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Not Flying Under The Radar – The Many FCPA Enforcement Actions Against Companies In The Aviation Industry

Radar Screen

When compiling a list of the industries that have the highest Foreign Corrupt Practices Act risk, the aviation industry is probably not going to be near the top of many lists.

However, it should be because as highlighted in this post there have been approximately 15 corporate FCPA enforcement actions against companies in the industry (broadly defined) throughout FCPA enforcement history. Last week’s enforcement action against Embraer (see here and here for prior posts) was merely the most recent example, albeit most high-profile given the settlement amount.

Indeed, the aviation industry was front and center in “The Story of the Foreign Corrupt Practices Act” as Lockheed’s payments to Japanese Prime Minister Tanaka, Prince Berhard (the Inspector General of the Dutch Armed Forces and the husband of Queen Juliana of the Netherlands) and Italian political parties was arguably the most high profile example of the foreign corporate payments problem Congress learned about in the mid-1970’s which motivated it to enact the FCPA.

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Embraer Bribery Schemes Result In Net $187 Million FCPA Enforcement Action

embraer

Yesterday, the DOJ and SEC announced resolution of a Foreign Corrupt Practices Act enforcement action against Embraer, a Brazil-based aircraft manufacturer with American Depositary Shares listed on the New York Stock Exchange.

According to the DOJ and SEC, Embraer engaged in bribery schemes between 2008 through 2011 in the Dominican Republic, Saudi Arabia, and Mozambique in which the company approved bribe payments, through various third-parties, to various alleged “foreign officials.” According to the DOJ and SEC, Embraer’s wholly-owned U.S. subsidiary was active in the bribery schemes including by making payments from its New York based bank account. In addition, the enforcement action also involved improper conduct in India between 2005 and 2009. In total, the government alleges that Embraer made approximately $84 million as a result of the improper conduct.

The enforcement action involved a DOJ component in which the company agreed to pay a criminal penalty of approximately $107.3 million and an SEC component in which the company agreed to pay $83.8 million in disgorgement and $14.4 million in prejudgment interest. The SEC agreed to credit a disgorgement amount that Embraer agreed to pay to Brazilian authorities and this filing suggests that disgorgement amount is approximately $18.6 million. Thus, the net FCPA settlement amount was approximately $187 million.

This post goes in-depth into the enforcement action by summarizing the approximate 115 pages of resolution documents.

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In Connection With A 2006 Argentine Labor Dispute, Chilean Airline Pays U.S. Government $22 Million

LATAM

Five months ago, the SEC brought a Foreign Corrupt Practices Act enforcement action against Ignacio Cueto Plaza (“Cueto”), the Chilean CEO of Santiago, Chile based LAN Airlines S.A. (“LAN”) for authorizing payments in 2006 and 2007 to a third party consultant in Argentina in connection with LAN’s attempts to settle disputes on wages and other work conditions between LAN Argentina S.A. (“LAN Argentina”), a subsidiary of LAN, and its employees.

Yesterday, the DOJ and SEC returned to the same conduct by announcing (here and here) parallel FCPA enforcement actions against LAN.

In short, the end result of an old labor dispute between a Chilean airline and Argentine workers is approximately $22 million flowing into the U.S. Treasury because LAN has shares that are traded on a U.S. exchange.

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Current CEO Of LAN Airlines Resolves SEC FCPA Enforcement Action Based On A Payment He Authorized 10 Years Ago In Connection With A Labor Dispute

PlazaLast week was busy for SEC Foreign Corrupt Practices Act enforcement.

First, there was the $3.9 million enforcement action against SAP (see here).

Then, there was the $12.8 million enforcement action against SciClone Pharmaceuticals (see here).

And then, as highlighted in this post, there was an individual action against Ignacio Cueto Plaza, the current CEO of LAN Airlines (pictured at left).

The Cueto enforcement action was noteworthy in at least five respects.

