On May 11, 2023, the Securities and Exchange Commission (“SEC”) announced that Netherlands-based Koninklijke Philips N.V. (“Philips”) will pay more than $62 million to resolve claims that it violated the Foreign Corrupt Practices Act (“FCPA”) with respect to alleged conduct related to its sales of medical diagnostic equipment in China. Admin. Proc. File No. 3-21411. According to the SEC, Philips’ subsidiaries in China used special price discounts with distributors that created a risk that excessive distributor margins could be used to fund improper payments to employees. Philips neither admitted nor denied wrongdoing as part of the settlement.
While the SEC alleged, in essence, a bribery case, the SEC’s claims were brought on a books-and-records theory. The SEC alleged that Philips violated Section 13(b)(2)(A) of the Securities Exchange Act of 1934 (the “Exchange Act”) by maintaining “inaccurate documentation” of the special price discounts it offered to its Chinese distributors and failing to include “adequate documentation” of “their business justification and management’s approval of them.” The SEC further alleged that Philips failed to maintain adequate internal controls, in violation of Section 13(b)(2)(B).
In support of the purported violations, the SEC alleged that a district sales manager at Philips’s China subsidiary had bribed a hospital director for assistance with the contract procurement process. Additionally, the SEC alleged that the Chinese subsidiaries’ “employees, distributors, or sub-dealers engaged in improper bidding practices by preparing additional bids with other manufacturers’ products to create the appearance of legitimate public tenders and to meet the minimum bids requirement under Chinese public tender laws.” All of these instances of conduct, the SEC alleged, were violations of the FCPA, and by failing to maintain internal controls and accounting procedures sufficient to monitor and prevent such instances, Philips had violated its obligations as an issuer under the Exchange Act.
In the settlement order, the SEC cited Philips’s cooperation and remediation, but nevertheless imposed undertakings requiring Philips to report to the SEC on the progress of its remediation for a period of two additional years. While no monitor was imposed, such reporting can be a significant imposition on firms. The SEC’s order does not spell out why such continued reporting was deemed necessary in this case, where the conduct at issue dated from between 2014 and 2019 and the SEC commended Philips’ remediation since that period.
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Settlement Order
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