Part I-the Background Facts

The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continued their stunning 2016 run of Foreign Corrupt Practices Act (FCPA) decisions with the announcement of the resolution of the Embraer SA (Embraer) FCPA enforcement action. The resolution documents included a Deferred Prosecution Agreement (DPA) and Criminal Information (Information) with the DOJ and a Complaint with the SEC.

1. The Fines and Penalties

Embraer agreed to a fine totaling $205MM; of which $107MM goes to the DOJ as a criminal penalty and $98MM goes to the SEC as disgorgement. The FCPA Blog noted, “Embraer could receive up to a $20 million credit from the SEC depending on the amount of disgorgement it will pay to Brazilian authorities in a separate enforcement action there. Even with a $20 million credit, the disgorgement is one of the biggest in an FCPA enforcement action. In a statement Monday, Embraer said it has reached a settlement with authorities in Brazil for about $20 million. Of that, about $18.5 million is disgorgement.”

Yet the fines and penalties could have been lessened, even with the egregious conduct documented. Embraer did not self-disclose the violative conduct to the DOJ. It only began full cooperation with the Justice Department and SEC after receiving a subpoena from the SEC. Finally, the company did not engage in full remediation. According to the DOJ Press Release, “It disciplined a number of company employees and executives engaged in the misconduct, but did not discipline a senior executive who was aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions. As a result, the criminal penalty in this case is 20 percent below the bottom of the applicable range under the U.S. Sentencing Guidelines, a discount that reflects Embraer’s full cooperation but incomplete remediation.”

2. The Bribery Schemes

The bribery schemes themselves were wide-ranging. According to the DOJ Press Release, the “schemes involving the bribery of government officials in the Dominican Republic, Saudi Arabia and Mozambique, and to pay millions more in falsely recorded payments in India via a sham agency agreement.” According to Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division “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.”

Assistant Special Agent in Charge William J. Maddalena, of the FBI’s Miami Field Office, said, “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.”

The company admitted a series of bribery schemes where “Embraer executives and employees paid bribes to government officials and falsified books and records in connection with aircraft sales to foreign governments and state-owned entities in multiple countries.” They included:

• In 2008, Embraer paid $3.52 million to an influential government official in the Dominican Republic via a false agency agreement to secure a contract to sell the Dominican Air Force eight military aircraft for approximately $92 million. 
• Also in 2008, Embraer paid $800,000 via a false agency agreement with an intermediary designated by a high-level official at Mozambique’s state-owned commercial airline, Linhas Aéreas de Moçambique S.A. (LAM), to secure LAM’s agreement to purchase two aircraft from Embraer for approximately $65 million. 
• In 2010, Embraer paid $1.65 million to an official at a Saudi Arabian state-owned and -controlled company via a false agency agreement to secure that instrumentality’s agreement to purchase three aircraft from Embraer for approximately $93 million. 
• In 2009, Embraer paid an agent $5.76 million pursuant to a false agency agreement with a shell company in connection with a contract it secured to sell the Indian Air Force three aircraft for approximately $208 million.

For all of these bribes Embraer “earned profits of nearly $84MM” for aircraft sales. Unfortunately for the company, it seems that its conduct with the government was such that the company was required to agree to a corporate monitor. Coupled with the recent Och-Ziff FCPA settlement action, we have now seen the return of the necessity of a corporate monitor as a requirement of the resolution. Such action usually means the government does not have a high degree of confidence that the company will fully embrace and adopt the compliance requirements laid out in the DPA.

3. International Investigation and Enforcement

In the SEC Press Release, Andrew J. Ceresney, Director of the SEC Enforcement Division, said, “As alleged in our complaint, Embraer realized significant revenues by surreptitiously using third parties to mask bribes paid to government officials with influence over contracts it was competing to win.” Most interestingly, Kara N. Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, pointed towards the truly international investigation and enforcement effort to bring the company to justice.

She stated, “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.” The Press Release specifically noted the assistance of the following agencies and departments: “the Brazilian Federal Prosecution Service, the Brazilian Federal Police, Brazil’s Comissão de Valores Mobiliários, the South African Financial Services Board, the Swiss Financial Market Supervisory Authority (FINMA), the Banco Central del Uruguay, the Spanish Comisión Nacional del Mercado de Valores, and the French Autorité des Marchés Financiers” all in addition to the FBI and DOJ.

