In May, Los Angeles-based direct sales and multilevel marketing company Herbalife Nutrition Ltd. declared that it had come to terms with the U.S. Department of Justice and the U.S. Securities and Exchange Commission (SEC) regarding allegations of corrupt payments by its Chinese subsidiary. The settlements were announced last month: a deferred prosecution agreement imposing a fine of more than $55 million, and a stipulated cease and desist order mandating over $67 million in disgorgement and interest. Two individuals—both Chinese nationals—were indicted last November for their role in the scheme, though neither has been apprehended.
China has prohibited multilevel marketing—arrangements in which an individual’s compensation is based on the number of “downstream” salespeople they recruit— since 2005, and has required licenses for other forms of direct sales. According to case documents, Herbalife China circumvented these regulations by paying bribes to secure licenses, to shut down investigations into its improper business practices and to remove unfavorable coverage of its practices from state-run media. The payments weren’t disguised well. In one instance, the company purportedly spent $150,000 to deliver gift produce to public officials, but for that amount, each official would have received more than 135 pounds of fruits and vegetables.
This isn’t the first time a direct sales company in China has been penalized for violating the U.S. Foreign Corrupt Practices Act—see, for example, the 2016 settlement between the SEC and Utah-based Nu Skin Enterprises. And this aligns with other regulatory issues Herbalife has faced regarding its business practices, including its agreement with the Federal Trade Commission in 2016 to pay $200 million to consumer-distributors it misled and to restructure its compensation model to prioritize actual sales over downstream recruiting, or its $20 million payment to the SEC in 2019 for investor misrepresentation.
But there’s a particular irony in the company’s activities in China. Bribery in China is often confused with the concept of guanxi, or networks of connection and obligation that provide a foundation for societal trust. In the translated and quoted words of one of the individual Herbalife defendants, “we need to build the connection” with an official if the bribery is to be effective.
In a similar manner, direct sales marketing is based on the exploitation of friendship and non-commercial social networks. The widespread distaste for multilevel marketing comes not only from disappointing financial outcomes for many downstream sales recruits, but also from the unwelcome awkwardness of receiving a sales pitch under the pretext of “reconnecting.” Understanding when and whether to regulate this abuse of trust will be important as multilevel marketing evolves into a viral economy of “influencers” and as electronic networks become increasingly entrenched in society, commerce and politics.