  • First, it was a rare SEC individual FCPA enforcement action (the Cueto action represents only the fourth core individual action since April 2012).
  • Second, it was an FCPA enforcement action against a CEO (rarely do individual FCPA enforcement actions involve an executive officer).
  • Third, it was an FCPA enforcement action against an existing CEO (most individual FCPA enforcement involve former employees because the company, as part of its remedial measures, terminates the employee found to be in violation of the FCPA).
  • Fourth, even though most FCPA enforcement actions are based on “old” conduct, a 2016 enforcement action based on 2006 conduct stretches the credibility of the SEC’s enforcement program to a new level, coupled with the fact that a U.S. law enforcement agency brought an enforcement action against a Chilean citizen based on alleged improper conduct in Argentina.
  • Fifth, most FCPA enforcement actions, even those that “only” charge or find FCPA books and records and internal controls violations, are still based on the alleged “foreign officials.” In this regard, the Cueto enforcement action is vague whether the SEC viewed the Argentine “union officials” to be “foreign officials” under the FCPA. If the SEC did view the “union officials” as such, it stretches the definition of “foreign official” even further. If the SEC did not view the “union officials” as foreign officials, the Cueto action represents a rare enforcement action concerning improper booking and insufficient internal controls concerning an instance of commercial bribery.

In this administrative action, the SEC found as follows.

“In 2006 and 2007, Ignacio Cueto Plaza (“Cueto”), the CEO of LAN Airlines S.A. (“LAN”), authorized $1.15 million in improper payments to a third party consultant in Argentina in connection with LAN’s attempts to settle disputes on wages and other work conditions between LAN Argentina S.A. (“LAN Argentina”), a subsidiary of LAN, and its employees. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. The payments were made pursuant to an unsigned consulting agreement that purported to provide services that Cueto understood would not occur. Cueto authorized subordinates to make the payments that were improperly booked in the Company’s books and records, which circumvented LAN’s internal accounting controls.”

Cueto is described as follows.

” [A] Chilean citizen and, since 2012, has been CEO of LAN. From 1995 to 1998, Cueto served as President of LAN Cargo, a LAN subsidiary located in Miami, Florida. He served on the Board of Directors of LAN from 1995 to 1997. From 1999 to 2005, Cueto was CEO of LAN’s passenger airline business. In 2005, Cueto became President and COO of LAN Airlines S.A. He remained in that position until June of 2012, when LAN merged with Brazilian Airline TAM, S.A. (“TAM”) and became LATAM Airlines Group S.A. (“LATAM”). Cueto remains CEO of LAN, which is now part of LATAM.”

The enforcement action focuses the “obstacles that LAN might face in trying to enter the Argentine airline market.” Under the heading “LAN Faces Major Issues Upon Entering the Argentine Market,” the order states:

“Upon entering the Argentine passenger airline market LAN immediately faced several major issues impacting its viability and began losing money. First, it needed to meet demands from labor unions representing the employees acquired from LAFSA and Southern Winds. Second, LAN needed majority ownership of its Argentine subsidiary, and therefore had to persuade the Argentine government to change its existing law on foreign ownership of domestic airlines and to increase caps on airfares. Third, LAN needed regulatory authorization to operate various flight routes, both domestically and internationally, in Argentina. Since the Argentine passenger airline market was heavily regulated by the government, particularly officials within the Department of Transportation who had close ties to the unions, LAN sought help from the government officials with each of these issues.

In early 2006, the consultant again contacted the Vice President of Business Development and offered to assist LAN in Argentina. By this time, the consultant was a government official in the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. On January 31, 2005, the Secretary of Transportation appointed the consultant as a Cabinet Advisor “ad-honorem.”

LAN executives, including Cueto, knew that for LAN Argentina to become profitable it would need an infusion of cash. LAN asked Argentine government officials to liberalize the laws on foreign ownership so that LAN could own a majority share of LAN Argentina and sought government authorization to raise regulated airfares. On or about August 8, 2006, the President of Argentina signed a Decree that enabled LAN to become a majority owner of LAN Argentina and allowed LAN to raise airfares by 20%. LAN Argentina was also awarded critical additional flight routes by the Transportation Secretary.”

Under the heading “LAN Encounters Problems with the Unions in Argentina,” the order states:

“As part of the deal that LAN reached with the Argentine government in March 2005, LAN was required to hire between six and eight hundred employees from the defunct LAFSA and Southern Winds airlines. LAN was bound by the existing bargaining agreements between LAFSA, Southern Winds and the labor unions.

