The U.S. Securities and Exchange Commission has fined manufacturing company Johnson Controls $14 million over about $4.9 million in bribes that its Chinese subsidiary paid to employees of Chinese government-owned shipyards through sham vendors.
From 2007 to 2013, the SEC said in an administrative order, Johnson Controls reaped a benefit of $11.8 million as a result of the improper payments. The former managing director of its China Marine subsidiary allegedly masterminded the scheme to “obtain shipbuilding projects and to enrich him and other China Marine employees.”
China Marine’s former owner, York International, was fined $12 million in a similar bribery case in 2007. After acquiring York in 2005, the SEC said, Johnson Controls made remediation efforts but the bribery continued.
To resolve the SEC’s investigation, the company agreed to pay disgorgement of $11.8 million, prejudgment interest of $1,382,561, and a civil money penalty of $1,180,000.
“JCI failed to devise and maintain an adequate system of internal accounting controls” despite knowing that China Marine “had a history of [Foreign Corrupt Practices Act] problems and that the China Marine business was high risk,” the SEC order said.
China Marine sells air conditioning and refrigeration equipment to shipbuilders and shipyards, some of which are owned by the Chinese government. In the earlier bribery case, it was accused of making improper payments through agents.
After acquiring York, Johnson Controls brought in a new managing director and limited the use of agents by China Marine, requiring that all sales go through its internal sales team based in China.
According to the SEC, however, China Marine employees “devised another avenue” to continue the bribery, using vendors to facilitate the improper payments. The vendor transactions were considered low risk due to the low dollar value of the transactions, the SEC said, with vendors receiving an average payment of $3,400.
The managing director was allegedly aided in the scheme by 18 China Marine employees including the finance manager. The scheme came to light after the managing director left the company in 2012.