Securities and Exchange Commission v. Avon Products, Inc.

------
UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF NEW YORK 
JUDGE FAILLA 
SECURITIES AND EXCHANGE COMMISSION, 
14 
Plaintiff, Civil No. 
­
V. 
A VON PRODUCTS, INC., 
Defendant. 
Plaintiff Securities and Exchange Commission ("Commission") 
CEC , rZ0 14 ­
SUMMARY OF ALLEGATIONS 
1. This matter concerns violations by A von Products, Inc. ("A von") of the corporate 
recordkeeping and internal controls provisions 
of the federal securities laws. 
2. Avon is  a global provider ofbeauty products, primarily using a direct sales . 
method. Avon's common stock is registered pursuant to Section 12(b) 
ofthe Securities 
Exchange Act 
of 1934 ("Exchange Act") [15 U.S.C. §78/(b)]. 
3. From 2004 through the third quarter of2008, Avon's books and records failed to 
accurately and fairly reflect payments by Avon Products (China) Co., Ltd. ("Avon Products 
China") to Chinese government officials. 
4. Avon Products China provided cash and things ofvalue, including gifts, travel, 
and entertainment, to various Chinese government officials, including government officials 
responsible for awarding a test license, and subsequently a direct sales business license, that 
would allow a company to utilize direct door-to-door selling in China. A von Products China 

was, in fact, awarded a test license and, then, the first official direct selling business license in 
China. A von Products China also adopted an internal "no penalty policy" and provided cash and 
things 
of value to Chinese government officials to avoid fines and other penalties in order to 
maintain an ostensibly pristine corporate image. A von Products China also paid a third-party 
consultant for purportedly legitimate interactions with government officials, even though A von 
Products China management knew the consultant's invoices were often false and could not point 
to legitimate services provided by the consultant. At times , payments were made to suppress 
negative news in state-owned media and to obtain competitor information. 
In addition, A von 
Products China provided cash to government officials 
on behalf ofother A von subsidiaries in 
China. 
5. Avon Products China falsified its books and records so as to conceal the cash and 
things 
of value provided to government officials. 
6. Near the end of2005, an Avon internal audit team reported potential issues 
concerning things 
ofvalue provided to Chinese government officials. Nevertheless, remedial 
measures sufficient 
to address the issues were not implemented at  A von Products China. Similar 
issues related 
to Avon Products China were raised at the end of2006. Again, responsive 
remedial measures were not implemented. 
7. The books and records at  A von Products China were consolidated into the books 
and records 
of Avon. Avon thus violated Section 13(b)(2)(A) ofthe Exchange Act [15 U.S.C. 
§ 78m(b)(2)(A)] by failing to make and keep books, records , and accounts, which, in reasonable 
detail , accurately and fairly reflected the transactions and disposition 
of assets of the issuer. 
8. By failing to ensure that it maintained adequate internal controls sufficient to 
record the nature and purpose 
ofpayments, or to prevent improper payments, to government 
2 


officials, A von failed to devise and maintain a system of internal accounting controls sufficient 
to provide reasonable assurances that its transactions and the disposition 
ofits assets were 
recorded correctly, accurately, and in accordance with authorization 
ofmanagement. A von 
thereby violated Section 13(b)(2)(B) 
ofthe Exchange Act [15 U.S.C . § 78m(b)(2)(B)]. 
9. Finally, in May 2008, Avon began a review of its compliance with the Foreign 
Corrupt Practices Act ("FCPA"), the U.S . legislation that, among other things, prohibits 
payments to foreign government officials to obtain or retain business.  As a result 
ofits review, 
the company instituted extensive, related reforms. 
JURISDICTION AND VENUE 
10. Thi s court has jurisdiction over this action pursuant to Sections 21 (d) , 2 1 (e) , and 
27 ofthe Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. 
11. Venue is proper in this District pursuant to Section 27 of the Exchange Act [ 15 
U.S.C. § 78aa]. 
DEFENDANT 
12. Avon Products, Inc. is  a New York corporation that has its headquarters in New 
York City. The company is a global manufacturer and marketer ofbeauty products. Avon 
primarily sells its products through direct selling by over 6 million active independent sales 
representatives. The company has wholly owned subsidiaries throughout the world with sales or 
distribution 
of its products in over 100 countries located in North America, Latin America, 
Europe, the Middle East, Africa, and Asia. The financi al results 
of Avon's wholly owned 
subsidiaries are ultimately consolidated into the financial statements 
of A von. Throughout the 
relevant period, 
Avon's shares were registered pursuant to Section 12(b) of the Exchange Act 
[15 U.S.C. § 78l(b)]  and quoted on the New York Stock Exchange (symbol: AVP) . 
3 


RELATED ENTITIES 

13. Avon Products (China) Co . Ltd. is headquartered in Guangzhou, China. Avon 
Products China is  a wholly owned indirect subsidiary 
ofA von. A von controls two other Chinese 
subsidiaries through Avon Products China: Avon Manufacturing (Guangzhou) Ltd. ("Avon 
Manufacturing China") and Avon Healthcare Products Manufacturing (Guangzhou) Limited 
("Avon Healthcare China"). 
STATEMENT OF FACTS 
Avon's Business Operations in China 
14. Avon Products China began operations in the People's Republic ofChina in 1989 
as part 
of a joint venture that manufactured its products and used a direct selling inodel. 
However, in 1998 the Chinese government banned all direct selling. For a number 
ofyears, 
A von then marketed its products in independently owned retail operations called "Beauty 
Boutiques." When China subsequently expressed an interest in joining the World Trade 
Organization ("WTO"), the 
WTO requested that the Chinese government consider allowing 
direct selling in the country as part 
ofits admission into the organization. In 2001, the Chinese 
government agreed to allow direct selling within three years. A von wanted to influence the 
legislation and regulations governing the reimplementation 
of direct selling in China. A von also 
wanted to 
be the first company to implement direct selling if, and when, the new regulations 
became effective. 
Avon Products China's Books and Records Attempt to Hide Payments to Government 
Officials 
15. In the years leading up to 2003, Avon Products China had expanded its 
government relations department to liaise with the Ministry 
of Commerce ("MOFCOM") and the 
State Administration for Industry and Commerce ("AIC"), the government agencies responsible 
4 


