From Organizational Deviance in the Direct Selling Industry

By Carol Juth, Ph.D., 1985

A Case Study of The Amway Corporation

The Amway Corporation entered the Canadian market in October 1962 with the incorporation of Amway of Canada, Ltd. When Amway began exporting its products to Amway of Canada, Ltd., Amway (U.S.) was actually two separate corporations: Amway Manufacturing Corporation and Amway Sales Corporation. The Manufacturing Corporation produced products which it sold to the Amway Sales Corporation. The Amway Sales Corporation in turn sold the goods to Amway's Direct Distributors. On January 1, 1964, Amway merged these two companies in the United States and formed the Amway Corporation. As a result of the merger, the Amway Corporation ran into difficulties with the Canadian National Revenue over the value for duty of Amway goods shipped into Canada.

Canadian customs laws require that the value of good for duty be "determined by ascertaining the price at which like goods are sold by the foreign exporter in his domestic market to arm's length purchasers who are at an equivalent level of trade and purchasing in the same or substantially the same quantities for home consumption as the Canadian importer" (Regina v. Amway, 1983, p. 9).

Prior to the merger, Amway products exported to Amway of Canada, Ltd. were valued at the same price as the products sold by the Amway Manufacturing Corporation. This "transfer price" was acceptable to Canadian officials because the Amway Manufacturing Corporation and the Amway Sales Corporation were two legally separate entities each with separate and distinct functions. And the function of Amway of Canada, Ltd. was the same as the Amway Sales Corporation in the United States.

When the Amway Corporation was formed (after the merger) Amway's products were now sold directly to Direct Distributors in the United States. Amway shipped their goods to independent warehouses located around the country and there the products were received by Direct Distributors. The goods were sold to the Direct Distributors at higher prices than the "transfer price" previously used by the Amway Manufacturing Corporation in its transactions with the Amway Sales Corporation. Thus, the first arm's length transaction in the United States was no longer the Amway Sales Corporation but the Direct Distributors. This change in Amway's marketing practices meant that Amway goods exported into Canada would now be valued at the higher Direct Distributor Cost.

Good are sold to Direct Distributors at listed retail prices less a discount of 35%, 25%, or 15% depending on the product. In addition, Direct Distributors may also be eligible to receive an additional 28- 1/4% in deferred bonuses in the forms of: (1) a deferred refund (Performance Bonus) from Amway of 3% to 25% depending on the volume of purchases made during a given month; and/or (2) a 3% bonus on the volume of sales of other Direct Distributors he or she may have sponsored; and (3) a yearly sales training bonus of 1/4 of 1%. Because these additional maximum bonuses (28-1/4%) ARE NOT ALWAYS EARNED by Direct Distributors each month, the goods invoiced to Direct Distributors do not show this deferred price. Apparently, the transfer price between the Amway Manufacturing Corporation and the Amway Sales Corporation did take into account these deferred costs.

The "assessment of customs duties is essentially a self-assessing system ... because of the very large volume of good which are imported daily into Canada, the Department, out of necessity, must rely on the truthfulness and accuracy of the declarations" made by the importer (Regina v. Amway, 1983 p. 117). In October of 1963 the Department of Revenue initiated a routine review of the fair market value of goods exported by Amway Corporation to Amway of Canada, Ltd. In response to inquiries about the new merger and its trade relationships with Amway of Canada, Ltd., the following was written in a letter, dated July 1, 1964, to the Revenue Department of Canada by Halliday, an attorney acting on behalf of Amway Corporation. The letter defended Amway's practice of valuing the goods it exported to Canada at prices lower than it charged Direct Distributors in the United States. The letter stated:

"Amway Corporation sells the products to Amway of Canada, Ltd., at such a price that Amway of Canada, Ltd., can in turn sell the product to its distributors at substantially the same discount as is given Amway Corporation to its American distributors. It is obvious that, if Amway Corporation were to sell the product to Amway of Canada, Ltd., at the same price that it sells the product to its American distributors, Amway of Canada, Ltd., would be in no position to sell the product to its distributors at a price which would permit it to receive a profit. Please be assured, on the other hand, that the product is sold by Amway Corporation to Amway of Canada, Ltd., at a profit since there is no desire on the part of either corporation that the product be marketed in Canada without a profit to the American Corporation. (Regina v. Amway, 1983, Appendix E, p. 2).

