Day: May 16, 2023

Categories
Blog

Phillips FCPA Enforcement Action: Lessons Learned – Part 3

We conclude our exploration of the Koninklijke Philips N.V. (Philips) Foreign Corrupt Practices Act (FCPA) enforcement action involving the Securities and Exchange Commission (SEC), for Phillips actions in China and its Chinese subsidiary, Phillips China. As set out in the SEC Order, Philips was order to “pay disgorgement of $41,126,170, prejudgment interest of $6,047,633, and a civil monetary penalty of $15,000,000” for a total fine and penalty of $62 million. Yesterday we considered the bribery schemes employed by Phillips China. After having reviewed the facts and Order we look at some lessons learned.

Distributors Under the FCPA

This is the third recent FCPA enforcement action involving distributors, following Oracle and Microsoft. Along with those cases, Phillips drives home the message that distributors are a risk under the FCPA. Oracle got into FCPA hot water regarding distributor discounts and marketing reimbursement. Microsoft came to OFAC grief as it did not know to whom its distributors were doing business as some distributors were selling to sanctioned entities. While distributors may not seem to be as high a risk commissioned sales agents, they do present a risk, which must be assessed and then managed with ongoing monitoring and improvements as appropriate. None of these steps were apparent from this FCPA enforcement action or found in the Order.

As noted yesterday, Philips in 2013 had agreed to “enhanced an anti-corruption training program that includes a certification process and a variety of training applications to ensure broad-based reach and effectiveness.” Whatever this training was, it does not seem to have reached China. Effective training is about communications, engagement and demonstrable implementation of the training messaging going forward. Once again Philips China did not seem as if that communications about not engaging in bribery and corruption was taken into its business operations.

Recidivist Behavior Under 2023 Corporate Enforcement Policy

As noted yesterday, in a May 10, 2023 Press Release,  Phillips announced that “The U.S. Department of Justice (DOJ) has closed its parallel inquiry into these matters” and the company intoned that it “fully cooperated with the SEC and DOJ.” Philips also reported that the FCPA matter had “previously been disclosed in Philips’ Annual Reports 2019 through 2022.”

There has been no statement by the Department of Justice (DOJ) regarding Philips. Further there has been no declination regarding Philips publicly announced by the DOJ. Given the strong statement about recidivists by Deputy Attorney General Lisa Monaco in announcing the Monaco Doctrine last September and the need for speed referenced by Kenneth Polite in announcing changes to the Corporate Enforcement Policy in January 2023; one might have expected some statement from the DOJ.

If the DOJ really wants companies to step forward and self-disclose, it would seem that Philips would be a good example to use. Apparently there was not self-disclosure, not extraordinary cooperation and no compliance with the 2013 SEC Order concluding the first Philips FCPA enforcement action. In other words, all the requirements for a company to obtain the significant credit under the 2023 Updated Corporate Enforcement Policy. If you add in Philip’s prior FCPA enforcement action into the mix, it would certainly appear that Phillips’ culture of compliance was lacking, at least along the lines of that aspect of the Monaco Doctrine.

Lessons Learned

With Phillips filing out the trio of recent distributor enforcement actions, it is clear that companies need to start paying more attention to the distributor sales model as a source of risk. Of course, robust due diligence screening is a must but it is only a starting point. Companies need to monitor the relationship after the contract is signed. The Philips FCPA enforcement action points toward the need for robust data analytics particularly around special price discounts with distributors creating excessive distributor margins which could be used to fund improper payments to employees of state-owned enterprises or governmental officials. A data analysis would quickly and efficiently show any special discount or discount beyond the standard range given to distributors. Moreover, regional discounts could be taken into account easily using the data analytics approach.

Additionally the maintenance of adequate books, records, and accounts concerning special price discounts to demonstrate that the discounts were supported by adequate documentation to ensure their business justification and management’s approval of them. This basic step also acts as a basic compliance internal control so that there can not only be oversight of the proposed distributors and any discounts but also creates a documented audit trail if a regulator ever comes knocking.

