Internal controls of subsidiaries were addressed in the Securities and Exchange Commission’s (SEC) resolution with Philips Electronics N.V. (“Philips”), a Netherlands-based parent of an affiliation of companies that manufacture and supply goods and services in a number of business sectors, including healthcare. Philips has shares listed on the New York Stock Exchange. In the cease-and-desist order entered by the SEC against Philips, violations of the FCPA’s record-keeping and internal controls provisions were alleged for conduct on the part of its Polish subsidiary.1
The record-keeping and internal violations of the FCPA were associated with improper inducements and kickbacks made by Philips’ Polish subsidiary to public officials of Polish healthcare facilities. These officials were alleged to have been rewarded for including specifications in tenders associated with the subsidiary’s products, thereby heightening the likelihood of their selection. In order to conceal the improper inducements, the records of the Polish subsidiary were falsified.
Although Philips’ initial internal investigation of its Polish subsidiary failed to reveal the improper inducements to the Polish healthcare officials, discipline was meted out and other remedial steps taken. Later, when further disclosures were brought to its attention, Philips undertook another internal investigation and rather extensive remediation. As a result, Philips was credited for its self-disclosure, cooperation, and remedial efforts. Other than disgorgement and interest, no fines were imposed by the SEC.
Of the remedial efforts undertaken by Philips, included were significant changes to its internal controls. “Philips established strict due diligence procedures related to the retention of third parties, formalized and centralized its contract administration system and enhanced its contract review process, and established a broad-based verification process related to contract payments.”2 All of these steps are suggestive of the precise type of internal controls that may be helpful if not required in higher risk settings, particularly when third parties are retained and used.
1Koninklijke Philips Electronics N.V., Exchange Act Release No. 69327 (ALJ Apr. 5, 2013) (cease-and-desist order).
2Id. at ¶ 14.