This recent post highlighted the approximate $62 million Foreign Corrupt Practice Act enforcement action against Philips based on conduct in Angola. By resolving another FCPA enforcement action, Philips joined the corporate FCPA repeat offender club.
This post highlights additional issues to consider.
Timeline
As highlighted in this prior post, Philips had been under FCPA scrutiny since at least June 2019.
Thus, from start to finish, the company’s FCPA scrutiny lasted approximately four years.
I’ve said it many times, and will continue saying it until the cows come home: if the DOJ/SEC want their FCPA enforcement programs to be viewed as more credible and more effective the enforcement agencies must resolve instances of FCPA scrutiny much quicker.
This is particularly true in the Philips matter given the following language from the SEC:
“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.”
China Only
As highlighted in prior posts here, here, and here, Philips FCPA scrutiny involved not just conduct in China, but conduct in Brazil and Bulgaria as well.
However, last week’s FCPA enforcement action Philips only concerned conduct in China.
Buzzwords by the SEC
Many in the compliance community speak in buzzwords and cliches (see here and here for examples).
One would hope however, that a government enforcement agency would “speak” with a bit more precision in an official document resolving a $62 million enforcement action.
But no.
Among the many vague concepts the SEC cited for Philips remedial efforts was “improving its tone at the top and the middle.”
“Improper Bidding Practices”
The Philips enforcement action (which “only” involved findings of books and records and internal controls violations) concerned “improper bidding practices” – in the words of the SEC – by Philips China employees, distributors, or sub-dealers “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.”
According to the SEC, the “following types of misconduct” took place:
- The hospital employee responsible for writing the technical specifications, in consultation with a manufacturer’s employees, a distributor, or sub-dealer, determined the hospital’s technical preferences and drafted technical specifications that would provide a manufacturer with a competitive advantage in the public tender prior to the opening of the bidding period;
- The hospital employee drafted the specifications to increase the likelihood that the selected manufacturer would qualify for the winning bid; and
- 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.
The SEC’s administrative order then cites two examples.
The first in which a “Philips China district sales manager for Hainan Province had delivered approximately $14,500 USD equivalent to the home of a director of the hospital’s radiology department in return for the director’s assistance in the procurement process.”
The second in which “Prior to the award, the decision-making directors at the tendering 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.”
Distributor Issues
The SEC’s order also contained the following two paragraphs about distributors.
“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. Philips China maintained inadequate books, records, and accounts concerning special price discounts, as the discounts were unsupported by adequate documentation to ensure their business justification and management’s approval of them. The company’s books and records also contained certain inaccurate documents relating to the special price discounts. The special price discounts granted by Philips China were consolidated into Philips’ books and records. In addition, Philips did not devise and 5 maintain an adequate system of internal accounting controls with respect to the approval process and recording of the special pricing discounts to provide reasonable assurances of appropriate management authorization of the discounts. This deficiency, combined with pressure to win additional sales, created an environment in which there was a risk that excessive distributor margins could be used to fund improper payments to employees of government-owned hospitals.
In addition, during the relevant period, Philips China did not enforce certain of its due diligence and training procedures for the engagement of distributors or conduct adequate testing in high risk areas of sales to identify control failures.”
