Little problems can become big ones.  A failure to respond to a risk – whether it is a conflict of interest violation or a weakness in internal controls – can become even more significant depending on the size and scope of the problem.

A recent criminal prosecution of two Rockwell Automation executives underscored the nature of this phenomena.  Last month, federal prosecutors arrested and charged Kevin Chao and Richard Sze, who worked together at Rockwell Automation, with conspiracy to commit honest services wire fraud and money laundering. Chao is also charged with several individual counts of wire fraud.

Chao and Sze contracted with a new Chinese software company owned by Chao’s friend and former colleague from a prior business at which Chao and Sze worked.  With the assistance of this individual, Chao and Sze were paid kickbacks that defrauded Rockwell. Chao and Sze established a shell company in California and then laundered the kickback proceeds totaling nearly $17 million.

Starting in 2005, Chao and Sze began working at Rockwell when the company at which they were working was acquired by Rockwell.  Chao eventually became the Global Business Director at Rockwell and Sze reported to him. 

Beginning in 2016 and continuing until 2020, Chao and Sze orchestrated a kickback scheme with a new software development company owned by Chao’s former colleague. Chao and Sze steered software development work to the new company, which submitted inflated or false

Chao and Sze set up a California shell company, Mooteec, to receive the payments.  Mooteec does not produce any product or service, maintains a P.O. box as its mailing address, and has no physical office. Investigators concluded that Mooteec was a shell company established to launder the illegal proceeds of the kickback scheme.

Rockwell paid the new software company approximately $30 million.  Approximately $17 million was then paid by the new software company to Mooteec.  Chao and Sze withdrew at least $5.4 and $1.3 million, respectively.

In late 2019, a Rockwell employee reported that “something funny” was occurring between Chao and the new software development company.  This report resulted in an internal investigation.  In December 2019, Chao and Sze resigned from Rockwell on the same day.

If convicted on the wire fraud counts, the maximum sentence for each count is 20 years in prison and a fine of $250k or twice the gross gain or gross loss.  If convicted for money laundering, the maximum sentence is 20 years in prison and a fine of $500k or twice the value of the property involved.