ITT Corp: The Pump Recommendation Hidden in a Commission
In the ITT Corp FCPA case, ITT agreed to give up $1,041,112 in profits to settle Securities and Exchange Commission allegations that its Chinese pump subsidiary hid improper payments inside increased commissions. The alleged payments bought influence over which pumps large infrastructure projects would purchase. For an insider who knows the sales process, the crucial detail is what the commission was expected to buy.
The Securities and Exchange Commission announced the settled civil charges on February 11, 2009 against ITT Corporation, a New York-based industrial company. The case concerned the Foreign Corrupt Practices Act’s books-and-records and internal-accounting-controls requirements. Its account followed payments at a wholly owned subsidiary into the financial statements ITT filed with the agency.
The Pump Sale Began With a Recommendation
Nanjing Goulds Pumps distributed water pumps to power plants, building developers and general contractors throughout China. Based in Nanjing, the subsidiary belonged to ITT’s Fluid Technology division. Its customers’ projects put equipment sellers in contact with organizations that could influence a purchase before an order reached the supplier.
According to the agency, state-owned entities developed, constructed and owned the infrastructure projects involved in the alleged scheme. Design institutes helped design those projects, and some of those institutes were themselves state-owned. The agency alleged that Nanjing Goulds paid institute employees to ensure that their organizations recommended its water pumps to the project owners.
That makes the recommendation part of the sales story. The person helping choose a pump could influence the eventual buyer without working in the buyer’s purchasing department. An employee familiar with those recommendations may understand why a particular institute mattered to the sales team, even when the customer order says nothing about it.
Different Payment Routes, the Same Commission Label
The agency alleged that Nanjing Goulds made improper payments from 2001 through 2005, both through its own employees and through third-party agents. The agency also described at least one instance in which an agent paid employees of a state-owned project company directly. The alleged influence therefore reached both the organizations recommending equipment and a project owner.
An agent’s involvement adds another relationship for an insider to explain. The employee approving an expense, the agent receiving the money and the person influencing a government customer’s decision can occupy different places in the transaction. Knowing the agent’s name is only the beginning of understanding what the payment was for.
In the agency’s account, the subsidiary disguised the payments as increased commissions in its books. Those entries then became part of ITT’s financial statements for the same fiscal years. This is the connection that makes foreign subsidiary accounting matter to an employee far from headquarters: the parent’s reporting carries the local description.
A payment allegedly intended to influence the customer’s choice appeared as the ordinary cost of making a sale. The ledger could show a commission while leaving out the very reason the company wanted to pay it.
The Controls Behind the Accounting Entry
The agency’s books-and-records and internal-controls allegations concerned both inaccurate descriptions and control over the money itself. The agency alleged that ITT’s accounts failed to reflect the subsidiary’s payments accurately and fairly. It also alleged that ITT lacked adequate checks on who approved payments, how they were recorded and who could access company funds.
The alleged failures pose concrete questions about a sales payment. What did management authorize, what purpose appeared in the approval, and what description finally reached finance? An insider who can explain a difference between those records gives the accounting allegation its commercial meaning.
A commission schedule and an approval can show different things. The schedule describes how compensation is calculated, while an approval may identify the intended recipient or purpose of a particular payment. We connect those records with what the sales employee knows about the project and what finance recorded afterward.
Watts Shows What a Local Sales Policy Can Reveal
Watts Water Technologies provides a close comparison involving valves for Chinese infrastructure projects. In its October 13, 2011 settled order, the Securities and Exchange Commission alleged that employees of Watts’s Chinese valve subsidiary paid design-institute employees to recommend its products and write favorable design specifications. The payments appeared in the accounts as sales commissions.
The order described a local sales policy that expressly allowed salespeople to pay design institutes out of their commissions. It also said the policy was never translated into English or submitted to U.S. management. According to the agency, a sales executive approved requests itemizing institute payments and resisted efforts to send the policy to headquarters.
The comparison supplies a useful distinction for someone looking at commission records. In ITT’s case, the agency described the allegedly false label and its passage into the parent’s accounts. In Watts’s case, the local policy and approval requests described the payment’s purpose more clearly than the ledger did. A sales employee’s explanation can connect documents that otherwise tell different stories.
The Payments, the Sales and the Settlement
The agency alleged that approximately $200,000 in improper payments accompanied business from customers generating over $4 million in sales for Nanjing Goulds. ITT realized more than $1 million in improper profits from that business, according to the agency. The commercial incentive was access to the sale and its profit, with the alleged payment hidden in the selling expense.
The announced settlement terms also included a $250,000 civil penalty. The agency said it considered ITT’s self-reporting, cooperation with its investigation and subsequent corrective measures. We see the problem with treating the penalty alone as the price of buying influence: it was smaller than the alleged profit.
What an Insider Can Add
An insider can connect the project, the recommendation, the recipient and the accounting description. Sales staff may know what an agent was expected to accomplish or why an institute’s recommendation mattered. Finance employees may recognize a payment’s description and who approved it, while someone working on the project may know which organization actually controlled the equipment choice.
That is the evidence connecting the business decision to the payment. We work with the person who understands the transaction to connect commission records, agent arrangements, payment approvals and the entries that reached the parent. The value lies in explaining what those documents meant inside the business.
An employee’s ability to explain the books can change the incentives inside a company. The 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, compared companies exposed to state False Claims Acts through state pension-fund ownership with companies outside that exposure. It reported a 5% to 9% reduction in estimated accounting-fraud likelihood associated with the increased risk of whistleblowing. The finding concerns the prospect of someone speaking up, a reason to take seriously the employee who can explain what a familiar expense label conceals.
For foreign-bribery information, the SEC whistleblower program can pay eligible whistleblowers 10% to 30% of qualifying collected sanctions. A separate program concerns false claims against the U.S. government: a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Our whistleblower experts work through which program fits the conduct you know.
You Know Why the Pump Was Recommended
If you know why a project favored particular equipment or what an increased commission funded, tell our whistleblower experts about the decision behind the sale. We develop the case alongside you and bring in FCPA whistleblower lawyers who understand industrial sales, overseas subsidiaries and the accounts that connect them. We build your strongest FCPA whistleblower case from that inside knowledge and remain your partners throughout it.
