Two Former Executives Of China Subsidiary Of International Multi-Level Marketing Company Charged In Manhattan Federal Court For Scheme To Pay Bribes And Circumvent Internal Accounting Controls
Former Head of China Subsidiary Also Charged With Perjury and Destruction of Records in Federal Investigations
Geoffrey S. Berman, the United States Attorney for the Southern District of New York (“SDNY”), Assistant Attorney General Brian A. Benczkowski of the Criminal Division of the United States Department of Justice (“DOJ”), and William F. Sweeney Jr., Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of charges against YANLIANG LI, a/k/a “Jerry Li,” the former head and managing director of the China subsidiary (the “China Subsidiary”) of a publicly traded international multi-level marketing company (“Company-1”), and HONGWEI YANG, a/k/a “Mary Yang,” the former head of the external affairs department of the China Subsidiary, in connection with a scheme, from in or about 2007 through in or about February 2017, to pay bribes and circumvent Company-1’s internal accounting controls in violation of the Foreign Corrupt Practices Act (“FCPA”). LI and YANG are each charged with one count of conspiring to violate the FCPA. LI is also charged with one count of perjury and one count of destruction of records in federal investigations. LI and YANG remain at large. The case is assigned to U.S. District Judge Vernon S. Broderick.
U.S. Attorney Geoffrey S. Berman said: “Li and Yang, both former top executives of a global multi-level marketing company headquartered in Los Angeles, allegedly approved the extensive and systematic payments of bribes to Chinese government officials over a ten-year period to promote and expand the company’s business in China and to avoid regulatory scrutiny in China. Moreover, in an effort to obstruct the Government’s investigation into this widespread corruption scheme, Li lied under oath about the bribe payments when interviewed by the SEC and also destroyed evidence. This case signifies this Office’s commitment to ensuring that companies operating in the U.S. do not gain an unfair advantage through corruption and illegal bribes of foreign officials.”
Assistant Attorney General Benczkowski said: “Today’s charges further demonstrate that the Department of Justice will hold accountable those who undermine the integrity of our financial markets by paying bribes and circumventing the internal controls of publicly traded companies. Furthermore, these charges send a clear message that committing perjury and destroying records to thwart SEC and grand jury investigations will not be tolerated.”
According to the allegations in the Indictment unsealed today in Manhattan federal court:
Relevant Persons and Entities
Company-1 was a publicly traded multi-level marketing company that sold health care, personal care, and other products in more than 90 countries around the world, including China. Company-1 was headquartered in Los Angeles, California, and its shares traded on the New York Stock Exchange. Company-1 conducted business operations in China through a group of wholly owned subsidiaries based in China (collectively, the “China Subsidiary”).
Company-1 operated as a multi-level marketing business, including in the United States, but multi-level marketing was prohibited under Chinese law. Chinese law did, however, permit a company to engage in “direct selling” – selling a company’s products through independent sales representatives – subject to certain requirements. In particular, as relevant here, before engaging in direct selling in any Chinese province, Chinese law required a company to obtain a direct-selling license from national authorities and local authorities in that province. The China Subsidiary received its first direct-selling license in or about March 2007, and subsequently received additional direct-selling licenses for other Chinese provinces. By in or about 2016, the China Subsidiary was responsible for approximately 20 percent of Company-1’s worldwide net sales, which exceeded $4 billion.
The China Subsidiary’s external affairs department (“EA”) was responsible for interfacing with Chinese governmental agencies and Chinese media entities, including Chinese government-owned media entities, on behalf of Company-1 in China. EA employees frequently entertained Chinese government officials at meals and other events and provided gifts to Chinese government officials. Between in or about 2007 and in or about 2016, the China Subsidiary reimbursed EA employees more than $25 million for entertaining and gift-giving to Chinese Government officials.
From in or about 2004 through in or about December 2007, LI was the director of sales and/or sales vice president at the China Subsidiary. From in or about December 2007 through in or about May 2017, LI was the managing director of the China Subsidiary, where LI was primarily responsible for many of the China Subsidiary’s day-to-day operations, including sales. LI was Company-1’s most senior executive in China. From in or about February 2006 through in or about May 2017, YANG was the head of EA. LI was YANG’s direct supervisor.
Various Chinese provincial and central government officials at the Ministry of Commerce (collectively, “MOFCOM”) were responsible, at least in part, for issuing licenses required for companies, such as the China Subsidiary, to conduct direct selling in China. Various Chinese provincial and central government officials of the State Administration for Industry and Commerce (collectively, “AIC”) were responsible, at least in part, for enforcing compliance with Chinese laws applicable to direct-selling companies, such as the China Subsidiary. AIC had the authority to conduct investigations into direct-selling companies and to impose fines and other penalties against direct-selling companies, such as the China Subsidiary, that it deemed not to be in compliance with applicable laws.
The Scheme to Pay Bribes and Circumvent Internal Accounting Controls
From at least in or about 2007 through in or about February 2017, LI, YANG, and others participated in a scheme to pay bribes and to circumvent Company-1’s internal accounting controls. The scheme involved, among other things, bribing Chinese government officials for the benefit of Company-1, obtaining reimbursements from Company-1 relating to the illicit bribes through fraudulent reimbursement requests, and circumventing Company-1’s internal accounting controls that were intended to prevent bribery and fraud.