for the implementation of direct selling regulation. In April 1999, an Avon Asia-Pacific 
subsidiary hired an executive to, as stated in his employment agreement, "bring [A von] to the 
attention 
of relevant organizations and help open doors and develop the required 'Guanxi' to 
successfully conduct business." ("Guanxi" is a Chinese term that roughly translates 
as 
"goodwill.") The executive was seconded to Avon Products China as its Vice President in 
Corporate Affairs, the department with oversight and liaison responsibility for government 
agencies on a national, provincial, and local level. Employees in the Corporate Affairs 
department provided gifts, entertainment, and travel to gove1nment officials in these agencies for 
the purpose 
ofinfluencing the direct selling laws and to position A von Products China as one of 
the companies to be selected to test direct selling when the new regulations were implemented. 
16. In October 2003, Avon was told informally that when China opened its markets to 
direct selling, A von Products China would be the first company to receive a test license. During 
this period, A von Products China continued to provide meals, travel, and entertainment to 
MOFCOM and AIC officials. Avon Products China also sponsored cultural events, paid for 
journalists to attend corporate announcements, and purchased the placement 
of positive news 
stories--or the suppression 
ofnegative news stories--in government media, to maintain a positive 
corporate image 
of the company. 
17. In April 2004, when the form 
of the direct selling regulations was being 
negotiated within the Chinese government agencies, A von continued to receive informal 
communications that A von 
Products China would 
be the first company allowed to test the new 
regulations. After these communications, A von Products China continued to provide travel, 
meals, and entertainment 
and. began to meet more frequently with provincial and local 
MOFCOM and AIC officials. Avon Products China also retained the services of a third-party 
5 


consultant ("Consulting Company 1 ") to manage public-relations-related affairs with the 
government and external parties and to handle media matters in provinces and localities where 
the subsidiary did not maintain an office. A von Products China did not contractually bind 
Consulting Company 1 to comply with the PCP 
A. 
18. The Chinesegovernment decided to issue one company a temporary license to 
conduct direct sales to test the planned regulations. In April 2005, MOFCOM and AIC officially 
approved A von Products China as the first company to receive test approval to conduct direct 
selling in Beijing, Tianjin, and Guangdong Province. 
19. In April2005, based on interviews and preliminary procedures it had conducted 
in China, Avon's global internal audit flagged gifts to government officials and inadequacies in 
related recordkeeping as an area 
of concern. Then, in a limited review conducted in May 2005 , 
Avon's internal audit personnel observed that employees of Avon Products China had incurred 
meals and entertainment expenses with government officials, but had failed to record the names 
ofthe government officials or the business purpose ofthe expenses. As a result, Avon's Vice 
President, Internal Audit opened an internal compliance case and noted that a further review 
of 
discretionary payments would be made in an upcoming limited scope internal audit. 
20. During the spring and summer 
of2005, Avon's global internal audit department 
considered the need to provide training on the provisions 
ofthe FCPA in the Asia-Pacific region, 
including China. However, ultimately, Avon determined that its budget for that year would not 
allow it to provide stand-alone FCP A training in the region. 
21 . In September 2005, an A von internal audit team conducted field work for the 
limited scope audit, including looking at discretionary payments at the Corporate Affairs 
department in China. In late September, the team generated a draft report prominently noting 
6 


that it was a common business practice for A von Products China to offer gifts and meals to 
various government officials and that the majority ofthe government-related activities at Avon 
Products China were not adequately documented. The draft report also noted that the gifts and 
meals might be construed 
as the company's intent to expedite licenses from the govemment or to 
avoid unfavorable rulings against the company, therefore potentially violating the provisions of 
the FCP A. The day before the audit closing meeting, the senior management of A von Products 
China told the intemal audit team that recording the name 
of the government official and the 
purpose 
of the meeting would have a chilling effect with the officials. The intemal audit team 
and the senior management 
of A von Products China brought the draft report to the attention of 
the V.P . Intemal Audit, who headed Avon 's global intemal audit department. The V.P. Intemal 
Audit in tum brought the draft audit repOii and its language 
to the attention of Avon's General 
Counsel. 
22. Avon's Legal Department took the position that conclusions about potential 
FCPA violations fell within the purview 
of Legal, and not Intemal Audit. The V.P. Intemal 
Audit directed the internal audit team to have the FCP A conclusions removed from the draft, 
pending further study 
ofthe issues .  After the V.P . Intemal Audit conferred with the Vice 
President 
of Finance, Asia-Pacific, the intemal audit team was directed to redraft the report, 
recall and destroy 
all hard copies, and delete any e-mail to which the draft was attached. 
23. Avon's General Counsel discussed the issues raised in the report with Avon 
's 
Vice President, Legal & Govemment Affairs, and Avon's Regional Counsel, Asia-Pacific. They 
determined 
to follow-up on the information with the internal audit team and to consult outside 
counsel. Avon's V.P. Legal 
& Government Affairs contacted a major law firm to consult about 
potential FCPA issues. 
In early November 2005, Avon's General Counsel, V.P. Internal Audit, 
7 