Also of note was that other jurisdictions have brought criminal charges against former Embraer executives and employees. This includes Brazil, which has “charged 11 individuals for their alleged involvement in Embraer’s misconduct in the Dominican Republic” and the Kingdom of Saudi Arabia, which has “charged two individuals for their alleged involvement in Embraer’s misconduct in Saudi Arabia.”

As reported by the FCPA Blog, “Saudi Aramco reportedly confirmed Friday that one of its employees took a bribe for arranging a deal with aircraft maker Embraer SA.” The same article noted that Embraer “cooperated with international agencies conducting "similar investigations" into Embraer deals.” Finally and pointing to the ongoing cost of bribery and other corrupt business practices, “the oil and gas giant said it has now "ceased doing business" with Embraer and added that it will take "appropriate legal measures" against the aircraft company.”

Part II-the Bribery Schemes

Next I want to consider the bribery schemes of Embraer in some detail so that a Chief Compliance Officer (CCO) or compliance practitioner can use them to determine what they might want to look for in their organization.

A.         The Bribery Schemes

1. Dominican Republic

The SEC Compliant specified that from 2008 until 2010, Embraer paid $3.52 million to an influential government official in the Dominican Republic via a false agency agreement to secure a contract to sell the Dominican Air Force eight military aircraft for approximately $96.4 million. Immediately before the Dominican Republic Senate was to vote on the contract for the airplanes at issue, the Dominican official handling the country’s negotiations requested a commission from Embraer, even though he was a government official.

This commission was paid through three Dominican companies. The SEC Compliant specifies the amounts paid were to be as follows:

1. “Dominican Agent A” ($100,000);
2. “Dominican Agent B” ($920,000); and,
3. “Dominican Agent C” ($2.5 million).

Embraer did not conduct any due diligence on these three companies; nor were the payments “based on any legitimate services rendered by these agents to Embraer.” These payments were made in spite of the fact that the company’s “legal department viewed consulting agreements that were signed after the execution of a sales contract as “high risk.”” Most conveniently when the Embraer legal department continued its objections to the commission payments, “senior executives at Embraer merely instructed subordinates to find a solution that did not involve the legal department.”

To overcome the problems raised by (apparently) lower level Embraer legal functionaries; a “senior Embraer legal executive became involved.” This senior legal department executive either thought up or approved another bribery scheme whereby another corrupt agent “Dominican Agent D” would be paid the full amount of the bribe. This Dominican Agent would then and did distribute the illegal payments.

Rather amazingly or perhaps brazenly, Embraer then wired the corrupt and illegal payments from its New York bank to the bank of Dominican Agent D, which was located in Uruguay. The payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records. The internal controls failures, listed in the DOJ Information were, “EMBRAER had conducted no diligence on the shell company, did not have a signed contract with the shell companies and knew that the shell company had not performed any legitimate services in exchange for the payment.”

2. Saudi Arabia

From 2009-2011, Embraer paid $1.65 million to an official at a Saudi Arabian state-owned and -controlled company via a false agency agreement to secure that instrumentality’s agreement to purchase three aircraft from Embraer for approximately $93 million. The specific scheme was another direct payment to the Saudi Arabian government official who headed up the country’s negotiating team. There was an agreed commission rate paid of $550,000 per aircraft sold.

The bribes were paid through a South African company unrelated to the transaction. Once again there was no due diligence performed on the agent who was the bribery conduit. Conveniently, “the same senior legal executive who was involved in the Dominican Republic bribery scheme, approved the selection of the South African company as the agent in the transaction with the Saudi state-owned enterprise. On March 5, 2010, Embraer RL executed a consulting agreement with the South African company, and the senior Embraer legal executive signed it on behalf of Embraer RL. There was no business justification for using the South African company as an agent given its lack of qualifications.”

Obviously also relying on a banking system that was now well-traveled, the company again wired the bribe money from its New York bank but this time the money was sent to the South African agent’s bank. This agent then wired the money to a bank account in Switzerland, which was controlled by the father of the Saudi Arabian official who was to receive the bribe. Following the same books and records façade, the payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records. The internal controls failures, listed in the DOJ Information were, “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.”

