“Two out of three ain’t bad” was the refrain of a well known song by rock star Meatloaf some years back. While Meatloaf probably was not thinking about government investigations, sometimes the notion applies as aircraft manufacturer Embraer S.A. recently learned. The firm failed to self-report, but did cooperate after receiving an SEC subpoena and individuals were charged – two of the three keys to cooperation credit. Those efforts yielded the firm a global settlement and, with the DOJ, a deferred prosecution agreement with a fine below the sentencing guideline calculation. See SEC v. Embraer, S.A., Civil Action No. 0:16-cv-62501 (S.D. Fla. Filed Oct. 24, 2016).
Embraer is the world’s largest manufacturer of mid-sized commercial jets. Its North American Office is in Fort Lauderdale, Florida. The manufacture’s ADRs are listed on the NYSE. Beginning in August 2008, and continuing over the next three years, the firm paid bribes to government officials in the Dominican Republic, Saudi Arabia and Mozambique. The bribes, paid to facilitate aircraft sales, totaled over $83 million. Bribes were also paid in India.
In the Dominical Republic the firm paid about $3.52 million to an official of the government to obtain a defense contract valued at about $96.4 million. Embraer officials initiated efforts to sell the firm’s Super Tucano aircraft to the military in 2007. Company employees negotiated directly with representatives of the Dominican Air Force and, in particular, a colonel with close ties to the Secretary of the Air Force.
In August 2008 when the Dominican Senate Finance Committee approved the financing for the project, the official requested a commission. It was agreed that the commission would be spread over three agents. Each had an agreement. No legitimate services were rendered under the agreements.
Subsequently, the government approved the purchases. The official with whom the firm had been negotiating was designated to oversee the transaction. Payment, however, had not been made and firm policy required approval from the legal department. To circumvent that requirement an arrangement was made with a fourth agent, another sham agreement was arranged, and eventually payment was made through New York with the assistance of a legal department official.
The firm made similar payments in Saudi Arabia beginning in 2009 to effectuate the sale of $93 million of aircraft. While the transaction traces to 2007 when a state owned company expressed interest in purchasing three used executive jets as replacements, it did not move forward until late 2009. At that time a then senior Embraer executive met with a Saudi Official to negotiate the deal. The Official was an employee of a state owned enterprise.
In December 2009 senior executives at the firm approved the deal. Arrangements were made to channel the payment through a South African company. The same legal department official involved in the Dominican Republic deal participated in the approval. By year end 2010 the deal was finalized and the payment made. The commission was falsely recorded as a sales commission.
In 2008 the aircraft manufacturer also negotiated a deal to sell two commercial aircraft to a state-owned commercial airline in Mozambique. The firm was a state owned enterprise. In negotiations with a Mozambican Agent, senior executives initially agreed to pay between $50,000 and $80,000 for each aircraft sold. That sum, however, proved to be insufficient. A modified agreement required payment of $400,000 per aircraft. By year end 2008 the agreement was concluded and the commissions were paid. Those payments were booked as sales commissions.
Finally, the firm entered into a contract to sell three specialized military aircraft to the Indian Air Force for a total contract price of $208 million in 2008. Embraer paid an Indian national as a Consultant to assist with the deal.