Upon completion of its review of the Amway Corporation, the National Revenue Board of Canada issued a new ruling on February 4, 1965 declaring that Amway's present method of valuing their goods (i.e. at prices it formerly charged the Amway Sales Corporation) was no longer acceptable. Amway was asked to declare the fair market value of goods at a value equal to that of the Direct Distributors in the United States. Since this price did not include the potential 28-1/4% deferred bonus, Amway thought the ruling was unfair and did not take into consideration Amway's unique marketing structure. Subsequently two meetings were set for March 1965 between Amway and Canadian Revenue officials.

The first meeting was held on March 12 and was attended by two Canadian Department officials, an attorney representing Amway Corporation's interests, the General Manger of Amway Canada, Ltd., Sheppard, and Discher, Amway's Corporate Treasurer. What transpired at this meeting is not altogether clear but an internal memorandum dated March 16, 1965, but one of the Canadian officials summarizing the events states:

"It is claimed that the 28-1/4% is always given in the United States and that if the distributors does not qualify for the full rebate, that portion of the rebate to make up the total of 28-1/4% is extended to an distributor who, by reason of his high volume of business, is now buying direct from Amway whereas he used to by from the distributor in question ... Mr. Discher was advised that if their marketing set up was changed in order that the deferred rebate be shown, allowed and deducted on copies of the domestic invoices, such rebate would then become acceptable for regular duty purposes. Mr. Discher is supposed to visit the Department again on Wednesday, March 17, to tell us what they have decided in this respect. Evidence to the effect that the additional 3- 1/4% is given in the United States will also be submitted at that time (Regina v. Amway, 1983, Exhibit C)."

In sworn testimony, Sheppard said that around this time period when the March 1965 meetings were held he suggested to Van Andel that a possible solution for the tax problem might be to have the Amway Corporation sell its goods to the independent warehouses it was presently using for storage and handling purposes. The Corporation could sell its products to these warehouses at a cost equal to that of the Direct Distributors including the 28-1/4% deferred purchase price plus the fees already paid by Amway to the warehouses for the services of storage and handling. In turn the warehouses would be authorized to sell only to Amway's Direct Distributors. The warehouses, Sheppard stated, "would be performing a function similar to that performed by Amway of Canada, Ltd. and as such would be at the same level as Amway of Canada, Ltd. In essence, I felt that creating more 'Amway of Canada' in the United States was the solution.... After making my suggestions, I left it up to Van Andel and Discher to consider the suggestion and, if they thought it would work or was feasible, it was up to them to implement it" (Regina v. Amway, 1983, pp. 127-128). The solution, while it might solve the Canadian tax problem, also meant that the Amway Corporation would also have to give up some of its potential income.

During the March 17, 1965 meeting between Amway officials and the Canadian Revenue people, Amway stated that, pending discussion by the Amway Corporate Board on March 18, the Corporation intended on April 1 to begin selling it products directly to the warehouses. Agreement was apparently reached between Amway and the Canadian Revenue officials that when Amway put in to operation its plan to sell to the warehouses and could offer proof of such sales then the February 4, 1965 ruling would be revised accordingly.

The trial proceedings indicate that following this meeting in Canada, the Executive Committee of the Amway Corporation did meet on March 18, 1965. However, what transpired at that meeting attended by Van Andel, Halliday, Discher, and others, as indicated in the record, was that:

"a policy was adopted to create fictitious invoices evidencing sales by Amway Corporation to United States warehouses. The policy included the adoption of a plan whereby distributors picking up goods at a warehouse would make out a check payable to the warehouse. The check would then be deposited in a special account held in the warehouse's name. However, the funds deposited to this special account were controlled exclusively by Amway Corporation and could be drawn upon only by Amway Corporation. In fact no sale was intended to take place between Amway Corporation and the warehouses. As was previously the case, the sale actually took place between Amway Corporation and its Direct Distributors; the warehouse still performed merely a storage and handling function. (Regina v. Amway, 1983, Exhibit 1, pp. 17-18).

