China fines NU Skin, eyes tighter direct-sales control

Reuters/March 24, 2014

Shanghai -- China has fined NU Skin Enterprises Inc (NUS.N) more than $500,000 for illegal product sales and misleading local consumers, the country's watchdog said in a statement on Monday, adding it would strengthen regulation of the country's direct sales market.

NU Skin sold items outside the permitted range and overstated the potential results from using some of its products, China's State Administration for Industry & Commerce (SAIC) said in a statement on its website, adding some employees had also engaged in unsanctioned sales and misled consumers.

Direct sales firms have come under fire in China, with the official People's Daily newspaper saying in January NU Skin had organized "brainwashing" gatherings, prompting SAIC to launch a probe. This dragged down NU Skin's shares, as well as rivals Herbalife Ltd (HLF.N) and USANA Health Science Inc (USNA.N).

NU Skin has been fined $540,000, while six sales staff will also face individual fines totaling $241,000, the U.S. firm said in a written statement. The company has previously said it has taken steps to resolve the matter and said last week it expected to face a fine in China.

"The company is already taking steps to correct the issues raised in the SAIC reviews, and is not aware of any other material enforcement investigations currently pending in China," NU Skin said in the statement.

The company added it would seek direction from the government about restarting normal business activities in China. It previously suspended promotional meetings and accepting applications from prospective new sales representatives.

SAIC will also look to increase regulation of the direct sales sector, an area analysts said was a regulatory grey area in China. This could pose a headache for rivals such as Herbalife, currently under investigation in the United States.

"For the next step, SAIC will work with other departments to increase the level of regulation of the direct sales market and sternly investigate and prosecute any illegal behavior in the direct sales sector," the SAIC statement said.

Chinese laws allow direct sales under limited conditions, but there are laws banning so-called pyramid selling, when members make more money recruiting new members than selling the actual product.

(Reporting by Adam Jourdan; Editing by Kazunori Takada and Matt Driskill)

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