Watts Water Technologies: The Sales Policy Kept From Headquarters

The Watts Water Technologies FCPA case required the company to give up $2,755,815 in profits after the Securities and Exchange Commission alleged that its Chinese valve subsidiary hid payments for favorable design specifications inside sales commissions. In the SEC’s account, the money passed through salespeople to employees of state-owned design institutes that helped shape infrastructure projects. An insider who knew what the commission covered could explain what the accounting entry concealed.

Watts and a former sales officer settled the FCPA enforcement action through an SEC administrative order dated October 13, 2011. The order addressed the Foreign Corrupt Practices Act’s accounting requirements, with separate payment obligations for the company and the officer. Its central allegation was concrete: payments intended to influence product recommendations and specifications appeared in the books as the cost of paying the sales force.

The Valve Sale Began With the Design Institute

Watts Valve (Changsha), the Chinese subsidiary, made large valves for infrastructure projects, and design institutes helped determine which products those projects would use. The SEC described a market in which state-owned entities mostly developed, built and owned the projects, then retained state-owned design institutes to help with design and construction. That put the people writing specifications between the valve manufacturer and the eventual purchaser.

Watts, a water-valve manufacturer headquartered in North Andover, Massachusetts, acquired Changsha Valve through its Chinese subsidiary in April 2006. According to the order, this was its first Chinese subsidiary doing business predominantly with state-owned enterprises. The acquisition brought a different customer base and a different route to the sale.

The SEC alleged that sales personnel paid design-institute employees to recommend the subsidiary’s valves and put favorable specifications into design proposals. For someone who knows industrial sales, that is the commercial advantage: influence over what the project calls for, before the purchaser selects the equipment. The competing manufacturer has to sell into requirements that may already favor someone else’s product.

The subsidiary’s sales policy made that connection unusually visible. According to the SEC, it expressly allowed payments to the organizations helping shape the customer’s project. A reader looking only at the valve order would miss the payment mechanism described in the company’s own compensation rules.

Sales Commissions Carried the Payments

The SEC alleged that the subsidiary used its employees’ commissions to fund payments to design institutes. A sales policy inherited from Changsha Valve and adopted in December 2006 required salespeople to cover sales-related expenses from their commissions, including travel, meals, entertainment and consulting fees to the institutes. The commission therefore paid for more than the employee’s compensation.

The policy set commissions at 7% to 7.5% of the contract price, depending on contract size, and permitted payments to design institutes of up to 3% of the total contract amount. According to the order, those institute payments then entered the accounts as sales commissions. The same policy described the money’s intended destination more clearly than the accounting label did.

That is why following a commission to its beneficiary matters. The employee receiving a commission, the manager approving it and the person being paid to influence a specification occupy different places in the transaction. Here, the SEC alleged that the former sales officer signed approval requests that explicitly itemized payments to design institutes. The detail survived inside the approval process even as the books reduced it to a commission.

The Policy Headquarters Never Saw

The SEC alleged that the sales policy was never translated into English or submitted to Watts’s U.S. management. The former sales officer, who had also served as the subsidiary’s interim general manager, knew headquarters was unaware of it and resisted colleagues’ effort to have it translated and submitted for approval. The order quotes his explanation in an email:

The officer’s stated concern was that involving U.S. management would reduce flexibility in dealing with salespeople, agents and buyers. The SEC described a manager responsible for enforcing the company’s prohibition on improper payments resisting review of the policy that enabled them. Local flexibility. That was the explanation for keeping headquarters out.

According to the order, the subsidiary accounted for approximately 1% of Watts’s gross revenues, but its books went into the parent’s financial statements. A small part of the business carried the alleged false entries into the parent’s accounts. The SEC’s books-and-records and internal-accounting-controls findings concerned both the inaccurate entries and the company’s failure to maintain controls capable of detecting and preventing the payments.

The order also separated the officer’s conduct from the company’s failures. The SEC said he caused inaccurate records by approving commissions that included the institute payments, and caused control failures by resisting review of the sales policy. A signed approval and an email about translation explained different parts of the same alleged concealment.

The Same Advantage in a Hospital Tender

The Fresenius Medical Care case shows why technical specifications belong beside payment records in a procurement inquiry. In its separate SEC order, the agency described how the company’s Spanish operation supplied a doctor at a state-owned hospital in Valencia with draft technical specifications, a scoring method and proposed scores for a tender. The doctor agreed to some proposals through a personal email account, and Fresenius won the tender, according to the SEC.

The 2022 Journal of Forensic and Investigative Accounting paper Fresenius Medical Care: A Case Study on the FCPA traces another connection between sales incentives and procurement in the company’s Chinese operations. It describes bonus payments to publicly employed doctors who influenced clinic purchasing decisions, recorded as center marketing fees and paid when Fresenius received hospital purchase payments. The paper reports that employee emails suggested the bonuses were intended to sway clinic decisions.

The comparison brings the commercial decision back into view. A bonus can follow a real sale, just as a commission can follow a real valve contract, while the payment’s purpose remains hidden by its label. For the insider, knowing who shaped the purchasing decision can explain why the company was willing to pay.

Salespeople Brought the Payment Policy to Light

Conversations with sales personnel brought the potential violations to the attention of Watts China’s internal legal team in July 2009, according to the SEC order. They occurred after anti-corruption training for Chinese management. Watts had adopted an FCPA policy in October 2006, but the SEC alleged that adequate training in China did not arrive until the conduct came to light.

The order says another company’s design-institute enforcement action prompted the training. Once the salespeople’s account reached headquarters, Watts began an internal investigation and reported it to the SEC. The salespeople’s explanation connected a familiar compensation arrangement to the payments the policy had failed to catch.

Watts then changed the payment mechanism itself. According to the order, the company directed sales and finance employees to stop payments to state-owned enterprises and eliminated commission-based compensation at the subsidiary while the investigation continued. Watts sold the business to a privately held Hong Kong company in January 2010.

What the SEC Ordered Watts and the Officer to Pay

The order’s payment terms imposed a $200,000 civil penalty on Watts and a separate $25,000 civil penalty on the former sales officer. The SEC expressly credited Watts’s cooperation in setting the company’s penalty. We see the imbalance: the penalty was far smaller than the profits the company had to give back.

What an Insider Can Add

The useful inside account connects the specification, the payment approval and the accounting entry. A sales employee may know what a commission was expected to fund. An engineer may recognize how a specification favors a particular valve, while a finance employee may see the institute payment on an approval request and a sales-commission description in the ledger. Those connections are the evidence behind the payment’s purpose.

At Watts, the SEC’s account also depended on who knew about the local policy and who resisted sending it to headquarters. That gives the email about translation a different significance from the policy alone. We work with insiders to connect what their records say about the money with what they know about the decisions around it.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For information about FCPA violations, the SEC whistleblower program has its own award range of 10% to 30% of qualifying collected sanctions. We work through the program that fits your information with you.

You Know What the Commission Covered

If you know why a valve specification changed or what a sales commission covered, speak to one of our whistleblower experts about where that commission went. We build the case with you and bring in FCPA whistleblower lawyers who understand overseas subsidiaries, industrial sales and the accounting behind a payment. We stay beside you as your knowledge of the business becomes the evidence that explains it.