Avery Dennison Corp: The Sightseeing Disappeared From the Invoice

The Avery Dennison Corp FCPA case included an agreement to pay a $200,000 civil penalty over Securities and Exchange Commission allegations that overseas operations concealed kickbacks, sightseeing and gifts in their accounts. A distributor’s profit margin allegedly funded a payment to a government customer’s project manager, while a revised travel invoice hid sightseeing among rooms, meals and transportation. The allegations also reached customs payments disguised as employee travel expenses at an acquired Indonesian warehouse.

The commission announced the settlement on July 28, 2009. This settlement concerned the accounting provisions of the Foreign Corrupt Practices Act, with allegations reaching from Avery China’s Reflectives Division to customs payments at acquired businesses. At the time, Avery was a Pasadena-based manufacturer of self-adhesive materials, office products, labels and graphics imaging media.

Reflective Materials and the Officials Who Shaped the Contracts

Reflective materials go into road signs, printing and emergency vehicle markings. The SEC’s administrative order explains why the Chinese government mattered to that business: products used in road communications and safety needed certification from an authorized government entity. The Wuxi Institute, part of the Ministry of Public Security, helped formulate project plans, draft specifications and test pilot projects.

That put the institute close to both product approval and contract awards. According to the SEC, Avery China’s Reflectives Division sought business through it, including a digital license plate project and new graphics for police cars. The order alleged that the company hired a former institute official whose wife was an official in charge of those projects, and that a sales manager bought shoes for institute officials during another business visit.

The police-car business supplied the clearest example of how a product price could carry a hidden payment. The SEC alleged that the division’s national manager secured contracts to install graphics on approximately 15,400 police cars by agreeing to raise the sales price artificially and refund the increase to the institute as a consulting fee. The order alleged that he understood officials would benefit from at least part of the refund.

The contracts produced $677,494 in sales, according to the order. The SEC put the proposed kickback at approximately $41,138 and said Avery’s Asia Pacific Group discovered the arrangement before that payment went out. We see the absurdity in the proposed fee: the officials’ benefit was to be built into the government’s own purchase price.

How a Distributor’s Margin Allegedly Funded a Kickback

The SEC described a different arrangement in which a distributor said it had paid the promised kickback. It alleged that during May and June 2005, an Avery China sales manager negotiated a sale to a state-owned end user and agreed to pay its project manager a commission to secure the sale. According to that account, he then asked a distributor to fill the order and fund that payment from its own profit margin.

According to the order, the distributor claimed to have paid approximately $24,752 to the project manager. The SEC alleged that Avery China booked the transaction as a sale to the distributor, although the sales manager had negotiated with the end user. The alleged arrangement gave the distributor two jobs: supply the product and supply the money for the official.

For a sales or finance insider, the connection is concrete. The customer’s project manager, the sales manager’s promise and the distributor’s margin explain a transaction that the customer name in the ledger alone would not. In the alleged arrangement, the paperwork changed who appeared to be buying the goods while the payment followed the actual buyer.

Another proposed kickback concerned Henan Luqiao, a state-owned enterprise. The SEC alleged that the Reflectives Division’s national manager approved a payment to an official there to secure a sales contract, but Avery China discovered the arrangement and stopped the promised payment.

The Sightseeing Stayed, the Expense Category Changed

The alleged travel and hospitality scheme depended on changing the paperwork after officials received the benefit. At a sales conference in a Chinese tourist destination in late 2005, the successor to the division’s national manager allegedly paid for government officials’ sightseeing. The SEC said he then asked his secretary to move the sightseeing costs into other expense categories and have the travel agency submit the revised invoice:

The order also described an earlier sightseeing trip in December 2002. According to the SEC, a salesman proposed it, the national manager approved it, and two reimbursement requests concealed its expenses, with one request altered along the way.

Someone who arranged the itinerary or handled the original invoice would recognize that difference. In the later episode, the alleged concealment required a manager’s instruction, a secretary’s involvement and a replacement invoice from the travel agency. The sightseeing disappeared from the bill. A convenient place for it to disappear.

