Boeing Fraud Enforcement Action: Part 2 – Facts of the Fraud

Thomas Fox

Compliance Evangelist

One of the top corporate scandals over the past few years entered its next phase with the settlement by the Department of Justice (DOJ) with The Boeing Company (Boeing) around its fraud in the certification of its 737 MAX aircraft. The resolution was via a Deferred Prosecution Agreement (DPA). Under the DPA, Boeing agreed to pay a total amount of $2.5 billion. According to a DOJ Press Release, this total amount consisted of “a criminal monetary penalty of $243.6 million, compensation payments to Boeing’s 737 MAX airline customers of $1.77 billion, and the establishment of a $500 million crash-victim beneficiaries fund to compensate the heirs, relatives, and legal beneficiaries of the 346 passengers who died in the Boeing 737 MAX crashes of Lion Air Flight 610 and Ethiopian Airlines Flight 302.” This enforcement involved a fraud by Boeing on the US government. There are multiple lessons for the anti-bribery compliance professional and today we take up the background facts of the case.

The flaws in Boeing’s 737 MAX led to two plane crashes involving Lion Air Flight 610 and Ethiopian Airlines Flight 302 and causing the deaths of some 346 people. Boeing initially blamed both disasters on ‘pilot error’. However, it turned out that the culprit was the plane’s “Maneuvering Characteristics Augmentation System (MCAS) that impacted the flight control system of the Boeing 737 MAX”. This had been originally approved by the Federal Aviation Administration (FAA) back in 2011.

According to the DPA, Before any US-based airline could operate a new commercial airplane, US regulations required the FAA to evaluate and approve the airplane for commercial use. Without this approval, a US-based airline would not be permitted to operate the airplane. As part of this evaluation and approval process, the FAA had to make two distinct determinations: (i) whether the airplane met US federal airworthiness standards; and (ii) what minimum level of pilot training would be required for a pilot to fly the airplane for a US-based airline. These two determinations were made by entirely different groups within the FAA that were composed of different personnel with different organizational structures and different reporting lines.

The FAA Aircraft Evaluation Group (AEG) was headed up the determination of the minimum level of pilot training required for a pilot to fly the airplane for a US-based airline. To make that determination, the FAA AEG compared the new version of the airplane to a similar, prior version. After evaluating the differences between the new and prior versions of the airplane, the FAA AEG mandated the minimum level of pilot training, known as “differences training”, for the new version.

At the conclusion of this evaluation, the FAA AEG published the 737 MAX Flight Standardization Board Report, which contained relevant information about certain aircraft parts and systems that Boeing was required to incorporate into airplane manuals and pilot-training materials for all US-based airlines. This Report also contained the FAA AEG’s differences training determination. After the 737 MAX FSB Report was published, Boeing’s airline customers were permitted to fly the 737 MAX.

Within Boeing, the 737 MAX Flight Technical Team, which was composed of 737 MAX Flight Technical Pilots, was principally responsible for identifying and providing to the FAA AEG all information that was relevant to the FAA AEG in connection with the FAA AEG’s Report. Because flight controls are vital, differences between the flight controls of the prior model and the 737 MAX were especially important to the FAA AEG for purposes of its publication of the Report and the FAA AEG’s differences training determination.

In November 2016, two of Boeing’s 737 MAX Flight Technical Pilots (Boeing Employee-1), one who was then the 737 MAX Chief Technical Pilot and another who would later become the 737 MAX Chief Technical Pilot (Boeing Employee-2), discovered information about an important change to MCAS. Unfortunately, these two Boeing employees did not inform the FAA about this change. Moreover, the DPA noted, “these two 737 MAX Flight Technical Pilots, concealed this information and deceived the FAA AEG about MCAS. Because of this deceit, the FAA AEG deleted all information about MCAS from the final version of the 737 MAX FSB Report published in July 2017.” The practical impact was that the “airplane manuals and pilot training materials for U.S.-based airlines lacked information about MCAS, and pilots flying the 737 MAX for Boeing’s airline customers were not provided any information about MCAS in their manuals and training materials.”

The reason for this fraud and deception was cost around training pilots on the new MCAS system. If the FAA had been aware of the true nature of the change, it would have every pilot certified on the system to have “training only by appearing in person wherever the pilot’s airline operated a full-flight simulator. Apart from the cost of acquiring one or more multimillion-dollar simulators and other related expenses, airlines that were required by the FAA AEG to train pilots on a full-flight simulator could also lose revenue that the pilot might otherwise have generated from flying airline passengers during that time.”

With the lower level of training mandated, this meant the “737 MAX would be a more attractive option for Boeing’s airline customers already flying the 737 NG than switching to an entirely new airplane, such as the new version of Company-1’s airplane, as such customers would save significant money in pilot-training costs by transitioning to the 737 MAX.”

In addition to this training issue, Boeing engineers recognized that the MCAS system had operating deficiencies when operating at lower speeds. Boeing Employee-1 further recognized that this lower-speed operation was different from what Boeing had briefed and described to the FAA. Boeing Employee-1 and Boeing Employee-2 had the following conversation in an internal chat function.

Boeing Employee-2: Oh great, that means we have to update the speed trim description in vol 2

Boeing Employee-1: so I basically lied to the regulators (unknowingly)

Both Boeing employees understood that it was their responsibility to update the FAA about any relevant changes to the 737 MAX’s flight controls – such as MCAS’s operational scope. However, despite knowing that the FAA had issued its lower training level required without any awareness of MCAS’s operational scope they did not correct the FAA’s understanding or otherwise ensure that the FAA educational determination requirement “was based on an accurate understanding of MCAS’s operation. Instead, Boeing—through Boeing Employee-1 and Boeing Employee-2—intentionally withheld and concealed from the FAA AEG their knowledge of MCAS’s expanded operational scope.” These failure directly led to the two airline disasters.

What type of company who makes a product that requires regulatory approval, provides both insufficient and incorrect information to the regulators? What was the culture of Boeing that allowed this type of behavior from employees? After the disasters occurred what type of company would have a Chief Executive Officer (CEO) who blamed ‘pilot error’ for the crashes all the while claiming the Boeing 737 MAX planes were still reliable and, more importantly, safe to fly? One with a vary broken culture.

Join back tomorrow, where I will consider the substantive remediation the company engaged in during the federal investigation.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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