Mud sticks

Avon exposes ugly side of doing business in China

Avon Products helps the plain look pretty. Now it is paying $135 million to US authorities for doing something similar in China. The New York-based cosmetics maker's local subsidiary disguised payments and gifts to officials in the People's Republic in order to win business and evade US graft controls. Avon has scrubbed itself clean, but the widespread belief that bribery pays in China still lingers.

An Avon employee cited in the US Department of Justice (DOJ) filing best explains the problem: "most of the time [we] have to fight in a muddy field, if we get on our hands some dirt, it is not our fault!". Using that oddly-worded logic, Avon's China business gave out Gucci handbags, cash, dinners and holidays to Macau between 2004 and 2008. An employee told Avon's internal auditors that officials would "sever their ties" with the company if it kept records.

Behaviour once thought de rigeur in China is coming under scrutiny. GlaxoSmithKline, the UK drug-maker, paid a £297-million fine in September over bribes in China, even though the health care market remains riddled with corruption. Investment banks like JPMorgan are being probed by US regulators over their hiring of family members of officials. Yet the fear is that being good isn't compatible with being successful. Avon's revenue from China has slumped since 2010, two years after it started its own investigations.

One worrying twist in the Avon case is that the DOJ honed in on money paid to state-owned media as sponsorship, to kill a negative story. In China, paying money to journalists and their employers, who are often agents of the state, remains commonplace. But it could cause big trouble if authorities seize on payments as an attempt to bribe officials.

The question is whether China is really any closer to cleaning up its own act. A good test would be if Chinese authorities now follow the lead of the US and set out to punish the officials who accepted Avon's various gifts. If not, it could suggest the war on graft is only skin deep.