Last week, the Securities and Exchange Commission (SEC)
instituted a Cease and Desist Order again Watts Water Technologies, Inc. (WWT)
and one of its employees, Leesen Chang (Chang). The Order was to obtain certain
civil penalties and fines for conduct of WWT and Chang concerning violations of
the books and records and internal control provisions of the Foreign Corrupt
Practices Act (FCPA) for its China operations. As noted by the FCPA
Professor, "The Watts enforcement action is yet another example of an FCPA
enforcement action focused on Chinese Design Institutes." WWT paid a fine of
$200,000, agreed to disgorge profits of $2,755,815 and paid prejudgment
interest of $820,791. Chang paid a fine of $25,000.
The violations revolved around the WWT China subsidiary,
Watts Valve (Changsha) Co., Ltd. (CWV) which did business in China and
purchased another Chinese company Changsha Valve in April 2006. This Chinese
company was consolidated in CWV. In 2010, WWT sold CWV to a Hong Kong entity.
Chang was the Vice President (VP) for sales of CWT from 2006-2009.
There were two forms of bribery set forth in the Cease
and Desist Order. First CWV made payments directly to employees of a Chinese
Design Institute. According to the FCPA Professor, Chinese Design Institutes
are "typically state-owned enterprises that provided design engineering and
technical integration services that can influence contract awards by end-user
state-owned customers." These direct payments were made to influence design
institutes to recommend CWV be awarded the sale of products for Chinese state
enterprises. The second form of bribery was that CWV paid "sales-related
expenses such as travel, meals, entertainment" of the Chinese Design Institute.
Lastly, CWV employees made direct payments to Chinese Design Institute for
sales made by CWV.
These payments for such sales-related expenses were made
by CWV employees out of their sales commissions and hidden on the CWV books and
records as employee expenses. The commissions paid directly to the Chinese
Design Institute for sales made by CWV employees were also hidden on the books
and records of CWV as its employees commissions. Chang knew about these
payments and attempted to block the US Company, WWT, from discovering them or
correcting the false entries into CWV books and records.
Discovery and Remedial Measures
The discovery of the above issues began with the WWT
General Counsel (GC) becoming aware of an enforcement action against another company
for unlawful payments to a Chinese Design Institute. This led to FCPA training
for certain CWV management who disclosed some of the above information. WWT
instituted an internal investigation and self-disclosed to the SEC.
The Cease and Desist Order listed several remedial
measures taken by WWT, one of which included changing the incentive based
compensation. There was also the creation of an enhanced compliance program
including policies and procedures, specifically including a Travel and Entertainment
Expense Reimbursement Policy for the company's Chinese subsidiaries.
Additionally there were enhanced due diligence procedures for foreign business
partners. WWT conducted a thorough world-wide FCPA anti-corruption audit.
Lastly, it was noted that WWT hired a Director of Legal Compliance to head up
the company's compliance efforts going forward.
The Watts Water enforcement action provides concrete
information for the compliance practitioner to review and re-assess your
compliance program and risk profile to determine if your company has any risks
which you are not currently seeing.
For a copy of the SEC Cease and Desist Order, click here.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
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© Thomas R. Fox, 2011
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