At this point there is perhaps some head-scratching about the final resolution, if any, regarding Philips given the state of the record as laid out by the Order. However it is clear there are significant lessons for the compliance professional from the Phillips enforcement action around distributors. I hope that at some point there is greater clarity under the 2023 Corporate Enforcement Policy update.

Categories
31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program in Training and Communications – Communication Across Cultures

A 360-degree approach to communications entails looking at all interactions as a way to interconnect. This means both verbal and non-verbal clues and hints. This concept can be beneficial in relating to and with cultures outside the U.S., as one of the most critical issues to a compliance function is breaking through a company’s internal cultural boundaries. In a  Harvard Business Review article entitled “Getting to Si, Ja, Oui, Hai, and Da,” Erin Meyer explained that “managers often discover that perfectly rational deals fall apart when their [business] counterparts make what seem to be unreasonable demands or don’t respect their commitments.” She laid out a five-point solution I have adapted for the CCO or compliance practitioner in communicating a compliance program across a multi-national organization. In its 2020 Update, the DOJ specified that when it comes to compliance training, a company must offer compliance training in the form and language appropriate for the audience.

Initially, look for as many cultural bridges as you can find, as it will help you understand what your international audience is communicating to you, in both verbal and non-verbal formats, during a wide variety of activities familiar to any compliance professional such as training, investigations or simple meetings where the compliance perspective must be articulated in any business setting. If you fail to have an understanding or even a person who can navigate these signs for you, here are five steps to help you out: 1) Adapt the way you express disagreement; 2) Know when to bottle it up and let it all pour out; 3) Learn how the other culture builds trust; 4) Avoid yes or no questions; and 5) Be careful about putting it in writing.

Three key takeaways:

  1. Communications in compliance must be largely drawn around trust.
  2. Look for as many cultural bridges as possible; it will help you understand what your international audience is communicating.
  3. One of the most critical issues to a compliance function is breaking through a company’s internal cultural boundaries.
Categories
Innovation in Compliance

Don’t Lose the Learner with Asha Palmer

Asha Palmer is on a mission to revolutionize the ethics and compliance profession. She joins Tom Fox in this episode of Innovation in Compliance to discuss how marrying technology with ethics and compliance can lead to unprecedented strides in the profession. She shares her new role at Skillsoft, insights on leveraging technology to support learning objectives, and why it’s important to understand different learning styles for more effective training outcomes.

Asha Palmer is the Senior Vice President of Compliance Solutions at Skillsoft, where she leads the strategy and product roadmap, delivering transformative learning experiences. She has a wealth of experience from her previous roles, including her time in the U.S. Attorney’s office, as well as working at Conversant and OneTrust. A seasoned compliance professional, Asha is applying the skills she’s honed throughout her career to enhance the ethics and compliance profession.

 

You’ll hear Tom and Asha discuss:

  • Technology plays a crucial role in the scalability and sustainability of the ethics and compliance profession.
  • Asha advocates for an understanding of different learning styles to deliver more effective training and compliance communications.
  • It’s important to understand the ‘why’ behind business operations to drive meaningful outcomes for both administrators and learners.
  • Trainers need to provide a varied learning experience to cater to different types of learners, fighting the forgetting curve and ensuring information retention.
  • Asha stresses the importance of delivering compliance training in a way that is tailored to the audience’s comfort, language, and culture. 
  • The speed of delivery can affect comprehension, especially for non-native English speakers. As such, training should be delivered at a pace that enables learners to retain and apply the information.
  • Asha discusses the challenge of delivering compliance learning globally. It involves adapting to various languages, cultures, and legal and regulatory requirements.
  • Skillsoft updates training modules in response to new or changing regulations, and emerging risks. Their strategy includes listening to customer needs and creating a roadmap to meet those needs.
  • It’s important to create a sustainable ethical and compliant culture within organizations. Asha encourages open conversation and learning from successes and failures in order to improve the effectiveness of ethics and compliance programs.

