Shearman & Sterling LLP | Government Regulatory Enforcement Blog | Johnson Controls, Inc.’s FCPA Settlement Is a Reminder That Extensive Cooperation Is Not a Free Pass <br >  
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  • Johnson Controls, Inc.’s FCPA Settlement Is a Reminder That Extensive Cooperation Is Not a Free Pass 
    On July 11, 2016, the Securities and Exchange Commission (“SEC”) announced that Johnson Controls, Inc. (“Johnson Controls”), a Wisconsin-headquartered global provider of automatic temperature control systems, had agreed to pay $14.3 million to settle alleged violations of the Foreign Corrupt Practices Act (“FCPA”).  In the Matter of Johnson Controls, Inc., Admin. Proc. No. 3-17337 (July 11, 2016) (order instituting proceedings).  Although Johnson Controls reportedly self-disclosed the violations, cooperated extensively with the SEC and Department of Justice (DOJ), identified individuals associated with the misconduct, and engaged in robust remediation, the company nevertheless was required to pay a civil money penalty in addition to disgorging the profits it reaped as a result of the scheme.  The DOJ agreed to issue a declination, but the SEC took a harder line.

    The case had its roots in an enforcement action brought by the SEC in 2007 against York International (“York”), which Johnson Controls acquired in 2005.  In that case, the SEC alleged that from 2004 to 2006, a York subsidiary, China Marine, made improper payments to Chinese government officials.  York agreed to settle the action by paying $8.9 million in disgorgement, $1 million in pre-judgment interest, and a $2 million civil monetary penalty, and to retain an independent compliance monitor.  As part of its remediation efforts, Johnson Controls hired additional compliance personnel, conducted extensive training, and implemented risk-based procedures and controls.  The company also terminated the employees involved in the alleged bribery and hired a new manager.

    Despite this extensive remediation, China Marine employees allegedly devised new methods to funnel payments to Chinese government officials and evade Johnson Controls’ compliance systems.  According to the SEC, from 2007 to 2013, China Marine employees added sham vendors to a vendor master file, to which the employees associated fake orders for parts and services.  These fake orders inflated project costs and generated bogus purchase orders.  The employees allegedly knew that vendor transactions were considered “low risk” by the Johnson Controls’ compliance program, and thus subject to less rigorous compliance review.  By the time Johnson Controls discovered the scheme in 2012, over $4.9 million of improper payments reportedly were made to sham vendors for the purpose of bribery and embezzlement.

    According to the SEC order, Johnson Controls promptly self-reported the conduct to the SEC and DOJ, and began an internal investigation.  The SEC stated that Johnson Controls “provided thorough, complete, and timely cooperation throughout the investigation,” which included providing all supporting documentation requested (including factual chronologies, hot document binders, interview summaries, and English translations of numerous documents and emails) and made foreign employees available for interviews and provided “real-time” downloads of employee interviews.  Johnson Controls also terminated or separated sixteen employees it identified as associated with the scheme, placed all sham vendors on a do-not-use list, enhanced its integrity testing and internal audits, and implemented random site audits which would have potentially detected the improper payments.

    Although the SEC praised Johnson Controls’ extensive cooperation and remediation, which was cited by the DOJ as a reason it would not prosecute the company, the SEC nevertheless required Johnson Controls to pay a civil monetary penalty of $1,180,000 and disgorge $11.8 million in ill-gotten gains and $1.4 million in prejudgment interest.