From Amway And Canada--The Judges Report

The Reformed Journal/September 1984
By Gaylen J. Byker

Delegates to the 1984 Synod of the Christian Reformed Church discussed at some length the conduct of the owners, executives, and employees of the Amway Corporation in connection with the criminal charges brought against them in Canada in 1983. The discussion began when a church member alleged that given Amway's conviction for criminal conduct, the continued acceptance of donations from the Amway Corporation by the CRC would damage the church's reputation in some Canadian communities. Although the appeal that the denomination refuse further Amway donations was not approved, the debate that was launched is reported to have been "long and acrimonious."

Whether the conduct of Amway personnel was a proper subject for floor debate at Synod is certainly questionable. Still the controversial and much publicized conduct of two prominent members of the denomination invites serious examination, in the course of which propaganda must be distinguished from the facts. There is indeed a fundamental tension between the view of the Canadian court in Toronto and the publicity subsequently released by the company.

On November 10, 1983, before Chief Justice Evans of the Supreme Court of Ontario, the Amway Corporation and Amway of Canada Ltd. pleaded guilty to charges of criminal fraud and paid a C$25,000,000 fine, the largest ever imposed in Canada. The crime was tax evasion. The Canadian court upheld the government's claim that by means of fake and ficticious invoices and price lists and the creation of a dummy corporation, the Amway companies had defrauded Canada out of amounts in excess of C$28,000,000.

On the same day in the United States, Amway's owners Jay Van Andel and Richard DeVos (1) ran advertisements in The Wall St. Journal, The Washington Post, The Detroit News, and the Grand Rapids Press and (2) sent a letter to their distributors and employees signed by Vice President and General Counsel Otto Stolz. The ads and the letter attempted to explain the company's conduct with these words: "Unfortunately, in this highly complex area of customs regulations in a foreign country, a combination of misunderstandings and poor advice resulted in decisions which caused the corporation these difficulties." The ads asserted that the charges against the persons of Van Andel, DeVos, and two others had been dismissed because they were willing to pay a high price "so the rest of us can go forward unburdened." The ads asked the distributors and employees of Amway to express appreciation to Van Andel and Devos for the great sacrifice they made in order to end the Amway ordeal in the Canadian courts.

Where--between what is charged in the legal verdict and the message of the Amway ads and letter--is the truth?

In accepting the pleas of guilty of the two Amway Corporations, Chief Justice Evans delivered the following oral summary of the evidence and the "Reasons for judgment." The transcript of the Chief Justice's statement is reproduced here in full so that the evidence can be compared with the company's public statements on the matter. It should be emphasized that the views expressed are those not of the prosecution but of the judge charged to make a fair assessment of all the evidence presented by the prosecution and defense alike.

The Amway ads and the letter to their distributors and employees constituted an official response to the company's conviction. The purpose of this response was, in its own words, to present "The Amway Story Behind the Canadian Headlines." The company's response contained, among others, the following statements:

"Dismissal of Canada's charges against Four Executives marks New Era."

"All charges against four Amway executives have been withdrawn as a part of the settlement of charges filed a year ago by Canadian authorities."

"Amway's co-founders relied consistently upon the advice of various responsible corporate officers and legal counselors that the agreement existed and that the company was acting in full compliance with the law."

"When questions about Canadian customs procedures arose, Amway's co-founders acted responsibly. My own experience [Otto Stolz's] in many different corporate setting convince me that Rich and Jay responded in a highly ethical manner consistent with sound business judgment and practice."

"They chose to make a tremendous personal and financial sacrifice in order to end the ordeal and eliminate this impediment to the future growth and potential of the business... They chose to make this sacrifice by settling now and thus preserving the Amway business opportunity for millions of individuals."

The judge reached his findings of fact and opinion after a long series of criminal investigations which had culminated in criminal indictments against four Amway executives and the two Amway corporations. At one point in the proceedings, when the individual defendants did not respond to the court's order that they appear at hearings in the case, the Canadian government took steps toward their extradition. Eventually, the individual defendants were permitted to negotiate a "plea bargain" to this effect: the court agreed to dismiss the criminal indictments against them on the condition that the corporations they control plead guilty to criminal fraud charges and pay the largest fine ever imposed in Canada. (It should be note that a corporation is an artificial entity that cannot engage in criminal activity, though it can be held liable for the criminal conduct of its officers and employees.) The verdict of guilty and the payment of the find do not, however, end Amway's legal battles with the Canadian government. A civil case, in which the Canadian government seeks C$148,000,000 in customs duties, taxes, and penalties, continues. In other words, the C$25,000,000 fine was not the result of a settlement of a tax dispute; it was not the payment of the customs duties and taxes that the company had failed to pay. Rather, it was a punishment for criminal fraud.

The judge explicitly rejected the claim that the non-payment of duties was due to misunderstandings and bad advice. The act was perpetrated, he said, as part of a policy designed to defeat the customs laws. This policy entailed elaborate techniques of camouflage that were in his judgment clearly designed to conceal and mislead. In the judge's terms, the submission of hundreds of false invoices and dummy price lists, along with the establishment of a dummy corporation, were steps in a "sophisticated fraud." The judge based the conviction on "the premeditated and deliberate course of conduct" that was further evidenced by the Amway executive's refusal to take the advice of their own auditors and customs brokers who had urged them to make a full disclosure of their "schemes" to the Canadian government. When Amway's executives rejected their advice, the auditors resigned, choosing to give up their undoubtedly lucrative Amway account rather than to participate further in the deception they had discovered.

As for the practice of "transfer price" manipulation mentioned in the opinion: this practice is one of the most pervasive areas of complaint by governments, in both developed and developing countries, against multinational corporations. Such manipulations are frequently used to reduce taxes and customs duties, as well as to circumvent currency exchange controls and other regulations. Within this country, several states have imposed a "unitary tax" on corporations, a tax whose principal aim is to prevent tax avoidance and evasion through transfer price manipulations. The techniques used in transfer price manipulations (which are often questionable and not infrequently illegal) are a preferred way for businesses go disguise internal transactions; and ways of devising these techniques are even discussed in some U.S. business school courses. Of those who practice free enterprise, many have always disliked various forms of government control. Few entrepreneurs view taxation itself, however, as justifying violation of the law.

Fraud and other forms of illegal business conduct short-circuit the marketplace, and thus corrode the free enterprise system itself, in which Amway vigorously believes. Fraudulent practices tend to divert business from the most efficient producers to those who are corrupt, thus undermining public confidence in the integrity of the marketplace. Such practices also put pressure on honest firms to compromise their standards in an effort to stay in business along with their less scrupulous competitors.

The Reformed tradition has long sustained a strong respect for law and belief in the obligation to obey the law in almost all situations. It is possible, however that react differently to sophisticated "white-collar" or "business" crime than we do to the acts of rapists, bank robbers, burglars, vandals, or shoplifters? Such a double standard is not justified, and it is high time that we examine our attitudes toward some of the things that "everyone does" in our affluent communities.

Near the end of the letter to Amway distributors and employees there appears the following paragraph:

"With settlement achieved despite its enormous personal cost, Jan and Rich are committed to putting the issue behind us all. But they insist that everyone in the organization learn from the important lessons this experience offers. The civil case concerning the amount of customs duties and taxes which may be owed to Revenue Canada will continue."

Anyone who evaluates the Amway ads and letter in the context of the court's summary and assessment of the evidence is bound to be puzzled about what, in the minds of the individual Amway executives, those lessons might be.