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.”
- Transactions are executed in accordance with management’s general or specific authorization;
- 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;
- Access to assets is permitted only in accordance with management’s general or specific authorization; and
- 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.