On June 3, 1965 Discher, on behalf of Amway, sent copies of 113 bogus invoices to the Revenue Department of Canada. On August 5 of the same year an additional 185 false invoices covering almost all of Amway's products were filed with the Canadian Custom's officials for their evaluation and approval. On August 10, 1965 the Canadian Revenue Department changed its ruling of February 4, 1965 to accommodate these "changes" in Amway's sales and marketing practices. This revised method of assessing the duty and sales tax for goods shipped to Amway of Canada, Ltd., by the Amway Corporation was in effect from 1965 until January 1980 when the ruling was revoked upon confirmation that Amway had evaded Canada's customs law and had misrepresented its marketing operations.

In January of 1968 customs officials again undertook a routine review of the value of goods shipped into Canada. In response to this review, Van Andel directed a memo to all directors in the corporation and to the General Manger of Amway of Canada, Ltd. advising them that "only the Treasurer and the General Counsel are authorized to communicate with the Canadian Customs Department or officials" ((Regina v. Amway, 1983, p. 132). In response to the 1968 review false price lists and invoices were submitted as before to Canadian officials.

The trial records show that in May of 1974, the Amway Corporation attempted to refine the scheme in case further evidence was required by Canada. By this time the Corporation had phased out its use of the independent warehouses and was building its own Regional Distribution Centers (RDC's). These RDC's were to be owned and operated by the Amway Corporation. In 1974 only two independent warehouses remained. One located in Denver and the other in Portland. The object of this new plan was to create not only invoices but canceled checks as well. Two schemes were proposed. One by Discher that was laid out in a memorandum to Van Andel dated May 9th, 1974, which stated:

"As soon as an invoice is prepared on a shipment (after the loading of a truck is complete), a telex will be sent to the warehouse with the amount of the invoice. The warehouse will immediately mail us a check for the invoice amount. We will, at the same time, mail a check to the warehouse for the invoice amount. This system will produce an invoice and a canceled check in payment of the invoice for each shipment to a warehouse. Neither the warehouse or Amway Corporation will have to commit any funds to the program since each will deposit the check of the other before their own check clears back through the banking system to their own bank" (Regina v. Amway, 1983, p. 136).

Concerned about a possible error in the above plan, Amway's Vice President of Distribution, Hoxie, laid out an alternate plan, varying only slightly, in a memorandum to the Policy Committee (Van Andel and DeVos) dated May 15, 1974. That these plans were initiated with the intent to deceive the Canadian officials is evident in Hoxie's opening paragraph of his confidential letter.

"C. Dale Discher, Vice President for Finance and Treasurer, has proposed a modus operandi for establishing documentary proof or our 'arm's length transaction' with a disinterested third party in the event we are audited by Canadian officials. This memo in response to Policy Committee's request for an evaluation from my office" (Regina v. Amway, 1983, pp. 137-138).

Van Andel authorized the scheme by writing in the corner of Discher's letter: "Check this after 60 days to see if it works. If not--try Hoxie's modification. 5/20/74 JVA" (Regina v. Amway, 1983, p. 140). Apparently the two warehouses did not agree to the scheme and the fraud continued as previously set--fictitious invoices and price lists were submitted to but no canceled checks were available.

In September of 1975 Canadian officials undertook another review of Amway's declared fair market values. As of November of 1975 Amway had not yet responded to Canada's September request for evidence of its arm's length sales to clients in a position similar to that of Amway of Canada, Ltd. The trial proceedings reveal that in December 1975 in response to a verbal request by Van Andel an Amway Administrative Assistant sent the following memorandum to Van Andel:

"This memo is responsive to your verbal request of December 12, 1975 for a memorandum summarizing the procedures presently being used for distributing goods through the contract warehouses at Denver and Portland.... Salient points are:

"1. No actual transactions take place between Amway and the contract warehouses.

"2. The invoices are never sent to the contract warehouses and never paid by them. The contract warehouses are not aware of the existence of the invoices.

"3. Periodically (every two years or so) Canadian tariff officials audit the Amway import tariff payments. They usually question the basis for valuing the goods, and Amway (U.S.) pulls a sampling of 'dummy' invoices from the file and offers them as proof of proper valuation. These invoices, coupled with a letter on file summarizing the understanding and agreement negotiated with Canadian tariff officials approximately 10 years ago by C. Dale Discher, have thus far satisfied auditors.

