Johnson Controls to pay $14.4 million for Chinese bribery

Company self-reported sham vendor scheme

Johnson Controls Inc. headquarters
The Johnson Controls Inc. operational headquarters in Glendale.

Last updated on July 2nd, 2019 at 09:08 pm

Glendale-based Johnson Controls, Inc. will pay $14.4 million to settle self-reported bribery and embezzlement claims against one of its Chinese business units.

Johnson Controls Inc. headquarters
The Johnson Controls Inc. headquarters in Glendale.

The company is neither admitting nor denying the Securities and Exchange Commission’s findings in an investigation into China Marine, a subsidiary acquired as part of the 2005 acquisition of York International.

The investigation found that from 2007 to 2013 China Marine used sham vendors to make $4.9 million worth of improper payments to employees at Chinese government owned shipyards and ship-owners. The businesses managing director along with 18 other employees in three offices used the scheme to obtain and retain business and personally enrich themselves.

The scheme started while the business was part of York and was the subject of a 2007 SEC action. However, the bribery continued under new leadership, despite Johnson Controls’ efforts to put a stop to it.

The multi-step scheme “required the complicity of nearly the entire China Marine office,” according to the SEC’s cease-and-desist order.

The managing director would approve the use of vendors with ties to sales managers. The sales manager would add bogus costs and services to sales reports, which were knowingly approved by the procurement manager. Vendors would create fake invoices for the costs and the finance manger would approve payment without proper documentation.

“Once the sham vendors were paid, the money was returned to China Marine employees’ personal bank accounts, where it was then used in part for foreign and commercial bribery and personal enrichment,” the SEC order says.

The employees used small dollar amounts to avoid detection by Johnson Controls’ internal controls team.

The SEC order also says Johnson Controls’ Denmark office, which oversaw the global marine business, provided little oversight.

“Even in the instances where managers in Demark did a review, they did not understand some of the highly customized transactions at China Marine or the projects involving the sham vendors,” the order said.

The SEC said the scheme was masterminded by the managing director and wasn’t discovered until the company received an anonymous tip after the managing director.

The company received $11.8 million in benefit from the scheme, but also self-reported the case when it was discovered.

Johnson Controls provided “thorough, complete, and timely cooperation,” according to the SEC. That included access to the results of an internal investigation, making employees available for interviews and securing an office to preserve evidence when a Chinese employee was caught shredding documents.

Still the company was ordered to pay back the $11.8 million in profits from the scheme, $1.4 million in interest and a $1.2 million civilian penalty.

Johnson Controls also has to report to the SEC for one year on its efforts to prevent corruption within its businesses.

“At Johnson Controls, integrity is at the center of everything we do,” said Alex Molinaroli, Johnson Controls chief executive officer. “The ability to identify and address issues when they do occur, reflects the company’s commitment to ethics, responsible management practices and the good governance systems that uphold them. Our continuous improvement culture also involves continuing to make those systems even stronger.”

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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