Control Components, Inc: The Alleged Bribes Were Approved by Email

In the Control Components, Inc FCPA case, prosecutors alleged that executives directed $4.9 million in bribes to employees of state-owned customers, alongside a separate scheme involving private customers. The criminal proceedings exposed a question that someone in sales or finance would recognize immediately: what happens when the people approving the payments are the people arranging the bribes? According to the government’s account, approvals traveled by email while auditors received false information.

Control Components manufactured control valves for nuclear, oil and gas, and power generation businesses worldwide. The indictment, as the court recounted it, alleged payments to state-owned customers between 2003 and 2007 under the Foreign Corrupt Practices Act.

The Valve Sales Behind the Case

Control Components’ customers included state-owned energy and industrial companies in China, Korea, Malaysia and the United Arab Emirates. The court identified customers including PetroChina, Korea Hydro and Nuclear Power, Petronas and National Petroleum Construction Company in its account of the criminal charges. The Justice Department identified the alleged recipients by their jobs, including engineering managers, procurement managers and purchasing officers. These were people inside the buying decision.

The company was headquartered in Rancho Santa Margarita, California. In its July 2011 filing in the executives’ criminal case, the Justice Department alleged that headquarters executives communicated with salespeople and representatives in the United States and abroad about how to bid on and obtain contracts. It said the executives often approved corrupt payments by email.

A salesperson may know the customer and the order being pursued, while finance sees the request and the transfer. We connect those views to the person authorizing the expense and the person meant to benefit from it.

Private Customers, Company Wires and the Travel Act

Prosecutors charged payments to private customers’ employees under a different law, the Travel Act. The Justice Department’s July filing described a criminal conspiracy covering both public and private customers.

The filing alleged that one headquarters executive approved a corrupt payment to an employee of a private customer and caused Control Components to wire approximately $10,000 from California to China for that purpose. It described the same executive approving another payment involving the same customer and approximately $5,000 wired from Sweden to China.

For another private customer, the filing described a promised corrupt payment split between different destinations. It alleged that another executive caused the first portion, $26,865, to be wired from Sweden to New York, with approximately $136,584 wired from Sweden to Latvia.

A later industrial-equipment case supplies a useful comparison. In a settled order against Deere & Company, the Securities and Exchange Commission found that Wirtgen Thailand paid employees of a commercial customer and recorded the payments as brokerage payments and sales commissions. It also found that the business rewarded both foreign officials and commercial customers’ employees with sightseeing-heavy trips described as factory visits. Its findings show why the name in an expense account cannot tell the whole story about the person receiving the benefit.

When the Valve Customer Held Public Power

The foreign-official question in the Control Components proceedings concerned employees of state-owned companies. The executives argued that those employees could never qualify as foreign officials under the Foreign Corrupt Practices Act. In its May 2011 ruling, the federal court in the Central District of California ruled that whether a state-owned company’s staff count as officials depends on the facts.

For an insider who knows the buyer, the question reaches beyond the purchasing desk. Who controls the company and what public job it performs are things a person selling equipment to it may already understand.

Admissions From Sales and Finance

According to the Justice Department’s April 2011 filing, the former director of worldwide factory sales pleaded guilty in early 2009 to conspiring to violate the Foreign Corrupt Practices Act. In his guilty plea, he admitted causing Control Components employees and agents to make corrupt payments to officials at state-owned customers.

The former finance director separately pleaded guilty to the same conspiracy offense that year. The Justice Department said he also admitted causing employees and agents to make corrupt payments to officials at state-owned customers. Those admissions connect the conduct to both sales and finance, where an insider could see who requested a payment, who approved it and where it went.

The July filing records another executive’s guilty plea in April 2011 to conspiring to violate the Foreign Corrupt Practices Act and the Travel Act. That plea brought both the public-customer and private-customer sides of the alleged conspiracy into the admissions, alongside the earlier sales and finance pleas.

What Auditors Were Told About the Payments

The Justice Department alleged in its July filing that members of the headquarters executive group gave false information to internal auditors and misleading information to the company’s legal team during an internal investigation. It also alleged that members of that group destroyed company documents. Its account also described vacations to Disneyland and Las Vegas for officers and employees of state-owned and private customers, along with lavish sales events. The alleged benefits reached beyond the bank transfers.

The government’s account put payment approvals and misleading answers to auditors in the same executive group. We see the absurdity: the people accused of arranging the bribes were also authorizing them for the company. Approved from within. An employee who knows what was actually discussed before approval may be able to explain what the audit response concealed.

RAE Systems illustrates another way business records can obscure the use of company money. In its civil complaint, the commission alleged that sales personnel submitted genuine receipts for expenses other than the ones actually incurred. The complaint described the substitutions in its own words:

The commission also alleged that warnings about bribery did not lead RAE to impose controls or make significant changes to the sales cash-advance practice. Control Components’ alleged false audit answers and RAE’s allegedly mismatched receipts present different versions of the same evidence problem. The document can look like ordinary company business while someone inside knows what the payment actually purchased.

What an Insider Can Add to the Payment Trail

For a person in sales, finance or audit, the useful evidence connects the customer decision, the payment and its approval. In the Control Components allegations, emails connected executives with sales representatives, and wire transfers connected company funds with the alleged benefits for customer employees. Someone who knows the order can explain what was being sought when the payment was approved. Someone who knows the accounts can explain how that decision became a transfer.

The industry records that make those connections include customer and contract files, agent agreements, invoices, payment approvals, accounting entries and internal warnings. We put the work a commission supposedly paid for beside the person who actually received it. We build the account with the person who understands those transactions, including the parts that looked ordinary to anyone outside the business.

The 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, examined companies exposed to state False Claims Acts through state pension-fund investment. It reported a 5% to 9% reduction in the likelihood of accounting fraud associated with that exposure. The study points to the value of an insider who can challenge the account management gives.

Financial rewards give that knowledge value. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Foreign-bribery information involves separate programs, and we work with you on the whistleblower program that fits your case, starting with the transactions and decisions you know.

You Know Who Approved the Payment

If you saw a valve order tied to a customer payment, or an approval email that tells a different story from the expense account, bring that account to our whistleblower experts. We work beside you to build the case around the sale, the beneficiary and the decisions inside the company, and bring in FCPA whistleblower lawyers who understand cross-border industrial sales. Speak to us about who approved the payment and why, and put that knowledge to work in your strongest foreign-bribery whistleblower case.