THE BLOG
02/18/2014 03:04 pm ET Updated Apr 20, 2014

Avon's Alleged Foreign Bribes Spell Big Trouble

The image of the serene Avon lady calling on charming housewives to sell beauty products is being replaced by a picture of hardened Avon executives across the developing world paying bribes to build their business.

This is not a trivial matter. Avon is in trouble.

Both the U.S. Department of Justice and the Securities and Exchange Commission (SEC) are deep into investigations of violations by Avon Products Incorporated of the Foreign Corrupt Practices Act (FCPA), which makes it a crime for a U.S. company to bribe foreign government officials. The focus is mainly on Avon's dealings in China.

Usually, companies being investigated reach a deal with the authorities where they pay some fines to resolve matters. But, in this case it looks as if the negotiations on a settlement are in rough waters.

Avon has just announced that it may have to shell out a total of around $132 million to reach a settlement.

Grand Jury

But, if a story by Wall Street Journal reporters is accurate, then this may be wishful thinking. The Journal's story stated, "Federal prosecutors investigating whether U.S. executives at broke foreign-bribery laws have presented evidence in the probe to a grand jury, people familiar with the matter said."

For many years the U.S. authorities were content to reach financial settlements of these kinds of cases that allowed the bribe-paying corporation to evade a clear admission that it was guilty of a crime. Mostly, the Justice Department has been willing to file civil, rather than criminal, charges in these cases.

But, times are changing and the authorities are getting tougher. Avon may find that it becomes a model of the ramped-up zeal of the prosecutors. Soon after taking office as head of the SEC last summer, former New York prosecutor Mary Jo White said defendants would no longer be allowed to settle some cases while "neither admitting nor denying" wrongdoing. At the time The New York Times noted that the SEC had been criticized for being too lenient with some major companies.

A major reason why companies have long been so unwilling to admit guilt is that they have feared this could be used against them in law suits. In fact, many companies have encouraged the U.S. Chamber of Commerce to lobby to soften the FCPA, arguing that U.S. firms are often disadvantaged as foreign rivals pay bribes. The truth is that the governments of an increasing number of leading industrial countries are either cooperating with the U.S. authorities in providing evidence for prosecutions, or initiating their own actions. As Avon may well find out, the costs of building business through bribery are rising rapidly.

The Department of Justice is keen to be seen as a tough cop. It has been criticized in the U.S. Congress, for example, of being too willing to settle major corporate cases and refraining from criminal prosecutions. If it brought criminal charges against Avon then this would send a sharp signal to large multinational corporations everywhere.

The pressure right now is on Avon's leadership -- it must not only find a way to resolve its problems with the U.S. authorities, which may force it to admit to possible FCPA violations in a range of countries, but it will need to find ways to bolster its damaged public image -- this may be its toughest challenge.