 

KEY QUOTES:

“I have a hashtag, don’t lose the learner. Because if you lose the learner, you’ll never get them back.” – Asha Palmer

 

“One of the great things I’ve learned is that we can’t be sustainable or scalable without the help and benefit of technology.” – Asha Palmer

 

“We listen to our customers. I talk to customers a lot. As I said earlier, if there is something that they need to educate on that we haven’t thought about, we go think about it and we think about how we can effectively then present learning and engagement so that they are able to educate their employee population on that.” – Asha Palmer

 

Resources:

Asha Palmer on Skillsoft | LinkedIn 

Skillsoft

Categories
Blog

Phillips FCPA Enforcement Action: Violations, Remediation and Recidivism – Part 2

We continue our exploration of the Koninklijke Philips N.V. (Philips) Foreign Corrupt Practices Act (FCPA) enforcement action involving the Securities and Exchange Commission (SEC), for Phillips actions in China and its Chinese subsidiary, Phillips China. As set out in the SEC Order, Philips was order to “pay disgorgement of $41,126,170, prejudgment interest of $6,047,633, and a civil monetary penalty of $15,000,000” for a total fine and penalty of $62 million. Yesterday we considered the bribery schemes employed by Phillips China. Today we consider the responses made by Phillips which led to its internal investigation, Phillips remediation and the prior FCPA enforcement action.

A. The FCPA Violations

In the SEC Order, Phillips was not charged with the payment of bribes. Rather, Phillips was charged with a failure of internal controls. Under the FCPA, companies which are issuers are required “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances.”

  1. Transactions are executed in accordance with management’s general or specific authorization;
  2. Transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
  3. Access to assets is permitted only in accordance with management’s general or specific authorization; and
  4. The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Philips violated the FCPA “failing to devise and maintain an adequate system of internal accounting controls regarding distributor transactions and the use of these third parties.” Additionally, “Philips’ internal accounting controls were not sufficient to provide reasonable assurances that transactions were executed in accordance with management’s general or specific authorization and that access to assets was permitted only in accordance with management’s general or specific authorization.”

B. Cooperation and Remediation

Interestingly Phillips did not self-disclose this issue. Nor did Phillips appear to engage in any ‘extraordinary” cooperation. This cooperation was noted in the Order as “Philips undertook an internal investigation and regularly shared with Commission staff the facts developed in its inquiry, including facts previously unknown to the staff, and identified and voluntarily provided translations of key non-privileged documents.” I was particularly intrigued by the statement “facts previously unknown to the staff” which would seem to indicate there were some facts which were previously known to the SEC (and not by the way of a self-disclosure.)

Phillips did engage in remediation efforts which were recognized by the SEC. These included:

  • Phillips made structural improvements to its policies and procedures;
  • The company improved its tone at the top and the middle, with a focus on Philips China;
  • Phillips increased accountability for enforcing compliance policies by its business leaders;
  • The company highlighted compliance as a key component of ethical business practices;
  • Phillips terminated or disciplined Philips China employees involved in the conduct;
  • Phillips terminated business relationships with distributors involved in the conduct;
  • The company also improved its internal accounting controls relating to distributors;
  • Phillips improved its ability to monitor its subsidiaries bidding practices and their use of discounts and special pricing; and
  • Finally, Philips has revised its compliance training.

 C. Prior FCPA Enforcement Action

In 2013 (the year before these actions began) Phillips agreed to its first FCPA enforcement action, also involving the SEC (2013 Order). That matter related to the company’s action in Poland. According to the FCPA Blog, “from 1999 to 2007, in at least 30 bids, employees of Philips’ subsidiary in Poland ‘made improper payments to public officials of Polish healthcare facilities to increase the likelihood that public tenders for the sale of medical equipment would be awarded to Philips. The bribes and kickbacks were 3% to 8% of the contract amounts.” In that 2012 enforcement action, “Philips agreed to pay $4.5 million in the settlement, consisting of disgorgement of $3.1 million and prejudgment interest of $1.4 million.” Of course, Phillips also agreed to “cease and desist from committing or causing any violations and any future violations of” the FCPA.

