United Technologies Pays $13.9 Million to Settle FCPA Charges (Part I of II)
The SEC’s FCPA Unit had a good week last week – they announced a second FCPA settlement along with the Sanofi case. The latest to fall was United Technologies that agreed to pay $13.9 million for bribes paid by its elevator and aircraft engine businesses.
The SEC FCPA settlement focused on Azerbaijan and China relating to third-party bribery payments. In addition to these two bribery schemes, UT was cited for improper trips and gifts paid by Otis and its Pratt & Whitney division to foreign officials in China, Kuwait, South Korea, Pakistan, Thailand and Indonesia.
In today’s post, I am focusing on the third-party bribery schemes used by UT companies to secure business in China and Azerbaijan. Tomorrow’s post will focus on the use of gifts, meals and entertainment to funnel bribery money to pay bribes
UT disclosed the investigation to DOJ and the SEC in late 2013 or early 2014. DOJ declined to prosecute in March 2018.
UT’s subsidiary, Otis Elevator, bribed government officials in Azerbaijan for public housing elevator sales in Baku. In China, UT’s subsidiary, through a joint venture, paid Chinese officials to obtain pre-bid confidential information help win engine sales to Air China, a state-owned airline.
UT agreed to disgorge $9 million, plus interest of about $919,000 and to pay a penalty of $4 million.
Third Party Bribery Schemes
In Azerbiajan, Otis Elevator hired third-party agents without conducting any due diligence. They hired agents who had no local experience or history in the elevator industry. One of the agents was not even registered until after participating in the transactions.
Otis also paid bribes with a kickback scheme to sell elevators in China in 2012.
In China, from 2009 to 2013, an agent working on behalf of a Pratt & Whitney joint venture (Pratt & Whitney is a majority owner) received a $2 million commission advance purportedly for an office expansion, and failed to provide any documentation to support the request in advance. The joint venture paid the agent $55 million in commissions from 2009 to 2013.
UTC self-reported the conduct and fully cooperated with the investigation. UTC terminated employees and third parties responsible for misconduct and enhanced its accounting controls and compliance organization.
In Azerbaijan, Otis Elevator used various bribery schemes to sell its elevators to a public housing municipal entity in Baku. Otis Elevator used sham subcontractors and third-party intermediaries to carry out some of the schemes.
In 2012, Otis Elevator hired two subcontractors to make payments to Baku Liftremont, a municipal entity. Otis Elevator did not conduct due diligence of the two subcontractors and they were paid over $790,000 (44% of the contract value), and there was no documentation that the subcontractors provided any services.
Between February 2013 and December 2014, Otis sought to win additional contracts. Otis Elevator retained four third-party intermediaries to pay bribes to secure nine contracts, as directed by a Liftremont senior official. Otis Elevator sold the equipment to the intermediaries, knowing that a portion of the payments would go to the Liftremont officials. The bribe payments totaled at least $11.8 million. The intermediaries were located in Russia and had no local experience in Azerbaijan or in the elevator business.
The contracts and the transactions were not approved through Otis Elevator’s internal controls. Legal, finance and business employees reviewed the transaction but failed to prevent the improper transactions. Legal approved the contracts since they contained the standard terms but did not question if the intermediaries had been through due diligence. Further, no one in finance reviewed the financial terms to make sure the pricing differentials were acceptable.
In another scheme, Otis Elevator hired Liftremont as a distributor of its elevators to other areas outside Baku as a way to funnel bribes, notwithstanding the fact that Liftremont was the government entity responsible for municipal projects in Baky. Otis Elevator’s regional president, as well as legal, finance and business employees approved the engagement.
Otis Elevator in Azerbiajan had a joint venture with a local partner but instead chose to work through Russian intermediaries. Otis’ JV partner raised concerns about the transactions. Specifically, the Managing Director of the joint venture emailed the regional president eight separate times to seek a confidential meeting about the Liftremont contracts, but no one took any steps to address the concerns.
In September 2014, an Otis Elevator lawyer in Russia refused to approve the contract and requested information about the ownership of a new intermediary and a written explanation as to why they needed to hire the new intermediary. One month later, the lawyer contacted the CFO and discussed who was conducting due diligence of the intermediaries. The lawyer eventually was provided with a perfunctory explanation to justify hiring the new intermediary, and the lawyer approved the contract. Unfortunately, the contract was executed four months before the lawyer approved it.
Otis Elevator entered into ten contracts with Liftremont totaling approximately $14.6 million.
In China, starting in 2006, Pratt & Whitney’s joint venture, IAE retained a Chinese sales agent to increase IAE’s sales in China. The agent had no background or experience in the airline industry, and had been involved in the toll road business. IAE and Pratt conducted minimal due diligence before retained the sales agent. IAE entered into a sales agent agreement with a commission of between 1.75 and 4 percent of sales to Chinese airlines. In October 2009, Pratt hired the same Chinese agent. From 2009 to 2013, the agent was paid approximately $55 million in commissions.
In one case, in 2009, the agent requested a commission advance of $2 million supposedly for an office expansion. The agent provided no documentation for the advance. The agent’s sole responsibility and involvement in Pratt and IAE projects was to arrange introductions and meetings. The following month, a Chinese official sent the agent confidential information concerning a tender. IAE compared the confidential information to IAE’s bid, and IAE subsequently modified its bid. No one asked the agent how he obtained the confidential information. IAE won the contract. The agent paid a total over $160,000 in six separate payments to the Chinese airline official, who was eventually arrested by Chinese law enforcement in a corruption investigation. Over a four year period, the agent was paid $4.3 million in success fee payments.
In 2012, Otis Elevator secured a contract to install four elevator units to a Chinese state-owned bank. The Chinese bank official requested a bribe if Otis won the contract. The Otis Elevator supervisor agreed to make such a payment using a distributor to carry out the scheme.
The supervisor retained a distributor to bid for the contract and based it on a false justification which was not questioned. The payment was made by inflating the cost of the project. The distributor retained a sub-distributor for the project. The distributor paid $98,000 to the Otis sales supervisor, who kept a portion and then paid the bank official the bribe.
Otis Elevator learned of the scheme after its sales supervisor, a Chinese national, was charged with bribery in China.