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.
The DOJ enforcement action involved this criminal information against Embraer charging conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions and willful violations of the FCPA’s internal controls provisions.
The information alleges four “unlawful schemes” relating to conduct in the Dominican Republic, Saudi Arabia, Mozambique, and India.
In terms of the Dominican Republic, the information alleges that between August 2008 to October 2010 “Embraer, through its employees and agents, agreed to pay and did pay Dominican Official approximately $3.52 million to obtain a defense contract valued at approximately $96.4 million.
The Dominican Official is described as “an official in a high-level decision-making position in the government of the Dominican Republic.” According to the information, the official “had influence over decisions made by the Fuerza Aerea de Republica Dominiciana (FAD), which was the Dominican Republic’s Air Force.
According to the information:
“Beginning in or around June 2007, Embraer began efforts to sell the Super Tucano aircraft, a turbine-driven military aircraft typically used for missions to fight drug trafficking, counter insurgence missions, and training, to the FAD. There was no public bid or tender for this sale. Rather, Embraer developed and negotiated the sale directly with representatives of the FAD, and Dominican Official was Embraer’s primary point of contact at the FAD.
By mid-2008, many of the terms of the sale had been negotiated but the Dominican Republic Senate (“Dominican Senate”) had not yet approved the deal’s financing or the purchase agreement, which were necessary steps for the completion of the sale. Embraer employees and Dominican Official began discussing how they could influence the Dominican Senate to provide the necessary approvals.
On or about August 25, 2008, an Embraer executive informed Embraer Executive A [described as an Executive in Embraer’s Defense and Government Markets Division] by email that Dominican Official would be talking to a Dominican Senator about compensation for the Senator but that Dominican Official wanted to talk to Embraer Executive A before having that conversation. Embraer Executive A informed the other Embraer executive that Embraer Executive A and Dominican Official had already spoken.
On or about September 1 , 2008, Embraer Executive A agreed to pay Dominican Official 3.7% of the value of the contract (which ultimately came to approximately $3.52 million) if the sale was completed. That same day, Embraer Executive A emailed another Embraer executive that the Dominican Senate’s meeting to approve financing of the transaction would soon take place and that “they want to have the agent agreement doc signed before the meeting.”
In or around early September 2008, Dominican Official and Embraer Executive A agreed that the payment referred […] would be paid to three separate Dominican shell entities: one would receive $2.5 million, a second would receive $920,000, and a third would receive $ 100,000.”
According to the information, after Embraer publicly announced the sale, Dominican Official repeatedly contacted Embraer requesting the payments that had been promised. The information then alleges:
“Based on these repeated requests, on or about April 24, 2009, Embraer RL [described as a wholly-owned subsidiary of Embraer incorporated in Delaware with a New York bank account from which Embraer made improper payments and whose financial statements were consolidated into Embraer’s financial statements] wired $ l 00,000 to one of the shell companies … from Embraer RL’s bank account in New York to a bank account in the Dominican Republic.
Following the $100,000 payment …, Dominican Official persisted with efforts to collect the promised payments, and an executive in Embraer’s legal department provided senior Embraer managers with guidance on how to make those payments in a manner that would conceal their true purpose.
For example, on or about September 30, 2009, an Embraer employee sent an email to an Embraer executive detailing how an executive in Embraer’s legal department had advised using a third-party agent, “Agent A,” [described as an individual who purportedly provided legitimate agency services to Embraer in connection with the sale of aircraft to the government of Jordan, but in reality was retained for the purpose of funneling bribes to Dominican Official to obtain or retain business in the Dominican Republic] who had previously provided agency services to Embraer, to remit the remaining two payments to Dominican Official instead of directly paying the shell companies that Dominican Official had identified.”
According to the information:
“On or about March 12, 2010, Embraer RL and Agent A ‘s company entered into a purported agency agreement, pursuant to which Embraer RL would pay Agent A ‘s company an 8% commission on any successful sales of aircraft to the Jordanian Air Force. The agreement called for Embraer RL to make advance payments to Agent A’s company of $2.5 million and $920,000, which, when totaled, equaled the $3,420,000 that Embraer had promised to Dominican Official.
