Today I continue my exploration of the recently announced Department of Justice (DOJ) and Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action with the announcement of the resolution of the Embraer SA (Embraer) matter. The resolution documents included a Deferred Prosecution Agreement (DPA) and Criminal Information (Information) with the DOJ and a Compliant with the SEC. Today I want to consider the bribery schemes of Embraer in some detail so that a Chief Compliance Officer (CCO) or compliance practitioner can use them to determine what they might want to look for in their organization.
I. The Bribery Schemes
- Dominican Republic
The SEC Compliant specified that from 2008 until 2010, 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 $96.4 million. Immediately before the Dominican Republic Senate was to vote on the contract for the airplanes at issue, the Dominican official handling the country’s negotiations requested a commission from Embraer, even though he was a government official.
This commission was to be paid through three Dominican companies. The SEC Compliant specifies the amounts paid were to be as follows:
- “Dominican Agent A” ($100,000);
- “Dominican Agent B” ($920,000); and,
- “Dominican Agent C” ($2.5 million).
Embraer did not conduct any due diligence on these three companies; nor were the payments “based on any legitimate services rendered by these agents to Embraer.” These payments were made in spite of the fact that the company’s “legal department viewed consulting agreements that were signed after the execution of a sales contract as “high risk.”” Most conveniently when the Embraer legal department continued its objections to the commission payments, “senior executives at Embraer merely instructed subordinates to find a solution that did not involve the legal department.”
To overcome the problems raised by (apparently) lower level Embraer legal functionaries; a “senior Embraer legal executive became involved.” This senior legal department executive either thought up or approved another bribery scheme whereby another corrupt agent “Dominican Agent D” would be paid the full amount of the bribe. This Dominican Agent would then and did distribute the illegal payments.
Rather amazingly or perhaps brazenly, Embraer then wired the corrupt and illegal payments from its New York bank to the bank of Dominican Agent D, which was located in Uruguay. The payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records. The internal controls failures, listed in the DOJ Information were, “EMBRAER had conducted no diligence on the shell company, did not have a signed contract with the shell companies and knew that the shell company had not performed any legitimate services in exchange for the payment.”
2. Saudi Arabia
From 2009-2011, 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. The specific scheme was another direct payment to the Saudi Arabian government official who headed up the country’s negotiating team. There was an agreed commission rate paid of $550,000 per aircraft sold.
The bribes were paid through a South African company unrelated to the transaction. Once again there was no due diligence performed on the agent who was the bribery conduit. Conveniently, “the same senior legal executive who was involved in the Dominican Republic bribery scheme, approved the selection of the South African company as the agent in the transaction with the Saudi state-owned enterprise. On March 5, 2010, Embraer RL executed a consulting agreement with the South African company, and the senior Embraer legal executive signed it on behalf of Embraer RL. There was no business justification for using the South African company as an agent given its lack of qualifications.”
Obviously also relying on a banking system that was now well-traveled, the company again wired the bribe money from its New York bank but this time the money was sent to the South African agent’s bank. This agent then wired the money to a bank account in Switzerland, which was controlled by the father of the Saudi Arabian official who was to receive the bribe. Following the same books and records façade, the payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records. The internal controls failures, listed in the DOJ Information were, “EMBRAER made payments to Agent B, even though it had conducted minimal due diligence on Agent B, did so almost exclusively on the basis of information Embraer Executive B personally provided to its contracts and legal departments, and did not require any proof of services from Agent B before making payment.”
In 2008-2009, 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. Mimicking the Dominican Republic negotiations, approximately one month before the purchase was to go through, the Mozambique agent involved, “told at least one senior Embraer employee that Embraer should make a “gesture” to unidentified officials in the government of Mozambique when delivering the first aircraft. This agent was a “middleman or agent for the government officials involved in the deal, and Embraer employees believed they needed to pay the Mozambican Agent in order to win the contract.””
The bribe price was negotiated to be $800,000 fixed, rather than the original commission per aircraft. The bribe was paid when “Embraer’s U.S.-based subsidiary, Embraer RL, executed a consulting agreement with a company based in the Democratic Republic of São Tomé and Príncipe that the Mozambican Agent controlled and which had only been incorporated in or about November 2008. Once again there was no due diligence performed on this third party entity nor was there any legitimate consulting services engaged in by this corrupt agent.
The company again wired the bribe money from its New York bank but this time the money was sent to the agent’s bank in Portugal. Following the same books and records façade, the payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records.
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. The company used a corrupt agent to facilitate the transaction, even though the Embraer “employees understood that India prohibited the use of commercial agents for military sales. For that reason, in January 2005 Embraer executed a consulting agreement with a company domiciled in the UK (the “UK Entity”), which had a relationship with the Indian Consultant.”
No doubt befitting its UK locus, the company moved to a more James Bond approach by keeping the contract for the illegal payments “stored in a safe deposit box in London that could only be opened by the simultaneous use of a key maintained by Embraer’s legal department and a card key in the possession of a representative of the UK Entity.” Perhaps one or both parties forgot where they kept their respective keys, as the agreement under which the corrupt payments were to be made, expired in its safely stored in its safe deposit box. This required another agreement under which to pay the bribe. This time it was through a Singaporean entity.
The company again wired the bribe money from its New York bank but this time the money was sent to the agent’s bank in Portugal. Following the same books and records façade, the payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records. The internal controls failures listed in the DOJ Information were “the only due diligence that EMBRAER conducted on Agent C’s company was Iimited to collecting the company’s registration documents, corporate by-laws, and board minutes from Agent C himself, and EMBRAER did not require any proof of services from Agent C before making payment.”
Lastly, it should be noted on the specific involvement of the Embraer legal department in making all of the above possible. The SEC Compliant stated in the final paragraph before the Claims for Relief, “Embraer’s legal department was responsible for approving the consultants its senior legal executive engaged on behalf of ERL. As a result, senior Embraer executives in Brazil, including a senior legal executive at the time, at least two other senior Embraer executives, and several Embraer managers, circumvented the Company’s internal accounting controls by, among other things, approving the engagement of third parties through sham contracts to act as conduits for bribes to foreign officials, and concealing bribe payments as legitimate expenses under contracts obtained in countries that bore no relation to any legitimate services rendered and that were intended largely to pay bribes to foreign government officials.” One might only hope the appropriate bar group or legal society will take appropriate disciplinary action against those lawyers involved in the illegal conduct.
Tomorrow I will consider how Embraer was able to extricate itself from these very serious facts and even receive a discount from the low end of the sentencing range. (Hint: It involves hiring some excellent FCPA counsel.)
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© Thomas R. Fox, 2016