Why Avery’s Controls Allegedly Missed the Next Payment

The Securities and Exchange Commission alleged that Avery’s accounts hid payments, gifts and sightseeing, and that its controls failed to ensure those benefits were properly recorded. Its books-and-records and internal-controls findings reached both the entries and the process that let them through. The distributor sale and revised travel invoice show why both questions matter: what the accounts said, and how a manager could get that account accepted.

Avery China was a wholly owned indirect subsidiary, overseen by Avery’s Asia Pacific Group. According to the order, discovery of the Wuxi arrangement in September 2004 prompted an internal review of the Reflectives Division and another China division, followed by Avery’s voluntary approach to SEC staff. Yet the order also described the later distributor and sightseeing episodes. Stopping an identified payment and preventing the next concealed payment were different jobs.

The same distinction appears in RAE Systems. In its non-prosecution agreement with the Justice Department, RAE admitted conduct involving cash advances and false expense descriptions supported by genuine receipts. Its account also described ineffective stop instructions and an internal audit that produced no findings or recommendations. An approved reimbursement can still hide what the money bought.

Acquired Businesses Allegedly Kept Paying Customs Officials

The acquisition problems involved separate operations and separate payment practices. In 2005, Avery integrated an acquired Indonesian contractor operating from a bonded zone. The SEC alleged that the contractor continued paying customs officials who regularly inspected its warehouse, using small daily petty-cash withdrawals recorded as an employee’s travel expenses.

The disguise was precise: the employee allegedly drew $10 a day to assemble the $300 needed each month. The order said the money funded payments of approximately $100 each to three customs officials. To an accountant, the entries looked like an employee’s travel spending. To someone at the warehouse, the recurring visitors supplied the missing explanation.

Paxar was another acquisition, completed in June 2007. The SEC said a whistleblower alerted Avery that September to Paxar Indonesia’s payments to customs and tax officials for bonded-zone licenses and to overlook regulatory violations. The order also alleged that the former general manager directed employees to fabricate invoices to conceal those payments.

According to the order, further review uncovered alleged payments through a customs broker in Pakistan and problematic payments in China. The order described payments before and after the acquisition, with approximately $51,000 paid after Avery bought Paxar. The alleged accounting problem extended beyond the original reflective-material sales.

The Profit the SEC Ordered Avery to Give Up

The administrative order required Avery to surrender $273,213 in profit, the same amount the SEC attributed to the distributor transaction. The order put sales from that transaction at $466,162. We see the scale of the incentive: the profit from this one sale exceeded the civil penalty for the case. The ordered repayment followed that profit back to the sale the alleged kickback secured.

What an Insider Adds to the Accounts

The Avery allegations connect ordinary work to facts an expense code can hide: who negotiated the sale, who approved the commission, what the itinerary included and why the warehouse needed petty cash. The Paxar discovery also came through a whistleblower, according to the SEC. You may know the purpose of a payment that someone else sees only as a travel expense or distributor sale.

Research gives that insider role a wider context. The 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, studied companies exposed to state False Claims Acts through state pension-fund ownership. It found a 5% to 9% reduction in the estimated likelihood of accounting fraud after exposure to those whistleblower provisions. In a smaller sample with internal-audit data, it found little evidence that increased audit spending, hours or staff explained the effect.

For separate fraud against the U.S. government, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. With evidence of foreign bribery or false corporate accounts, we work through the Foreign Corrupt Practices Act whistleblower options with you and bring in the right expertise for what you know.

You Know What the Invoice Left Out

If you know why a distributor gave up its margin, why sightseeing became room charges or why warehouse petty cash went to customs officials, speak with our whistleblower experts about the payment behind the paperwork. We build your case around the sales decisions, approvals and concealed benefits. We bring in FCPA whistleblower lawyers who understand overseas accounting cases and stay beside you throughout.