On or about April 6, 2010, Agent A’s company submitted to Embraer RL two invoices for “sales promotion services” in the amounts of $2.5 million and $920,000. An internal Embraer memorandum indicated that the payments were related to the commission owed for the Super Tucano aircrafts sold to the government of the Dominican Republic, not potential sales to the Jordanian Air Force. Indeed, Embraer never sold any aircraft to the Jordanian Air Force, Agent A rendered no services in connection with any attempted sale to the Jordanian Air Force, and Agent A rendered no legitimate services to Embraer related to the sale of Super Tucanos to the FAD.”
According to the information:
“The payments to Agent A ‘s company were falsely booked as sales commissions in Embraer RL’s internal accounting records and as selling expenses in Embraer’s consolidated 2010 financial statement. The April 24, 2009, payment of $100,000 to one of the Dominican shell companies was likewise falsely booked as a selling expense in Embraer’s consolidated 2010 statement.”
In terms of Saudi Arabia, the information alleges that between November 2009 and February 2011 “Embraer agreed to pay and did pay Saudi Arabia Official [described as “an official in a high-level decision-making position in a state-owned and controlled company in Saudi Arabia that performed a government function] more than $1.5 million to obtain a contract for the sale of three business jets, valued at approximately $93 million to Saudi Arabia Instrumentality.”
According to the information:
“In or around 2007, Embraer learned that Saudi Arabia Instrumentality was interested in purchasing executive jets. By 2009, Saudi Arabia Instrumentality had narrowed its interest to purchasing aircraft from Embraer and one other manufacturer.
In or around early December 2009, Embraer Executive B [described as an executive in Embraer’s Executive Jets Division] met with Saudi Arabia Official in London. Saudi Arabia Official offered to help Embraer win the aircraft contract and to change the terms of the deal from the sale of used jets to new jets, which would be a more lucrative transaction for Embraer, if Embraer compensated Saudi Arabia Official. Embraer Executive B knew that Saudi Arabia Official was a high-level official at Saudi Arabia Instrumentality and believed that Saudi Arabia Official could deliver on the promise.
Saudi Arabia Official and Embraer Executive B negotiated the amount of Saudi Arabia Official’s payment. Saudi Arabia Official rejected an initial offer of $200,000 per aircraft. Embraer Executive B sent an email to Embraer Executive B’s supervisor and another Embraer executive on or about December 10, 2009. indicating that Saudi Arabia Official had justified the request for a higher payment on the grounds that “he has budget for used only and will have to lobby for more funds to take new aircraft over used.” Embraer Executive B added, “there is more to come to replace the entire fleet they have with 170,s Saudi Arabia Officials sees this as long term.” Embraer Executive B’s supervisor approved offering a per aircraft payment of $550,000.
On or about December 28, 2009, Embraer Executive B and Saudi Arabia Official agreed on a per-aircraft payment of $550,000, for a total amount of $ l .65 million. Two days later, on or about December 30, 2009, Embraer Executive B told another Embraer executive that Saudi Arabia Instrumentality had opted to purchase three new jets.
Embraer Executive B devised a plan to conceal the payments to Saudi Arabia Official by funneling them through Agent B [described as a company that purportedly provided legitimate agency services to Embraer in connection with the sale of aircraft to Saudi Arabia Instrumentality, but in reality was retained for the purposes of funneling bribes to Saudi Arabia Official to obtain or retain business in connection with the sale], which had no experience in the aircraft industry or in Saudi Arabia.
On or about February 26, 2010, pursuant to Embraer Executive B’s request, Embraer executives, including one in Embraer’s legal department, approved the agency arrangement with Agent B, pursuant to which Agent B would purportedly serve as Embraer’s sales agent for the deal with Saudi Arabia Instrumentality.
On or about March 5, 2010, Embraer RL executed an agency contract with Agent B signed by Embraer executives, pursuant to which Agent B was to “promote sales of . . . aircraft manufactured by Embraer . . . solely and specifically to” a subsidiary of Saudi Arabia Instrumentality.
