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.
DOJ Enforcement Action
The DOJ action involved this two-count criminal information against Latam Airlines Group S.A. (LATAM), the successor-in-interest to LAN, for violating the FCPA’s books and records and internal controls provisions.
The criminal charges were resolved via this deferred prosecution agreement in which LATAM agreed to pay a $12.75 million criminal penalty.
Like the prior SEC enforcement action against Cueto, the criminal information begins with the background of “LAN’s Entry into the Argentine Market” and states:
“LAN sought entry into the Argentine commercial airline market in the early 2000s. At the time, Argentina prohibited foreign-owned airlines from operating in the country, so LAN looked for a local Argentine company in which it could acquire a minority interest. In 2004 and 2005, LAN engaged in discussions with government officials from Argentina’s Ministry of Transportation about a variety of issues surrounding its entry into the market, including: (a) which local airline it could acquire (the government had to approve its acquisition); (b) revising the law to permit LAN to own a majority of that company; (c) granting LAN additional routes within Argentina it could operate once it had established operations in the country; (d) raising the maximum allowable ticket prices, which were set by the government; and (e) labor issues that arose after it entered the market.
By early 2005, LAN had agreed with officials from the Argentine Ministry of Transportation that it would acquire the defunct Argentine airline, Aero 2000, which had no active operations. A s part of that agreement, LAN also agreed to employ the labor forces from two other defunct airlines, LAFSA and Southern Winds. In return for that commitment, Argentine government officials agreed that the officials would revise the law so that LAN could own a majority of the airline it had acquired, would raise the cap on maximum airfares, and would grant LAN additional domestic routes.
However, LAN’S relationship with the labor unions representing its inherited workforce began deteriorating during this time frame. The tension focused on the so-called “one function rule,” which mandated that each employee could engage in only one, narrowly-defined type of work. Although LAN’S labor unions did not strictly enforce the rule in practice, the unions threatened to do so, which would have had the effect of significantly increasing LAN’S labor expenses.”
Like the previous Cueto action, the criminal information next alleges “the fictitious consulting agreement” and states in pertinent part:
“In September and October 2006, LAN negotiated and executed a fictitious $1 .15 million consulting agreement with Consultant [described as an advisor to the Secretary of Argentina’s Ministry of Transportation], through a company he owned and operated, in order to funnel bribes to labor union officials. As a result of these corrupt payments, LAN’S unions had agreed not to enforce the one function rule for a period of years and had accepted substantially lower wage increases than they had been demanding.”
“LAN and Consultant’s company never fully signed and executed the fictitious consulting agreement, and neither the Consultant nor anyone else affiliated with his company ever performed any of the services specified in the draft agreement. Despite the absence of a fully executed agreement and despite the failure of Consultant’s company to perform the services specified in the draft agreement, Consultant’s company invoiced LAN for payment under the draft agreement and a LAN affiliate paid those invoices.”
According to the information, payments were made to the consultant from its Citibank account in New York to: (i) a Wachovia account in Roanoke, Virginia held in the name of the consultant and his wife, not in the name of his company; or (ii) a New York Bank of America account in the name of another company, which was jointly owned by Consultant’s wife and son.
According to the information:
“All of the payments to Consultant’s company were intentionally mis-recorded as “other debtors” on the books, records, and accounts of LAN’S Delaware subsidiary. LAN Executive approved the payments to Consultant’s company, knowing that the payments were pursuant to an unsigned fictitious consulting agreement with Consultant’s company.”
“LAN obtained an estimated benefit of $6,743,932 as a result of the improper payments to Consultant’s company to resolve LAN’s union issues.”
Under the heading “LAN’s Internal Accounting Controls,” the information alleges:
“During the relevant period, LAN knowingly and willfully failed to implement a sufficient system of internal accounting controls. ln particular and as relevant here, LAN had deficient internal accounting controls that did not require, among other things, (a) due diligence for the retention of third party consultants; (b) a fully executed contract with a third party before payment could be made to it; (c) invoices issued to the LAN entity that in fact engaged the third party; (d) documentation or other proof that services had been rendered by a third party before payment could be made to it; (e) that payment to third parties retained by LAN or LAN entities be made to bank accounts held in the names of those third parties; or (f) oversight of the payment process to ensure that payments were made pursuant to appropriate controls, including those described above.
