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Koninklijke Philips N.V., a global medical technology manufacturer, recently agreed to pay over $62 million to resolve a Foreign Corrupt Practices Act (FCPA) enforcement action with the Securities and Exchange Commission (SEC). The enforcement action – the second for the Netherlands-based company – centered on alleged violations of the FCPA’s books-and-records and internal-accounting controls provisions related to special pricing discounts that “could” foster bribery payments to Chinese government officials.
The Conduct
The settled claims relate to two of Philips’ foreign subsidiaries, Philips Electronics Hong Kong Ltd. and Philips (China) Investment Co., Ltd. (collectively, “Philips China”). Most healthcare providers in China are government-owned enterprises, and purchasing new medical equipment is generally done through public tenders. Here, the SEC contended that Philips China employees, distributors, and sub-dealers improperly influenced public tenders for the purchase of diagnostic imaging equipment.
Among the allegations, the SEC claimed that Philips China engaged healthcare provider employees to draft public tenders with specifications that would “increase the likelihood” that Philips China would be successful in the bidding process. In addition, it alleged that Philips China gave special pricing discounts to its distributors that “created the risk” of improper payments to Chinese officials via increased margins that “could be used to fund improper payments to employees of the government-owned hospitals.”
Inadequate Books and Records
Under 15 U.S.C. § 78m, companies are generally required to create and use regular bookkeeping, internal controls and compliance procedures to identify and prevent FCPA violations.
Here, the SEC alleged that Philips violated these sections because it failed to adequately keep books and records documenting its special pricing discounts, failed to document the business justification of the discounts, and failed to ensure appropriate internal controls were in place to authorize the discounts. The SEC concluded that the lack of documentation and internal controls “created the risk” that the increased margins resulting from the discounts “could be used” and ultimately result in bribery in violation of the FCPA.
Takeaways
This settlement offers several key takeaways:
- Compliance generally. The settlement demonstrates the importance of companies’ compliance programs that include evaluating the corporation’s dealings with foreign officials, directly and indirectly, and – especially – any payments or financial arrangements with such officials.
- Broad reach of the FCPA’s books-and-records and internal-controls provisions. These provisions apply to all “issuers” – that is companies whose securities are listed in the U.S. In this case, the company’s stock was listed on a foreign exchange, but its common stock was registered with the SEC and publicly traded through a secondary listing on the NYSE, qualifying it as an issuer.
- Recidivism. Philips settled an earlier books-and-records FCPA enforcement action in 2013. While only passingly noted in this settlement agreement, companies with an FCPA enforcement history should anticipate increased scrutiny.
- Benefits of cooperation. Although the settlement was significant, it appears that Philips benefited from its cooperation, including providing non-privileged results of its own internal investigation and terminating business relationships with distributors implicated in the conduct. The settlement agreement explicitly noted Philips’ cooperation and remedial efforts.
