A recent Foreign Corrupt Practices Act (FCPA) enforcement action involving Philips highlights a bribery risk often overlooked: excessive discounts to distributors. This case underscores the need for companies operating globally to manage not just the well-known risks of paying intermediaries for assistance with securing overseas customers, but also the risks associated with offering excessive discounts to distributors—a practice that can raise as much of a bribery risk as an excessive commission. While it’s logical to identify discounts as a risk, understanding why requires a deeper dive into the principles behind the regulations—a main theme in compliance.
In recent years, FCPA enforcement actions have increasingly focused on distributor relationships, as evidenced by cases involving Oracle, Microsoft, and now Philips. Oracle faced FCPA issues related to distributor discounts and marketing reimbursements. Microsoft faced scrutiny due to a lack of knowledge about who its distributors were doing business with, including some sanctioned entities. The Philips case accentuates the necessity of ongoing risk assessment, monitoring, and improvement with respect to distributor relationships. From the enforcement action and related order, it was apparent that these steps were missing in Philips’s operations.
Moreover, the Philips case has shone a light on the need for robust and effective anti-corruption training. Despite promising to enhance its anti-corruption training program in 2013, Philips failed to ensure the implementation of its training in China, suggesting that the message about avoiding bribery and corruption wasn’t adequately integrated into its business operations.
The role of DOJ guidance
This situation becomes even more concerning when considering the updates to the U.S. Department of Justice (DOJ) Evaluation of Corporate Compliance Programs in March. The updated DOJ guidance is a crucial resource for developing strong compliance programs, emphasizing the need to scrutinize financial relationships that may serve as conduits for corruption. It specifically mentions the need for close monitoring of discounts to third parties like distributors, which can potentially be used to facilitate bribery.
Following this guidance, as part of the well-known risk-based approach, companies are required to identify potential risk areas, such as excessive discounts to distributors and devise measures to detect and prevent possible misconduct. Not surprisingly, the DOJ guidance recommends the use of data analytics tools to monitor these discounts to quickly identify any irregularities or trends that could suggest wrongdoing.
In the Philips case, the principles of the updated DOJ guidance are particularly pertinent. Philips’s violation of the FCPA through the misuse of distributor discounts underscores the need for a dynamic risk-based compliance program. Despite previous FCPA enforcement actions, the company’s failure to monitor these discounts suggests a deeper issue: a deficiency in creating a culture of compliance within the organization.
Consequently, the Philips case serves as a stern reminder of the importance of regularly evaluating and updating compliance programs in alignment with evolving risks and regulatory expectations. It underlines the necessity for companies to adopt a proactive risk-based approach to compliance, use advanced analytics to oversee potential risk areas and cultivate a culture of compliance from the top down.
This case, alongside DOJ’s guidance, presents valuable lessons for companies seeking to remain compliant with the FCPA in an increasingly intricate and challenging global business environment. It proves, once again, that an effective compliance program isn’t just about devising policies and procedures but ensuring they are enacted in practice and integral to a company’s operations and culture.
What can we learn?
So, what are the key takeaways from the Philips enforcement action for compliance professionals? First, the distributor sales model requires greater scrutiny as a significant source of risk. While comprehensive due diligence screening is a must, it is merely the starting point. The relationship with distributors should be continually monitored, sometimes even after contracts have been signed. In addition to this, it is crucial to implement vigorous data analytics to enable real-time flagging of risky transactions involving discounts with distributors.
Data analytics can reveal excessive distributor margins that may fund improper payments to employees of state-owned enterprises or government officials. A data-driven approach can efficiently fix anomalies such as special discounts or discounts beyond the standard range. The updated DOJ guidance reaffirms this strategy, stressing the significance of comprehensive risk assessment and use of technological tools in detecting and preventing corruption.
Moreover, it is important to maintain proper books, records, and accounts concerning special price discounts. There should be enough documentation to support the business justification of these discounts, and it should also reflect the management’s approval. The Philips case serves as a reminder that this “basic” step is a vital compliance internal control providing oversight of proposed distributors and discounts and creating a documented audit trail if a regulator ever comes knocking.
Lastly, the Philips enforcement action and the 2023 DOJ guidance underline the impact of creating a healthy compliance culture. The Philips case showed that the risk of reoffending remains high even if a company is subjected to a previous FCPA enforcement action without a substantial compliance culture. A compliance culture is not merely about having the right policies in place but about integrating those policies into everyday business conduct.
The Philips enforcement action has thrown light on several key areas for improvement for global businesses. While there might be some ambiguity regarding the final resolution of the Philips case, the lessons it offers are crystal clear. By aligning their compliance programs with the principles highlighted in DOJ’s updated guidance, companies can significantly mitigate the risks associated with distributor discounts and enhance their overall compliance effectiveness.
The Philips case underscores the importance of scrutinizing distributor relationships in light of the Foreign Corrupt Practices Act (FCPA), specifically in relation to excessive discounts, as these can be as risky as excessive commissions.
Anti-corruption training and its effective implementation are crucial for global companies. Despite prior commitments, Philips’s failure to fully integrate its training in China signifies the necessity of integrating the avoidance of bribery and corruption into business operations.
The updated guidance from the U.S. Department of Justice (DOJ) emphasizes close monitoring of financial relationships, including discounts to third parties like distributors, potentially used to facilitate bribery. The use of data analytics tools for monitoring these discounts is highly recommended.
The Philips case highlights the need for a robust risk-based compliance program and the cultivation of a compliance culture within organizations. Despite previous FCPA enforcement actions, Philips’s failure to monitor distributor discounts suggests a deficiency in its compliance culture.
The updated DOJ guidance and Philips case underline the magnitude of creating a comprehensive audit trail, particularly around special price discounts, as well as nurturing a culture of compliance. It’s not just about having policies but also about integrating these into everyday business conduct.