LAN Executive, LAN Cargo Executive, and one other high-level LAN executive knew that the services described in the unsigned fictitious agreement with Consultant’s company were false, and that the true purpose of the payments made under it were to resolve LAN ‘S disputes with its Argentine labor unions. At least LAN Cargo Executive, moreover, knew that Consultant would pay bribes to officials of the labor unions. LAN Executive and the other high level LAN executive who knew about the false nature of the agreement had the authority and responsibility to ensure that LAN devised and maintained an adequate system of internal accounting controls, knew that LAN ‘S then-existing internal accounting controls failed to prevent LAN from entering into an unsigned fictitious consulting agreement, and knowingly and willfully failed to implement internal accounting controls to address the known weaknesses in part to permit LAN to enter into the contract.”
To resolve the criminal charges, LATAM agreed to a three-year DPA. Under the heading “Relevant Considerations,” the DPA states:
The Office 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 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;
(b) because of the delayed disclosure, potentially relevant evidence was lost or destroyed, including through the routine application of data retention policies;
(c) the Company fully cooperated with the Office’s investigation and provided all relevant facts known to the Company, including information about individuals involved in the misconduct;
(d) the Company had an inadequate compliance program at the time of the criminal conduct;
(e) the Company now has designed and is implementing a compliance program and system of internal accounting controls, and has committed to ensuring that these will continue to be implemented in a manner that satisfies the elements set forth in Attachment C to this Agreement;
(f) 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;
(g) the nature and seriousness of the offense;
(h) the Company’s prior history, which includes a guilty plea by its subsidiary LAN Cargo in 2009 for its involvement from 2003 through 2006 in a criminal conspiracy to fix prices in the airline cargo industry;
(i) the Company has agreed to continue to cooperate with the Office 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 ;
(j) accordingly, after considering (a) through (i) above, the Company will enter into a deferred prosecution agreement, pay a criminal penalty of 25% above the low end of United States Sentencing Guidelines range, and an independent compliance monitor will be imposed for a term of twenty-seven (27) months.”
The DPA sets forth an advisory sentencing guidelines range of $10.2 million – $20.4 million.
As is typical in FCPA DPAs, the company agreed to a so-called muzzle clause in which it agreed not to, directly or indirectly through others, “make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by the Company … or the facts described in the … Statement of Facts.”
SEC Enforcement Action
This SEC administrative order is based on the same core findings as the previous Cueto enforcement action and the DOJ’s action. In summary fashion, the order states:
“These proceedings arise from violations of the FCPA by Respondent LAN Airlines S.A. In 2006 and 2007, LAN, through Ignacio Cueto Plaza (“the CEO”), the current CEO of 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, LAN 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 LAN understood would not occur. The CEO authorized subordinates to make the payments that were improperly booked in the Company’s books and records, which circumvented LAN’s internal accounting controls.”
Under the heading “LAN Encounters Problems With the Unions In Argentina,” the order states:
“The Argentine government in March 2005, required that LAN 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 Aeronautico (APA), the pilots’ union, the Asociación de Pilotos de Líneas Aéreas (APLA), the mechanics’ union, Asociación del Personal Tecnico Aeronautico (APTA), the flight attendants’ union, Asociación de Tripulantes de Cabina de Pasajeros de Empresas Aerocomerdiales (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 collective CBAs. The single-function rule was a provision that limited workers from performing more than one work function 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 the CEO, attempted to negotiate on the wage issues but made no progress and things worsened over time. Eventually there were work stoppages and 5 slowdowns on the part of the workforce, including strikes involving the pilots’ and the mechanics’ unions.”
Under the heading “Failure to Maintain Accurate Books and Records,” the order states:
“LAN, directly and through LAN Argentina and AAI, failed to make and keep books, records, and accounts that accurately and fairly reflected LAN’s transactions with the consultant’s company and the company owned by consultant’s son and wife. The improper payments were concealed within AAI’s books and records in transitory holding accounts. Later, the payments were mis-recorded in AAI’s accounts as “various other debtors’ debits.” LAN failed to accurately disclose in its books and records that payments to consultant’s company and the company owned by consultant’s son and wife could benefit union officials in Argentina.”
