Johnson Controls will pay $14.4 million and neither admit nor deny charges brought by the Securities and Exchange Commission that it engaged in bribery in China in violation of the Foreign Corrupt Practices Act (FCPA).
The Justice Department declined prosecution.
Johnson Controls was represented by Jay Holtmeier and Erin Sloane of WilmerHale in New York.
In a letter to Holtmeier and Sloane, Daniel Kahn, head of the Justice Department’s FCPA unit, writes that under the FCPA Pilot Program, “we have closed our inquiry into this matter despite the bribery by employees of Johnson Control’s subsidiary in China.”
Kahn cites a number of factors in reaching a decision to decline, including the voluntary self-disclosure of the matter by Johnson Controls, the thorough investigation undertaken by the company, the company’s full cooperation in this matter — including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct, the steps that the company has taken and continues to take to enhance its compliance program and its internal accounting controls, the company’s full remediation — including separating from the company all 16 employees found to be involved in the misconduct, including high-level executives at the Chinese subsidiary, and the fact that Johnson Controls will be disgorging to the SEC the full amount of disgorgement as determined by the SEC, as well as paying a civil penalty to the SEC.
The Justice Department declined any comment beyond the text of the letter.
The SEC alleged that the managing director of the Johnson Controls unit in China, China Marine and eighteen employees of China Marine, made payments to sham vendors, some of which were then used “to make improper payments of approximately $4.9 million to employees of Chinese government owned shipyards, and shipowners and others, to obtain and retain business, as well as to personally enrich China Marine employees.”
The SEC alleged that the improper vendor payments were improperly recorded on Johnson Controls’ books and records, and the company “failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances to detect and prevent such payments.”
The SEC alleged that China Marine operated with very little oversight by Johnson Controls’ Denmark office, which oversaw the Global Marine business.
The SEC alleged that Johnson Controls gave the newly hired managing director a lot of autonomy and put significant reliance on his ability to self-police his business operations.
“Because of the delegation of authority thresholds in place, and the average low-dollar value of the transactions in China Marine, few business transactions in China Marine required approval by managers in the Denmark office that oversaw China Marine,” the SEC alleged. “The average vendor payment was approximately $3,400. The China Marine employees fashioned the vendor scheme to stay below certain thresholds that would not trigger review by Denmark. Even in the instances where managers in Denmark did a review, they did not understand some of the highly customized transactions at China Marine or the projects involving the sham vendors. The managing director masterminded the scheme to make improper payments to government officials and others to obtain shipbuilding projects and to enrich him and other China Marine employees.”
The SEC alleged that “the managing director instructed China Marine employees to be cautious about their discussions regarding vendor payments to Johnson Control lawyers, accountants, and auditors, as well as to avoid or delete documentation about vendor payments.”
From 2007 to 2013, Johnson Controls obtained a benefit of $11.8 million as a result of over $4.9 million in improper payments made to or through approximately eleven problematic vendors for the purpose of foreign and commercial bribery, and embezzlement.
The SEC said that Johnson Controls did not learn of the conduct until December 2012, when the company received the first of two anonymous hotline reports alleging that certain employees in China Marine were making payments to sham vendors that did not provide goods or services in order to personally profit and/or bribe Chinese officials.
“The reports arrived shortly after China Marine’s managing director left the company,” the SEC alleged. “Johnson Controls self-reported the conduct and began an internal investigation.”