More specifically, LI, YANG, and others paid and agreed to pay bribes to Chinese government officials, including MOFCOM officials, AIC officials, and officials of a media company owned by the Chinese government, for the purpose of obtaining, retaining, and increasing Company-1’s business in China by, among other things, (1) obtaining and retaining the China Subsidiary’s licenses to operate as a direct-selling enterprise in provinces throughout China, (2) corruptly influencing Chinese governmental investigations into the China Subsidiary’s compliance with Chinese laws applicable to direct-selling enterprises, and (3) corruptly influencing Chinese state-owned and state-controlled media for the purpose of suppressing negative media reports about the China Subsidiary.
In order to carry out the scheme, LI, YANG, and others obtained reimbursement for the bribes they paid to Chinese officials from the China Subsidiary through fraudulent expense claims designed to conceal the true nature of the expenditures at issue. In doing so, LI, YANG, and others circumvented Company-1’s internal accounting controls related to EA’s expenditure on gifts and entertainment for Chinese government officials. These internal accounting controls, among other things, prohibited the payment of bribes, established limits on the value, frequency, and nature of expenditures on government officials, and required EA employees to provide receipts and other specific information, including the names of the government officials involved, in order to obtain approval and reimbursement for their expenditures. LI, YANG, and others agreed to, and did, submit and approve fraudulent reimbursement requests, obtain reimbursement for those fraudulent requests, and conceal their fraud from Company-1’s internal audit department.
In or about 2013, the U.S. Securities and Exchange Commission (the “SEC”) opened a formal investigation into Company-1 for violations of the federal securities laws. On or about October 20 and 21, 2016, LI testified under oath before the SEC in New York, New York, in connection with the SEC’s investigation of Company-1.
During his sworn testimony before the SEC, LI was asked whether he had offered any payment to any government officials at MOFCOM or AIC, and whether he was aware of any such payments offered by anyone at the China Subsidiary. In response, LI, in sum and substance, falsely denied having knowledge of the China Subsidiary’s employees paying bribes or circumventing Company-1’s internal accounting controls.
During LI’s sworn testimony before the SEC, SEC staff also played for LI audio recordings of LI, including (a) a recording of a conversation from in or about 2006 in which LI and YANG discussed LI’s approval of giving “red envelopes” – i.e., cash gifts – to AIC officials, and (b) a recording of a conversation from in or about March 2007 in which LI and YANG agreed to making bribe payments of 35,000 yuan to various Chinese government officials, including 10,000 yuan to an official whom LI identified as an AIC deputy director. In response to questions posed to him by SEC staff regarding these recordings, LI, in sum and substance, again falsely denied having knowledge of the China Subsidiary’s employees paying bribes or circumventing Company-1’s internal accounting controls.
The SEC also asked LI whether he had a personal email account, and whether he used any email account other than his Company-1 email account. LI falsely stated, “No,” in response to both questions. In truth and in fact, LI had a personal email account (the “LI Gmail Account”), LI had used the LI Gmail Account throughout 2016, and LI had sent multiple emails from the LI Gmail Account approximately 16 days prior to his testimony before the SEC. LI had used the LI Gmail Account for, among other things, correspondence related to his work at the China Subsidiary.
Destruction of Records in Federal Investigations
In addition to the SEC’s investigation into Company-1, in or about 2013, a federal grand jury investigation in the Southern District of New York relating to Company-1 was also initiated.
LI received multiple notices from Company-1 attorneys informing him of his obligation to retain all Company-1 documents dating back to at least January 1, 2007, in connection with, among other things, pending U.S. governmental investigations and potential litigation. Those directives were initially sent beginning in 2012 and remained in place up to and including at least through February 2017. On or about January 20, 2017, Company-1 stated, in a public filing with the SEC, that, in sum and substance, the SEC had requested documents and other information related to Company-1’s anti-corruption compliance in China; Company-1 was undertaking its own review of that subject; and Company-1 had discussed these matters with the United States Department of Justice (the “DOJ”). LI received emails in or about late January 2017 that informed him of the pending SEC and DOJ investigations.
On or about February 11, 2017, LI was informed he would be interviewed by Company-1 attorneys in connection with an internal investigation into potential misconduct at the China Subsidiary. A few days later, on or about February 17, 2017, LI installed an application (the “Wiping Application”) onto the laptop that Company-1 had issued to him (the “LI Laptop”). The Wiping Application enabled a user to erase files in a manner that would render the deleted files unrecoverable. That same day, LI utilized the Wiping Application to delete approximately 200 files from the LI Laptop.
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LI, 51, a citizen of China, and YANG, 51, a citizen of China, were each charged with one count of conspiracy to violate the FCPA, which carries a maximum sentence of five years in prison. LI was also charged with one count of perjury, which carries a maximum sentence of five years in prison, and one count of destruction of records in federal investigations, which carries a maximum sentence of 20 years in prison. The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentences would be determined by a judge.
Mr. Berman and Mr. Benczowski praised the outstanding work of the FBI and also thanked the SEC for its assistance and cooperation in this investigation.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force and the FCPA Unit of the Fraud Section of DOJ’s Criminal Division. Assistant United States Attorneys Joshua A. Naftalis and Scott A. Hartman, and Trial Attorney Jason Manning of the FCPA Unit, are in charge of the prosecution.
The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
 As the introductory phrase signifies, the entirety of the texts of the Indictment and the descriptions of the Indictment set forth below constitute only allegations, and every fact described should be treated as an allegation.