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When it comes to pursuing bribery cases, the U.S. Department of Justice and the Securities and Exchange Commission are usually joined at the hip. If one brings charges, usually, so will the other. That’s why the agencies’ split decision on Rockwell Automation, Inc., stands out. On Tuesday the SEC filed an administrative order in which it directed Rockwell to pay $2.76 million for violations of the Foreign Corrupt Practices Act. According to the order, the company violated the FCPA by failing to “accurately record” payments that a former subsidiary made to Chinese state-owned businesses. Milwaukee-based Rockwell produces industrial automation components and software, and has annual sales of $4.8 billion. “These incidents, while isolated, have led us to heighten our vigilance and further improve our training,” CEO Keith Nosbusch said in a statement. “We are firmly committed to excellence in compliance practices.” The company declined a request for further comment. In its 2006 annual report, the company said that it discovered the payments by its Chinese subsidiary during an internal review. Rockwell reported the potential FCPA violation to both the Justice Department and the SEC. Last year, Justice officials sent a letter to Rockwell in which they said they would not file criminal charges against the company. Bribery expert Alexandra Wrage is surprised that the SEC decided to press ahead after Justice dropped the case. “It’s a little unusual for them to diverge” on a FCPA investigation, she says. Wrage is the president of TRACE International, Inc., a Washington, D.C.–based nonprofit that assists its members with anti-bribery compliance. Wrage adds, “The joke goes that if you call one agency, by the time you put down the phone and call the other agency, you’ll find the line busy.” Wrage also questions the SEC’s decision to penalize Rockwell even though it self-reported the violations. “You just want to make sure that you’re sending the right message to companies that are trying to get it right,” she explains. “It’s tough to see a company get dinged for something that happened in 2003, especially when it was so modest.” Rockwell became a TRACE member after it discovered the Chinese payments, says Wrage. An SEC spokesperson said the agency declined to comment on the case beyond the administrative order. According to the order, the payments by Rockwell’s former subsidiary were made to “design institutes.” Wrage describes the institutes as technical consulting firms. She says that any non-Chinese manufacturer seeking seeking to do business with a Chinese state-owned company “will probably need to use” an institute as an intermediary. Chinese customers like the design institutes because they can ease linguistic and cultural differences, Wrage explains. However, she adds: “They can provide services, but they can also shape the procurement process to your benefit. And that’s where the line gets hazy.” Rockwell’s subsidiary opened a factory in Shanghai in 2003 to manufacture transmissions that it sold primarily to state-owned coal mining and processing plants, according to the SEC. The agency adds that the subsidiary paid approximately $615,000 through a third party to design institutes which “had an influence” on the mining companies. The subsidiary recorded the payments as “costs of sales,” the order states. In addition, the SEC says that the subsidiary paid approximately $450,000 to fund trips for employees of design institutes and state-owned customers that weren’t business-related, yet were recorded as business expenses. As an example, the agency says that the subsidiary arranged for design meetings in New York, even though Rockwell had no facilities in the city, because “everyone likes New York.” According to the SEC, Rockwell discovered the payments by its subsidiary in 2006 as part of an internal review. The company first targeted China for enhanced FCPA scrutiny two years earlier. The SEC says that Rockwell took several remedial steps, “including employee termination.” In 2007 Rockwell sold the unit which operated the Chinese subsidiary to Baldor Electric Company, an Arkansas-based manufacter of industrial components. Rockwell neither admitted nor denied the findings in the SEC’s order. The company agreed to disgorge approximately $1.7 million in net profit that the agency said was associated with the payments to the design institutes. Rockwell also agreed to pay interest of $590,000 and a penalty of $400,000, which the SEC said could have been higher if Rockwell hadn’t cooperated with the agency. Rockwell was represented by Gregory Bruch, a partner in the Washington, D.C., office of Willkie Farr & Gallagher, and David Simon, a partner in the Milwaukee office of Foley & Lardner. Rockwell general counsel Doug Hagerman was a litigation partner in Foley’s Chicago office before joining the company. None of the lawyers responded to requests for comment. According to Wrage, the Rockwell case marks the second time that the SEC has penalized a U.S. company for making payments to Chinese design institutes. In 2009, ITT Corporation agreed to pay almost $1.7 million in disgorgement, interest, and penalty in order to settle claims that it violated the FCPA by inaccurately recording payments to the institutes. Wrage says that the design institutes “bring a host of FCPA problems,” but that the Chinese government “really likes them.” She adds, “Part of what they do is practical and clear, but much of what they do seems deliberately opaque, and the ultimate Chinese customer seems to conspire in that.”

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