Less than two weeks later, on or about March 15, 2010, Embraer and a U .S.-based subsidiary of Saudi Arabia Instrumentality entered into an aircraft purchase agreement, pursuant to which the subsidiary agreed to purchase three new aircraft for approximately $93 million. The aircraft were delivered in or around November and December of 2010.
In or around December 2010, Agent B submitted three invoices, each in the amount of $550,000, for its purported commission, even though Agent B had not rendered any services to Embraer in connection with the sale. Executives at Embraer approved paying the invoices. The payments were made through two wire transfers from Embraer RL’s bank account in New York to Agent B’s bank account in South Africa: $550,000 on or about December 22, 2010, and $1.1 million on or about February 18, 2011 . Embraer RL booked the payments as “sales commissions” and the payments were consolidated into the parent’s financial statements.
Agent B subsequently transferred more than $1.4 million of the $1 .65 million it received from Embraer RL to bank accounts held by Saudi Arabia Official’s longtime acquaintance, who in turn kept a portion of the monies and transferred the remainder to Saudi Arabia Official.”
In terms of Mozambique, the information alleges that:
“Embraer submitted a formal proposal to LAM [described as the state-owned commercial airline in Mozambique that performed a government function] in May 2008 for the sale of two commercial aircraft for approximately $32 million each, with an option for LAM to buy two more aircraft at the same price. The proposal followed nearly three years of work by Embraer Executive D [described as executive in Embraer’s Commercial Jets Division] to convince LAM to purchase from Embraer rather than competitors.”
According to the information:
“In mid-August 2008, during negotiations between Embraer and LAM, Agent C [described as an individual who purportedly provided legitimate agency services to Embraer in connection with the sale of aircraft to the government of Mozambique, but in reality was retained for the purposes of funneling bribes to Mozambican officials to obtain or retain business], who had not previously worked or had any contact with Embraer, contacted Embraer Executive D and said that Agent C would be serving as a consultant on the deal ….
Rather than reject Agent C’s solicitation, on or about August 11 , 2008, Embraer Executive D sent an email to two Embraer executives and proposed that they “create some margins for the commissions” for Agent C in the pricing of the two optional aircraft LAM could buy after purchasing the first two.”
The information then alleges various communications between Mozambique Official [described as an official in a high-level decision-making position in the government of Mozambique who had influence over decisions made by LAM] and how Agency C was used to facilitate bribe payments to the official.
According to the information:
“Pursuant to the [purported] agency agreement [with Agent C] Embraer RL agreed to pay Agent C’s company $400,000 per aircraft (the exact amount Mozambique Official had previously said Embraer could “get away” with paying). However, neither Agent C nor Agent C’s company ever provided any legitimate services to Embraer.
Embraer delivered the two aircraft to LAM on or about July 30, 2009, and September 2, 2009. Following the delivery of each aircraft, Agent C’s company submitted two invoices to Embraer for $400,000 each, one dated August 15, 2009, and one dated September 24, 2009. An Embraer executive signed and approved both invoices for payment. On or about August 31, 2009, Embraer RL wired $400,000, from its U.S.-based bank account to an account at a bank in Sào Tomé and Principe, for further credit to the an account at a bank in Portugal, which was held by Agent C’s company. On or about October 2, 2009, Embraer RL wired an additional $400,000 from its U.S.-based bank account to Agent C’s company’s Portugal-based bank account. Embraer RL recorded these payments as “Sales Commision” and they were consolidated into Embraer’s books under “Net Operating (expenses) income” as a “selling” expense, specifically, “Sales Commission.”
In terms of India, the information alleges:
“On or about July 3, 2008, Embraer executed a contract to provide three highly specialized military aircraft to the Indian Air Force for approximately $208 million, In connection with the deal, Embraer retained the services of Agent D [described as an individual who purportedly provided legitimate agency services to Embraer pursuant to two separate agency agreements in connection with the sale of aircraft to the government of India] pursuant to a 2005 agency agreement. It later paid $5.76 million to Agent D pursuant to a false agency agreement signed in or around 2008.