3. Mozambique

In 2008-2009, Embraer paid $800,000 via a false agency agreement with an intermediary designated by a high-level official at Mozambique’s state-owned commercial airline, Linhas Aéreas de Moçambique S.A. (LAM), to secure LAM’s agreement to purchase two aircraft from Embraer for approximately $65 million. Mimicking the Dominican Republic negotiations, approximately one month before the purchase was to go through, the Mozambique agent involved, “told at least one senior Embraer employee that Embraer should make a “gesture” to unidentified officials in the government of Mozambique when delivering the first aircraft. This agent was a “middleman or agent for the government officials involved in the deal, and Embraer employees believed they needed to pay the Mozambican Agent in order to win the contract.””

The bribe price was negotiated to be $800,000 fixed, rather than the original commission per aircraft. The bribe was paid when “Embraer’s U.S.-based subsidiary, Embraer RL, executed a consulting agreement with a company based in the Democratic Republic of São Tomé and Príncipe that the Mozambican Agent controlled and which had only been incorporated in or about November 2008. Once again there was no due diligence performed on this third party entity nor was there any legitimate consulting services engaged in by this corrupt agent.

The company again wired the bribe money from its New York bank but this time the money was sent to the agent’s bank in Portugal. Following the same books and records façade, the payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records.

4. India

In 2009, Embraer paid an agent $5.76 million pursuant to a false agency agreement with a shell company in connection with a contract it secured to sell the Indian Air Force three aircraft for approximately $208 million. The company used a corrupt agent to facilitate the transaction, even though the Embraer “employees understood that India prohibited the use of commercial agents for military sales. For that reason, in January 2005 Embraer executed a consulting agreement with a company domiciled in the UK (the “UK Entity”), which had a relationship with the Indian Consultant.”

No doubt befitting its UK locus, the company moved to a more James Bond approach by keeping the contract for the illegal payments “stored in a safe deposit box in London that could only be opened by the simultaneous use of a key maintained by Embraer’s legal department and a card key in the possession of a representative of the UK Entity.” Perhaps one or both parties forgot where they kept their respective keys, as the agreement under which the corrupt payments were to be made, expired in its safely stored in its safe deposit box. This required another agreement under which to pay the bribe. This time it was through a Singaporean entity.

The company again wired the bribe money from its New York bank but this time the money was sent to the agent’s bank in Portugal. Following the same books and records façade, the payments were characterized as “Sales Commission”; “Selling Expense” and “Commercialization Expense” in the company’s books and records. The internal controls failures listed in the DOJ Information were “the only due diligence that EMBRAER conducted on Agent C’s company was Iimited 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.”

Lastly, it should be noted on the specific involvement of the Embraer legal department in making all of the above possible. The SEC Compliant stated in the final paragraph before the Claims for Relief, “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.” One might only hope the appropriate bar group or legal society will take appropriate disciplinary action against those lawyers involved in the illegal conduct.

Part III-the Comeback

Next, I want to consider the rather stunning comeback the company made in the face of the damning facts it admitted to in the above documents.

1. The Penalties

Embraer agreed to a fine totaling $205MM; of which $107MM goes to the DOJ as a criminal penalty and $98MM goes to the SEC as disgorgement, however as previously noted, the FCPA Blog stated, “Embraer could receive up to a $20 million credit from the SEC depending on the amount of disgorgement it will pay to Brazilian authorities in a separate enforcement action there. Even with a $20 million credit, the disgorgement is one of the biggest in an FCPA enforcement action. In a statement Monday, Embraer said it has reached a settlement with authorities in Brazil for about $20 million. Of that, about $18.5 million is disgorgement.” Even with the credit given for the Brazilian fine, the correct amount for the total penalty assessed against Embraer is the full $205MM figure.

Yet it could have been much greater. According to the DPA, the base DOJ fine was calculated at $83MM. This was multiplied by the size of the organization and the involvement of high-level company personnel but reduced by Embraer’s full “cooperation in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.” Note there was no discount given for self-disclosure or extensive remediation. All of this led to a DOJ fine range of between $134MM to $268MM.