Under the heading “Failure to Maintain Adequate Internal Controls,” the order states:
“LAN failed to devise and maintain an adequate system of internal accounting controls. The controls in place during 2006 and 2007 were minimal and clearly deficient. The conduct in Argentina involved executives at the highest levels of LAN. High level executives approved the payments to the consultant’s company and to the company owned by consultant’s son and wife, and other executives and managers made the payments while overlooking numerous red flags. During the relevant period LAN had no internal controls requiring due diligence on third parties, and as a result no due diligence was conducted on the consultant or his related entities, or the company owned by his son and wife. If a due diligence review had been conducted on the consultant, LAN might have become aware of his January 2005 appointment as a Cabinet Advisor to Argentina’s Transportation Secretary.
The payments to the consultant were supported by a sham contract between the consultant’s company and AAI, a LAN subsidiary incorporated in Delaware that had no personnel and was completely unrelated to LAN’s business in Argentina. LAN’s legal department reviewed the sham contract with the consultant’s company and raised no concerns. The contract was never finalized and never signed by the parties. LAN’s accounting division did not require any proof of services before paying the $1,150,000 to the consultant’s company, and no one questioned why payments were wired to a U.S. brokerage account in the name of the consultant and his wife rather than to an account in the name of the consultant’s company. Similarly, LAN paid $58,000 to a Costa Rican company owned by the consultant’s wife and son without any proof of services. Despite the consultant’s receipt of illicit funds in 2006 and 2007, LAN executives considered hiring him again in 2009 to work on another airline matter but ultimately did not retain him.
LAN did not implement even the most basic compliance controls until 2008, when it issued a new Code of Conduct, which for the first time contained anti-corruption policies. The company did not offer any compliance training until about 2010, and the training was minimal and did not apply to all employees. Training did not become compulsory for managers until about 2011.
LAN did not implement a comprehensive company-wide corporate compliance program until early 2014. In addition, the primary individuals who caused the controls failures at LAN and LAN Argentina are still with the company and no disciplinary action has been taken against them.”
Based on the above, the SEC’s order finds that LAN violated the FCPA’s books and records and internal controls provisions.
As noted in the SEC’s release, “to settle the SEC’s charges that it failed to keep accurate books and records and maintain adequate internal accounting controls, LAN agreed to pay $9.4 million in disgorgement and prejudgment interest.”
The SEC’s order contains a section titled “Remedial Actions and Undertakings” which states:
“In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent. In 2008, LAN began steps to create a basic compliance program by hiring a new General Counsel and Vice President who was tasked with monitoring the compliance department. In 2013, LATAM adopted a new Code of Conduct, 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. The new compliance program was implemented in early 2014. LAN also hired a new Compliance Manager who, along with two deputies and a senior compliance analyst, oversees twenty people, including regional heads of legal, located in nine different regions to ensure compliance. LATAM also now requires annual training of employees who must certify compliance with LAN’s Code of Conduct.”
Under the heading “Non-Imposition of a Civil Penalty,” the order states:
“Respondent acknowledges that the Commission is not imposing a civil penalty based upon its payment of a $12,750,000 criminal fine as part of Respondent’s settlement with the United States Department of Justice.”
In the SEC’s release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states:
“LAN used a sham consulting agreement to make its financial reporting appear as though the company was funding a study rather than steering money to settle labor disputes. This settlement along with our prior case against the CEO shows that public companies and their executives must be truthful and forthcoming about its overseas consulting agreements or otherwise pay the consequences.”
LATAM issued this release which states:
“[The company] has reached voluntary agreements with the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) to resolve inquiries into payments LAN Airlines S.A. (“LAN”) made 10 years ago in 2006-2007 to a consultant on labor matters in Argentina.
After an exhaustive investigation in which the Company actively cooperated, both agencies concluded in relation to the 2006-2007 consultant payments that the Company did not comply with the provisions of the U.S. Foreign Corrupt Practices Act (FCPA) that require the Company to keep accurate books and records and to establish and maintain adequate internal controls.
The agreement with the DOJ provides for a total fine of $12.75 million and the agreement with the SEC provides for a payment of $6.7 million plus interest.
Additionally, LATAM has agreed to retain an independent compliance monitor for a period of 27 months.
As has been communicated in its corporate financial reports, the company has cooperated fully with relevant authorities throughout this process.
LATAM and its senior management reaffirm its commitment to complying with the laws of all of the countries where the Group operates. From the time this event occurred, the company has taken action and made significant improvements in its Compliance structure and its internal accounting controls.”
Roger Witten (WilmerHale) represented LAN.
Yesterday LATAM’s stock fell 1.35%.