This previous post went in-depth into the Foreign Corrupt Practices Act enforcement action against Embraer.
This post continues the analysis by highlighting additional issues to consider from the enforcement action.
In previous SEC filings Embraer stated: “In September, 2010, we received a subpoena from the Securities and Exchange Commission, or SEC, and associated inquiries from the U.S. Department of Justice, or DOJ, concerning possible non-compliance with the U.S. Foreign Corrupt Practice Act, or FCPA, in relation to certain aircraft sales outside of Brazil.”
Thus from start to finish Embraer’s FCPA scrutiny lasted over six years.
If the DOJ/SEC want the public to view its FCPA enforcement program as legitimate, credible, and effective, it must resolve instances of FCPA scrutiny much faster particularly against companies that “fully cooperate with the DOJ’s investigation” (as the DOJ stated Embraer did).
U.S. Government Contractor
Embraer was an egregious FCPA enforcement action. Among other things, the alleged conduct involved active participation by high-level executives across multiple corporate divisions and improper conduct in multiple countries.
I stated in my November 2010 FCPA testimony to the Senate that one of the more concerning aspects of FCPA enforcement is the extent to which the U.S. government continues to do business with companies under FCPA scrutiny and/or companies that have resolved FCPA enforcement action where the underlying conduct is egregious.
Embraer is yet another example highlighting this concern.
Like most corporate FCPA enforcement actions, the Embraer action involved use of third parties to facilitate the bribery schemes. As a result, both the DOJ and SEC enforcement actions contain several allegations about Embraer’s deficient internal controls related to third parties.
Like most corporate FCPA enforcement actions, there is an element of assumed causation embedded in the allegations (in other words, if only the company had conducted due diligence, if only the third party had experience, etc. the improper conduct would not have happened).
Nevertheless, the resolution documents do contain a checklist of sorts for companies to consult to measure third party compliance best practices.
In the words of the DOJ:
“Embraer had no internal accounting controls that, among other things, (a) required adequate due diligence for the retention of third-party consultants and agent; (b) required a fully executed contract with a third-party before payment could be made to it; (c) required documentation or other proof that services had been rendered by a third-party before payment could be made to it; or (d) implemented oversight of the payment process to ensure that payments were made pursuant to appropriate controls ….”
In the words of the SEC:
“During the relevant time period, Embraer’s policies, procedures, or controls required that all commitments above a certain sum with third parties have a formal, written contract. However, Embraer did not enter into a written contract with the Dominican Official, the Saudi Arabian Official, the Mozambican Official, or the Indian Agent even though these individuals were the intended beneficiaries of the payments referred to in this complaint. Similarly, Embraer’s code of ethics and internal company directives required due diligence on sales representatives or agents, such as checking corporate documentation and publicly available information, gathering evidence of access to the customer or market, and inquiring whether the representative or agent was recommended by government officials. In each of the schemes described in this Complaint, the bribes and improper payments involved were transacted through third parties. Critical steps that Embraer’s internal process at the time required, such as checking publicly available information about the third parties’ access to customers or relevant markets, were either ignored or circumvented. The information obtained, had these steps been taken, would have alerted Embraer employees that some or all of the agents identified in this Complaint lacked any experience or expertise in the aviation industry or access to the relevant markets in question.”
The Saudi Arabia and Mozambique conduct alleged in the enforcement action concerned alleged payments to individuals at alleged state-owned or state-controlled airlines that the DOJ stated “performed a government function.”
In U.S. v. Esquenazi, the only legal decision of precedent that directly addressed the meaning of “foreign official, the 11th Circuit stated:
“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract.”
As to function, the 11th Circuit stated that in deciding if the entity performs a function the government treats as its own, Courts and juries should examine whether
- the entity has a monopoly over the function it exists to carry out;
- whether the government subsidizes the costs associated with the entity providing services;
- whether the entity provides services to the public at large in the foreign country; and
- whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.
A few days after the Embraer enforcement action, Saudi Armaco issued this statement:
“Saudi Aramco confirmed …, as a follow-up to recently published reports by the media about a corruption case involving Embraer S.A., a Brazilian company, that its internal auditing activities that took place a few years ago revealed irregularities of the transaction that occurred between Brazilian Embraer S.A. and Saudi Aramco.
With significant and extensive assistance from the Saudi Ministry of Interior authorities, Saudi Aramco’s internal investigations established that a former Saudi Aramco employee was involved in receiving a bribe in return for facilitating the purchase of three aircrafts from Embraer. These findings led the company to apply maximum disciplinary actions against its former employee per its policies. The matter was further referred by the company to the relevant national authorities and concurrently Saudi Aramco suspended all business dealings with Embraer since that time.
The case dates back to 2012 when Saudi Aramco conducted an internal audit process of a transaction which led to identifying certain violations. This prompted Saudi Aramco to proactively initiate an internal investigation with the cooperation of concerned authorities in Saudi Arabia. The investigation confirmed the involvement of the former employee in these violations. Consequently, Saudi Aramco took appropriate measures against the involved former employee and referred the case to competent government authorities and cooperated in revealing all entities involved in this case.
Saudi Aramco also cooperated with international agencies which were conducting similar investigations into Embraer’s transactions. This cooperation also contributed to revealing the circumstances of the case and its international network. Although Saudi Aramco has ceased all future dealings with Embraer and excluded them from any future business, the company is taking appropriate legal measures against Embraer over the aforementioned violations upon the completion of the ongoing investigations by all other agencies.”