There were five unions representing airline employees in Argentina. They included the grounds crew union, the Asociación del Personal Aeronáutico (APA), the pilots’ union, the Asociación de Pilotos de Lineas Aereas (APLA), the mechanics’ union, Asociacion del Personal Técnico Aeronáutico (APTA), the flight attendants’ union, Asociación de Tripulantes de Cabina de Pasajeros de Empresas Aerocomerciales (ATCPEA), and the supervisors’ union, Unión del Personal Superior y Profesional de Empresas Aerocomerciales (UPSA).

All of the unions were powerful and unafraid to make demands on LAN. They sought wage increases and additional benefits, and used the terms of their respective Collective Bargaining Agreements (“CBAs”) as leverage. These labor agreements contained provisions that LAN believed were unfavorable, such as restrictions on the hours employees could work and their work locations.

The mechanics’ union, the flight attendants’ union and the supervisors’ union each had a single-function rule contained in their CBAs. The single-function rule was a provision that limited workers from performing more than one work function at a time for LAN. The single-function rule was loosely interpreted and for the most part not enforced by the unions. Had it been enforced, the single-function rule would have required LAN to double its work force and would have seriously imperiled LAN’s ability to continue its operations in Argentina.

Around 2006 the unions began campaigning for wage increases. The unions threatened to enforce the single-function rule unless LAN Argentina agreed to a substantial wage increase. LAN’s management, including Cueto, attempted to negotiate on the wage issues but made no progress and things worsened over time. Eventually there were work stoppages and slowdowns on the part of the workforce, including strikes involving the pilots’ and the mechanics’ unions.”

Under the heading “Cueto Approves Improper Payments,” the order states:

“Beginning in the summer of 2006, the consultant supplied LAN executives with information on how to deal with specific union members and the unions in general. Eventually, the consultant offered to negotiate directly with the unions on LAN’s behalf, making it clear that he would expect compensation for such negotiations, and that payments would be made to third parties who had influence over the unions. After his staff informed Cueto that the consultant was well connected with the unions and could effectively negotiate an agreement with union officials, Cueto approved the retention of the consultant.

During the summer of 2006, Cueto approved payments totaling $1,150,000 to the consultant in connection with LAN’s attempts to settle disputes on wages and other work conditions with the unions. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. Cueto approved the payments to get the unions to abandon their threats to enforce the single-function rule and to get them to accept a wage increase lower than the amount asked for in negotiations. LAN and the consultant agreed that LAN would make the payment to a company controlled by the consultant in Argentina. In 2006, LAN did not have a policy requiring that due diligence be performed on consultants, and neither Cueto nor LAN conducted any due diligence on the consultant or any of his related entities.

Around August 2006, Cueto’s staff informed him that the consultant had reached an oral agreement to settle the wage dispute with the mechanics’ union on LAN’s behalf. Although the existing Collective Bargaining Agreement with the mechanics’ union would remain unchanged, Cueto understood that the union would orally agree not to seek enforcement of the single-function rule for a period of four years in exchange for a wage increase of approximately 6 15% of salary. The wage increase of approximately 15% was lower than the amount originally sought by the mechanics’ union.

Around August 2006, the flight attendants’ and supervisors’ unions both agreed to accept wage increases of approximately 15% and 10% respectively of salaries. The amounts were lower than the amounts originally sought by each union.”

Under the heading, “Cueto Authorized Improper Payments That Were Not Accurately and Fairly Feflected on LAN’s Books and Records,” the order states:

“Cueto directed subordinates to make the improper payments. The improper payments authorized by Cueto were improperly described in the books and records as “other debtors” costs in a LAN subsidiary that had no role in LAN’s argentine business.”

Under the heading, “Cueto Caused LAN’s Internal Accounting Control Failure,” the order states:

“As President and Chief Operating Officer of LAN, Cueto, along with others, was responsible for devising and maintaining compliance with internal accounting controls at LAN. Cueto did not follow the company’s existing internal accounting controls when he authorized the payment of $1,150,000 to the consultant’s company and failed to prevent the payment of $58,000 to another company owned by consultant’s son and wife. Cueto received and approved the sham contract for the consultant’s company to provide consulting services to LAN, knowing that such services would never be provided. Cueto also authorized payment of invoices from the consultant’s company that contained a description of services listed on the invoices that was false.”

