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), with a three-year term and Criminal Information (Information) with the DOJ and a Compliant with the SEC. Today I want to consider the rather stunning comeback the company made in the face of the damning facts it admitted to in the above documents.
I. The 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, however as previously noted, the FCPA Blog stated, “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.” Even with the credit given for the Brazilian fine, the correct amount for the total penalty assessed against Embraer is the full $205MM figure.
Yet it could have been much greater. According to the DPA, the base DOJ fine was calculated at $83MM. This was multiplied by the size of the organization and the involvement of high-level company personnel but reduced by Embraer’s full “cooperation in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.” Note there was no discount given for self-disclosure or extensive remediation. All of this led to a DOJ fine range of between $134MM to $268MM.
Nevertheless, Embraer was able to obtain a DOJ penalty of only $107MM. This is a 20% discount “from the low end of the United States Sentencing Guidelines range”. The factors, which led to this discount, included:
- the Company had no prior criminal history;
- that the Company agreed to continue to cooperate with the Section as set forth in this Agreement in any investigation of the Company and its officers, directors, employees agents, business partners, and consultants relating to violations of the FCPA;
- the Company agreed to disgorge the profits from the misconduct described in the attached Statement of Facts to the SEC and to Brazilian authorities; and Embraer engaged in partial remediation: it has disciplined a number of Company employees and executives engaged in the misconduct described in the attached Statement of Facts, 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; and
- the Company agreed to institute a best practices compliance program, under the auspices of an outside monitor.
If there was any doubts about the credit which can be garnered under the FCPA Pilot Program, the Embraer enforcement action should end them all, as in now.
II. Best Practices Compliance Program
The DPA laid out the compliance program that Embraer currently is using and must implement to successfully complete its three-year DPA. While it most generally it follows the accepted Ten Hallmarks of an Effective Compliance Program from the 2012 FCPA Guidance, it does rearrange things, which bear laying the requirements out in full.
- High-level commitment. Embraer “will ensure that its directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.”
- The company will develop policies against further FCPA violations and violations of other country’s anti-corruption laws. It shall create procedures to implement these policies.
- These policies and procedures will apply to all officers, directors, employees relevant third parties and shall address the following issues: (a) gifts, travel & entertainment; (b) political contributions; (c) charitable donations; (d) facilitation payments and (e) solicitation and extortion.
- There shall be effective internal controls.
- The company must engage periodic risk assessments.
- The company must review and updates its policies and procedures.
- The CCO shall have appropriate responsibility, oversight and autonomy.
- The company shall implement effective training for employees, officers, directors and appropriate third parties.
- The company shall provide ongoing guidance on anti-corruption compliance.
- The company shall implement an effective system of internal and where possible, confidential reporting for employees and where appropriate third parties.
- The company “will maintain, or where necessary establish, an effective and reliable process with sufficient resources for responding to, investigating, and documenting allegations of violations of the anti-corruption laws or the Company’s anticorruption compliance code, policies, and procedures.”
- The company will implement effective “mechanisms designed to effectively enforce its compliance code, policies, and procedures, including appropriately incentivizing compliance and disciplining violations.”
- The company will institute appropriate disciplinary procedures. Moreover, “Such procedures should be applied consistently and fairly, regardless of the position held by, or perceived importance of, the director, officer, or employee. The Company shall implement procedures to ensure that where misconduct is discovered, reasonable steps are taken to remedy the harm resulting from such misconduct, and to ensure that appropriate steps are taken to prevent further similar misconduct including assessing the internal controls, compliance code, policies, and procedures and making modifications necessary to ensure the overall anticorruption compliance program is effective.”
- The company will institute an appropriate and effective risk-based due diligence process relating to the hiring and oversight of agents, business partners and other third parties.
- The company will incorporate standard compliance terms and conditions into its contract with third parties.
- Embraer will “develop and implement policies and procedures for mergers and acquisitions requiring that the Company conduct appropriate risk-based due diligence on potential new business entities, including appropriate FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel.”
- If an acquisition is successful, the company integrates the newly acquired entity into Embraer’s compliance regime as quickly as possible. Embraer will also “train the directors, officers, employees, agents, and business partners consistent with Paragraph 8 above on the anti-corruption laws and the Company’s compliance code, policies, and procedures regarding anti-corruption laws; and where warranted, conduct an FCPA-specific audit of the newly acquired or merged businesses as quickly as practicable.”
- Finally, “The Company will conduct periodic reviews and testing of its anti-corruption compliance code, policies, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anti-corruption laws and the Company’s anticorruption code, policies, and procedures, taking into account relevant developments in the field and evolving international and industry standards.”
III. The Monitor
Together with the recent Och-Ziff FCPA resolution, the Embraer DPA requires an external corporate monitor. While most FCPA enforcement actions are now usually resolved without an external monitor; the presence of the monitor requirement shows the DOJ thinks the company still needs external oversight to fulfill its DPA obligations. The DPA lays out the Monitor’s responsibility as follows: “The Monitor’s primary responsibility is to assess and monitor the Company’s compliance with the terms of the Agreement, including the Corporate Compliance Program in Attachment C, so as to specifically address and reduce the risk of any recurrence of the Company’s misconduct. During the Term of the Monitorship, the Monitor will evaluate, in the manner set forth below, the effectiveness of the internal accounting controls, record-keeping, and financial reporting policies and procedures of the Company as they relate to the Company’s current and ongoing compliance with the FCPA and other applicable anti-corruption laws (collectively, the “anti-corruption laws”) and take such reasonable steps as, in his or her view, may be necessary to fulfill the foregoing mandate (“the Mandate”). This Mandate shall include an assessment of the Board of Directors’ and senior management’s commitment to, and effective implementation of, the corporate compliance program described in Attachment C of the Agreement.”
Tomorrow I will give my take on the lessons to be garnered from the Embraer FCPA miasma.
How did Embraer obtain a discount off the Sentencing Guidelines for such egregious conduct?Click to tweet
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© Thomas R. Fox, 2016