"4. The danger, of course, lies in the fact that the 'dummy' invoices are not actually proof of an 'arm's length transaction.' They are evidence of only 'half' of a transaction. A sharp auditor could request proof that the invoices were actually paid by the contract warehouse. No such proof exists.

"5. The present contract warehouses operate in the same manner that all contract warehouses have for the last ten years except that distributor checks are now made payable to Amway Corp. instead of the warehouse name as in the past" (Regina v. Amway, 1983, pp. 143-144).

On the same day (December 17, 1975) the above memorandum was written, the Amway Corporation responded to the September 1975 review request by the Canadian tariff officials for sales invoices by sending them copies of "dummy" invoices showing shipments to the warehouses in Colorado and Oregon. The Canadian officials responded on January 14, 1976 asking for more invoices noting that the Department required invoices showing sales to at least three different customers at the same level of trade in the United States. In reply Amway submitted invoices showing sales to companies in Honolulu and Puerto Rico. Based on these documents the Canadian Revenue officials issued a new ruling dated February 26, 1976 advising Amway that the prices shown on the submitted invoices would be acceptable as the fair trade market.

From 1976 through 1978 the Amway Corporation explored ways in which it could better justify the prices it was providing on the "dummy" invoices it was submitting to the Canadian officials. On September 12, 1978 Amway Corporation incorporated the Hawaii Distribution Corporation (HDC). This wholly owned subsidiary was to purchase products from the Amway Corporation for resale to distributors in Hawaii. The resulting paperwork (invoices, checks, etc.) would then be submitted to Canadian Revenue officials as evidence of sales to an "arm's length" purchaser. In order to give evidence that a disinterested third part was involved, a trust agreement was drawn naming a local bank as the trustee of the corporation. Beneficial owners of the Hawaii Distribution Corporation would be the Jay and Betty Van Andel Foundation and the Richard and Helen DeVos Foundation.

The operation of the Hawaii Distribution Corporation was to be evaluated for its effectiveness and ability to show profits for the Corporation. The plan was to form another corporation which would "create" reduced values for shipments to Canada. This intent is made clear in a Policy Committee memorandum dated September 5, 1978:

"This will record the Policy Committee's approval of the formation of the Hawaii Distribution Corporation.... Approval of this project is predicated on the after tax income projected.... This projects a three- year accumulative net income of $1,267,000.00 to the warehouse and a 3- year accumulative net income of $253,000.00 to the Amway Corporation.

"This approval is also predicated on the understanding that every effort will be expended during the 3-year contract period to effect supply of Amway products to the Canadian Company through 1) Amway manufacture in Canada, 2) contract manufacture in Canada, 3) shipment from non-Amway resources in the United States, 4) supply through Amcom.

"By the end of the 3-year period, a report describing the source of each product marketed in Canada should be available. It will then be possible to assess the duty costs that would attach to continuing direct shipment of the items which cannot be obtained through any of the above means, but only through Amway U.S. manufacture and shipment to Canada. This cost can then be compared to the additional expense penalty associated with operating through the Hawaii Distribution Corporation, and a judgment made as to the least costly method. If direct shipment with payment of duty into Canada is less costly, the Hawaii Corporation could then be dissolved. If the reverse is true, arrangements can then be made for continuing the Hawaii Distribution Corporation" (Regina v. Amway, 1983, pp. 154-155).

Unbeknown to Amway in January 1978 one of its employees in its tax department disclosed to an employee of Border Brokers Limited (Amway of Canada, Ltd.'s customs broker and consultant) Amway's practice of submitting fictitious invoices to the Canadian officials. He stated that "he personally had procured and submitted 'phony price lists and invoices' to the department" (Regina v. Amway, 1983, p. 162). In May of 1978 new auditors (Arthur Anderson & Co.) hired by Amway of Canada, Ltd. also discovered the illegal practices of the Corporation (i.e. Amway Corporation and Amway of Canada, Ltd.). Both companies, Border Brokers Limited and Arthur Andersen, advised the Amway Corporation to make full disclosure to the Canadian officials and seek a resolution of the problem. Realizing that their advice was not taken and prevented from fully functioning in their duties both companies resigned their positions with Amway of Canada, Ltd. in the early months of 1979. Upon its resignation Border Brokers Limited informed the Canadian Revenue officials of Amway's non-compliance as required by Canadian law.

