Embraer’s FCPA Deferred Prosecution Agreement and $205 Million Payment Demonstrate Need for Adequate Internal Controls
Brazilian aircraft manufacturer Embraer SA (“Embraer”) will pay the United States government $205 million to settle allegations that the company violated the Foreign Corrupt Practices Act (“FCPA”) by paying millions in bribes and falsifying accounting records. The U.S. government asserted that Embraer bribed government officials within the Dominican Republic, Saudi Arabia, and Mozambique with millions of dollars to win government aircraft contracts. The U.S. government also alleged Embraer paid millions in falsely recorded payments in India through a fraudulent agency agreement.
Under the settlement with the United States government, Embraer will pay $107 million to the Justice Department under a three-year deferred prosecution agreement (“DPA”), and will pay over $98 million in disgorgement and interest to the Securities and Exchange Commission (“SEC”). As part of the DPA, Embraer admitted to a conspiracy to violate the FCPA’s anti-bribery provisions, the FCPA’s books and records provisions, as well as its willful failure to execute adequate internal accounting controls. As part of the DPA, Embraer agreed to implement numerous corporate compliance measures, including retaining an independent monitor for a three-year term.
In 2008, Embraer paid a Dominican Republic government official $3.52 million to secure the sale of eight military aircrafts to the Dominican Air Force for approximately $92 million, which was paid out to three separate Dominican shell entities. The same year, Embraer paid $800,000 to an official within Mozambique’s state-owned commercial airline, Linhas Aéreas de Moçambique S.A., in connection with the airline’s purchase of two Embraer aircrafts for $65 million. The deal was executed through a false agency agreement with an intermediary that had been designated by the Mozambique official. In 2009, Embraer paid $5.76 million to an agent in India to secure the sale of three specialized military aircrafts for India’s air force; these payments were falsely recorded in Embraer’s books and records as part of an illegitimate consulting agreement. Finally, in 2010 Embraer routed $1.65 million to an official at a Saudi Arabian state–owned and –controlled company to secure the purchase of three aircrafts. Embraer’s total profits from all of these aircraft sales amounted to almost $84 million.
In the DPA, the Justice Department explained that the decision to enter into the DPA and assess a $107 million criminal penalty (20 percent below the bottom of applicable range under the U.S. Sentencing Guidelines) was based on several factors. These factors included Embraer’s failure to disclose the violations, its full cooperation in the government’s investigation once served with a subpoena by the SEC, its inadequate compliance program at the time of the conduct and subsequent intention to design more effective controls, and its failure to engage in full remediation. Specifically, while Embraer did discipline managers and employees involved in the conduct at issue, it did not discipline a senior executive who was aware of bribery discussions as early as 2004 based on email evidence and who had oversight responsibility for the disciplined employees.
Lessons can be learned from Embraer’s recent FCPA settlement. The Justice Department’s DPA noted that Embraer failed to have sufficient internal controls such as requiring adequate due diligence of third party agents and consultants, requiring a fully executed contract with a third party prior to making any payment, or implementing any oversight over the payment process to third parties. Companies should ensure they have robust internal compliance procedures in relation to their interactions with third party agents and consultants to protect against potential FCPA violations.