V.P. Legal & Govemment Affairs, and V.P. Finance, Asia-Pacific, directed the intemal audit 
team 
to retum to Avon Products China and to expand to the beginning of2005 the timeframe of 
their review of the expenses of the Corporate Affairs department. The intemal audit team was 
told not 
to create any electronic documents, not to send any e-mails regarding the follow-up 
review, and not 
to use the term "FCPA" in any written document. 
24. The intemal audit team completed the field work and created several handwritten 
spreadsheets that confirmed the concems the team had reported in their draft audit report. 
Avon's V.P. Finance, Asia-Pacific then hand-carried the spreadsheets on a flight from Hong 
Kong 
to New York. 
25. 
In mid-November 2005, after Avon's V.P. Legal & Govemment Affairs received 
the spreadsheets, he consulted the outside law firm and sent the spreadsheets 
to the firm. After 
two subsequent telephone conferences with the law firm, Avon's V.P. Legal 
& Govemment 
Affairs, in mid-December 2005, sent the law firm a short e-mail stating that the company had 
"moved on" from the issues and asking for an estimate 
of the fees incurred. 
26. 
In December 2005, China's new direct selling regulations came into effect, lifting 
the ban on direct selling and allowing companies 
to apply for licenses to conduct direct selling. 
Under the direct selling regulations, a company was required 
to obtain a national direct selling 
license and a direct selling license from each province and municipality 
in which it  sought to 
make direct sales. For a company to obtain a license, it was required to satisfy a number of 
conditions, including having "a good business reputation" and a record of no serious illegal 
operations for the previous five years. 
27. The direct selling regulations also banned the recruitment 
of certain types of 
persons as direct sales staff, including persons under the age of 18, full-time students, foreigners, 
8 


teachers, medical personnel, civil servants, active service members ofthe armed forces, and any 
person who was prohibited from taking any part-time job under applicable laws and regulations. 
28. In late December 2005 and January 2006, Avon's General Counsel, Avon's V.P. 
Legal 
& Government Affairs, and Avon's Regional Counsel, Asia-Pacific decided to implement 
certain remedial measures at A von Products China, including the creation 
of a log listing the 
government officials entertained or provided with gifts, and 
to require representations and 
warranties in Avon Products China's contracts with third parties, including Consulting Company 
1, that interacted with government officials and government agencies on behalf of A von Products 
China. 
29. The ordered remedial measures did not require a description 
ofthe business 
purpose 
of any meeting with government officials. Moreover, A von Products China was 
allowed 
to keep the log off-premises. In fact, none of the responsive measures were 
implemented. Moreover, there was no instmction 
to the employees at A von Products China to 
otherwise change the practice ofproviding things ofvalue to Chinese government officials. 
30. In March 2006, the Chinese government did grant A von Products China the first 
national direct selling business license.  (Avon competitors did not receive test or permanent 
licenses until, or after, December 2006.) In the time between Avon Products China's receiving 
the test direct selling license, in April 2005, and the time when it  received the permanent direct 
selling business license, the company provided over $100,000 in cash or things 
of value to 
government officials. 
31. Between March 2006 and July 2006, A von Products China obtained all sought 
provincial and municipal approvals 
to conduct direct selling. 
9 


32. After March 2006 , Avon Products China continued providing things ofvalue to 
Chinese government officials at the national, provincial, and local levels to ensure that A von had 
a clean corporate image in China. Avon Products China's General Manager and its V.P. 
of 
Corporate Affairs implemented a "zero penalty policy." 
33. Under the zero penalty policy, Avon Products China and Consulting Company 1 
provided cash and things ofvalue to Chinese government officials and government media to 
reduce 
or eliminate potential fines against the company and to prevent negative news articles 
from appearing in the media. 
34. In December 2006, an A von Products China executive informed an A von Asia-
Pacific executive and Avon ' s new head 
ofinternal audit by e-mail that Avon Products China's 
Associate Director 
of Corporate Affairs had been terminated because he had submitted false 
expense reports seeking reimbursement for gifts and entertainment provided to government 
officials.  Avon's General Counsel was provided with a copy 
of the e-mail. 
35. After consultation with the General Counsel, a new head 
of internal audit at Avon 
asked two members 
ofthe audit team that had conducted the 2005 A von Products China internal 
audit to do follow-up work looking into expenses at the China Corporate Affairs group and to 
confirm that the remedial measures had been implemented. Based on their review, the two 
internal auditors advised the new head 
of internal audit that they had concluded that problematic 
payments and inadequate recordkeeping continued at  A von Products China and that the measures 
had not been implemented. 
No remedial measures were implemented in response to the review. 
36. In May 2008 , the Avon Products China Corporate Affairs executive who had been 
terminated wrote to Avon' s 
Chief Executive Officer alleging improper payments to Chinese 
government officials over several years in the form of meals, entertainment, travel, sponsorship 
10 


of cultural events, gifts ofart, and cash. The letter was forwarded to A von's Legal Department 
and, in tum, to the audit committee 
ofAvon's board ofdirectors. The audit committee 
commenced an internal investigation into the allegations and, in October 2008, A von informed 
the Commission and the Department 
ofJustice. 
37. 
As a result ofits internal investigation, Avon subsequently initiated substantial 
remedial processes and procedures, on a global basis. A von also instituted worldwide FCP A 
training for all employees 
ofthe company. 
Representative Categories of Improper Payments 
38. From at least 2004 through the third quarter 2008 , Avon Products China provided 
cash and things 
ofvalue to government officials, government entities, and state-owned media. 
Avon Products 
China's books and records were created in a manner that would not allow a 
reviewer to ascertain 
the specific government official or entity that received the payment or the 
purpose for which the payment was made. In some instances, the documentation for the 
payments contained almost no details . 
39. Altogether, Avon Products China provided approximately $8 million dollars in 
cash and things ofvalue to Chinese government officials during the period from 2004 through 
the third quarter 2008. The following are examples: 
40. During the period, Avon Products China employees made approximately 9,600 
payments totaling $1.65 million for meals and entertainment involving government officials. 
The majority ofthese payments were for meals and entertainment expenses under $200 per 
occurrence, without indication as to who 
atten~ed the meal/entertainment or the business purpose 
ofthe expense. One expense report submitted by a Corporate Affairs associate in May 2007 
listed $8,100 for entertainment 
of government officials in a two-month period during the time 
that A 
von Products China was negotiating a certification of apparel for sale in China. Another 
11 