In May of 1979 Amway Corporation responded to another Canadian review by submitting invoices including ones from the "independent jobber in Hawaii." In establishing the Hawaii Distribution Center (HDC), Amway had contracted with a jobber, P.M.&F. Enterprises, to operate the warehouse in Hawaii on behalf of the Hawaii Distribution Corporation. In May of 1980 the Canadian Revenue Department issued a statement advising the Amway Corporation that they did not consider the transactions between Amway and the Hawaii Distribution Corporation to constitute "arm's length" sales.

The ruling of August 10, 1965 and February, 1976 were revoked and the proper value for duty of goods entering Canada would be the price at which like goods were sold to Direct Distributors in the United States not including the deferred rebates. While this current ruling is being appealed by the Amway Corporation, the Corporation and its counterpart Amway of Canada, Ltd. pleaded guilty on November 10, 1983 to criminal charges of defrauding the Canadian government from February 5, 1965 through January 31, 1980. Amway admitted that they:

"...unlawfully did, by deceit, falsehood or other fraudulent means, defraud her Majesty the Queen in right of Canada and the Government of Canada of an undetermined amount of property, money or valuable securities of a value in excess of Twenty-eight million dollars ($28,000,000) ... with respect to goods purchased by ... Amway of Canada Ltd. from ... Amway Corporation and imported into Canada" (Regina v. Amway, 1983, p. 103).

In sum, constrained in achieving its profits and growth goals by Canadian customs laws after the merger of the Amway Manufacturing Corporation and the Amway Sales Corporation, the Amway Corporation chose to systematically violate the customs laws of Canada. The executives of the Amway Corporation felt that the unique structural arrangement of the Amway Corporation could not be altered to accommodate this new constraint in the environment wrought by the merger. In their prepared statement read at that trial Van Andel and DeVos stated that:

"Amway felt that the marketing plan was novel in that, by company policy, the manufactured good were only sold to Direct Distributors employing a sliding scale of discounts to establish the price. Amway felt that the Customs Act did not 'fit' ... this novel direct sales operation. Nevertheless, Amway felt that the 'transfer price' was still a fair value for duty purposes, but since it did not sell to outsiders at this price, although fair, it did not comply wit the Act.... As time went on, sales by Amway of Canada Limited increased dramatically and the little problem became one of some considerable magnitude.... Blinded by our belief in the 'fairness' of the 'transfer price' concept, we allowed ourselves and the companies to enter into a scheme that was illegal" (Regina v. Amway, 1983, Exhibit 2).

Van Andel and DeVos may have rationalized their actions as the only possible solution available, but Cole (1959) has pointed out that "while economic conditions may define the problem for the entrepreneurial actors, they do not necessarily decide it."

The owners and executives acting on behalf of the Amway Corporation freely decided upon an illegal solution to the problem. The Amway entrepreneurs chose to illegally manipulate the existing ambiguities in the social structure in order to accomplish their goals. The Amway executives were aware of the fact that the Canadian customs system was basically one of "self-assessment." The Amway Corporation was also aware of the fact that activities carried on by it inside its corporate offices would be hard to detect much less prove. Further, it would be naive to think that the Amway Corporation officials were not aware of the fact that the practices in which they engaged and/or contemplated were not in fact illegal. The judge in the Canadian trial came to these same conclusions during the trial when he stated:

"This of course was not a small-type operation or an isolated occurrence, but a premeditated and deliberate course of conduct and action undertaken at least in the early stages, with professional advice, and with the knowledge that it would provide enormous profits and business advantage over a long period of years and I suppose, when you gamble, and all the stakes are high, if you win, you win big, and if you lose, you lose big.... As the fraud was set up and improved upon, the risk of detection was minimal, and without the assistance of the customs broker, Border Brokers Limited, I would imagine that a prosecution was rather remote" (Regina v. Amway, 1983, pp. 220-221).