Based on the above findings, the order finds that Cueto caused books and records and internal controls violations by LAN and that Cueto also knowingly circumvented or knowingly failed to implement a system of internal accounting controls or knowingly falsified book, record or account and that Cueto also violated falsified or cause to be falsified, a book, record, or account.

Under the heading “Remedial Actions and Undertakings,” the order states:

“As the CEO of LAN, which is now a division of LATAM, Cueto is subject to LATAM’s enhanced compliance structure and internal accounting controls. Cueto is required to certify compliance with LATAM’s new Code of Conduct that was adopted in 2013, as well as other internal corporate policies, including an Anti-Corruption Guide, a Gifts, Travel, Hospitality and Entertainment Policy, an Escalation Policy, and Procurement and Payment policies.

Cueto has attended the Corporate Governance Training provided by the LATAM Chief Compliance Officer and has provided a certification confirming acknowledgement of the Code of Conduct, the relevant applicable regulations, as well as the Company policies. Cueto has also executed an amendment to his employment agreement whereby Respondent acknowledges having been informed regarding the LATAM Manual for the Prevention of Corruption, among other matters, and his responsibilities to perform his duties with the highest ethical standards, in compliance with all Company Policies and Procedures.

[…]

Cueto also undertakes to attend all anti-corruption training sessions required for senior executives at LAN. These sessions will include, but are not limited to, both live and online anti-corruption trainings to be completed on at least an annual basis and according to LAN’s Compliance Department’s training schedule. These sessions will include, in addition to anticorruption laws and regulations, such as the FCPA, training on anti-trust laws, the Company’s Code of Conduct and all other applicable policies that each LAN employee must follow. After the conclusion of each session Cueto will sign the appropriate documentation that acknowledges his attendance and understanding of the topics presented. Should LAN modify the schedule of such  training sessions for any reason, Cueto will, so long as he is a senior executive of LAN, attend a comparable anti-corruption session on an annual basis and complete appropriate documentation attesting to his attendance and the session’s contents.”

Without admitting or denying the SEC’s findings, Cueto agreed to cease and desist from future legal violations and agreed to pay a $75,000 civil penalty.

Cueto was represented by Richard Grime (Gibson, Dunn & Crutcher –  a former Assistant Director of Enforcement at the SEC heavily involved in FCPA enforcement). Commenting generally on the SEC’s evolving and expansive FCPA enforcement theories, Grime recently stated:

“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”

Dallas Airmotive Inc. The Latest Aircraft Maintenance Company To Resolve An FCPA Enforcement Action

Dallas Air

First it was Oklahoma-based BizJet International in 2012 (see here).  Then it was Oklahoma-based The NORDAM Group in 2012 (see here). The latest aircraft maintenance company to resolve a Foreign Corrupt Practices Act enforcement action is Texas-based Dallas Airmotive.

Earlier this week, the DOJ announced that “Dallas Airmotive Inc., a provider of aircraft engine maintenance, repair and overhaul (MRO) services based in Grapevine, Texas, has admitted to violations of the Foreign Corrupt Practices Act (FCPA) and agreed to pay a $14 million criminal penalty to resolve charges that it bribed Latin American government officials in order to secure lucrative government contracts.”

As highlighted in this post discussing unsealed documents in connection with individual FCPA prosecutions of BizJet executives, all three enforcement actions seemed to be casually related.

Criminal Information

The Dallas Airmotive criminal information focuses on the conduct of Dallas Airmotive do Brasil (DAB), a corporate affiliate under the direction and control of Dallas Airmotive Inc. (DAI), and the information states that DAB’s employees were supervised and managed by directors and managers of DAI.  According to the information, DAB assisted DAI in providing MRO engine services to customers in Latin America, including to governmental and other customers.  The information states that DAB also bid on and secured engine service contracts with Brazilian government and commercial customers, the work for which was often done in part by DAI.

