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Data Driven Compliance

Data Driven Compliance: Vincent Walden – Analyzing the Philips FCPA Enforcement Action Using AI

Are you struggling to keep up with the ever-changing compliance programs in your business? Look no further than the award-winning Data Driven Compliance podcast, hosted by Tom Fox, is a podcast featuring an in-depth conversation around the uses of data and data analytics in compliance programs.

Data Driven Compliance is back with another exciting episode featuring the insightful Vince Walden from KonaAI. In this episode, Walden and host Tom Fox discuss how data analytics can help uncover potential FCPA enforcement actions, using the Philips case as an example. They delve into the benefits of internal controls and the segregation of duties to prevent bribery and corruption. Walden goes on to examine the customer 360 model, which focuses on analyzing customer orders to pinpoint risky transactions and potential improper payments. Additionally, they explore Kona AI’s platform, which utilizes advanced algorithms to pick up problems and highlight high-risk transactions.

The podcast also features a discussion on the use of artificial intelligence and how machine learning can help compliance professionals identify anomalies that require investigation. You won’t want to miss the exciting upcoming episode where Walden showcases real-world examples of how companies can use machine learning in 2023.  Tune in to Data Driven Compliance and stay ahead of the curve in the compliance world!

Key Highlights

·      Data analytics for FCPA compliance detection

·      Kona AI’s Customer Analytics and Risk Assessment

·      Improper Vendor Payments Tracking

·      The importance of second level reviews in internal control

·      Analytics and Investigating Fraud Potential

·      Improving Precision in Machine Learning Models

KEY QUOTES

“Just those basic type of analytics could have been easily spotted these issues.”

“These are the types of things that when you could just sort, you would be able to find those high risk transactions.”

“Nowadays the technology is there to spot these types of activities when compliance has access to the data.”

“Let’s see if this event took place. And he just did a simple Google search on the Internet couldn’t find the event.”

Resources:

Vince Walden on LinkedIn 

KonaAI

 Tom Fox 

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2 Gurus Talk Compliance

2 Gurus Talk Compliance – Episode 6 – The Risk of Distributors

What happens when two top compliance commentators get together? They talk compliance, of course. Join Tom Fox and Kristy Grant-Hart in their podcast, 2 Gurus Talk Compliance, as they dive into hot compliance topics. This episode covers the potential crisis with due diligence in China, highlights from the Compliance Week 2023 National Conference, and a recent fraud case. They also discuss strategies for managing distributor risk, stakeholder management, and the need for AI regulation. With its unique insights and engaging storytelling, this podcast is a must-listen for anyone in compliance. Take advantage of the latest episode of 2 Gurus Talk Compliance, and stay ahead of the curve!

Highlights Include:

·      Philips FCPA Enforcement Action and Distributor Risk Management

·      Stakeholder Strategy for Ethical Business Practices

·      Risks of Due Diligence in China for US Companies

·      Risks of Conducting Investigations in China

·      Quantitative skills, AI regulation, and challenges

·      Tech Hearings & Messaging Compliance Reform

·      The Problems with Ephemeral Messaging and Hot Desking

·      The Myth of Informal Office Collaboration

·      IRS Scam Calls and Sanctions Compliance

 Resources 

  1. Board governance and Strategy in a Changing Economic Landscape.
  2. How to Create a Stakeholder Strategy
  3. Messaging crackdown
  4. Corporate Crime and National Security
  5. Philips pays SEC $62 million to resolve China FCPA violations
  6. U.S. Companies in China Worry Due Diligence Will End in Spy Dramas
  7. OpenAI Founder Calls for the Global Regulation of Artificial Intelligence
  8. Why Employees Hate Hot-Desking
  9. Travis County cautions of ongoing jury duty fraud calls

Connect with Kristy Grant-Hart on LinkedIn

Spark Consulting

Tom

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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.

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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.

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Blog

Phillips FCPA Enforcement Action: The Risks with Distributors – Part 1

Last week the Amsterdam based Koninklijke Philips N.V. (Philips) agreed pay more than $62 million to the Securities and Exchange Commission (SEC) to resolve charges that it violated the Foreign Corrupt Practices Act (FCPA) with respect to conduct related to the sales of medical diagnostic equipment in China. This case is yet another recent FCPA enforcement matter involving distributors. It demonstrates once again some of the inherent risks in a distributor sales model, as opposed to the model traditionally seen as the highest risk, the commissioned sales-agent. (Shout out to Harry Cassin at the FCPA Blog for breaking the story to the compliance community.)

