ObservationsYesterday I reviewed the underlying facts of the long running Foreign Corrupt Practice Act (FCPA) matter involving the LATAM Airlines Group S.A. (LATAM). The resolution involved criminal charges detailed in an Information resolved via a Deferred Prosecution Agreement (DPA), and a civil settlement with the Securities and Exchange Commission (SEC), resolved through a Cease and Desist Order (Order) outlining the civil violations, which named LATAM’s predecessor-in-interest is LAN Airlines S.A. (LAN) as the respondent party.

The cost to LATAM was not insignificant. As noted in the Department of Justice (DOJ) Press Release, “As part of the DPA, LATAM agreed to pay a $12.75 million criminal penalty” and under the civil settlement with the SEC the company “agreed to pay $6.74 million in disgorgement and $2.7 million in prejudgment interest. Thus, the company paid approximately $22.2 million in combined penalty, disgorgement”.

This week’s settlements bookends the civil settlement with current LATAM President Ignacio Cueto, reached in February 2016. Under the SEC Cease and Desist Order (Cueto Order), Cueto agreed to a civil penalty of $75,000 for both approving an Argentinian official to act as a consultant for the company and approving a payment of $1.15MM to this consultant understanding, at the time, “that it was possible the consultant would pass on some portion of the $1.15 million to union officials in Argentina.” In addition to the aforementioned fine, he agreed to receive anti-corruption training for senior executives of the company.

The company clearly did not take compliance very seriously at the time of the incidents giving rise to this enforcement action, nor did it apparently take seriously any potential FCPA liability. As noted in the DOJ Press Release, “LATAM did not voluntarily disclose the FCPA violations,” and in not self-disclosing compromised certain evidence in the matter. During the pendency of the investigation, they “did not, however, remediate adequately. LATAM failed to discipline in any way the employees responsible for the criminal conduct, including at least one high-level company executive [Cueto listed above], and thus the ability of the compliance program to be effective in practice is compromised.”

At some point the company did see the light and began to “cooperate with the department’s investigation after the press in Argentina uncovered and reported the conduct approximately four years after it had occurred. After LATAM began cooperating, it did so fully and provided all relevant facts known to it, including about individuals involved in the misconduct.” In the DPA, it reflected this lack of cooperation in the paucity of discounting factors, which “As a result, the company paid a penalty within the U.S. Sentencing Guidelines range instead of receiving a discount off the bottom of the range.”

The DOJ clearly did not credit the company for its recalcitrant conduct before and during the investigation. However, as laid out in the DPA, the fine range was $10.2 to $20.4 so the company did obtain a DOJ fine in the lower range of the Sentencing Guidelines. The clear message, yet again from the DOJ, is that the conduct of a company can, will and does lead to receiving credit and such credit can lead to a lower fine or, in the cases of Johnson Controls, Inc., Akamai Technology, Inc., and Nortek Corporation, declinations to prosecute.

I think a couple of other observations are in order for this matter. First in this matter is that the foreign official was paid some amount of money for fraudulent services. The Consultant, a government official at the relevant times, was given money to pay a bribe. From the Cueto Order, it appears the Consultant may well have kept some portion of the $1.15MM destined to bribe the Argentinian labor union officials. How much this Consultant kept and would have constituted his bribe has not been reported.

There is also something else about this case that makes it most interesting and may well portend a new direction of FCPA enforcement. This is one of the rare cases of an agreed criminal charge of the Accounting Provisions of the FCPA. The FCPA itself specifies that violations of the Accounting Provisions become criminal matters under two conditions, found under 15 U.S.C. § 78m [Section 13 of the Securities Exchange Act of 1934].

(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as pro­vided in paragraph (5) of this subsection.

(5) No person shall knowingly circumvent or knowingly fail to imple­ment a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

 There is nothing in this language which ties it to the foreign official requirement found in sections detailing prohibited practices by issuers (15 U.S.C. § 78dd-1) or domestic concerns (15 U.S.C. § 78dd-2). This might mean that a company, which engages in private or commercial bribery and tried to disguise it through falsification of books and records as the senior management of LATAM did, could be prosecuted for a FCPA violation. So the next time bribes are paid to a union official, but this time not using a foreign government representative to facilitate the bribe payment and does not record the bribe as a bribe, a criminal FCPA violation could result.

Finally, what happens under the FCPA if the SEC changes its definition of issuer to include a class of private companies or even all private companies? Does this sound far-fetched? Consider the Keynote Address at the SEC-Rock Center on Corporate Governance Silicon Valley Initiative by SEC Chairperson Mary Jo White, on March 16, 2016. In this speech White addressed concerns about the disclosures by certain Silicon Valley companies in the pre-IPO stages of fund raising. At this point the SEC is more concerned about the multi-billion dollar unicorns and the information they release to the capital market in capital raising exercises. Yet, if the SEC somehow begins to apply issuer requirements to these private companies for the purposes of access to capital markets, it does not seem to me to be too much of a stretch to move that logic to the FCPA, particularly if the SEC follows this logic of the protection of investors, as laid out by White in her speech.

Fortunately we are not at that bridge as yet. However, the LATAM/LAN enforcement action is instructive for the compliance practitioner. Once again, the DOJ has demonstrated the benefits a company will receive by self-disclosure. One only has to compare this matter with the first four cases resolved after the initiation of the Pilot Program to see the benefits of meeting the four prongs of the Pilot Program. The message could not be clearer.


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© Thomas R. Fox, 2016