expense of$4,147 in Apri l 2007 paid for a Pearl River cruise for 200 State and Regional AIC 
officials during a conference 
ofofficials with responsibility for the oversight of A von Products 
China's direct selling business license. During the cruise, Avon Products China also placed free 
products in each official's hotel room. 
In January 2008, an expense of$4,808 was incurred to 
"accompany government officials" in Guangdong Province during a period in which A von 
management met with the Governor 
of that Province. 
41. A von Products China employees also provided gifts totaling $400,000, in addition 
to at least $1.7 million worth of Avon products. Approximately $70,000 to 90,000 ofthat total is 
attributable 
to tickets or corporate boxes at the China Open tennis tournament, given to AIC and 
other government officials in 2004 and 2005 "to thank them for their support." During these 
years, Avon Products China was a corporate sponsor 
of the tournament and received the tickets 
as part ofthat sponsorship .  A von Products China also provided government officials with gifts 
that included Louis Vuitton merchandise, Gucci bags, and Tiffany pens. 
42. During the period, A von Products China employees provided approximately 
$1 
million in payments for travel by government officials. Half of that amount was spent on the 
following trips: (1) $93,000 for an eighteen-day, all-expenses-paid trip 
to the United States by 
Guangdong Food and Drug Administration officials, in December 2005 and January 2006, that 
included one half-day 
of visiting Avon's research facilities in Suffern, NY; (2) $328,000 for 
three-to-five days 
of travel by more than 200 AIC officials to visit Avon Products China's 
Guangzhou property, with one half-day at  that property and the remainder 
of the time spent 
touring resort areas in southern China; (3) $23,000 for travel and expenses for government 
journalists to attend the ceremony at  which A von Products China launched its direct selling test; 
and (4) $22,000 for a trip by a provincial governor 
to Hong Kong without any Avon business 
12 


purpose. A von Products China also sponsored trips ofAIC officials to Europe during this 
period. However, no records can 
be located that show the expenses for these trips. 
43. Employees at  A von Products China also made payments totaling $1.5 million 
to 
vendors and consultants, with knowledge that a significant portion ofthe funds would in tum be 
paid to government officials. 
Ofthat amount, approximately $1.2 million was paid to Consulting 
Company 1 
to provide government relations and media crisis management. The payments to 
Consulting Company 1 were often made in cash by Avon Products China's V.P. in Corporate 
Affairs, who then would submit, or would have a subordinate submit, false expense reports for 
reimbursement. 
44. Employees 
of A von Products China made a cash payment of approximately 
$12,500 
to an AIC official in Hunan Province to avoid a fine. The official told A von Products 
China that the AIC did not have a bank account and directed A von Products China to wire the 
funds 
to his personal bank account, structured in several deposits to avoid Chinese bank 
reporting regulations. 
45. A von Products China's employees also made payments 
to government officials 
for conferences, and related meals, gifts, and entertainment, in 150 instances aggregating 
$143,000. Records for these expenses do not indicate who attended the conferences, or the 
business purpose 
ofthe expenses. Approximately $15,000 of this amount was for expenses 
related 
to government journalists' attendance at an A von Products China media event. 
46. On occasion, an AIC official would request that Avon Products China sponsor 
an 
activity in lieu of paying a fine related to the direct selling or Beauty Boutique business. 
Similarly, rather than having a news story appear in the Economic Information Daily alleging 
that Avon 
Products China had unlawfully recruited students 
to be sales promoters, Avon 
13 


Products China, at the behest ofthe publication's editor, paid $81,000 to sponsor an article 
contest at that publication. 
4
7. Employees at A von Products China also made payments to state-owned media to 
purchase advertising, in order to avoid negative news articles. During the relevant period, A von 
Products China made approximately 
16 purchases ofadvertising totaling $41,000 to avoid 
negative press. 
48. Avon 
Products China's employees also paid for association fees , at the request 
of 
Chinese government officials. These payments totaled approximately $5,000 and were often 
made in cash. 
49. During the relevant period, employees at A von Products China also made 
payments 
of approximately $740,000 that lacked documentation sufficient to place the payments 
in any 
ofthe exemplary categories set forth herein. 
FIRST CLAIM FOR RELIEF 

Corporate Books and Records 

[Violations of Section 13(b)(2)(A) ofthe Exchange Act, 
15 U.S.C. § 78m(b)(2)(A)] 
50. Paragraphs 1 through 49 are realleged and incorporated 
by reference. 
51. Section 13(b )(2)(A) 
of the Exchange Act requires each issuer with securities 
registered with the Commission pursuant to Section 12 [15 U.S.C . 
§ 78!] to make and keep 
books, records, and accounts, which, in reasonable detail , accurately and fairly reflect the 
transactions and the dispositions 
of the assets of the issuer. 
52. As described above, A von, through its officers, employees, and agents, fai led 
to 
keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its 
transactions and the disposition 
ofits assets. 
14 


53. By reason ofthe foregoing, Avon violated Section 13(b )(2)(A) ofthe Exchange 
Act 
(1 5 U.S.C § 78m(b)(2)(A)]. 
SECOND CLAIM FOR RELIEF 

Internal Controls 

[Violations of Section 13(b )(2)(B) ofthe Exchange Act, 
15 U.S.C. § 78m(b)(2)(B)] 
54. Paragraphs 1 through 49 are realleged· and incorporated 
by reference. 
55. Section 13(b)(2)(B) of the Exchange Act requires issuers ofregistered securities 
to devise and maintain a system 
ofinternal accounting controls sufficient to provide reasonable 
assurances that, among other things, transactions are executed in accordance with management's 
general or specific authorization; transactions are recorded as necessary to permit preparation 
of 
financial statements in conformity with generally accepted accounting principles or any other 
criteria applicable 
to such statements; transactions are recorded as necessary to maintain 
accountability for assets ; and access to assets is permitted only in accordance with management's 
general or specific authorization. 
56. A von fai led to devise and maintain such a system 
ofinternal controls and was 
therefore unable to record the nature and purpose of, or prevent, the provision 
of cash and things 
of value to government officials by A von Products China, as set forth above. 
57. By reason 
of the foregoing, Avon violated Section 13(b)(2.)(B) ofthe Exchange 
Act [
15 U.S.C. § 78m(b)(2)(B)]. 
15 


PRAYER FOR RELIEF 
WHEREFORE, the Commission respectfully requests that this Court enter judgment: 
a. Permanently enjoining Defendant Avon from violating Sections 13(b)(2)(A) and 
13(b)(2)(B) 
ofthe Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]; 
b. Ordering Defendant Avon to disgorge ill-gotten gains wrongfully obtained 
as a 
result 
of its illegal conduct described herein, plus prejudgment interest thereon; and 
c. Granting such other relief as this Court may deem just and appropriate. 
Dated:~~{ \1 ,2014 
Respectfully submitted, 
Attorneys for Plaintiff 
Securities and Exchange Commission 
100 F Street, N.E. 
Washington, D.C. 20549 
Telephone: (202) 551-4962 (Friestad) 
Facsimile: (202) 772-9286 
E-Mail: [email protected] 
16 

- -----

UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF NEW YORK JUDGE FAILLA 

SECURITIES AND EXCHANGE COMMISSION, 14 
Plaintiff, Civil No. ­

V. 

