I conclude 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. But first I also want to conclude my classic monster movie month review by considering an unlikely candidate for the best of the Frankenstein movies, Young Frankenstein.
I. Young Frankenstein
This Mel Brooks and Gene Wilder movie (Wilder co-wrote the script) manages to combine some of the top elements of all three of the Boris Karloff featured films: Frankenstein, Bride of Frankenstein and Son of Frankenstein. The decision by Brooks to film his 1974 movie in black and white certainly adds to the special milieu of his version. Of course it was a comedy but Brooks described it as a story one-quarter turned away from the more classic version.
The late Gene Wilder starred as Dr. Froderick von Frankensteen, the grandson of Victor, who tries to deny his lineage by calling his forbearer a ‘cuckoo’ in an early scene. The evolution of both Froderick as the mad scientist who feels remorse over his creation and tries to give the Monster humanity is a key theme running throughout this visual and audio feast of gags. It is not just the audience who roared at the movie; the cast sometimes could not make it through an entire scene with erupting into laughter. Sometimes Brooks would have to edit multiple takes just to get a few seconds of screen time because the cast could not make it through without laughing uproariously at each other’s antics. So even while it is a comedy, I and many others rate it up there as one of the best Frankenstein treatments.
II. Box Score
As I have tried to make clear in the prior posts on Embraer, the bribery schemes engaged in by the company were brazen and stunning. I have resuscitated the corruption “Box Score”, as set forth below.
|Country||Bribe Payment Mechanism||Amount of Bribe||Benefit Received by Embraer||Illegal characterization in company books and records|
|Dominican Republic||Payment to corrupt 3rd Party Agent in Uruguay made from a NY bank||$3.52 MM||$96MM||Sales Commission; Selling Expense & Commercialization Expense|
|Mozambique||Consulting agreement with Mozambican Agent. Money paid into a Republic of São Tomé and Príncipe company||$800K||$65MM||Sales Commission; Selling Expense & Commercialization Expense|
|Saudi Arabia||Payment to corrupt 3rd Party agent in South Africa from NY bank. Money then sent to Swiss bank account in name of father of corrupt Saudi official||$1.65MM||$93MM||Sales Commission; Selling Expense & Commercialization Expense|
|India||Payment from NY bank made to corrupt 3rd Party Agent in Portugal||$5.72||$208MM||Sales Commission; Selling Expense & Commercialization Expense|
III. Lessons for the Compliance Practitioner
- Due Diligence
Even through Embraer had some modicum of a compliance program in place, the company intentionally paid bribes in violation of not only the FCPA but also its own internal controls. Nevertheless, both the DOJ DPA and the SEC Compliant list out failures in due diligence and management of third parties, which are valuable for the compliance practitioner to use in benchmarking your own compliance program. Some of the failures in third party risk management, in addition to not simply doing any, included:
- Conducting minimal due diligence on the corrupt agents which did not use publicly available information on the third parties;
- Concluding due diligence which consisted of accepting the representations of the agents which investigated the information provided by the agent (self-certification);
- Making contracts with third parties who were not competent to deliver any legitimate services, even as such services were described in a Consulting Agreement; and
- Entering into contracts with third parties recommended by corrupt foreign government officials
2. Payments to third parties
There were numerous issues with the payments made by Embraer, which showed the clear intent to pay bribes. However, they also provide the compliance practitioner with information on what might be considered as a benchmark of nefarious actions. These include:
- Making payment to jurisdictions identified as ‘tax havens’ and offshore venues without investigation or business justification;
- Payments to third parties in jurisdictions other than where the services were delivered without investigation or business justification;
- Making payments to employees of a customer;
- Making payments to third parties with no written contract in place; and
- Making payments to third parties with no proof of services or delivery by those third parties of any legitimate services
While Embraer clearly created sham contracts, designed to either circumvent existing anti-corruption controls or made illegal in the absence of any such controls, this list also provides a good review for the compliance professional. These failures include:
- No valid description of specified services to be delivered;
- No anti-corruption compliance terms and conditions in the Consulting Agreements;
- No validation that no corrupt acts would be engaged in by the third party; and
- No certification as to applicability of or adherence to the requirements of the FCPA by the third party agent
4. Internal Controls
In addition to the above failures there was a basic lack of internal controls in place at Embraer. As a compliance practitioner you should have compliance internal controls in place which, among other things, should (a) require adequate due diligence for the retention of third-party consultants and agent; (b) require a fully executed contract with a third-party before payment could be made to it; (c) require documentation or other proof that services had been rendered by a third-party before payment could be made to it; or (d) implement oversight of the payment process to ensure that payments were made pursuant to appropriate controls.
The Embraer FCPA enforcement action should be considered in light of not only the company’s intentional acts but also the failures around its meagre compliance program which was in place at the time of the incidents in question. While the company received a hefty credit for its cooperation, after the FCPA counsel at Baker and McKenzie came on board to advise and represent the company, it could have received even more credit had it engaged in full remediation. As noted in the DPA, “the Company has 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 (at the very Ieast) aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions”.
You should study the Embraer FCPA enforcement action for not only the company’s failures but also what the company did to receive a 20% discount on its criminal penalty.
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© Thomas R. Fox, 2016