According to the information, DAI conspired with a DAI Sales Director (an individual responsible for overseeing DAI’s sales efforts in Latin America), a DAI Sales Agent (an individual responsible for obtaining and retaining MRO business for DAI and DAB in Latin America, including with commercial and government customers), a DAI Sales Manager (an individual responsible for obtaining and retaining MRO business for DAI and DAB in Latin America, including with commercial and government customers), DAB Manager A (an individual responsible for obtaining and retaining MRO business for DAI and DAB in Latin America, including with commercial and government customers), DAB Manager B (an individual responsible for obtaining and retaining MRO business for DAI and DAB in Latin America, including with government customers), Official 1 (a Sub-Officer in the Brazilian Air Force – BAF), Official 2 (a Sergeant in the BAF), Official 3 (a Captain for the Governor of the Brazilian state of Roraima), Front Company A (a Brazil-based sales and logistics services company that was affiliated with Official 1), Front Company B (a Brazil-based sales and logistics services company that was beneficially owned by Official 1), and a Intermediary Company (a Brazil-based company that was used to make payments for the benefit of Official 3), and others to make improper payments to the foreign officials to assist DAI in obtaining and retaining business.

According to the information, the purpose of the conspiracy was to obtain and retain engine MRO service business for DAI and DAB from foreign government customers in Latin America, including the BAF, the Peruvian Air Force, the Office of the Governor of the Brazilian State of Roraima, and the Office of the Governor of the Argentinean State of San Juan, by paying bribes to foreign officials employed by such customers.

According to the information, DAI, through its employees and agents, including employees of DAB, discussed in person and via e-mail making bribe payments – which they called “commissions” or “consulting fees” – and granting other benefits to employees of customers, including foreign government customers, in order to obtain and retain for DAI and DAB business to perform engine MRO services.  According to the information, certain bribe payments were wired from DAI’s bank account in New York and DAB’s bank account in Brazil to bank accounts of Front Company A, Front Company B, and Intermediary Company in Brazil.

The information also alleges that DAI/ DAB paid for a vacation for Official 2 and his spouse in exchange for Official 2’s assistance in securing MRO business.

As to Peru and Argentina, the information alleges that payments were made to a bank account of a third party commercial representative in Florida and Argentina (respectively) while knowing that the funds, at least in part, would be passed on to officials of the Peruvian Air Force and the office of the Governor of the Argentinean State of San Juan.

In addition to the conspiracy charge, DAI was also charged with one substantive violation of the FCPA’s anti-bribery provisions.

Deferred Prosecution Agreement

The above charges were resolved via this DPA in which DAI admitted, accepted and acknowledged that it was responsible for the acts alleged in the information.  The 3 year DPA states, under relevant considerations, as follows.

“The DOJ enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the factors considered were the following: (a) the Company’s substantial cooperation, including conducting an internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (b) the Company’s improvements to date to its compliance program and internal controls, as well as its commitment to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in the DPA; (c) the nature and scope of the offense conduct; and (d) the Company’s agreement to continue to cooperate with the DOJ in any ongoing investigation of the conduct of the Company and its officers, directors, employees, and agents relating to possible violations under investigation by the DOJ.”

As highlighted in the DPA, the advisory guidelines fine range was $17.5 million to $35 million.  The DPA states as follows.

“The Company agrees to pay a monetary penalty in the amount of $14,000,000 to the United States Treasury within ten (10) days of the filing of the Information. The Company and the Office agree that this fine is appropriate given the facts and circumstances of this case, including the cooperation in this matter and the nature and scope of the offense conduct.”

As common in FCPA DPAs, DAI “expressly agree[d] that it shall not, through present or future attorneys, officers, directors, employees, agents or any other person authorized to speak for the Company, make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by the Company set forth [in the DPA and Information].”

Karen Seymour (Sullivan & Cromwell) represented Dallas Airmotive.

This Wall Street Journal Risk & Compliance post notes:

“A spokeswoman for the company said the U.S. Justice Department acknowledged the firm’s cooperation and the improvements it made to its compliance program. She said the company upholds high standards articulated in its code of business ethics, but it regrets that “those standards were breached by a limited number of third-party agents and employees of Dallas Airmotive’s business in South America” from 2008 through 2012. “These individuals are no longer with the company, and Dallas Airmotive do Brasil and our South American sales team are operating under new leadership,” the spokeswoman said in an email.”

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