A VON PRODUCTS, INC., 

Defendant. 

Plaintiff Securities and Exchange Commission ("Commission") 

CEC , rZ0 14 ­

SUMMARY OF ALLEGATIONS 

1. This matter concerns violations by A von Products, Inc. ("A von") of the corporate 

recordkeeping and internal controls provisions of the federal securities laws. 

2. Avon is a global provider of beauty products, primarily using a direct sales . 

method. Avon's common stock is registered pursuant to Section 12(b) of the Securities 

Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78/(b)]. 

3. From 2004 through the third quarter of2008, Avon's books and records failed to 

accurately and fairly reflect payments by Avon Products (China) Co., Ltd. ("Avon Products 

China") to Chinese government officials. 

4. Avon Products China provided cash and things ofvalue, including gifts, travel, 

and entertainment, to various Chinese government officials, including government officials 

responsible for awarding a test license, and subsequently a direct sales business license, that 

would allow a company to utilize direct door-to-door selling in China. A von Products China 



was, in fact, awarded a test license and, then, the first official direct selling business license in 

China. A von Products China also adopted an internal "no penalty policy" and provided cash and 

things of value to Chinese government officials to avoid fines and other penalties in order to 

maintain an ostensibly pristine corporate image. A von Products China also paid a third-party 

consultant for purportedly legitimate interactions with government officials, even though A von 

Products China management knew the consultant's invoices were often false and could not point 

to legitimate services provided by the consultant. At times , payments were made to suppress 

negative news in state-owned media and to obtain competitor information. In addition, A von 

Products China provided cash to government officials on behalf of other A von subsidiaries in 

China. 

5. Avon Products China falsified its books and records so as to conceal the cash and 

things of value provided to government officials. 

6. Near the end of2005, an Avon internal audit team reported potential issues 

concerning things ofvalue provided to Chinese government officials. Nevertheless, remedial 

measures sufficient to address the issues were not implemented at A von Products China. Similar 

issues related to Avon Products China were raised at the end of2006. Again, responsive 

remedial measures were not implemented. 

7. The books and records at A von Products China were consolidated into the books 

and records of Avon. Avon thus violated Section 13(b)(2)(A) ofthe Exchange Act [15 U.S.C. 

§ 78m(b)(2)(A)] by failing to make and keep books, records , and accounts, which, in reasonable 

detail , accurately and fairly reflected the transactions and disposition of assets of the issuer. 

8. By failing to ensure that it maintained adequate internal controls sufficient to 

record the nature and purpose of payments, or to prevent improper payments, to government 

2 




officials, A von failed to devise and maintain a system of internal accounting controls sufficient 

to provide reasonable assurances that its transactions and the disposition of its assets were 

recorded correctly, accurately, and in accordance with authorization of management. A von 

thereby violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C . § 78m(b)(2)(B)]. 

9. Finally, in May 2008, Avon began a review of its compliance with the Foreign 

Corrupt Practices Act ("FCPA"), the U.S . legislation that, among other things, prohibits 

payments to foreign government officials to obtain or retain business. As a result of its review, 

the company instituted extensive, related reforms. 

JURISDICTION AND VENUE 

10. Thi s court has jurisdiction over this action pursuant to Sections 21 (d) , 2 1 (e) , and 

27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. 

11. Venue is proper in this District pursuant to Section 27 of the Exchange Act [ 15 

U.S.C. § 78aa]. 

DEFENDANT 

12. Avon Products, Inc. is a New York corporation that has its headquarters in New 

York City. The company is a global manufacturer and marketer ofbeauty products. Avon 

primarily sells its products through direct selling by over 6 million active independent sales 

representatives. The company has wholly owned subsidiaries throughout the world with sales or 

distribution of its products in over 100 countries located in North America, Latin America, 

Europe, the Middle East, Africa, and Asia. The financi al results of Avon's wholly owned 

subsidiaries are ultimately consolidated into the financial statements of A von. Throughout the 

relevant period, Avon's shares were registered pursuant to Section 12(b) of the Exchange Act 

[15 U.S.C. § 78l(b)] and quoted on the New York Stock Exchange (symbol: AVP) . 

3 




RELATED ENTITIES 


13. Avon Products (China) Co . Ltd. is headquartered in Guangzhou, China. Avon 

Products China is a wholly owned indirect subsidiary of A von. A von controls two other Chinese 

subsidiaries through Avon Products China: Avon Manufacturing (Guangzhou) Ltd. ("Avon 

Manufacturing China") and Avon Healthcare Products Manufacturing (Guangzhou) Limited 

("Avon Healthcare China"). 

STATEMENT OF FACTS 

Avon's Business Operations in China 

14. Avon Products China began operations in the People's Republic of China in 1989 

as part of a joint venture that manufactured its products and used a direct selling inodel. 

However, in 1998 the Chinese government banned all direct selling. For a number of years, 

A von then marketed its products in independently owned retail operations called "Beauty 

Boutiques." When China subsequently expressed an interest in joining the World Trade 

Organization ("WTO"), the WTO requested that the Chinese government consider allowing 

direct selling in the country as part of its admission into the organization. In 2001, the Chinese 

government agreed to allow direct selling within three years. A von wanted to influence the 

legislation and regulations governing the reimplementation of direct selling in China. A von also 

wanted to be the first company to implement direct selling if, and when, the new regulations 

became effective. 