In or around January 2005, Embraer executed an agency agreement with a shell company domiciled in the United Kingdom and affiliated with Agent D (although Agent D’s name never appeared in the agreement). Under the agency agreement, Embraer agreed to pay the shell company a commission of 9% of the value of any defense contracts Embraer obtained in India because Embraer believed Agent D could help ensure that any contract would be awarded on a single-source, rather than competitive, basis. Embraer personnel thought the agreement with Agent D was illegal under Indian law and thus took steps to conceal its existence, including secreting the sole fully-executed version of the agreement in a safe deposit box in London that could be opened only when both an Embraer employee and Agent D or an associate of Agent D were present.
Less than a month after executing the agency agreement with the shell company, on or about February 8, 2005, Embraer announced that it had signed a memorandum of understanding (“MOU”) with India’s Defence Research and Development Organisation to support the development of a new early warning radar system for the Indian Air Force, which Embraer believed could ultimately result in Embraer securing a contract for the sale of three Embraer 145 aircraft.
On or about July 3, 2008, nearly three years after signing the MOU , the Indian Air Force agreed to purchase three aircraft from Embraer for approximately $208 million (the “India contract’). The next day, on or about July 4, 2008, Agent D contacted Embraer employees and demanded payment of the commission pursuant to the contract ….
Agent D continued making demands for payment and, in or around February and March 2009, an Embraer executive met with lawyers representing Agent D to discuss Agent D’s payment demands. Following these discussions, Embraer executives agreed to pay $5.76 million to Agent D to settle the claim.
To conceal the payment … Embraer created a false agency agreement. On or about November 21 , 2009, more than a year after Embraer was awarded the India contract, Embraer, through its wholly owned subsidiary, ECC lnvestment Switzerland AG, executed an agency agreement with a shell company domiciled in Singapore and affiliated with Agent D for its purported services as an agent in a sale Embraer had made to an unrelated customer in another country that had purchased an Embraer aircraft more than a year earlier, in or around July 2008. The Singaporean shell company never performed any services related to that sale or to the sale to the lndian Air Force.
The same day that the agency agreement was executed, the Singaporean shell company delivered three invoices to ECC, each for $1 .92 million. Embraer, through ECC, remitted three payments to the shell company shortly thereafter. Embraer’s books and records did not reflect that this transaction was related to its arrangement with Agent D.”
According to the information, Embraer’s total profits from the above bribery schemes was approximately $83.8 million.
Under the heading “Embraer’s Internal Accounting Controls,” the information alleges:
“During the relevant period, Embraer knowingly and willfully failed to devise and maintain an adequate system of internal accounting controls. In particular … 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 ….
For example, in connection with the Dominican Republic bribery scheme, Embraer made payments to one of the shell companies identified by Dominican Official, even though a foreign official had told Embraer to which company to make agency payments, and Embraer had conducted no diligence on the shell company, did not have a signed contract with the shell company, and knew that the shell company had not performed any legitimate services in exchange for the payment.
Also in connection with the Dominican Republic bribery scheme, Embraer made payments to Agent A for services purportedly rendered in connection with an aircraft sale to the Jordanian Air Force, even though Embraer never sold any aircraft to the Jordanian Air Force, and Embraer knew that Agent A had rendered no services in connection with any attempted sale to the Jordanian Air Force, and even though an internal Embraer memorandum indicated that the payments were related to the commission owed for the Super Tucano aircrafts sold to the government of the Dominican Republic, not potential sales to the Jordanian Air Force.
Further, in connection with the Saudi Arabia bribery scheme, Embraer made payments to Agent B, even though it had conducted minimal due diligence on Agent B, did so almost exclusively on the basis of information Embraer Executive B personally provided to its contracts and legal departments, and did not require any proof of services from Agent B before making payment.
Similarly, in connection with the Mozambique scheme, the only due diligence that Embraer conducted on Agent C’s company was limited to collecting the company’s registration documents, corporate by-laws, and board minutes from Agent C himself, and Embraer did not require any proof of services from Agent C before making payment.
