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By Stuart Gittleman
The Securities and Exchange Commission on Friday sanctioned – but did not fine – global electronics maker Koninklijke Philips Electronics N.V. for violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act.
The move reflects statements by the SEC in recent years that compliance and remediation efforts, even after the wrongdoing has been stopped, may protect the entity from the most severe repercussions. This is particularly important in corruption cases, where the fines can eclipse the company's profits, and other U.S. and international agencies can bar the company from future business opportunities.
Although an initial internal probe prompted by the arrest of two employees of a Polish subsidiary missed the fact that its employees had been bribing officials for at least eight years, Philips' subsequent self-reporting, cooperation and remedial efforts supported the decision to not impose a fine, the SEC said.
Without admitting or denying the SEC's findings that it violated Sections 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934, Philips agreed to be ordered to cease and desist from committing or causing future violations, and to pay over $4.5 million in disgorgement and prejudgment interest.
The SEC found that from at least 1999 through 2007, employees of a Polish subsidiary made improper payments to healthcare officials in Poland to greatly increase the likelihood that at least 30 public tender offers by Polish healthcare facilities to buy medical equipment would be awarded to Philips.
The sales representatives submitted the technical specifications of Philips' equipment to the officials drafting the tenders. The officials incorporated the specifications into the contracts, which increased Philips' chances of being awarded the contracts and minimized the potential success of its competitors.
Moreover, some of the officials also decided to whom the tenders should be awarded, and when Philips won the contracts, the officials were usually paid from 3 to 8 percent of the contracts' net value.
Philips employees sometimes also kept a portion of the improper payments as a "commission" by making the improper payments through a third party agent who helped make improper arrangements and payments to the Polish healthcare officials.
The improper payments were falsely characterized and accounted for in Philips' books and records as legitimate expenses, and were at times supported by false documentation created by the Polish employees, third parties or both.
Philips learned of the misconduct in August 2007 when Polish officials searched three of its offices and arrested two of its Polish employees. The search and arrests prompted an internal audit that failed to discover the improper payments but resulted in Philips terminating and disciplining several employees and making substantial management changes and significant revisions to its internal controls.
In December 2009, Polish prosecutors indicted 23 individuals, including three former Philips employees, in a filing that described the improper payments to the officials. Philips then launched an internal probe that confirmed the allegations and found that the employees had made unlawful payments; that its books, records and accounts failed to accurately account for the improper payments; and that its internal controls failed to ensure that Philips properly recorded transactions in its books and records.
In early 2010, Philips self-reported its internal investigation to the SEC and the Department of Justice; shared the progress of the internal investigation with the SEC and the DoJ; and undertook significant remedial measures. In response to these steps, Philips terminated and disciplined several employees and installed new management at Philips Poland, and retained three law firms and two auditing firms to conduct the investigation and design remedial measures to address weaknesses in its internal controls.
The internal controls changes included establishing strict due diligence procedures for retaining third parties; formalizing and centralizing its contract administration system; enhancing its contract review process; and establishing a broad-based verification process related to contract payments. Philips also significantly revised its global business principles policies and is continually revising them to keep them current and relevant, and established and enhanced an anti-corruption training program that includes a certification process and applications to ensure broad-based reach and effectiveness, the SEC said.
Global companies beware: the SEC noted the importance of implementing an effective FCPA compliance and training program commensurate with the extent of an issuer's international operations.
Implementing an effective program must be an continuing effort, anti-corruption experts tell Compliance Complete. Most potential violations do not involve rogue staffers who create a scam to boost their commissions and keep some of the bribes themselves like Philips' employees did. The biggest risk to a company is that employees may not know what to do at critical points in their work.
A company can provide initial training and ongoing reminders, but the risk is still great if an honest employee facing a business opportunity far from the office does not know what to do, Scott Peeler, head of compliance at Stroz Friedberg, a risk management consultancy, told Compliance Complete.
Peeler, a veteran anti-corruption lawyer under former Manhattan District Attorney Robert Morgenthau and at the law firms Arent Fox and Chadbourne & Parke, said giving employees access to compliance guidance before they make a mistake is better than trying to clean up the error after it has been made.
Peeler has developed Navigator, a desktop and mobile application that puts this guidance in the hands of remote employees wherever they are so they can determine whether what they are about to do conforms to applicable law and company policies. But he said software is only a supplement to – rather than a substitute for – appropriate policies, and initial and ongoing training and refreshers, and an app only works if the employees are honest and if they use it.
"Good compliance policies, by nature, are designed with a great deal of complexity, but that very complexity is often a roadblock to employees understanding or following the rules. Navigator puts that complexity in the background where it belongs, removing barriers that all too often keep employees from reviewing and using compliance resources at the critical moment when their failure to do so can be so devastating. It really puts compliance in the palm of your hands," Peeler said.