The Foreign Corrupt Practices Act corporate repeat offender club is getting so large, that it really is not all that exclusive.
In 2013, Koninklijke Philips Electronics N.V. (“Philips”), a Netherlands-based company with shares listed on the New York Stock Exchange, resolved a $4.5 million FCPA enforcement action concerning conduct in Poland. (See here for the prior post).
In resolving the matter, Philips consented to entry of the Order prohibiting future FCPA violations.
Yesterday, the SEC announced that Philips agreed to pay “more than $62 million to resolve charges that it violated the FCPA” with respect to conduct related to its sales of medical diagnostic equipment in China.”
This administrative order states in summary fashion:
“These proceedings arise from violations of the books and records and internal accounting controls provisions of the FCPA. Philips, headquartered in the Netherlands, is a global manufacturer of health technology products, including diagnostic imaging equipment and patient monitoring systems. Between 2014 and 2019, Philips China employees, distributors, or sub-dealers engaged in improper conduct to influence foreign officials in connection with tender specifications in certain public tenders to increase the likelihood that Philips’ products were selected. In some cases, Philips China’s employees, distributors, or sub-dealers also engaged in improper bidding practices to create the appearance of legitimate public tenders by preparing additional bids with other manufacturers’ products to meet the minimum bids requirement under Chinese public tender rules. As a result, Philips was unjustly enriched by approximately $41 million.
In connection with some of these transactions, Philips China provided special pricing discounts to distributors, which created a corruption risk that the increased margins could be used to fund improper payments to employees of government-owned hospitals. During the relevant period, Philips China had insufficient internal accounting controls to prevent and detect the conduct described above and to provide reasonable assurances that certain transactions were recorded accurately in the books and records of Philips China, which were consolidated into the books and records of Philips. These deficiencies in China also created an environment that facilitated the conduct.”
As to general background, the order states:
“Philips entered the Chinese market in 1920 and established its first joint venture in 1985. Operating through Philips China, Philips has several wholly owned subsidiaries and representative offices in the region. 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.
In this same timeframe, Philips China sought to grow its diagnostic imaging business and win public tenders in an increasingly competitive market. 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.”
Under the heading “Philips China Employees and Distributors Improperly Influenced Public Hospital Tenders,” the order finds:
“In numerous transactions occurring from 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.
Each of the relevant transactions included, in whole or in part, elements of the following types of misconduct in public tenders:
(a) 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;
(b) The hospital employee drafted the specifications to increase the likelihood that the selected manufacturer would qualify for the winning bid; and
(c) 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 improper conduct occurred in several regions of China. The Philips China employees who participated in the conduct described above included district sales managers, sales employees, and employees in the technical group that supported sales.
One example of the conduct is a 2017 public tender in which a Philips China distributor won a procurement award for two Philips devices valued at $4.6 million. At the time of the bid submission in March 2017, the hospital had already taken steps to increase the likelihood that Philips China’s equipment would be selected for the award. The 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 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. There also was at least one additional transaction involving improper conduct in which the Hainan district sales manager’s team was involved.
A second example involved Philips China improperly influencing a public tender valued at $475,000. 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.
During the relevant period, 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 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.”
Based on the above, the order finds that Philips violated the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, Philips agreed to pay approximately $62.2 million (disgorgement of $41,126,170, prejudgment interest of $6,047,633, and a civil monetary penalty of $15,000,000).
Philips also agreed to cease and desist from committing future FCPA violations and to report to the SEC periodically during a two-year term “on the status of its ongoing remediation and implementation of compliance measures.”
The order states:
“The reports will focus particularly on due diligence on prospective and existing third-party consultants and vendors, FCPA training, and the testing of relevant controls, including the collection and analysis of compliance data.”
Philips also agreed to certify in writing compliance with various undertakings required by the order.
Under the heading “Commission Consideration of Philips’ Cooperation and Remedial Efforts,” the order states:
“In determining to accept the Offer, the Commission considered the ongoing remedial efforts undertaken by Respondent and cooperation afforded the Commission staff. 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.
Philips’ ongoing remediation has included: structural improvements to its policies and procedures; improving its tone at the top and the middle, with a focus on Philips China; increased accountability for enforcing compliance policies by its business leaders; highlighting compliance as a key component of ethical business practices; terminating or disciplining Philips China employees involved in the conduct described above; and terminating business relationships with distributors involved in the conduct described above. The company also improved its internal accounting controls relating to distributors, bidding practices, and the use of discounts and special pricing. Additionally, Philips has revised its compliance training.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“This matter highlights the need for companies to design and implement internal accounting controls sufficient for the scale of their business. Despite remediation done in connection with its prior violations, Phillips nevertheless failed over the course of several years to implement sufficient internal accounting controls with respect to its sales of medical technology products in China.”
This Philips release states:
“Resolving these legacy matters is important to Philips. Everyone at Philips is committed to achieving and maintaining the highest standards in its global business, building on a culture of integrity and compliance. Philips has substantially invested in the deployment and enhancement of compliance policies, procedures, controls, and awareness programs, which are regularly reviewed and updated.”
The release further states that the DOJ “has closed its parallel inquiry” of the matter.