Avon Products China's Books and Records Attempt to Hide Payments to Government 
Officials 

15. In the years leading up to 2003, Avon Products China had expanded its 

government relations department to liaise with the Ministry of Commerce ("MOFCOM") and the 

State Administration for Industry and Commerce ("AIC"), the government agencies responsible 

4 




for the implementation of direct selling regulation. In April 1999, an Avon Asia-Pacific 

subsidiary hired an executive to, as stated in his employment agreement, "bring [A von] to the 

attention of relevant organizations and help open doors and develop the required 'Guanxi' to 

successfully conduct business." ("Guanxi" is a Chinese term that roughly translates as 

"goodwill.") The executive was seconded to Avon Products China as its Vice President in 

Corporate Affairs, the department with oversight and liaison responsibility for government 

agencies on a national, provincial, and local level. Employees in the Corporate Affairs 

department provided gifts, entertainment, and travel to gove1nment officials in these agencies for 

the purpose of influencing the direct selling laws and to position A von Products China as one of 

the companies to be selected to test direct selling when the new regulations were implemented. 

16. In October 2003, Avon was told informally that when China opened its markets to 

direct selling, A von Products China would be the first company to receive a test license. During 

this period, A von Products China continued to provide meals, travel, and entertainment to 

MOFCOM and AIC officials. Avon Products China also sponsored cultural events, paid for 

journalists to attend corporate announcements, and purchased the placement of positive news 

stories--or the suppression of negative news stories--in government media, to maintain a positive 

corporate image of the company. 

17. In April 2004, when the form of the direct selling regulations was being 

negotiated within the Chinese government agencies, A von continued to receive informal 

communications that A von Products China would be the first company allowed to test the new 

regulations. After these communications, A von Products China continued to provide travel, 

meals, and entertainment and. began to meet more frequently with provincial and local 

MOFCOM and AIC officials. Avon Products China also retained the services of a third-party 

5 




consultant ("Consulting Company 1 ") to manage public-relations-related affairs with the 

government and external parties and to handle media matters in provinces and localities where 

the subsidiary did not maintain an office. A von Products China did not contractually bind 

Consulting Company 1 to comply with the PCP A. 

18. The Chinesegovernment decided to issue one company a temporary license to 

conduct direct sales to test the planned regulations. In April 2005, MOFCOM and AIC officially 

approved A von Products China as the first company to receive test approval to conduct direct 

selling in Beijing, Tianjin, and Guangdong Province. 

19. In April2005, based on interviews and preliminary procedures it had conducted 

in China, Avon's global internal audit flagged gifts to government officials and inadequacies in 

related recordkeeping as an area of concern. Then, in a limited review conducted in May 2005 , 

Avon's internal audit personnel observed that employees of Avon Products China had incurred 

meals and entertainment expenses with government officials, but had failed to record the names 

of the government officials or the business purpose of the expenses. As a result, Avon's Vice 

President, Internal Audit opened an internal compliance case and noted that a further review of 

discretionary payments would be made in an upcoming limited scope internal audit. 

20. During the spring and summer of2005, Avon's global internal audit department 

considered the need to provide training on the provisions ofthe FCPA in the Asia-Pacific region, 

including China. However, ultimately, Avon determined that its budget for that year would not 

allow it to provide stand-alone FCP A training in the region. 

21 . In September 2005, an A von internal audit team conducted field work for the 

limited scope audit, including looking at discretionary payments at the Corporate Affairs 

department in China. In late September, the team generated a draft report prominently noting 

6 




that it was a common business practice for A von Products China to offer gifts and meals to 

various government officials and that the majority ofthe government-related activities at Avon 

Products China were not adequately documented. The draft report also noted that the gifts and 

meals might be construed as the company's intent to expedite licenses from the govemment or to 

avoid unfavorable rulings against the company, therefore potentially violating the provisions of 

the FCP A. The day before the audit closing meeting, the senior management of A von Products 

China told the intemal audit team that recording the name of the government official and the 

purpose of the meeting would have a chilling effect with the officials. The intemal audit team 

and the senior management of A von Products China brought the draft report to the attention of 

the V.P . Intemal Audit, who headed Avon 's global intemal audit department. The V.P. Intemal 

Audit in tum brought the draft audit repOii and its language to the attention of Avon's General 

Counsel. 

22. Avon's Legal Department took the position that conclusions about potential 

FCPA violations fell within the purview of Legal, and not Intemal Audit. The V.P. Intemal 

Audit directed the internal audit team to have the FCP A conclusions removed from the draft, 

pending further study of the issues . After the V.P . Intemal Audit conferred with the Vice 

President of Finance, Asia-Pacific, the intemal audit team was directed to redraft the report, 

recall and destroy all hard copies, and delete any e-mail to which the draft was attached. 

23. Avon's General Counsel discussed the issues raised in the report with Avon 's 

Vice President, Legal & Govemment Affairs, and Avon's Regional Counsel, Asia-Pacific. They 

determined to follow-up on the information with the internal audit team and to consult outside 

counsel. Avon's V.P. Legal & Government Affairs contacted a major law firm to consult about 

potential FCPA issues. In early November 2005, Avon's General Counsel, V.P. Internal Audit, 

7 




V.P. Legal & Govemment Affairs, and V.P. Finance, Asia-Pacific, directed the intemal audit 

team to retum to Avon Products China and to expand to the beginning of2005 the timeframe of 

their review of the expenses of the Corporate Affairs department. The intemal audit team was 

told not to create any electronic documents, not to send any e-mails regarding the follow-up 

review, and not to use the term "FCPA" in any written document. 

24. The intemal audit team completed the field work and created several handwritten 

spreadsheets that confirmed the concems the team had reported in their draft audit report. 

Avon's V.P. Finance, Asia-Pacific then hand-carried the spreadsheets on a flight from Hong 

Kong to New York. 

