Corruption in the Aviation Industry? “Please Say it Isn’t So!”

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The international aviation industry is highly competitive, international, and yes, known for allegations of corruption. Whether buying, selling, maintaining, servicing or supplying an aircraft, an airport, or the supply chain or related needs, corruption risks associated with the aviation industry is well documented. Companies and individuals involved in the industry face pressures and temptations to flout the law to gain business advantage. However, the legal and business consequences of airline corruption includes, but is not limited to, criminal investigations, prosecutions, convictions, penalties, reputations being destroyed, disgorgement of profits, shareholder losses from the drop of share price, careers ruined, civil law suits launched by investors, loss of confidence by the investment community, legal fees, fines, and jail terms for individuals involved.  Several examples illustrate the serious risks and consequences of corruption in the global aviation industry.

In June 2012, Brazil-based Embraer S.A., the world’s third largest commercial aircraft manufacturer, indicated in its Form 6-K (Report of Foreign Private Issuer) filed with the United States Securities and Exchange Commission (“SEC”), that the company had received a subpoena from the SEC inquiring into certain operations concerning sales of aircraft. In response to this SEC-issued subpoena and associated inquiries into the possibility of non-compliance with the U. S. Foreign Corrupt Practices Act (“FCPA”), Embraer retained outside legal counsel to conduct an internal investigation on transactions carried out in three specific countries.

In September, 2014, government prosecutors in Brazil filed criminal charges against eight Embraer SA employees for an alleged $3.5 million bribe to an official in the Dominican Republic in return for a $92 million contract for attack planes – The Department Of Justice (‘DOJ”) and SEC had been investigating Embraer’s sales practices in the Dominican Republic and other countries and subsequently shared the evidence with law enforcement authorities in Brazil.  The Brazilian criminal complaint alleges that Embraer agreed to pay a $3.5 million bribe to a retired Dominican Air Force Colonel, who then pressured legislators to approve the contract and relted financing agreement between the Dominican Republic and the National Economic and Social Development Bank. The sale was completed and the aircraft were delivered.

In June, 2016, Embraer said in an SEC filing that Frederico Curado, its Chief Executive Officer, was resigning from the company. The company’s official statement was that it was part of a planned succession  process not the ongoing corruption investigation and charges.  After the public announcement, Embraer’s share price on the NYSE fell to a two year low. Curado has not been formally charged with corruption charges in the ongoing Brazilian and American investigations.

More recently, in October, 2016, Embraer admitted in a settlement with the SEC and U.S. Department of Justice, that it bribed officials in three countries, the Dominican Republic, Saudi Arabia, and Mozambique. The bribes were paid by a U.S.-based subsidiary through third-party agents. The company made more than $83 million in profits from the bribes. The SEC also accused Embraer of an accounting scheme in India to hide payments there. Saudi Aramco told the Wall Street Journal that an internal investigation found that an employee took a bribe in 2010 for facilitating the purchase of three aircraft from Embraer. The company is paying a $107 million criminal penalty to the Justice Department as part of a three-year Deferred Prosecution Agreement (“DPA”). It is also paying more than $98 million in disgorgement and interest to the SEC.

Embraer admitted that it paid $1.65 million to a Saudi Aramco official through a false agency agreement to secure the purchase of three aircraft for about $93 million. Saudi Aramco told the Wall Street Journal it cooperated with international agencies conducting similar investigations into Embraer deals.  The oil and gas giant, Saudi Aramco, said it has now ceased doing business with Embraer and indicated that it will take appropriate legal measures against the aircraft company.

In May, 2014, in another aviation related corruption case, Thomson Reuters reported that former Omani commerce minister was jailed for three years for corruption by paying bribes with $1,000,000 to the then Undersecretary of the Ministry of Transport and Communications for civil aviation contracts for the first development of the Muscat International Airport. This involved the most senior government figure to be convicted in a campaign against graft in the Gulf Arab state.

In July, 2016, the former New Jersey attorney general and head of the Port Authority of New York and New Jersey, pleaded guilty to bribery for pressuring United Airlines to operate a non-stop flight from Newark to South Carolina for his personal convenience. United flew between Newark Liberty International Airport and Columbia Metropolitan Airport in South Carolina apparently because Samson wanted to travel to his house there. The airline entered into a non-prosecution agreement with the New Jersey U.S. Attorney’s Office requiring it to cooperate, to reform its compliance program, and to pay a $2.25 million penalty. The DOJ also charged a consultant and lobbyist for United Continental Holdings Inc., the Chicago-based parent company of United Airlines Inc., in a separate criminal complaint with conspiring to commit bribery.

In December, 2016, another recent aviation industry corruption example saw four Texas-based businessmen admitted bribing Mexican officials in return for aircraft maintenance and repair contracts with government-owned and controlled entities. The bribes helped them win aviation maintenance, repair and overhaul contracts for their Brownsville-based company. Some of the bribes were paid via wire transfer and checks to accounts in the United States controlled by the Mexican officials.

The two Mexican citizens also pleaded guilty to one count of conspiracy to commit money laundering.  One was sentenced to prison for 15 months.  The four American businessmen paid more than $2 million in bribes to at least seven different Mexican government officials. The bribes helped them win aviation maintenance, repair and overhaul contracts for their Brownsville-based company.

Canadian companies involved the airline industry are not immune to the pressure and culture of the global aviation industry. The need for effective anti-bribery and corruption (”ABC”) policies and programs is critical in any international business, but especially those with known and documented corruption histories. Understanding the risk associated with the aviation industry as well as the country and the region of the world in which a Canadian company is considering doing business, is a necessary part of an effect risk management  approach to legal compliance.  Review of the Transparency International “corruption perception index” is an essential part of effective ABC compliance program. Also, companies with significant global business, such as airlines, aircraft manufacturers, supplies and services, would be well advised to consider implementing the ISO 37000 ABC management system.

Norm Keith

Norm Keith

Mr. Keith is a senior partner and member of the White Collar Defence practice group in the Toronto office of Fasken Martineau and the author of 12 books, including Insider Trading in Canada (Lexis Nexis, 2012). Contact him at +1 416 868 7824 or nkeith@fasken.com.