Herbalife, a nutritional supplement company that one hedge fund manager has accused of being a pyramid scheme, has been charged by the Securities and Exchange Commission with violating the Foreign Corrupt Practices Act (FCPA) by making bribes to Chinese government officials.

The SEC complaint said that the firm needed to get a direct selling license from the Chinese government in 2006. The agency said that Herbalife was able to do so mainly by bribing officials. Among various communications that the SEC provided to support its claim was a Jan. 10, 2007, phone call in which a managing director asked the external affairs director whether Herbalife China had been "taken care of." The managing director also asked, "We have gotten the money to [Official 1], haven't we?" to which the external affairs director said, "Of course we have," which prompted the managing director to say, "The money works well on him."

In another instance, a March 2007 call, the managing director and external affairs director were talking about paying certain provincial officials; the managing director asked if they should perhaps give more, and the external affairs director said this would be fine but the official "guarantee this...to be effective."

The SEC said that the company continued using bribes to influence Chinese government officials for years after that—giving them not only cash but also expensive meals, alcohol, karaoke, and luxury gifts. This was partially to quash investigations into the company. For instance, on Aug, 8, 2012, the managing director and external affairs director discussed an investigation in Nanjing into their company; the external affairs director told the managing director that "a Chinese government official had helped stop an investigation involving Herbalife China" and that the external affairs director "was going to obtain the interview records and police report for the investigation." The managing director said they should thank the official, and the external affairs director responded that she already did so. The managing director wanted to up the gratitude shown, and said that the fine the company would have paid should instead be sent to the official. The external affairs director, according to the SEC, warned the managing affairs director not to discuss this over the phone.

The company, said the SEC, hid the alleged bribes through fake invoices and false expense reports to get reimbursed for improper benefits they provided to government officials. The complaint tells of a conversation about whether the purchase of an expensive Prada bag should be covered via a fake meal invoice or a fake gift invoice as the best way to avoid internal audit scrutiny; during this talk, there was also a complaint that the usual fake invoice provider was no longer available and other sources could not provide enough fake invoices. The SEC noted that, because these bribes were passed off as legitimate expenses, "these falsified and/or fake expenses recorded by Herbalife China were incorporated into Herbalife’s financial statements."

“Herbalife’s inadequate internal accounting controls allowed an environment of corruption to exist in its Chinese subsidiaries for more than a decade,” said Sanjay Wadhwa, senior associate director of the SEC’s New York regional office.  “A strong system of internal controls is vital for issuers, especially those with operations around the globe.”

Herbalife agreed to cease and desist from committing violations of the books and records and internal accounting controls provisions of the FCPA.  Herbalife agreed to pay disgorgement of more than $58.6 million and prejudgment interest of more than $8.6 million, and to report on the status of its remediation and compliance measures for a three-year period.