Numerous high-level Embraer executives knew that the various agency agreements referenced above falsely represented that payments were being made for legitimate agency services, and that the true purpose of the payments made to the agents was to funnel bribes to foreign officials. Many of the high-level executives who knew about the false nature of the agreements and the improper purpose of the payments had the authority and responsibility to ensure that Embraer devised and maintained an adequate system of internal accounting controls, knew that Embraer’s then-existing internal accounting controls failed to prevent Embraer from entering into false agency agreements and making improper payments, and knowingly and willfully failed to implement adequate internal accounting controls to address the known weaknesses, in part to permit Embraer to enter into false agency agreements and funnel bribes to foreign officials.”
Based on the above, the information charges conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions and willful failure to implement an adequate system of internal accounting controls. As to the later charge, the information specifically alleges that Embraer willfully failed to implement controls that:
“(a) required adequate due diligence for the retention of third-party consultants and agents; (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 …”.
The criminal charges were resolved via this deferred prosecution agreement in which Embraer admitted, accepted and acknowledged that it was responsible for the conduct charged in the information.
The three-year DPA contains a section titled “Relevant Considerations” which states as follows:
(a) the Company did not voluntarily disclose the FCPA violations to the [DOJ]; the investigation of the matter commenced when the Securities and Exchange Commission (SEC) served the Company with a subpoena;
(b) the Company fully cooperated with the [DOJ’s] investigation and provided all non-privileged relevant facts known to the Company, including information about individuals involved in the misconduct, which assisted in the prosecutions of individuals by foreign authorities for the misconduct …;
(c) the Company had an inadequate compliance program at the time of the criminal conduct;
(d) the Company now has designed and is implementing a more adequate compliance program and system of internal accounting controls, has committed to ensuring that these will be implemented in a manner that satisfies the elements set forth in Attachment C to this [DPA], and has agreed to engage the Monitor pursuant to the terms described herein;
(e) the Company has engaged in partial remediation: it has disciplined a number of Company employees and executives engaged in the misconduct …, but did not discipline a senior executive who was (at the very least) aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions;
(f) the nature and seriousness of the offense, including its pervasiveness throughout each of the Company’s three separate sales divisions and the involvement of high-level executives in each set of criminal conduct …;
(g) the Company has no prior criminal history;
(h) the Company has agreed to continue to cooperate with the [DOJ] … in any investigation of the Company and its officers, directors, employees, agents, business partners, and consultants relating to violations of the FCPA;
(i) the Company has agreed to disgorge the profits from the misconduct … to the SEC and to Brazilian authorities;
(j) accordingly, after considering [of the above] the Company will enter into the [DPA], pay a criminal penalty of 20% below the low end of United States Sentencing Guidelines range, and the Monitor will be imposed …”.
The DPA sets forth an advisory Sentencing Guidelines range of $134 million to $268 million and states that a $107 million penalty is appropriate given the facts and circumstances of the case.
Pursuant to the DPA, Embraer agreed to enhance its corporate compliance program consistent with the provisions set forth in the agreement and to retain an independent compliance monitor for a three year period.
The DPA was signed by Embraer executives and Embraer’s counsel on October 3, 2016 and by the DOJ on October 21, 2016.
In this release, DOJ Assistant Attorney General Leslie Caldwell stated:
“Embraer paid millions of dollars in bribes to win government aircraft contracts in three different continents. But this prosecution shows that the Criminal Division will hold accountable those who treat corruption as a mere cost of doing business. Between U.S., Brazilian and Saudi authorities, bribe payers and bribe takers alike have been brought to justice for their wrongdoing.”
William Maddalena (Assistant Special Agent in Charge of the FBI’s Miami Field Office) stated:
“Embraer tried to bribe their way into several profitable aircraft contracts around the world. Instead of reaping a nice profit, their criminal conduct earned the Brazilian aircraft manufacturer a substantial penalty that more than wiped out their gains from these contracts. Crime does not pay!”
