Brazilian aerospace company Embraer SA will pay a total of $205 million to U.S. authorities and enter into a Deferred Prosecution Agreement (DPA) to resolve allegations that the company violated the Foreign Corrupt Practices Act (FCPA). The settlement illustrates the Department of Justice’s (DOJ) expectations about the discipline a corporation must mete out to fully remediate its misconduct, and quantifies the consequences of partial remediation. In short, to minimize penalties a corporation must scrutinize and appropriately discipline all employees – including senior executives – who knew of the criminal misconduct or supervised the employees who committed it.
Embraer’s Admission and Allegations against the Company
Embraer SA is incorporated and headquartered in Brazil. However, shares of its stock are traded on the New York Stock Exchange, and it is required to file reports to the SEC, and therefore it qualifies as an issuer over which the FCPA provides jurisdiction. See 15 U.S.C § 78c(a)(8); Information, United States v. Embraer S.A., No. 0:16-cr-60294, ¶ 2 (S.D. Fla. Oct. 24, 2016).
In a DPA dated October 24, 2016, Embraer admitted using third parties to bribe government officials across the globe to secure government contracts, falsely recording payments, and lacking accounting controls to prevent or detect the misconduct. See DPA, United States v. Embraer S.A., No. 0:16-cr-60294 (S.D. Fla. Oct. 24, 2016). Embraer admitted to the following schemes:
(1) Paying $3.52 million to an official in the Dominican Republic in exchange for a defense contract worth approximately $96.4 million. Embraer made the payments via shell companies designated by the official, following guidance from an executive in the legal department about how to make the payments in a way that would conceal their purpose, and then falsely recorded the payments in its books and records. DPA Attachment A ¶¶ 14, 19, 25-34.
(2) Paying more than $1.5 million to a Saudi official to obtain a contract for the sale of three business jets valued at approximately $93 million. Embraer made the payments via an agent who had not rendered any services in connection with the sale. Embraer booked the payments as “sales commissions.” Id. ¶¶ 35-46.
(3) Paying an $800,000 kickback to the head of a state-owned airline in exchange for purchasing two aircrafts valued at approximately $65 million collectively. Embraer made the payments through an agent whose company was not formed until after the purchase agreement had been signed. Embraer again recorded the payments as “sales commissions.” Id. ¶¶ 47-58.
(4) Using a complex scheme involving its Swiss subsidiary to mask a $5.76 million payment to a shell company that helped Embraer obtain a $208 million contract with the Indian Air Force. Id. ¶¶ 59-65. Embraer concealed the payments using a false agency agreement with a Singaporean shell company. Id. ¶ 64.
The SEC’s complaint against Embraer included the same schemes. See Complaint, SEC v. Embraer S.A., No. 16-cv-62501 (S.D. Fla. Oct. 24, 2016).
In addition, Embraer admitted that it failed to have an appropriate system of internal accounting controls, which could have detected or prevented the bribes described above. DPA Attachment A ¶¶ 67-72. Specifically, Embraer did not require adequate due diligence before hiring consultants and agents, did not require having a signed contract or proof that any services had been performed before paying a third party, and did not have anyone overseeing the process to ensure payments were subject to controls. Id. These control failures directly contributed to the misconduct described above, and they were not accidental: several high-level executives knew the agency agreements were covering up the improper payments to government officials, knew that Embraer’s controls would fail to prevent this, and knowingly did not remediate the control deficiency – in part to allow these schemes to continue. Id.
Settlement Agreements with DOJ and SEC
To resolve the charges against it, Embraer entered into a DPA with DOJ and a settlement with the SEC. As part of the DPA, Embraer agreed to further improve its compliance program, implement an improved system of internal accounting controls and retain an independent monitor for three years. DPA ¶ 4. Embraer will pay a $107 million penalty to DOJ and $98 million in disgorgement of profits to the SEC. Embraer, SA, SEC Litigation Release No. 23676 (Oct. 24, 2016). However, Embraer may receive a credit of up to $20 million for the disgorgement payment, depending on the amount of disgorgement it pays to Brazilian authorities as a result of parallel civil proceedings in Brazil. Id.
DOJ acknowledged Embraer’s full cooperation, but stated that Embraer did not voluntarily disclose its violations and that its remediation was only partial. DPA ¶ 4. Specifically, although DOJ credited Embraer with disciplining a number of company employees and executives involved in misconduct, DOJ specifically noted Embraer did not discipline a senior executive who was “at the very least” aware of bribery discussions over email and was responsible for overseeing the employees involved in the discussions. Id. ¶ 4(e). DOJ called out in its press release that the penalty Embraer will pay is 20% below the applicable range in the sentencing guidelines, “a discount that reflects Embraer’s full cooperation but incomplete remediation.” Press Release, DOJ, Embraer Agrees to Pay More than $107 Million to Resolve Foreign Corrupt Practices Act Charges (Oct. 24, 2016).
Implications of the Embraer Settlement
The settlement with Embraer, a Brazilian company that issues stock in the United States, is a reminder of the FCPA’s jurisdictional reach. This settlement continues a recent enforcement trend of prosecuting foreign companies under the FCPA.
In addition, the settlement shows in action the DOJ’s FCPA “pilot program” to encourage cooperation and remediation. DOJ announced the program last spring in a guidance memo, “The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance” (click here). See Jenner Client Alert, DOJ Issues Guidance Regarding Enhanced FCPA Enforcement and Credit for Voluntary Disclosure, Cooperation, and Remediation (April 7, 2016). As discussed in the Guidance, DOJ expects corporations to look beyond the individuals directly involved in the corporation’s criminal conduct. DOJ expects corporations to also scrutinize – and appropriately discipline – those in leadership positions who were aware of the misconduct but did nothing to stop it or report it.
The Embraer settlement illustrates the consequences of failing to meet that expectation. Embraer did not discipline a senior executive who knew about the bribery discussions and was responsible for supervising the employees involved in those discussions. DOJ considered the failure to discipline this individual significant enough to preclude full credit for remediation. In this regard, DOJ is using the Embraer settlement and press release to send notice to other companies that DOJ expects companies to fully scrutinize all of those who knew or had reason to know of potential criminal conduct regardless of their level of seniority within the company.
The settlement also provides an example financially quantifying the failure of full remediation. The Guidance explains that if a corporation both fully cooperates and fully remediates its misconduct (but does not voluntarily disclose, which Embraer did not), the DOJ will consider at most a reduction of 25% below the bottom of the sentencing guidelines fine range. Here, Embraer is paying a fine that is only 20% below the bottom of the fine range, having sacrificed up to 5%, or approximately $6.7 million, for its failure to discipline a senior executive