Kevin Chao and Richard Sze were executives at Rockwell Automation, with the ranks of Global Business Director and Manager of Software Engineering, respectively. In November 2021, they were charged with fraud for orchestrating a $17 million kickback and money-laundering scheme that operated from 2016 until 2020. Chao and Sze originally worked for a smaller company that Rockwell purchased, and Chao was always Sze’s supervisor across both companies. 

To accomplish their fraud, they set up a shell company, Mooteec, which had no physical office, made no products, and provided no services, and whose only location was a post-office box. Mooteec was merely a shell company whose sole purpose was to serve as a legal vehicle for perpetrating the fraud. 

Chao re-directed business from an established software company that was originally doing business with Rockwell to a new Chinese software company, whose owner was a friend of Chao. Chao and Sze issued $30 million of false or inflated invoices on behalf of Rockwell to purchase software development services from the Chinese company. When Rockwell paid the invoices, the Chinese company then funneled $17 million of the proceeds to Mooteec. Chao and Sze then funneled the money from Mooteec accounts to their own bank accounts in the amounts of $5.4 million and $1.3 million, respectively. 

In late 2019, an individual who was resigning from Rockwell alerted his colleagues that “something funny” was occurring between Chao and the Chinese company. Rockwell personnel investigated, discovered the fraud, and Chao and Sze both resigned in December 2019. Both men were arrested and charged with fraud and money laundering in late 2021.

a. Define the terms kickback and money laundering. 

b. Explain the four steps in a typical money-laundering scheme, and then relate those four steps to the actions of Chao and Sze in this case. 

c. What internal controls should Rockwell had in place to prevent or detect this type of fraud? 

d. Research the outcome of the fraud in terms of punishments for Chao and Sze.