The DOJ’s release states:
“With the cooperation of U.S. authorities, Brazilian authorities have charged 11 individuals for their alleged involvement in Embraer’s misconduct in the Dominican Republic. Saudi Arabian authorities have charged two individuals for their alleged involvement in Embraer’s misconduct in Saudi Arabia.”
Based on the same core conduct alleged in the DOJ enforcement action, the SEC brought this civil complaint against Embraer charging violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.
In summary fashion, the complaint alleges:
“This action arises from violations of the FCPA by Embraer, a global aircraft manufacturer for the commercial, defense, and executive jets markets.
Between at least May 2008 and February 2011, Embraer paid bribes through its U.S.-based subsidiary to foreign government officials in the Dominican Republic, Saudi Arabia, and Mozambique to obtain business. Embraer realized over $83 million in profits from business obtained through the use of illicit payments.
These bribes were authorized by senior executives at Embraer and its subsidiaries while knowing or recklessly ignoring red flags which indicated a high probability that such payments were intended for, or would be passed to, foreign officials.
Embraer created false books and records to conceal the authorization of least three bribe payments to at least one government official in the Dominican Republic and another two bribe payments to a government official in Saudi Arabia. Embraer also created false books and records to conceal two bribe payments to a government official in the government of Mozambique. These payments were remitted from a New York-based bank account held in the name of Embraer’s U.S. subsidiary and paid through intermediaries from as early as April 2009 until at least February 2011.
These payments were improperly recorded as legitimate expenses in Embraer’s U.S. subsidiary’s books and records and were consolidated into Embraer’s financial statements. Embraer’s internal accounting controls were inadequate because they failed to prevent such payments or detect red flags which should have alerted its employees that these payments, in whole or in part, were bribes to foreign government officials. Moreover, the internal controls were circumvented to allow employees to authorize payments to third parties that were illegal in the host country, authorized with little or no supporting documents, or concealed through unrelated business transactions in an effort to avoid detection.
Additionally, from January 2005 through November 2009, Embraer, through its employees, improperly booked large payments to an agent, and concealed its relationship with this agent, while trying to obtain business in India. Embraer, through its employees, went to great lengths to conceal the existence of the agreement with its agent in India and falsely recorded a payment to this agent in order to conceal the true nature of the payment, which Embraer employees believed were in violation of Indian law, under a different contract serviced in another country which did not, in reasonable detail, accurately and fairly reflect its payments to this agent.
As a result of its conduct in the Dominican Republic, Saudi Arabia, and Mozambique, Embraer violated [the FCPA’s anti-bribery provisions] when it authorized or paid bribes to foreign officials in order to obtain or retain business. Embraer violated [the FCPA’s books and records provisions] when it created false books and records to conceal the authorization of bribe payments in the Dominican Republic, Saudi Arabia, and Mozambique and to conceal payments to an agent in India. Embraer also violated [the FCPA’s internal controls provisions] by failing to have sufficient internal accounting controls in place to detect and prevent the authorization or payment of bribes in the Dominican Republic, Saudi Arabia, and Mozambique, and detect and prevent the authorization or payment to an agent in India that Embraer employees had reason to believe was illegal.
Embraer is reasonably likely, unless restrained and enjoined, to continue to engage in the acts and practices set forth in this complaint, and in acts and practices of similar purport and object.”
Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint alleges:
“Embraer failed to devise and maintain an adequate system of internal accounting controls. 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.
Lastly, Embraer’s legal department was responsible for approving the consultants its senior legal executive engaged on behalf of ERL. As a result, senior Embraer executives in Brazil, including a senior legal executive at the time, at least two other senior Embraer executives, and several Embraer managers, circumvented the Company’s internal accounting controls by, among other things, approving the engagement of third parties through sham contracts to act as conduits for bribes to foreign officials, and concealing bribe payments as legitimate expenses under contracts obtained in countries that bore no relation to any legitimate services rendered and that were intended largely to pay bribes to foreign government officials.”