25. In mid-November 2005, after Avon's V.P. Legal & Govemment Affairs received 

the spreadsheets, he consulted the outside law firm and sent the spreadsheets to the firm. After 

two subsequent telephone conferences with the law firm, Avon's V.P. Legal & Govemment 

Affairs, in mid-December 2005, sent the law firm a short e-mail stating that the company had 

"moved on" from the issues and asking for an estimate of the fees incurred. 

26. In December 2005, China's new direct selling regulations came into effect, lifting 

the ban on direct selling and allowing companies to apply for licenses to conduct direct selling. 

Under the direct selling regulations, a company was required to obtain a national direct selling 

license and a direct selling license from each province and municipality in which it sought to 

make direct sales. For a company to obtain a license, it was required to satisfy a number of 

conditions, including having "a good business reputation" and a record of no serious illegal 

operations for the previous five years. 

27. The direct selling regulations also banned the recruitment of certain types of 

persons as direct sales staff, including persons under the age of 18, full-time students, foreigners, 

8 




teachers, medical personnel, civil servants, active service members of the armed forces, and any 

person who was prohibited from taking any part-time job under applicable laws and regulations. 

28. In late December 2005 and January 2006, Avon's General Counsel, Avon's V.P. 

Legal & Government Affairs, and Avon's Regional Counsel, Asia-Pacific decided to implement 

certain remedial measures at A von Products China, including the creation of a log listing the 

government officials entertained or provided with gifts, and to require representations and 

warranties in Avon Products China's contracts with third parties, including Consulting Company 

1, that interacted with government officials and government agencies on behalf of A von Products 

China. 

29. The ordered remedial measures did not require a description of the business 

purpose of any meeting with government officials. Moreover, A von Products China was 

allowed to keep the log off-premises. In fact, none of the responsive measures were 

implemented. Moreover, there was no instmction to the employees at A von Products China to 

otherwise change the practice of providing things ofvalue to Chinese government officials. 

30. In March 2006, the Chinese government did grant A von Products China the first 

national direct selling business license. (Avon competitors did not receive test or permanent 

licenses until, or after, December 2006.) In the time between Avon Products China's receiving 

the test direct selling license, in April 2005, and the time when it received the permanent direct 

selling business license, the company provided over $100,000 in cash or things of value to 

government officials. 

31. Between March 2006 and July 2006, A von Products China obtained all sought 

provincial and municipal approvals to conduct direct selling. 

9 




32. After March 2006 , Avon Products China continued providing things ofvalue to 

Chinese government officials at the national, provincial, and local levels to ensure that A von had 

a clean corporate image in China. Avon Products China's General Manager and its V.P. of 

Corporate Affairs implemented a "zero penalty policy." 

33. Under the zero penalty policy, Avon Products China and Consulting Company 1 

provided cash and things ofvalue to Chinese government officials and government media to 

reduce or eliminate potential fines against the company and to prevent negative news articles 

from appearing in the media. 

34. In December 2006, an A von Products China executive informed an A von Asia-

Pacific executive and Avon ' s new head of internal audit by e-mail that Avon Products China's 

Associate Director of Corporate Affairs had been terminated because he had submitted false 

expense reports seeking reimbursement for gifts and entertainment provided to government 

officials. Avon's General Counsel was provided with a copy of the e-mail. 

35. After consultation with the General Counsel, a new head of internal audit at Avon 

asked two members of the audit team that had conducted the 2005 A von Products China internal 

audit to do follow-up work looking into expenses at the China Corporate Affairs group and to 

confirm that the remedial measures had been implemented. Based on their review, the two 

internal auditors advised the new head of internal audit that they had concluded that problematic 

payments and inadequate recordkeeping continued at A von Products China and that the measures 

had not been implemented. No remedial measures were implemented in response to the review. 

36. In May 2008 , the Avon Products China Corporate Affairs executive who had been 

terminated wrote to Avon' s Chief Executive Officer alleging improper payments to Chinese 

government officials over several years in the form of meals, entertainment, travel, sponsorship 

10 




of cultural events, gifts of art, and cash. The letter was forwarded to A von's Legal Department 

and, in tum, to the audit committee of Avon's board of directors. The audit committee 

commenced an internal investigation into the allegations and, in October 2008, A von informed 

the Commission and the Department of Justice. 

37. As a result of its internal investigation, Avon subsequently initiated substantial 

remedial processes and procedures, on a global basis. A von also instituted worldwide FCP A 

training for all employees of the company. 

Representative Categories of Improper Payments 

38. From at least 2004 through the third quarter 2008 , Avon Products China provided 

cash and things ofvalue to government officials, government entities, and state-owned media. 

Avon Products China's books and records were created in a manner that would not allow a 

reviewer to ascertain the specific government official or entity that received the payment or the 

purpose for which the payment was made. In some instances, the documentation for the 

payments contained almost no details . 

39. Altogether, Avon Products China provided approximately $8 million dollars in 

cash and things ofvalue to Chinese government officials during the period from 2004 through 

the third quarter 2008. The following are examples: 

40. During the period, Avon Products China employees made approximately 9,600 

payments totaling $1.65 million for meals and entertainment involving government officials. 

The majority ofthese payments were for meals and entertainment expenses under $200 per 

occurrence, without indication as to who atten~ed the meal/entertainment or the business purpose 

of the expense. One expense report submitted by a Corporate Affairs associate in May 2007 

listed $8,100 for entertainment of government officials in a two-month period during the time 

that A von Products China was negotiating a certification of apparel for sale in China. Another 

11 




expense of$4,147 in Apri l 2007 paid for a Pearl River cruise for 200 State and Regional AIC 

officials during a conference of officials with responsibility for the oversight of A von Products 

China's direct selling business license. During the cruise, Avon Products China also placed free 

products in each official's hotel room. In January 2008, an expense of$4,808 was incurred to 

"accompany government officials" in Guangdong Province during a period in which A von 

management met with the Governor of that Province. 

