J&F Investmentos FCPA Settlement: Lessons Learned (Part IV of V)

Michael Volkov
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The Volkov Law Group

J&F Investmentos (“J&F”) FCPA settlement presents a number of important lessons learned.  While the bribery scheme was brazen and involved a large amount of money, the techniques and warning signs must have been fairly obvious.

Despite J&F’s large global operations and expansion plans, J&F made no apparent effort to build an ethics and compliance program or implement basic compliance requirements, such as a Code of Conduct, anti-corruption compliance policies and procedures, and basic training programs.  Global companies wherever based have to design and implement compliance programs to meet basic expectations.

While there are numerous lessons learned, here are my most significant:

Shell Companies: The bribery schemes were executed through the creation of shell companies and associated bank accounts.  Given the large amount of funds, roughly $145 million involved, such transactions should have been subject to some internal scrutiny at J&F.  From the factual descriptions, the suspect transactions appear to have sailed through any internal controls and authorizations without any significant questions.

Before allowing these kinds of transactions, internal controls should verify the ownership of the shell company, the purpose of the shell company’s participation in the transaction, and related documentation to confirm the nature and purpose of the transaction.  In the absence of a valid explanation and related documentation, the transactions should not have been approved nor repeated.

C-Suite Misconduct and Controls:  J&F, which is privately-owned by the Batista brothers, owns several publicly-traded companies in Brazil and the United States.  In light of this configuration of ownership and regulation, J&F should have conducted a risk assessment of its C-Suite and imposed basic financial controls over transactions involving either or both of the Batistas.

While companies are reluctant to implement C-Suite controls, or even question such transactions, the risk of misconduct and the implications of such misconduct can be devastating.  The J&F misconduct confirms what we already know – one or two bad apples in the C-Suite can bring down an entire global company’s operations with devastating reputational and financial impact.

Jurisdictional Reach:  The J&F FCPA enforcement action underscores the jurisdictional reach of DOJ and the SEC.  J&F, a Brazil-based global company, paid bribes to Brazilian officials, received important government loans and investments from Brazil institutions.  The United States portion of the scheme involved a financial institution in New York City, an apartment in New York City, and meetings in New York City.

In the SEC action, the United States conduct extended to commingling of funds from Pilgrim’s Pride with JBS funds, which in turn were used to fund various bribery payments.  Pilgrim’s Pride and JSB were publicly-traded companies on US stock exchanges.

Absence of Financial and Compliance Controls: After reading the relevant settlement papers, there is a significant question – what financial controls were in place and how were these transactions authorized?  My question is not rhetorical.  But how can a company permit the transfer of nearly $150 million without any verification, authorization or documentation?

It is hard to imagine how such financial activity can occur without some (any) controls in place.  Even basic financial controls would have imposed some kind of rigor around these financial activities.  If J&F was simply a piggy-bank for the Batista brothers to engage in misconduct, they still operated publicly-traded companies that were subject to audit and even independent financial audits.  Even a sophisticated set of lies would eventually crumble in the face of basic financial controls.

We have seen this kind of picture before – Siemens, Novartis, Alstom and other pervasive bribery schemes where company officials, employees and third-party professionals put their head in the sand and fail to raise concerns in response to serious red flags.  Going along to get along, or professionals who are silent rather than forego large fees, are typically present in these situations.  But no one holds these officials, employees and professionals accountable.

The SEC factual recitation underscores the absence of any compliance program and controls.  Brazil prosecutors and enforcement agencies have raised the profile on ethics and compliance programs.  Yet, J&F, one of the largest companies in Brazil and in the global meat and agricultural markets, made only a negligible attempt to implement a compliance program.  The absence of any culture of compliance or evidence of such a culture is an important indicator that J&F was committed to a culture of non-compliance or expediency.

In-Kind Bribery: J&F’s bribery scheme included the purchase and transfer of a New York City apartment worth $1.5 million to a Brazilian official.  Unfortunately, we do not have information concerning how the purchase was funded, approved and ultimately authorized for sale of the apartment to the Brazilian official.

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.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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