As noted in this SEC release:
“Under the settlement, Embraer must pay a $107 million penalty to the Justice Department as part of a deferred prosecution agreement, and more than $98 million in disgorgement and interest to the SEC. Embraer may receive up to a $20 million credit depending on the amount of disgorgement it will pay to Brazilian authorities in a parallel civil proceeding in Brazil.”
In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states:
“Embraer’s alleged misconduct spanned multiple continents, and it has taken significant ongoing coordination among international regulators and law enforcement agencies to uncover the company’s complex bribery schemes.”
In this release, Embraer stated:
“As part of the settlement, the company has agreed to retain an external and independent monitorship for up to three years, to ensure full compliance with the settlement terms. The company has also agreed to payments in an aggregate amount of close to $206 million to the U.S. and Brazilian authorities. The settlement further provides that as long as the terms of the agreements are fully honored, no charges will be brought against the company.
This inquiry began in 2010 when Embraer was questioned by American authorities regarding potential nonconformities related to certain commercial transactions abroad. The company then undertook a wide internal investigation, led independently by external law firms.
From the beginning, Embraer took the matter seriously and fully cooperated with the investigation. As events unfolded, the company voluntarily expanded its scope and shared the results with the appropriate authorities.
The company recently concluded its internal investigation after six years of intensive effort. Hundreds of thousands of documents were analyzed and more than 100 interviews with employees and third parties were conducted. As part of the settlement documentation, the investigation determined that the company was responsible for misdeeds in four transactions between 2007 and 2011 in Saudi Arabia, India, Mozambique and the Dominican Republic. Those transactions involved the sale of 16 aircraft.
The company acknowledges responsibility for the conduct of its employees and agents according to the facts ascertained in the investigation. Embraer deeply regrets this conduct. The company has learned from this experience and will be stronger as it moves forward and continues its nearly 50 years of successful existence in which it has delivered more than 8,000 aircraft in over 90 countries.
The Brazilian Federal Prosecution Service has been conducting its own investigations in parallel and is filing lawsuits against certain individuals. Embraer is not party to these lawsuits.
For many years, Embraer has been improving and expanding its global compliance program for the continuous enhancement of its systems and internal controls. The company conducts ongoing training for its employees and business partners. Company staff members are required to attend workshops and seminars on ethics and integrity and to review relevant case studies. Nearly 400 business partners have been trained in these exercises as well.”
In this filing, Embraer states the following regarding the Brazil enforcement action.
“Simultaneously with the Final Agreements, we finalized a TCAC with the MPF and the CVM to settle any potential claims that could be brought in court (ação civil pública) or through administrative proceedings (processo administrativo sancionador) in Brazil. The TCAC has also been approved by the relevant authorities and is fully effective.
Under the TCAC, we acknowledged violations of certain Brazilian laws between 2007 and 2011 and agreed to:
Pay a total of R$ 64 million, out of which R$58 million to a Brazilian federal fund (Fundo de Defesa dos Direitos Difusos), as disgorgement of illegal profits, and R$6 million to the CVM, as damages and penalty. The amounts payable under the TCAC is to be deducted from the amount payable under the Final Agreements.
Cooperate with the MPF and the CVM in lawsuits and administrative proceedings against individuals arising out of the acts acknowledged in the TCAC.
Under the TCAC, the MPF and the CVM acknowledged that (i) we voluntarily conducted a broad internal investigation, which assisted in uncovering facts that were the subject of criminal and administrative investigations, and (ii) we approached the Brazilian authorities pro-actively and in good faith, and they agreed that:
The MPF will not file suit (ação civil pública and ação de improbidade administrativa) against us arising out of the acts we have acknowledged and will terminate proceedings now underway.
The CVM will end an ongoing administrative proceeding arising out of the acts we have acknowledged.
The MPF and the CVM will inform other Brazilian federal agencies of the terms of the TCAC and cooperate with us in seeking that these agencies take the TCAC into consideration should other proceedings regarding the acknowledged acts be brought.
The Final Agreements and the TCAC represent the conclusion of the internal investigation of allegations of noncompliance with the FCPA and certain Brazilian laws in some aircraft sales outside Brazil.”
Yesterday, Embraer’s U.S. shares closed up .45%