According to the SEC Press Release announcing the matter, “Philips’ subsidiaries in China, cumulatively referred to in the order as Philips China, used special price discounts with distributors that created a risk that excessive distributor margins could be used to fund improper payments to government employees.” Equally significant was that the “SEC’s Order also found that employees, distributors, or sub-dealers of Philips’ subsidiaries in China engaged in improper conduct to influence hospital officials to draft technical specifications in public tenders to favor Philips’ products.” The SEC pointed to two examples, “in one instance, a district sales manager at Philips China provided funds to a hospital director in return for the director’s assistance in the procurement process, and, in another instance, Philips China employees discussed tailoring technical specifications for a public tender with hospital directors so that only Philips China and two other manufacturers would qualify for the bid.” As a result of its conduct, Philips was unjustly enriched by approximately $41 million.

I. Introduction

According to the Order, in “China the majority of hospitals and other healthcare providers are state-owned enterprises. These government-owned entities purchase the majority of their diagnostic imaging equipment through public tenders. By 2016, the majority of Philips China’s sales were made indirectly through authorized distributors or sub-dealers engaged by the authorized distributors. By 2018, 91% of Philips’ diagnostic imaging revenue in China was earned through this indirect sales channel.”

Philips China aggressively grew its diagnostic imaging business, winning public tenders in an increasingly competitive market. Phillips was aggressive in its pricing discounts to do so. According to the Order, “in some transactions, at the request of distributors, Philips China provided special pricing discounts on the health technology equipment that it sold to its distributors. However, Philips China’s approval processes and its recording of the special pricing discounts were not subject to sufficient internal accounting controls to ensure appropriate management authorization of the discounts.”

II. The Corruption Schemes

  1. The Hospitals

The Order related that in multiple transactions between 2014 through 2019, Philips China employees, distributors, or sub-dealers engaged in improper bidding practices to increase the likelihood that Philips China’s distributors or their sub-dealers were awarded public tenders to sell medical equipment to government-owned hospitals. There were three general prongs to these bribery schemes. The employee responsible for writing the technical specifications, in consultation with a bidder such as Phillips would provide that same bidder “with a competitive advantage in the public tender prior to the opening of the bidding period” by providing the information to the bidder prior to the formal beginning of the bidding process.

Another scheme was to draft specifications which would meet that bidder’s equipment “to increase the likelihood that the selected manufacturer would qualify for the winning bid.” In the final bribery scheme the “hospital employee directed the winning bidder or its distributor or sub-dealer to prepare the manufacturer’s bid and also two additional accompanying bids to meet the three-bid requirement of public tenders and give the appearance of legitimacy.” Further, “Phillips China employees who participated in the conduct described above included district sales managers, sales employees, and employees in the technical group that supported sales.”

  1. Phillips Responses

The SEC Order pointed to three examples of bribery schemes engaged in by Philips in response to the corruption perpetrated by the health care providers.

a. Bribes for Inside Information

In one example a Philips China district sales manager for Hainan Province delivered approximately $14,500 directly to the home of a director of the hospital’s radiology department in return for the director’s assistance in the procurement process. With the inside information obtained through this payment, “the sales team discussed the specifications to be included in the bid with the relevant hospital director, and its distributor prepared an accompanying bid with another manufacturer’s products.” It ended with a “procurement award for two Philips devices valued at $4.6 million.”

b. Bribes to Obtain Unlawful Influence

In another example, the decision-making directors at a hospital discussed tailoring the technical specifications with Philips China employees so that only Philips China and two other manufacturers would qualify to compete in the bidding process. In October 2017, a Philips China distributor won the bid to sell two Philips devices to the hospital. This tender was won as a result of inappropriately influencing the tender specifications, netting Philips a tender valued at $475,000.

c. Excessive Discounts Provided to Distributors

In perhaps the most classic distributor bribery model, Philips China’s use of special price discounts with distributors created the risk that excessive distributor margins could be used to fund improper payments to employees of government-owned hospitals. The SEC Order did not specify the amount of the discounts or how it differed from the standard (if any) discount provided to Philips distributor.

Join us tomorrow where we consider Philips lack of internal controls, the fine and penalty, the recidivism of Philips and any potential Department of Justice (DOJ) enforcement action.

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Daily Compliance News

Daily Compliance News: May 13, 2023 – The Mike Lynch Extradited Edition

Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance, brings you compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee, and listen 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 we are following in today’s edition:

  • Recidivist Koninklijke Philips N.V. settles another FCPA enforcement action. (FCPA Blog)
  • Mike Lynch was extradited to the US. (BBC)
  • Key FIFA corruption witness to be sentenced. (Reuters)
  • Supreme Court overturns yet another corruption conviction. (CNN)