Nu Skin Settles Chinese Corruption Charges with SEC

The SEC was going after Nu Skin because One Million RMB (approximately $154,000) was transferred to a charity to obtain the influence of a high-ranking Chinese Communist party official to impact an on-going provincial agency investigation. Nu Skin China described the purpose of the payment to the charity in its books and records as a donation rather than an improper payment to obtain the Party Official’s influence. As a result of this conduct, Nu Skin US violated the internal controls and books and records provisions of the Foreign Corrupt Practices Act (“FCPA”).

In anticipation of this SEC action, Nu Skin submitted an Offer of Settlement to the SEC which they accepted.  These scammers seem to always walk away with just one more payment to a government official.

Here are the details of Nu Skins “charity” in China and their settlement in the US:

The laws and regulations applicable to direct selling in China (the “Direct Selling Laws”) prohibit the multi-level commission structure employed by Nu Skin US domestically (Maybe the US should prohibit their scam structure as well?). Instead, Nu Skin China has to consummate its sales primarily through retail stores, where its sales transactions are processed even if the products in question were promoted through offsite meetings. In addition, while Nu Skin China’s sales representatives receive performance-based salaries that are recalibrated periodically, they do not receive direct commissions based on the sales of other representatives they referred to the company.

Moreover, the Direct Selling Laws provide that before a direct selling business such as Nu Skin China can operate within a particular geographic area in China, the company must receive direct selling licenses at the national, provincial, and city levels. These direct selling licenses are conditioned on a number of factors, which typically include the business reputation of the applicant.

In 2013, sales representatives of Nu Skin China held an unauthorized promotional meeting in a city in which, at the time, Nu Skin China neither possessed a direct selling license nor had a physical store. Representatives of the province’s Administration of Industry and Commerce (“AIC”) discovered the meeting and initiated an investigation of Nu Skin China. Following the initial investigation, the AIC informed Nu Skin China that it had gathered enough information to support violations of the Direct Selling Laws against the company for the unauthorized activities of its sales representatives.

Nu Skin China personnel sprang into action and decided to initiate a charity project in the province in order to affect the outcome of the investigation. A Nu Skin China employee contacted the Party Official, who was his acquaintance, to suggest a charity located in the province. The Party Official had a pending request to Nu Skin China to facilitate obtaining college recommendation letters to U.S. universities from an influential U.S. person for his child. The Party Official proposed a charity, although at the time a branch of the charity had not yet been established in the province and it had no operations there. The Party Official, however, was associated with the entity that was responsible for establishing the charity in the province. Further, the provincial head of the AIC had previously reported to the Party Official.

A week later, the AIC informed Nu Skin China that the AIC intended to charge Nu Skin China and certain of its sales staff with Direct Selling Law violations and to impose a fine against the company in the amount of 2.8 Million RMB (approximately $431,088). In response, as reflected in an internal email, Nu Skin China informed the AIC of Nu Skin China’s desire to reach an outcome in which the company was not charged and to “donate some money instead of a fine.”

Senior personnel of Nu Skin China then made a decision to request that the Party Official personally intervene in the AIC matter in return for Nu Skin China making a One Million RMB donation to the charity identified by the Party Official.

Approximately one week later, the donation ceremony was held in the province. A top official of the AIC, the Party Official, and representatives of Nu Skin China all attended the donation ceremony. At the ceremony, the Party Official gave a speech praising Nu Skin China. Furthermore, the day after the donation ceremony, a Nu Skin China employee suggested contacting the Party Official to request that Nu Skin China not be named or fined by the AIC. Internal emails reflect that Nu Skin China believed that such action was “crucial for us to settle this issue [the AIC investigation] peacefully.”

Two days later, Nu Skin China received notice of the AIC’s final decision in which the company was neither charged nor fined.

SEC Settlement

It is hereby ORDERED that:

A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of $431,088, prejudgment interest of $34,600, and a civil money penalty in the amount of $300,000 to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment of disgorgement and prejudgment interest is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If timely payment of the civil money penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.

– Source

Nu Skin Settlement Conclusion

Nu Skin walks away with a fine and a promise that they will not do it again. I look forward to the day this company is actually held accountable for their corrupt actions and shutdown. That day is not today.