Rockwell Automation, Inc. (“Rockwell”), an industrial automation products and services provider, headquartered in Milwaukee, Wisconsin, resolved an enforcement action in which the SEC alleged it violated the FCPA’s books and records and internal controls provisions through the actions of its former China based subsidiary, Rockwell Automation Power Systems (Shanghai) Ltd. (“RAPS-China”), which was divested by Rockwell in 2007.
- The SEC alleged that from 2003 to 2006, RAPS-China employees paid approximately $615,000 to Design Institutes which were typically state owned enterprises for design engineering and technical integrations services that can influence contract awards by end user state owned customers. The payments were made through third party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director with the expectation of influencing the state owned companies to purchase RAPS products. RAPS-China recorded these payments as “cost of sales.” These inaccurate books and records were then incorporated into Rockwell’s books and records for the purposes of preparing financial statements filed with the SEC.
- During this same period, the SEC alleged that RAPS-China also paid about $450,000 for sightseeing and leisure travel for employees of Design Institutes to destinations including New York City, Washington D.C., and Hawaii. According to the SEC, “some trips appeared to have no direct business component, other than the development of customer good will.” For example, the SEC stated, “RAPS-China arranged for so-called design meetings in New York City despite the lack of any Rockwell facility there because ‘everyone likes New York.’“
- In connection with the aforementioned payments by RAPS-China to Design Institutes, the SEC alleged that Rockwell “failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act” and “failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act.”
- Rockwell discovered the violations as part of its normal financial review process and global corporate compliance and internal controls program. Rockwell, thereafter, investigated the payments and self-reported.
- Without admitting or denying the SEC’s allegations, Rockwell consented to the entry of a cease-and-desist order prohibiting Rockwell from further violations of the FCPA’s books and records and internal controls provisions, and agreed to pay disgorgement of $1,771,000, prejudgment interest of $590,091 and a civil penalty of $400,000.
- The cease-and-desist order specifically stated the SEC would not impose a civil penalty in excess of the $400,000 – a relatively modest penalty in today’s FCPA enforcement environment – based on Rockwell’s cooperation with the SEC in its investigation and enforcement action.
- The Rockwell enforcement action once again demonstrates the need for US companies with wholly-owned foreign subsidiaries to maintain a robust global compliance program that accurately and transparently documents the services being provided and monies being paid in the books and records, or face the prospect of discovering years later a “poison pill” in the subsidiary’s records resulting in SEC enforcement and significant liability.
Reference: SEC Administrative Release No. 64380, Accounting and Auditing Enforcement Release No. 3274, and Administrative Proceeding File No. 3-14364 in In Re Rockwell Automation Inc. (all dated May 3, 2011)