The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continued their stunning 2016 run of Foreign Corrupt Practices Act (FCPA) decisions with the announcement of the resolution of the Embraer SA (Embraer) FCPA enforcement action. The resolution documents included a Deferred Prosecution Agreement (DPA) and Criminal Information (Information) with the DOJ and a Compliant with the SEC. This post will begin a multi-part series exploring the enforcement action, considering the government’s case and the company’s response and, finally, the lessons to be learnt by the compliance practitioner.
The Fines and Penalties
Embraer agreed to a fine totaling $205MM; of which $107MM goes to the DOJ as a criminal penalty and $98MM goes to the SEC as disgorgement. The FCPA Blog noted, “Embraer could receive up to a $20 million credit from the SEC depending on the amount of disgorgement it will pay to Brazilian authorities in a separate enforcement action there. Even with a $20 million credit, the disgorgement is one of the biggest in an FCPA enforcement action. In a statement Monday, Embraer said it has reached a settlement with authorities in Brazil for about $20 million. Of that, about $18.5 million is disgorgement.”
Yet the fines and penalties could have been lessened, even with the egregious conduct documented. Embraer did not self-disclose the violative conduct to the DOJ. It only began full cooperation with the Justice Department and SEC after receiving a subpoena from the SEC. Finally, the company did not engage in full remediation. According to the DOJ Press Release, “It disciplined a number of company employees and executives engaged in the misconduct, but did not discipline a senior executive who was aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions. As a result, the criminal penalty in this case is 20 percent below the bottom of the applicable range under the U.S. Sentencing Guidelines, a discount that reflects Embraer’s full cooperation but incomplete remediation.”
The Bribery Schemes
The bribery schemes themselves were wide-ranging. According to the DOJ Press Release, the “schemes involving the bribery of government officials in the Dominican Republic, Saudi Arabia and Mozambique, and to pay millions more in falsely recorded payments in India via a sham agency agreement.” According to Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division “Embraer paid millions of dollars in bribes to win government aircraft contracts in three different continents”. “But this prosecution shows that the Criminal Division will hold accountable those who treat corruption as a mere cost of doing business. Between U.S., Brazilian and Saudi authorities, bribe payers and bribe takers alike have been brought to justice for their wrongdoing.”
Assistant Special Agent in Charge William J. Maddalena, of the FBI’s Miami Field Office, said, “Embraer tried to bribe their way into several profitable aircraft contracts around the world. Instead of reaping a nice profit, their criminal conduct earned the Brazilian aircraft manufacturer a substantial penalty that more than wiped out their gains from these contracts.”
The company admitted a series of bribery schemes where “Embraer executives and employees paid bribes to government officials and falsified books and records in connection with aircraft sales to foreign governments and state-owned entities in multiple countries.” They included:
- In 2008, Embraer paid $3.52 million to an influential government official in the Dominican Republic via a false agency agreement to secure a contract to sell the Dominican Air Force eight military aircraft for approximately $92 million.
- Also in 2008, Embraer paid $800,000 via a false agency agreement with an intermediary designated by a high-level official at Mozambique’s state-owned commercial airline, Linhas Aéreas de Moçambique S.A. (LAM), to secure LAM’s agreement to purchase two aircraft from Embraer for approximately $65 million.
- In 2010, Embraer paid $1.65 million to an official at a Saudi Arabian state-owned and -controlled company via a false agency agreement to secure that instrumentality’s agreement to purchase three aircraft from Embraer for approximately $93 million.
- In 2009, Embraer paid an agent $5.76 million pursuant to a false agency agreement with a shell company in connection with a contract it secured to sell the Indian Air Force three aircraft for approximately $208 million.
For all of these bribes Embraer “earned profits of nearly $84MM” for aircraft sales. Unfortunately for the company, it seems that its conduct with the government was such that the company was required to agree to a corporate monitor. Coupled with the recent Och-Ziff FCPA settlement action, we have now seen the return of the necessity of a corporate monitor as a requirement of the resolution. Such action usually means the government does not have a high degree of confidence that the company will fully embrace and adopt the compliance requirements laid out in the DPA.
International Investigation and Enforcement
In the SEC Press Release, Andrew J. Ceresney, Director of the SEC Enforcement Division, said, “As alleged in our complaint, Embraer realized significant revenues by surreptitiously using third parties to mask bribes paid to government officials with influence over contracts it was competing to win.” Most interestingly, Kara N. Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, pointed towards the truly international investigation and enforcement effort to bring the company to justice.
She stated, “Embraer’s alleged misconduct spanned multiple continents, and it has taken significant ongoing coordination among international regulators and law enforcement agencies to uncover the company’s complex bribery schemes.” The Press Release specifically noted the assistance of the following agencies and departments: “the Brazilian Federal Prosecution Service, the Brazilian Federal Police, Brazil’s Comissão de Valores Mobiliários, the South African Financial Services Board, the Swiss Financial Market Supervisory Authority (FINMA), the Banco Central del Uruguay, the Spanish Comisión Nacional del Mercado de Valores, and the French Autorité des Marchés Financiers” all in addition to the FBI and DOJ.
Also of note was that other jurisdictions have brought criminal charges against former Embraer executives and employees. This includes Brazil, which has “charged 11 individuals for their alleged involvement in Embraer’s misconduct in the Dominican Republic” and the Kingdom of Saudi Arabia, which has “charged two individuals for their alleged involvement in Embraer’s misconduct in Saudi Arabia.”
The Embraer resolution by the DOJ and SEC, as they continue this most dramatic year in FCPA enforcement.Click to tweet
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© Thomas R. Fox, 2016