FCPA COMPLIANCE: DOES THE SEC “GET IT?”
“Do they get it?” This is a question frequently asked by FCPA enforcement officials. “Do they get it” meaning does the company understand what happened, why it happened and what is required going forward. Does the company “get” the point of FCPA and anti-corruption enforcement and the laws or are their efforts little more than going through the motions. If they “get it” then a key purpose of enforcement has been served and there will be reasonable assurances against a future reoccurrence. If they don’t, clearly more needs to be done. This is where sanctions come in with the hope of bludgeoning the company until hopefully they “get it.”
Last week the SEC settled an FCPA case with Watts Water Technologies, Inc. described briefly here. This is not one of the larger or more significant cases in the sphere of anti-corruption actions. It is not about to break into the “top ten” FCPA settlements by amount with about $2.75 million paid in disgorgement along with another t $820,000 in prejudgment interest and $200,000 in civil penalties.
Nevertheless, it involves violations of the law in a high risk part of the world. The question is does the company now “get it.” The answer to the question begins with the facts detailed in the SEC’s Order for Proceedings:
Violations: The violations are payments to Chinese Design Institute employees to influence business at state owned enterprises. They stem from the sales incentive policy adopted by Watts when it acquired the subsidiary in 2006. Under that policy all sales related expenses including travel, meals, entertainment and “consulting fees” are paid by sales employees out of their commissions which equaled 7% to 7.5%. From those commissions the sale personal paid 3% to the employees of the Design Institutes. The policy was written in Chinese and never translated for Watts senior U.S. management.
Discovery: The General Counsel of Watts learned about the payments from instituting additional FCPA procedures after he learned about an SEC investigation involving payments to employees at Chinese Design Institutes. The new procedures eventually surfaced a report of the payments.
What happened? Watts retained outside counsel. An internal investigation of the sales practices at the Chinese subsidiary was conducted in conjunction with forensic accountants. The company self-reported the results to the SEC and shared them with its auditors.
What remedial steps were taken? Watts initiated a series of remedial steps including the following:
- At the start of the internal investigation all payments were stopped to the Design Institutes;
- Commission based compensation at the Chinese subsidiary was terminated;
- Watts disclosed the internal investigation in a Form 10Q;
- Additional outside counsel was retained to draft and implement enhanced anti-corruption policies and procedures including an enhanced Anti-Bribery Policy, a Business Courtesy Policy, an enhanced Travel and Entertainment Expense Reimbursement Policy for its Chinese subsidiaries and enhanced intermediary due diligence procedures;
- A worldwide anti-corruption audit was conducted;
- Additional FCPA and anti-corruption training for its China operations and locations in Europe was undertaken;
- A risk assessment and anti-corruption compliance review of its international operations in Europe, China and any U.S. location with international sales was undertaken and completed;
- Anti-corruption testing at seven international Watts sites including each of the manufacturing and sales locations in China was done; and
- A Director of Legal Compliance, a new position that reports to the General Counsel was hired.
Seaboard is the Commission’s statement on cooperation. It has been followed by more recent initiatives regarding the use of non-prosecution and deferred prosecution agreements which were designed to spur cooperation and facilitate Commission law enforcement investigations. Under those initiatives enforcement officials continually tout the benefits of cooperating by self-reporting, conducting a full investigation, turning over all the facts to the staff, making full disclosure and implementing the necessary remedial steps to prevent a future reoccurrence.
Watts took every Seaboard step and more, much more, undoubtedly spending far more in remediation than the profits from the violations. Watts demonstrated beyond all doubt that the company “got it.” Yet it was sanctioned by the SEC although its cooperation was acknowledged. The question now is “Does the SEC get it?”
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