Johnson Controls Inc. agreed Monday to pay $14 million to settle SEC charges that it violated the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act.
The SEC said a wholly-owned Chinese subsidiary called China Marine used sham vendors to pay bribes of about $4.9 million to employees of Chinese government-owned shipyards, ship-owners and others, to obtain and retain business and personally enrich themselves.
Also Monday, the DOJ released to the public a declination letter dated June 21 that it sent to Johnson Controls’s lawyers. The DOJ letter said “at this time and consistent with the FCPA Pilot Program, we have closed our inquiry into this matter despite the bribery by employees of JCI’s subsidiary in China.”
The DOJ launched the Pilot Program in April to encourage companies to self report FCPA compliance problems and cooperate with U.S. enforcement agencies and regulators.
In its declination to Johnson Controls, the DOJ cited the company’s voluntary self-disclosure and thorough investigation, full cooperation “including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct,” and its remedial compliance efforts.
Wisconsin-based Johnson Controls is a global provider of HVAC (Heating, Ventilation and Air Conditioning) systems.
The SEC resolved the enforcement action with an internal administrative order and didn’t go to court.
Johnson Controls acquired the China Marine subsidiary as part of a 2005 acquisition of York International.
China Marine consists of two legal entities: York Refrigeration Marine (China) Ltd. and JCI Marine (Shanghai) Trading Company Ltd. The China Marine entities operate as indirect, wholly-owned subsidiaries of Johnson Controls and are consolidated into its financial statements.
In 2007, York International paid $22 million to the DOJ and SEC to resolve FCPA offenses in China and other countries that happened from 2001 through 2006. The offenses involved York’s marine unit.
Johnson Controls wasn’t charged in the case.
York paid more than $7.5 million in bribes through subsidiaries and agents to win commercial and government projects.
On Monday, the SEC said in its administrative order that despite Johnson Controls’s “efforts to remediate China Marine, the bribery continued.”
From 2007 to 2013, the SEC said, the managing director of China Marine — with help from 18 China Marine employees in three offices — continued the bribery and theft that began under his predecessor by using vendors instead of agents to make the improper payments.
The SEC order said:
- After Johnson Controls limited the use of agents, the China Marine employees used vendors to create slush funds.
- Vendor transactions were considered low risk by Johnson Controls due to their low dollar value, with the average vendor payment about $3,400.
- Johnson Controls’s internal controls over vendor payments were less rigorous, and China Marine operated with very little oversight by Johnson Controls’s Denmark office, which oversaw the global marine business.
- Even when managers in Denmark did a review, they didn’t understand some of the “highly customized” transactions at China Marine or the projects involving the sham vendors.
The SEC found that Johnson Controls violated the internal accounting controls and books and records provisions of the FCPA that are part of the Securities Exchange Act of 1934.
The company settled the offenses without admitting or denying the SEC’s findings.
Johnson Controls disgorged $11.8 million plus prejudgment interest of $1.38 million. It also paid a civil penalty of $1.18.
It agreed to report to the SEC for a year on the status of its FCPA and anti-corruption related remediation and compliance program.
Johnson Controls Inc. trades on the NYSE under the symbol JCI.
The SEC’s Order as Securities Exchange Act of 1934 Release No. 78287 and Administrative Proceeding File No. 3-17337 (dated July 11, 2016) In the Matter of Johnson Controls Inc. is here (pdf).
* * *
Here’s the full text of the DOJ Pilot Program declination letter:
U.S. Department of Justice
1400 New York Avenue, NW
Washington, D.C. 20005
June 21, 2016
Jay Holtmeier, Esq.
Erin G.H. Sloane, Esq.
7 World Trade Center
250 Greenwich Street
New York, New York 10007
Re: Johnson Controls, Inc.
Dear Mr. Holtmeier:
I write regarding the investigation by the Department of Justice, Criminal Division, Fraud Section into your client Johnson Controls, Inc. (“JCI” or “the Company”), concerning possible violations of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1, et seq. Based upon the information known to the Department at this time and consistent with the FCPA Pilot Program, we have closed our inquiry into this matter despite the bribery by employees of JCI’s subsidiary in China. We have reached this decision based on a number of factors, including but not limited to: the voluntary self-disclosure of the matter by JCI; 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) and its agreement to continue to cooperate in any ongoing investigations of individuals; 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 JCI 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. If additional information or evidence should be made available to us in the future, we may reopen our inquiry.
Richard L. Cassin is the publisher and editor of the FCPA Blog. He’ll be the keynote speaker at the FCPA Blog NYC Conference 2016.