year for any Chinese government official. In response, the Herbalife Executive suggested that the Chinese official falsify the details of the requests and associated expense reimbursements, explaining that the auditor will never verify the details in the receipts.
Additional Payments and Gifts to Government Officials
After obtaining the first direct selling license, Li and others made additional improper payments and gifts to Chinese government officials and falsely recorded the expenses.
In May 2007, Yang and China executives arranged for payment of approximately $3000 to a Chinese government official to reduce a government fine of approximately $16,000.
In January 2012, External Affairs employees arranged for the submission of $87,000 of fake meal and gift invoices.
In September 2012, Yang reported to Li that she had spent 20,000 Yuan on a shopping trip and a spa visit for a Government Agency 2, along with his daughter and her classmates. Later that same year, Yang and Li discussed providing a false confirmation of an internship for a son of a government official, and opening a bank account in a Chinese Bank to benefit the some of a Chinese Government official.
In April 2013, Yang told Li that she had met with an official at State-Owned Media Outlet and provided food and drink to convince the official to withdraw several unflattering articles.
Yang and other External Agency employees routinely falsified expense reports and receipts; for example, during a six month period in 2012, Yang received $772,433 in reimbursement for allegedly entertaining 4,312 government officials at 239 meals (more than one meal per day) and $248,622 in reimbursement for purported gifts to Chinese officials.
The range of improper expenses covered numerous expenditures for expensive meals, alcohol, karaoke, and lavish gifts. On one occasion, a Herbalife official complained about government officials’ demands for expensive entertainment and gifts, noting that the government official candidly stated that the government officials could never leave an event “empty-handed.” Often executives and employees colluded to come up with fake names and expense reports.
Internal Audit Oversight Failure
The SEC’s settlement document outlines the failure of Herbalife’s Internal Audit to uncover the extensive fraudulent expense reporting and reimbursement documentation. The Internal Audit in China reported directly to the Internal Audit at corporate headquarters in Los Angeles, California.
The IA China conducted an audit of China’s External Affairs office twice annually, and reported its results to the IA in the US. The EA Audit Reports showed large expenses and identified violations of Herbalife’s internal policies relating to the FCPA, including fake receipts and verbal approval of expenses when prior, written approval had been required.
The SEC cited, as examples, EA Audit Reports for 2012 and 2015 revealed large amounts claimed for meals, gifts and entertainment ($3.7 million in 2012 for 6 months for 239 meals for a total number of 4,312 participants, averaging $3232 per meal; in 2015, 115 restaurant meals with government officials at an average cost of $1472 per meal). In the 2015 Report, IA China noted that External Affairs often replaced problematic receipts and had expended $811,465 without the corporate approvals required.
Two board members raised concerns about these IA reports and asked if the amount of these expenditures were “reasonable” under the FCPA. The IA Director noted that these findings were “typical” and are within “tolerance.”
Between 2012 and 2016, Herbalife reimbursed External Affairs employees for over $7.2 million in questionable meals and gifts for government officials in China.
Herbalife’s FCPA settlement is another one for books – the wreckage left includes two criminal indictments for Chinese officials who may never be apprehended, along with $123 million in penalties. When going through the wreckage, there are serious issues of corporate failures at senior levels of the company with pervasive and systemic misconduct in China.
What is surprising is the obvious red flags of expense reports and reimbursement documentation. It is not worth listing the numerous indicators of bribery, but it is clear that the head-in-the-sand problem does not adequately capture the complicity of senior management and oversight functions in the ongoing bribery activities.
Taking a step back, let’s look at some of the important lessons learned.
Board and Internal Audit Failure: Despite questions from two board members in reviewing the Internal Audit reports showing large and obvious fraudulent expenditures and documentation, Internal Audit failed to acknowledge any issue and denied any possible wrongdoing. Evidently, the two board members were satisfied by that ridiculous and unbelievable answer. Both the board and the Internal Auditor failed to ask for additional investigation and follow up. The amount of money spent on so-called meals and entertainment were ridiculous on their face – the board members and internal Audit failed to follow up to resolve red flags. In this situation, their excuses and rationalizations ring hollow.
Chinese “Gift-Giving Culture”: It goes without saying that China is a hotbed for abuse of entertainment, gifts, meals expenditures. Through the last 20 years, FCPA enforcement actions on corrupt practices surrounding gifts, meals and entertainment expenses have focused on China. If your company operates in China and regularly interacts with government officials, strict controls, monitoring and review controls are essential to avoiding FCPA risks.
Numerous companies have a mix of government and private interactions in China. The interactions with government officials often involve government officials who are critical to the business operations. There is significant demand from government officials for generous entertainment and gifts. A company operating in this environment has to draw a strict line early and stick to the limitations, notwithstanding the obvious negative impact on its business. If the company makes it clear from the beginning that it will not tolerate such improper payments, the company will eventually gain breathing room as its reputation is accepted by Chinese officials. It is easy in theory and difficult in practice, especially when the company experiences real financial damage from such an attitude. In the long-run, however, avoiding this trap pays off.
Gifts, Meals, Entertainment Policies and Procedures: Global companies have to design and implement carefully-constructed controls for gifts, meals and entertainment expenses. Even with the best controls, employees will figure ways in which to circumvent the controls. Herbalife’s controls included pre-approval requirements, which were routinely ignored, and a strict limitation of six events each year for a government official. This latter control was flouted at the direction and approval of a Herbalife senior executive who instructed a China executive to make false entries of names of government officials because no one would check the identities to ensure an accurate listing of attendees.
Absence of Audit and Compliance Oversight: With the ongoing expenditures of millions of dollars in gifts, meals and entertainment needed to expand Herbalife’s China business, Herbalife had no meaningful oversight from Internal Audit and Compliance functions. Herbalife’s culture was not committed to any notion of compliance. In fact, Herbalife’s culture appears committed to the business at all costs culture. Even when detected by Internal Audit, there was no effort made to investigate and restrict China from continuing its criminal conduct. Business was too important in China and Herbalife had no intention of halting its ongoing activities.
Herbalife had no commitment to compliance. Indeed, its remediation included the hiring of a dedicated Chief Compliance Officer. It is surprising that a public company with global operations failed to maintain any compliance function. Going forward, even with a new dedicated CCO, Herbalife faces numerous high-risk activities and will require regular reviews and compliance audits, as well as monitoring of compliance data.
Michael Volkov (copyright 2020)
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