As for the remedial actions taken by Phillips for the 2013 Order it stated, “Philips also retained three law firms and two auditing firms to conduct the investigation and design remedial measures to address weaknesses in its internal controls. Included in changes to internal controls, Philips established strict due diligence procedures related to the retention of third parties, formalized and centralized its contract administration system and enhanced its contract review process, and established a broad-based verification process related to contract payments. In addition, Philips has made significant revisions to its Global Business Principles policies and continually revises the policies to keep them current and relevant. Philips also established and enhanced an anti-corruption training program that includes a certification process and a variety of training applications to ensure broad-based reach and effectiveness.”

Given that the Phillips China bribery scheme started in 2014 does it sound like Phillips took these obligations very seriously. I wonder just where those three law firms and two audit firms were looking when they conducted an investigation and designed “design remedial measures to address weaknesses in its internal controls.”  Finally I am not sure where the company’s “certification process” went after the 2013 Order, but apparently not as far as China.

All this means that Phillips is yet another FCPA recidivist. There was no statement in the 2023 Order that Phillips self-disclosed the illegal conduct in China to the SEC. Nevertheless, Phillips seemed to get the benefit of the doubt from the DOJ. In a May 10, 2023 Press Release,  Phillips announced that “The U.S. Department of Justice (DOJ) has closed its parallel inquiry into these matters” and the company intoned that it “fully cooperated with the SEC and DOJ.” Phillips also reported that the FCPA matter had “previously been disclosed in Philips’ Annual Reports 2019 through 2022.”

There has been no statement by the Department of Justice (DOJ) regarding Phillips. Further there has been no declination regarding Phillips publicly announced by the DOJ. Given the strong statement about recidivists by Deputy Attorney General Lisa Monaco in announcing the Monaco Doctrine last September and the need for speed referenced by Kenneth Polite in announcing changes to the Corporate Enforcement Policy in January 2023; one might have expected some statement from the DOJ.

Or perhaps not. Tomorrow, we conclude with some final thoughts.

Categories
Daily Compliance News

Daily Compliance News: May 16, 2023-the AI and Compliance Edition

Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance brings to you compliance related stories to start your day. Sit back, enjoy a cup of morning coffee and listen in to the Daily Compliance News. All, from the Compliance Podcast Network. Each day we consider four stories from the business world, compliance, ethics, risk management, leadership or general interest for the compliance professional.

Stories Include

  • Using AI to manage risk. (InsideBigData)
  • How will AI change the workplace. (WSJ)
  • Using AI to manage regulatory risk frameworks. (PYMNTS)
  • Will AI help compliance? (Forbes)
Categories
Sustainability

Sustainability: The Business Opportunity of the 21st Century – Episode 1, Introduction

We are at a defining moment in human history, a moment for change, in which climate is the single biggest commercial opportunity of our time.  In this podcast, Tom Fox and Sustainability guru Richard Blundell explore the opportunities open to businesses that embrace sustainability from the business perspective. Find out why sustainability is the greatest opportunity of the 21st century, and you can prepare your business to take advantage of the unprecedented global opportunity.

In this inaugural episode of the Sustainability podcast, Tom Fox and Richard Blundell, a Sustainability guru and maven, discuss how his unwavering passion for sustainability led him to see it as a business opportunity. Richard shares his journey from being counseled against pursuing geology to starting a business with little industry knowledge. His company morphed into an environmental services provider and expanded into cleaning sewers and recycling oil.

Richard’s passion for sustainability is evident, as he sees it not only as an environmental issue but also as a financial opportunity. His vision is for businesses to shift towards sustainable practices to reduce costs while contributing to environmental preservation. “I think the big opportunity we’ve got here is by working sustainably, and we can create a better world than we have today. But we can do that in a way where the business case makes sense,” says Richard.

For businesses looking to implement sustainability practices, here are three tips from the podcast episode:

1. Identify areas where sustainability can reduce costs and enhance efficiency

2. Approach sustainability as a long-term investment instead of a short-term expense

3. Collaborate with stakeholders to create a sustainable ecosystem.

Listen to the full episode for insights and practical tips for incorporating sustainability into business practices. Richard’s enthusiasm and practicality will inspire you to explore sustainability as a business opportunity.

Resources

Richard Blundell

Tom Fox

Instagram

Facebook

YouTube

Twitter

LinkedIn