Last week, the Justice Department (here) and the SEC (here) announced parallel FCPA settlements totaling $22 million in fines, penalties and disgorgement against LAN Airlines, a Chile-based airline, for conduct in resolving a labor dispute in Argentina.
In March 2016, the SEC settled a case with LAN’s CEO for approving payments to a consultant, an advisor to the Secretary of Argentina’s Ministry of Transportation, to assist in settling a labor dispute with an Argentine labor union (here for prior post).
The underlying facts are fairly straightforward: executives at LAN entered into a fictitious consulting agreement to pay the consultant for $1.15 million. The agreement allegedly required the consultant to undertake a study of Argentine airline routes, but the consultant never provided any of the described services. Instead, the consultant funneled the monies he received to Argentine labor officials in exchange for the labor union’s abandoning of wage and work requirement claims.
LAN (through its successor company, LATAM Airlines Group) entered into a three-year deferred prosecution agreement (here) and agreed to pay a $12.75 million criminal penalty for violating the accounting provisions of the FCPA. LAN also agreed to retain an independent compliance monitor for a term of 27 months. In a separate action, LAN agreed to an SEC settlement under which it has to pay $9.4 million in disgorgement and prejudgment interest.
The DPA included a more fulsome recitation of factors considered by DOJ in reaching the settlement with LAN. Most significantly, LAN fell short on two important factors – voluntary disclosure and remediation.
According to the DPA, LAN did not voluntarily disclose the matter to DOJ but only reported the matter after press reports in Chile and Argentina reported the initiation of corruption investigations in those countries. On the issue of remediation, DOJ noted that LAN did not remediate the conduct adequately because it failed to discipline the employees responsible, including one high-level executive, referring to the CEO who settled his FCPA case with the SEC in March 2016. LAN’s CEO (and significant owner) has remained in his position at the airline despite his involvement in this matter. As a result of these two factors, LAN paid a fine of $12.75 million, approximately 25 percent above the bottom of the sentencing range under the Sentencing Guidelines.
The focus of the enforcement action by DOJ and the SEC is not bribery but internal controls and books and records violations. DOJ and the SEC are silent on whether the Argentine labor officials were in fact “foreign officials” under the FCPA. DOJ and the SEC suggest that LAN executives knew or had reason to believe that a portion of the payments to the consultants was in fact bribery payments made to the union officials.
DOJ and the SEC both cite the lack of internal controls governing payment of the invoices for so-called sham services as the basis for the internal controls/books and records violations. In particular, DOJ and the SEC cited the fact that: LAN executives knew the description of the services in the consulting agreement was false; the consultant never provided any of the specified services; the consulting agreement was never fully executed but payments were made for several invoices issues under the agreement; LAN directed that payments should be made from an affiliated entity and not the entity specified in the invoice; LAN made payments to the consultant’s personal account in the United States and not to the consultant’s company account.