Nevertheless, Embraer was able to obtain a DOJ penalty of only $107MM. This is a 20% discount “from the low end of the United States Sentencing Guidelines range”. The factors, which led to this discount, included:

• the Company had no prior criminal history;
• that the Company agreed to continue to cooperate with the Section as set forth in this Agreement in any investigation of the Company and its officers, directors, employees agents, business partners, and consultants relating to violations of the FCPA;
• the Company agreed to disgorge the profits from the misconduct described in the attached Statement of Facts to the SEC and to Brazilian authorities; and Embraer engaged in partial remediation: it has disciplined a number of Company employees and executives engaged in the misconduct described in the attached Statement of Facts, but did not discipline a senior executive who was aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions; and
• the Company agreed to institute a best practices compliance program, under the auspices of an outside monitor.

2. Best Practices Compliance Program

The DPA laid out the compliance program that Embraer currently is using and must implement to successfully complete its three-year DPA. While it most generally it follows the accepted Ten Hallmarks of an Effective Compliance Program from the 2012 FCPA Guidance, it does rearrange things, which bear laying the requirements out in full.

1. High-level commitment. Embraer “will ensure that its directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.”
2. The company will develop policies against further FCPA violations and violations of other country’s anti-corruption laws. It shall create procedures to implement these policies.
3. These policies and procedures will apply to all officers, directors, employees relevant third parties and shall address the following issues: (a) gifts, travel & entertainment; (b) political contributions; (c) charitable donations; (d) facilitation payments and (e) solicitation and extortion.
4. There shall be effective internal controls.
5. The company must engage periodic risk assessments.
6. The company must review and updates its policies and procedures.
7. The CCO shall have appropriate responsibility, oversight and autonomy.
8. The company shall implement effective training for employees, officers, directors and appropriate third parties.
9. The company shall provide ongoing guidance on anti-corruption compliance.
10. The company shall implement an effective system of internal and where possible, confidential reporting for employees and where appropriate third parties.
11. The company “will maintain, or where necessary establish, an effective and reliable process with sufficient resources for responding to, investigating, and documenting allegations of violations of the anti-corruption laws or the Company's anticorruption compliance code, policies, and procedures.”
12. The company will implement effective “mechanisms designed to effectively enforce its compliance code, policies, and procedures, including appropriately incentivizing compliance and disciplining violations.”
13. The company will institute appropriate disciplinary procedures. Moreover, “Such procedures should be applied consistently and fairly, regardless of the position held by, or perceived importance of, the director, officer, or employee. The Company shall implement procedures to ensure that where misconduct is discovered, reasonable steps are taken to remedy the harm resulting from such misconduct, and to ensure that appropriate steps are taken to prevent further similar misconduct including assessing the internal controls, compliance code, policies, and procedures and making modifications necessary to ensure the overall anticorruption compliance program is effective.”
14. The company will institute an appropriate and effective risk-based due diligence process relating to the hiring and oversight of agents, business partners and other third parties.
15. The company will incorporate standard compliance terms and conditions into its contract with third parties.
16. Embraer will “develop and implement policies and procedures for mergers and acquisitions requiring that the Company conduct appropriate risk-based due diligence on potential new business entities, including appropriate FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel.”
17. If an acquisition is successful, the company integrates the newly acquired entity into Embraer’s compliance regime as quickly as possible. Embraer will also “train the directors, officers, employees, agents, and business partners consistent with Paragraph 8 above on the anti-corruption laws and the Company’s compliance code, policies, and procedures regarding anti-corruption laws; and where warranted, conduct an FCPA-specific audit of the newly acquired or merged businesses as quickly as practicable.”
18. Finally, “The Company will conduct periodic reviews and testing of its anti-corruption compliance code, policies, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anti-corruption laws and the Company’s anticorruption code, policies, and procedures, taking into account relevant developments in the field and evolving international and industry standards.”

