SEC vs. Philips: Expansion of Foreign Corrupt Practices Act
In May 2023, a complex SEC law enforcement proceeding was concluded against Philips, a public Dutch medtech company. The proceeding concluded with a settlement, whereby Philips agreed to pay a fine of more than USD 62 million to resolve charges that it violated provisions of the Foreign Corrupt Practices Act (FCPA).
The proceedings began as a result of suspicions that Philips, through its wholly owned subsidiaries operating in China, won public hospital tenders in China that were “tailor-made” for it as a result of bribes given by Philips China’s employees, distributors, or sub-dealers to hospital executives. The SEC further alleged that Philips China used special price discounts with distributors that created a risk that excessive distributor margins could be used to fund improper payments to government employees.
The law enforcement proceeding and the ultimate settlement raise interesting points relating both to American law enforcement authorities’ jurisdiction and to the nature of the actions giving rise to suspicions of bribery.
The aforesaid violations were committed in China by one of Philips’ private companies that prima facie has no connection to the United States or to SEC oversight. However, the SEC is expanding the application of US FCPA (and not for the first time) beyond the United States and is acquiring jurisdiction over the actions of individuals and companies worldwide.
The reason for the application of the FCPA to Philips China’s violations is the mere fact that Philips China’s parent company, Philips, is a public company traded, inter alia, on the New York Stock Exchange. This is despite the fact the case involves non-American companies and the violations were not committed on American soil.
A Discount or a Bribe?
The allegations raised against Philips include that the provision of exceedingly high discounts to Philips China’s distributors raises suspicions that distributors are using such distributor margins to bribe foreign public officials. This constitutes a significant expansion of what is considered suspicions of bribery, because the SEC considers the mere granting of a significant discount an opening for corruption that requires law enforcement measures, without even alleging that such acts of corruption were actually committed. In other words, Philips was suspected of substantively fostering bribery and, in the eyes of the SEC, the very granting of the substantial discount was a violation of the FCPA.
Internal Compliance Program in Constant Motion
We can draw several obvious conclusions from the SEC-Philips settlement. First, it is clear that any company with international operations must have a compliance program that complies with the provisions of the FCPA and the latest decisions in this regard, regardless of whether or not it operates in the United States. Such compliance program is necessary due to concerns US law enforcement authorities, which are steadily expanding the application of the FCPA to even the most indirect connection to the United States, will open administrative or criminal proceedings. We also recommend that such companies thoroughly examine all of their trade practices and engagements – discounts, benefits, scopes of responsibility, and various connections to foreign civil servants – as well as the contracts and agreements underpinning them, with the assistance of attorneys who are experts in the provisions of the FCPA. This is to ensure that such benefits cannot be construed as an under-the-table agreement or as a red flag for acts of bribery and corruption.