41. A von Products China employees also provided gifts totaling $400,000, in addition 

to at least $1.7 million worth of Avon products. Approximately $70,000 to 90,000 ofthat total is 

attributable to tickets or corporate boxes at the China Open tennis tournament, given to AIC and 

other government officials in 2004 and 2005 "to thank them for their support." During these 

years, Avon Products China was a corporate sponsor of the tournament and received the tickets 

as part of that sponsorship . A von Products China also provided government officials with gifts 

that included Louis Vuitton merchandise, Gucci bags, and Tiffany pens. 

42. During the period, A von Products China employees provided approximately $1 

million in payments for travel by government officials. Half of that amount was spent on the 

following trips: (1) $93,000 for an eighteen-day, all-expenses-paid trip to the United States by 

Guangdong Food and Drug Administration officials, in December 2005 and January 2006, that 

included one half-day of visiting Avon's research facilities in Suffern, NY; (2) $328,000 for 

three-to-five days of travel by more than 200 AIC officials to visit Avon Products China's 

Guangzhou property, with one half-day at that property and the remainder of the time spent 

touring resort areas in southern China; (3) $23,000 for travel and expenses for government 

journalists to attend the ceremony at which A von Products China launched its direct selling test; 

and (4) $22,000 for a trip by a provincial governor to Hong Kong without any Avon business 

12 




purpose. A von Products China also sponsored trips ofAIC officials to Europe during this 

period. However, no records can be located that show the expenses for these trips. 

43. Employees at A von Products China also made payments totaling $1.5 million to 

vendors and consultants, with knowledge that a significant portion of the funds would in tum be 

paid to government officials. Ofthat amount, approximately $1.2 million was paid to Consulting 

Company 1 to provide government relations and media crisis management. The payments to 

Consulting Company 1 were often made in cash by Avon Products China's V.P. in Corporate 

Affairs, who then would submit, or would have a subordinate submit, false expense reports for 

reimbursement. 

44. Employees of A von Products China made a cash payment of approximately 

$12,500 to an AIC official in Hunan Province to avoid a fine. The official told A von Products 

China that the AIC did not have a bank account and directed A von Products China to wire the 

funds to his personal bank account, structured in several deposits to avoid Chinese bank 

reporting regulations. 

45. A von Products China's employees also made payments to government officials 

for conferences, and related meals, gifts, and entertainment, in 150 instances aggregating 

$143,000. Records for these expenses do not indicate who attended the conferences, or the 

business purpose ofthe expenses. Approximately $15,000 of this amount was for expenses 

related to government journalists' attendance at an A von Products China media event. 

46. On occasion, an AIC official would request that Avon Products China sponsor an 

activity in lieu of paying a fine related to the direct selling or Beauty Boutique business. 

Similarly, rather than having a news story appear in the Economic Information Daily alleging 

that Avon Products China had unlawfully recruited students to be sales promoters, Avon 

13 




Products China, at the behest of the publication's editor, paid $81,000 to sponsor an article 

contest at that publication. 

47. Employees at A von Products China also made payments to state-owned media to 

purchase advertising, in order to avoid negative news articles. During the relevant period, A von 

Products China made approximately 16 purchases of advertising totaling $41,000 to avoid 

negative press. 

48. Avon Products China's employees also paid for association fees , at the request of 

Chinese government officials. These payments totaled approximately $5,000 and were often 

made in cash. 

49. During the relevant period, employees at A von Products China also made 

payments of approximately $740,000 that lacked documentation sufficient to place the payments 

in any of the exemplary categories set forth herein. 

FIRST CLAIM FOR RELIEF 


Corporate Books and Records 


[Violations of Section 13(b)(2)(A) ofthe Exchange Act, 
15 U.S.C. § 78m(b)(2)(A)] 

50. Paragraphs 1 through 49 are realleged and incorporated by reference. 

51. Section 13(b )(2)(A) of the Exchange Act requires each issuer with securities 

registered with the Commission pursuant to Section 12 [15 U.S.C . § 78!] to make and keep 

books, records, and accounts, which, in reasonable detail , accurately and fairly reflect the 

transactions and the dispositions of the assets of the issuer. 

52. As described above, A von, through its officers, employees, and agents, fai led to 

keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its 

transactions and the disposition of its assets. 

14 




53. By reason of the foregoing, Avon violated Section 13(b )(2)(A) of the Exchange 

Act (1 5 U.S.C § 78m(b)(2)(A)]. 

SECOND CLAIM FOR RELIEF 


Internal Controls 


[Violations of Section 13(b )(2)(B) ofthe Exchange Act, 
15 U.S.C. § 78m(b)(2)(B)] 

54. Paragraphs 1 through 49 are realleged· and incorporated by reference. 

55 . Section 13(b)(2)(B) of the Exchange Act requires issuers of registered securities 

to devise and maintain a system of internal accounting controls sufficient to provide reasonable 

assurances that, among other things, transactions are executed in accordance with management's 

general or specific authorization; transactions are recorded as necessary to permit preparation of 

financial statements in conformity with generally accepted accounting principles or any other 

criteria applicable to such statements; transactions are recorded as necessary to maintain 

accountability for assets ; and access to assets is permitted only in accordance with management's 

general or specific authorization. 

56. A von fai led to devise and maintain such a system of internal controls and was 

therefore unable to record the nature and purpose of, or prevent, the provision of cash and things 

of value to government officials by A von Products China, as set forth above. 

57. By reason of the foregoing, Avon violated Section 13(b)(2.)(B) ofthe Exchange 

Act [15 U.S.C. § 78m(b)(2)(B)]. 

15 




PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that this Court enter judgment: 

a. Permanently enjoining Defendant Avon from violating Sections 13(b)(2)(A) and 

13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]; 

b. Ordering Defendant Avon to disgorge ill-gotten gains wrongfully obtained as a 

result of its illegal conduct described herein, plus prejudgment interest thereon; and 

c. Granting such other relief as this Court may deem just and appropriate. 

Dated:~~{ \1 ,2014 

Respectfully submitted, 

Attorneys for Plaintiff 
Securities and Exchange Commission 
100 F Street, N.E. 
Washington, D.C. 20549 
Telephone: (202) 551-4962 (Friestad) 
Facsimile: (202) 772-9286 
E-Mail: [email protected] 

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mailto:[email protected]