3. The Monitor

Together with the recent Och-Ziff FCPA resolution, the Embraer DPA requires an external corporate monitor. While most FCPA enforcement actions are now usually resolved without an external monitor; the presence of the monitor requirement shows the DOJ thinks the company still needs external oversight to fulfill its DPA obligations. The DPA lays out the Monitor’s responsibility as follows: “The Monitor’s primary responsibility is to assess and monitor the Company’s compliance with the terms of the Agreement, including the Corporate Compliance Program in Attachment C, so as to specifically address and reduce the risk of any recurrence of the Company’s misconduct. During the Term of the Monitorship, the Monitor will evaluate, in the manner set forth below, the effectiveness of the internal accounting controls, record-keeping, and financial reporting policies and procedures of the Company as they relate to the Company’s current and ongoing compliance with the FCPA and other applicable anti-corruption laws (collectively, the “anti-corruption laws”) and take such reasonable steps as, in his or her view, may be necessary to fulfill the foregoing mandate (“the Mandate”). This Mandate shall include an assessment of the Board of Directors’ and senior management’s commitment to, and effective implementation of, the corporate compliance program described in Attachment C of the Agreement.”

Part IV-Lessons Learned for the Compliance Professional

Even with such egregious and intentional conduct there are several practical lessons to be garnered by the compliance practitioner that you can incorporate into your compliance regime or use a bench-marking exercise. A good starting point is the corruption “Box Score”, as set forth  below.

1. Box Score

2. Lessons for the Compliance Practitioner

1. Due Diligence

Even through Embraer had some modicum of a compliance program in place, the company intentionally paid bribes in violation of not only the FCPA but also its own internal controls. Nevertheless, both the DOJ DPA and the SEC Compliant list out failures in due diligence and management of third parties, which are valuable for the compliance practitioner to use in benchmarking your own compliance program. Some of the failures in third party risk management, in addition to not simply doing any, included:

• Conducting minimal due diligence on the corrupt agents which did not use publicly available information on the third parties;
• Concluding due diligence which consisted of accepting the representations of the agents which investigated the information provided by the agent (self-certification);
• Making contracts with third parties who were not competent to deliver any legitimate services, even as such services were described in a Consulting Agreement; and
• Entering into contracts with third parties recommended by corrupt foreign government officials

2. Payments to third parties

There were numerous issues with the payments made by Embraer, which showed the clear intent to pay bribes. However, they also provide the compliance practitioner with information on what might be considered as a benchmark of nefarious actions. These include:

• Making payment to jurisdictions identified as ‘tax havens’ and offshore venues without investigation or business justification;
• Payments to third parties in jurisdictions other than where the services were delivered without investigation or business justification;
• Making payments to employees of a customer;
• Making payments to third parties with no written contract in place; and
• Making payments to third parties with no proof of services or delivery by those third parties of any legitimate services

3. Contracts

While Embraer clearly created sham contracts, designed to either circumvent existing anti-corruption controls or made illegal in the absence of any such controls, this list also provides a good review for the compliance professional. These failures include:

• No valid description of specified services to be delivered;
• No anti-corruption compliance terms and conditions in the Consulting Agreements;
• No validation that no corrupt acts would be engaged in by the third party; and
• No certification as to applicability of or adherence to the requirements of the FCPA by the third party agent

4. Internal Controls

In addition to the above failures there was a basic lack of internal controls in place at Embraer. As a compliance practitioner you should have compliance internal controls in place which, among other things, should (a) require adequate due diligence for the retention of third-party consultants and agent; (b) require a fully executed contract with a third-party before payment could be made to it; (c) require documentation or other proof that services had been rendered by a third-party before payment could be made to it; or (d) implement oversight of the payment process to ensure that payments were made pursuant to appropriate controls.

3. Conclusion

The Embraer FCPA enforcement action should be considered in light of not only the company’s intentional acts but also the failures around its meagre compliance program which was in place at the time of the incidents in question. While the company received a hefty credit for its cooperation, after the FCPA counsel at Baker and McKenzie came on board to advise and represent the company, it could have received even more credit had it engaged in full remediation. As noted in the DPA, “the Company has engaged in partial remediation: it has disciplined a number of Company employees and executives engaged in the misconduct described in the attached Statement of Facts, but did not discipline a senior executive who was (at the very Ieast) aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions”.

You should study the Embraer FCPA enforcement action for not only the company’s failures but also what the company did to receive a 20% discount on its criminal penalty.