This previous post  went in-depth regarding the $22 million parallel DOJ and SEC enforcement action against LAN Airlines.
This post continues the analysis of the enforcement action by highlighting additional issues to consider.
As noted in connection with the prior SEC enforcement action against Ignacio Cueto Plaza , the conduct at issue is notable for several reasons.
First, the problematic conduct was engaged in by an individual currently with the company. The vast majority of FCPA enforcement actions involve the conduct of former employees.
Second, the problematic conduct was engaged in by a high-level executive of the issuer (most FCPA enforcement action do not involve executive officers of the issuer). Indeed, Cueto is the CEO of LAN and the company’s most recent annual report states:
“The Cueto Group is LATAM’s controlling shareholder and it is comprised of Mr. Juan José Cueto Plaza (one of our directors), Mr. Ignacio Cueto Plaza (the CEO LAN), Mr. Enrique Cueto Plaza (the CEO LATAM) and certain other family members. As of January 31, 2016, the Cueto Group owned 25.00% of LATAM Airlines Group’s common shares. The Cueto Group is entitled to elect three of the nine members of our board of directors and is in a position to direct the management of the Company.”
Even though the company may have voluntarily disclosed (see below) and cooperated with the enforcement agencies inquiries, the company was defiant in terms of what is generally considered a best practice (disciplining or terminating the culpable actor(s). As stated by the DOJ:
“the Company has failed to remediate adequately, including significantly by failing to discipline in any way the employees responsible for the criminal conduct recounted in the statement of facts … including misconduct by at least one high-level Company executive, and thus the ability of the compliance program to be effective in practice is compromised”
No doubt this defiance resulted in a couple of million more in terms of settlement compared to the alternative. But perhaps the defiance was a reflection of corporate thinking that the DOJ and SEC’s case (based on conduct seemingly beyond any conceivable statute of limitation) was dubious and that the company was better off with Cueto (even if it meant a higher settlement amount) than without Cueto (recognizing that this alternative perhaps could have exposed the company to civil employment claims).
Some believe that the DOJ and SEC have transformed the FCPA into an all-purpose corporate ethics statute and/or that FCPA enforcement sometimes serves as a convenient cash cow for the U.S. government.
The LAN enforcement action – based on conduct approximately ten years old involving a Chilean citizen employed by a Chilean company engaging in conduct in connection with a Argentina labor dispute – only fuels these concerns.
Another issue to consider.
As noted in connection with the Cueto enforcement action  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, both the DOJ and SEC (like in the prior Cueto action) are vague as to whether the DOJ/SEC viewed the Argentine “union officials” to be “foreign officials” under the FCPA. If the DOJ/SEC did view the “union officials” as such, it stretches the definition of “foreign official” even further. If the DOJ / SEC did not view the “union officials” as foreign officials, the LAN action represents a rare enforcement action concerning improper booking and insufficient internal controls concerning an instance of commercial bribery.
The LAN enforcement action is believed to be the first FCPA enforcement in history against a company headquartered in South America.
Voluntary Disclosure Dispute
On the issue of voluntary disclosure, the DOJ’s press release states that the company “did not voluntarily disclose the FCPA violations.” Yet the DOJ’s DPA states:
“the Company did not timely voluntarily disclose the FCPA violations to the Office; it began cooperating with the Office in the investigation of the matter only after the publication of press reports in Argentina appearing approximately four years after the criminal conduct in 2006-07 that stated that both Argentine and Chilean law enforcement officials had commenced investigations of the conduct”
In its two prior annual reports filed with the SEC, LATAM disclosed:
“Authorities in Chile and the United States continue to investigate payments by LATAM Airlines Group S.A. (formerly LAN Airlines S.A.) in 2006-2007, to a consultant who assisted in the resolution of labor issues in Argentina. In connection with the above, the Company has hired lawyers in Chile and the United States, and in June 2011 voluntarily reported this situation to the Securities and Exchange Commission (“SEC”) and the Justice Department of the United States.“
Unlike the unaccountable statements in the DOJ’s press release, the company’s statement in its SEC filing is subject to accountability under the securities laws for false or misleading statements.
Regardless of whether LATAM voluntarily disclosed, or if its disclosure was timely,” from start to finish, the company’s scrutiny appears to have lasted over 5 years. If the DOJ/SEC want the public to have confidence in their FCPA enforcement programs, they must resolve instances of FCPA scrutiny much quicker.
Examining the root cause of an enforcement action is not to excuse the alleged conduct, but to understand the circumstances which gave rise to the enforcement action in the first place.
As highlighted many times on these pages, trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.
So what was the root cause of the LAN enforcement action?
In many respects, Argentina’s prohibition on foreign-owned airlines operating in the country and the further requirement that LAN needed to partner with a local Argentine company. Added to this was the so-called “one function rule” which mandated that each airline employee could engage in only one, narrowly-defined type of work.
No-Charged Bribery Disgorgement
The LAN enforcement action is the latest of numerous examples of the SEC ordering disgorgement even though the offending company was not charged with violating the FCPA’s anti-bribery provisions.
As highlighted in this  previous post, so-called no-charged bribery disgorgement is troubling.
Among others, Paul Berger (here ) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”
If Graham Were Applied
SEC v. Graham was a recent appellate court decision holding that disgorgement is subject to a five-year limitations period. (See here  for the prior post).
As noted in this  prior post, Graham of course should matter to FCPA enforcement; however, the reality is that Graham will likely not matter because legal elements, legal exceptions, legal defenses, and other general legal principles often only directly matter to the extent an adversarial proceeding takes place and a litigant is forced to prove things consistent with the applicable burden of proof.
Like other corporate FCPA enforcement actions, the SEC was not put to its burden of proof in the LAN matter.
According to the SEC, the conduct giving rise to the enforcement action occurred from 2006 to 2007. Obviously conduct occurring 9-10 years prior to an enforcement action is beyond any conceivable limitations period. Further, if Graham were applied, the statute of limitations would only reach back to mid-2011. Presumably then the entire $9.4 million disgorgement and prejudgment interest amount would not have survived judicial scrutiny.
In most FCPA enforcement actions involving a DOJ and SEC component in which the SEC seeks disgorgement, the DOJ and SEC seek recovery of money for the same conduct in what can only be called double-dipping.
For instance, both the SEC and DOJ stated that LAN obtained a benefit of $6,743,932 as a result of the improper payments to resolve LAN’s union issues.
The SEC enforcement action consisted of disgorgement of $6,743,932 plus prejudgment interest of $2,693,856 for a total payment of $9,437,788. The DOJ DPA set forth the Sentencing Guidelines calculation which has a major factor the value of the benefit received.
In other words, LAN repaid the approximate $6.7 million benefit it received twice – first to the DOJ and then to the SEC.
Philip Urofsky, the former DOJ Assistant Chief of the Fraud Section, has stated :
“Take two companies, one public and one private, and assume that both violate the FCPA and realize the same illicit gain from the violation. The private company will be subject only to DOJ’s jurisdiction and will therefore be exposed to a criminal fine of up to twice its gain. The public company, on the other hand, will be subject both to that criminal fine and to a civil fine and disgorgement of the illicit proceeds, thus potentially paying a third more in fines than the private company for the same conduct.”