Compliance, Cooperation Mitigates FCPA Liability with DOJ-SEC

Well designed compliance systems coupled with solid internal controls can be instrumental in preventing violations of the FCPA. Despite best of efforts, there is no doubt that even a well-constructed compliance system can be circumvented. Johnson Controls, a global firm which sold marine products in China through subsidiary China Marine, is a good example of this point. Fortunately, its cooperation mitigated the violations. In the Matter of Johnson Controls, Inc., Adm. Proc. File No. 3-17337 (July 11, 2016).

Johnson Controls acquired York International in 2005. At the time the firm was the subject of an FCPA investigation. Two years later York settled with the Commission in an action which alleged violations of the FCPA bribery, books and records and internal control provisions. The action centered on improper payments made at least in part through agents in China at shipyards to obtain and/or retain business. A monitor was installed. Following the merger York’s China operations were merged into China Marine.

Johnson Controls devoted additional resources to its compliance programs in the wake of the York action. Additional compliance personnel were hired, training was conducted and risk-based procedures were implemented. A new managing director was hired for China Marine. The use of agents was restricted in view of their involvement in the York action and all sales were routed through a China based sales team. Audits were conducted. China Marine reported to Johnson Marine’s Denmark subsidiary which oversaw the Global Marine business in multiple countries.

Nevertheless, the bribery scheme at China Marine continued. The new employees circumvented the procedures installed and the steps taken to prevent a repetition of the wrongful conduct:

• The scheme involved virtually everyone in the office;

• Vendors were used in place of agents because they were considered low risk but local employees failed to disclose that in some instances sales managers had an interest in the firm;

• Sales managers added bogus costs for parts and services;

• The dollar value of the transactions was set to fall below certain minimums to avoid scrutiny; and

• A slush fund was created.

Despite a new manager and supervision by the Danish subsidiary, China Marine operated with little oversight. The new manager had significant autonomy and reliance was put in self-policing. Even in instances when those in Denmark reviewed transactions they did not understand some of the highly customized transactions at China Marine or the projects involving sham vendors. Not only did the managing director craft the scheme to make improper payments, China Marine employees were instructed to be cautious regarding their discussion of vendor payments with firm attorneys, accountants and auditors. From 2007 through 2013 Johnson Marine obtained the benefit of about $11.8 million as a result of over $4.9 million in improper payments made through eleven problematic vendors.

Johnson Marine finally learned about the misconduct in December 2012 when it received the first of two anonymous hotline reports about certain employees in China Marine. The reports arrived shortly after China Marine’s managing director left the company. John Controls self-reported and undertook an extensive series of steps to cooperate with the Commission’s investigation detailed in the Order. The Order alleges violations of Exchange Act Section 13(b)(2)(A).

To resolve the action the firm consented to the entry of a cease and desist order based on the Section cited in the Order. Johnson Controls agreed to pay disgorgement of $11,800,000 and prejudgment interest. In addition, the firm will pay a penalty of $1,180,000 or 10% of the disgorgement. The DOJ declined prosecution.