Herbalife Nutrition, Ltd: Buying Official Favors, Booking Business Expenses

In the Herbalife Nutrition, Ltd FCPA case, the company agreed to pay more than $67 million to the Securities and Exchange Commission to settle charges of false accounting records and failed controls surrounding payments to Chinese officials. The business objectives were concrete: obtain sales licenses, influence government investigations and remove negative media coverage. For an insider who knew why a payment was made, the travel and entertainment entry told only the story the company wanted on its books.

Herbalife was a U.S.-based, publicly traded global nutrition company operating through wholly owned subsidiaries in China. In its criminal deferred prosecution agreement under the Foreign Corrupt Practices Act, announced on August 28, 2020, the company admitted a scheme running from 2007 through 2016 to falsify its books and records and provide corrupt payments and benefits to Chinese government officials. The Justice Department’s account of those admissions connects the local business decisions to the false records maintained by the parent.

The civil agreement included more than $58.6 million in gains Herbalife agreed to give up. The Securities and Exchange Commission’s New York Regional Office investigated the civil action with assistance from its FCPA Unit, while the FBI’s New York Field Office investigated the criminal case.

The Direct-Selling License Was the Business

Herbalife China provided corrupt payments and benefits while its first direct-selling license was pending. According to the company’s admissions in its deferred prosecution agreement, its Chinese operations provided payments and benefits in late 2006 and early 2007 to officials who included those responsible for awarding that license. The company falsely recorded the expenses at the same time.

The license mattered because it governed access to the direct-selling business. The later executive indictment described licenses allowing the company to operate as a direct-selling enterprise in provinces throughout China. In that setting, the official deciding whether to issue a license held a commercial decision that sales staff could not make for themselves.

A restaurant receipt can show the price of a meal while leaving out the license decision behind it. In Herbalife’s case, the admitted purpose of the benefits supplies that missing context. We connect the proposed benefit to the decision the recipient could make, then to the people who authorized and recorded the expense.

The company’s admissions also put a senior Herbalife officer inside the accounting story. Around the first-license period, that officer suggested to a senior China executive that personnel falsify expense-reimbursement documents connected to entertaining Chinese officials. The instruction to change the paperwork came from high in the business. We would follow that instruction as closely as the money: the person explaining how to disguise an expense has supplied evidence of why it needed disguising.

Payments to Influence Investigations and News Coverage

The company’s admitted scheme also targeted government investigations into Herbalife China’s compliance with Chinese laws. The license payments aimed to secure permission to sell, while the investigation payments aimed to influence scrutiny of the business already operating.

State-owned and state-controlled media supplied another pressure point. Under its deferred prosecution agreement, Herbalife admitted improperly influencing those outlets to remove negative reports about its China operations. We see the absurdity: buy influence over the coverage, then book a business expense. Reputation management, apparently.

For someone in External Affairs, these were different assignments with different desired results. A license application, an investigation and an unwelcome news report each identify what management wanted changed. Connecting that assignment to a payment request or expense approval gives the accounting entry a meaning its label conceals.

The Securities and Exchange Commission’s separate account likewise tied payments, meals, gifts and other benefits to these objectives. Its announcement of the civil action described managers asking employees to falsify expense documents to conceal improper payments. The expense process supplied a respectable description for the influence the business was buying.

How the Payments Became Business Expenses

Herbalife admitted in its deferred prosecution agreement that it continued recording certain improper payments and benefits as travel and entertainment expenses. It also maintained false Sarbanes-Oxley sub-certification letters in its books, records and accounts. The false description therefore appeared in both expense records and the company’s certification paperwork.

This is why books and records rules under the Foreign Corrupt Practices Act matter to the person who saw an ordinary-looking reimbursement pass through finance. The company’s criminal admissions identify the improper benefit and its false accounting treatment together. A payment approval can connect the person seeking influence with the person making the expense look routine.

In a multinational business, local operations authorize and record transactions while the parent supervises management and consolidates accounts. Foreign subsidiary accounting connects those layers. For Herbalife, the admitted false expenses and sub-certifications put the China transactions inside the parent’s accounting story.

According to the Securities and Exchange Commission’s account of its order, executives received reports of high travel and entertainment spending in China and violations of internal anti-corruption policies, yet failed to detect and prevent the improper benefits and false expense reports. The agency also found that Herbalife failed to maintain sufficient internal accounting controls.

The warning had reached people with authority. We would want to understand what those reports said, who received them and what happened to the spending afterward. For an internal auditor or compliance employee, that response can be the part of the case they know best.

What the Executive Indictment Alleged

The separate criminal indictment concerned the former head and managing director of the China subsidiary and its former External Affairs head. The Justice Department’s November 14, 2019 announcement described allegations that they and others paid bribes to obtain and retain direct-selling licenses, influence investigations and suppress negative media reports.

Prosecutors alleged that the executives and others obtained reimbursement for bribes through false expense claims designed to conceal the payments’ true nature. That allegation identifies a practical connection an employee may recognize: the person who paid the official also needed a way to get the money back from the company.

The indictment separately alleged that the former managing director gave false sworn testimony to the Securities and Exchange Commission. It also alleged that, knowing about the federal investigations, he installed a wiping application on his company laptop and erased 200 files so they would be unrecoverable.

When the Warning Exists but the Payments Continue

Fresenius Medical Care illustrates a similar gap between the payment and its accounting description. The Securities and Exchange Commission’s administrative order found that employees at a Saudi subsidiary cashed company checks and handed the cash to its general manager. The transactions were falsely recorded as project marketing expenses and collection commissions in accounts that Fresenius consolidated.

The Journal of Forensic and Investigative Accounting’s 2022 study draws out the failure behind those false entries. Identifying a suspicious transaction and stopping it are different achievements:

We look at the response to a warning alongside the payment itself. For someone who reviewed Herbalife’s expenses, the gap between what management learned and what it stopped may be the most revealing part of the accounting trail.

What an Insider Can Connect

The most useful whistleblower evidence connects the official decision, the benefit and the explanation entered in the books. In this case, the relevant business decisions involved sales licenses, government investigations and state-media coverage. The accounting trail included reimbursement claims, travel and entertainment entries and certification letters.

Different employees may know different parts of that sequence. An External Affairs employee may know what an official was being asked to do, while someone in finance may know who requested a false description. An auditor may know that management received a warning and continued approving the same kind of expense.

We work with the connection you can explain: what the payment was meant to accomplish, how the paperwork described it and who knew the difference. Your knowledge of the business can turn an unremarkable expense entry into evidence of a decision someone wanted concealed.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Foreign Corrupt Practices Act enforcement has separate agency whistleblower programs, and we assess the relevant FCPA whistleblower reward program with you.

You Know What the Expense Was For

If you know which approval, investigation or news report sat behind a supposedly ordinary expense, speak to one of our Whistleblower Experts about what that expense really bought. We connect your knowledge of the China business to the payment and accounting evidence, and bring in FCPA whistleblower lawyers who understand foreign-subsidiary records and management approvals. We work with you to build your strongest FCPA whistleblower case and stay beside you throughout it.