* Four Avon employees asked to take administrative leave
* Issue related to 2008 China probe, which is ongoing
* Probe now includes Latin America - WSJ
* Shares close down 8 percent
(Adds lawyer's comments, details, updates share activity)
By Jessica Wohl and Donny Kwok
CHICAGO/HONG KONG, April 13 Avon Products Inc
(AVP.N), 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
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
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 (BAES.L), 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 (DAIGn.DE),
Avery Dennison Corp (AVY.N) and telecommunications company
UTStarcom (UTSI.O), 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 (RIO.AX) (RIO.L) 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.