Herbalife Nutrition Ltd. was a California-based multi-level marketing corporation that sold health care, personal care, and other products in more than 90 countries around the world, including China. While multi-level marketing is legal in the United States, it is prohibited under Chinese law, which allows only "direct selling," i.e. selling a company's products through independent sales representatives. Herbalife operated in China through a group of wholly-owned subsidiaries--Herbalife (Shanghai) Management Co., Ltd.; Herbalife (China) Health Products Ltd.; Herbalife (Jiangsu) Health Products Ltd.; and Herbalife NatSource (Hunan) Natural Products Co. Ltd.--collectively known as Herbalife China. Throughout the relevant period, Herbalife China’s financial statements were consolidated with those of Herbalife.
According to the documents in this case, from 2006 to 2016, Herbalife China engaged in a scheme to offer payments and other benefits to Chinese government officials in connection with obtaining direct sales licenses, curtailing government investigations of Herbalife China, and removing negative coverage of Herbalife China in state-owned media. Specifically, between 2012 and 2016, Herbalife China employees, including Herbalife China’s then-Managing Director, Yanliang Li, aka “Jerry Li,” and Herbalife China’s then-Director of External Affairs, Hongwei Yang, aka “Mary Yang,” provided improper benefits of cash, gifts, travel, alcohol, meals, and entertainment to Chinese government officials. Even after receiving reports of high travel and entertainment spending in China and violations of Herbalife’s internal FCPA policies, certain Herbalife executives failed to detect and prevent improper payments and benefits and falsifications of expense reports. By 2016, Herbalife China was responsible for approximately twenty percent of Herbalife’s worldwide net sales, and in all, Herbalife obtained approximately $58.7 million in benefit as a result of these payments and gifts of over $7.2 million in connection with the scheme.
In a settled administrative proceeding initiated on August 28, 2020, the SEC ordered Herbalife to cease and desist violations of the books and records and internal controls provisions of the FCPA. Under the terms of the proceeding, Herbalife agreed to pay disgorgement of $58,669,993.00 plus prejudgment interest of $8,643,504.50 and to report the status of the company's remediation and implementation of compliance measures to the SEC for three years. The SEC noted the company's cooperation and remediation and agreed not to impose a civil penalty because a criminal penalty was imposed in the parallel DOJ action.
In a related proceeding, on August 28, 2020 the DOJ filed a single count Information in the Southern District of New York against Herbalife alleging conspiracy to violate the books and records provisions of the FCPA. On the same date, the company entered into a deferred prosecution agreement with the DOJ. Under the terms of the agreement, Herbalife agreed to pay a criminal fine of $55,743,093, which represents a 25% downward departure below the bottom of the U.S. Sentencing Guidelines range, and to self report to the DOJ for three years on the status and implementation of the company's enhanced anti-corruption compliance policies and procedures. The DOJ noted Herbalife's cooperation and remediation.
In related proceedings, both filed on November 14, 2019, the DOJ filed a three count indictment in the Southern District of New York against Li and Yang alleging (1) conspiracy to violate the anti-bribery and internal controls provisions of the FCPA, (2) perjury, and (3) destruction of records in a federal investigation, and the SEC filed a civil complaint against Li in the Southern District of New York alleging violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. Those actions are ongoing.