In July, the Justice Department and Securities and Exchange Commission concluded the long-running Foreign Corrupt Practices Act (FCPA) enforcement action involving the LATAM Airlines Group S.A. (LATAM). The settlement documents released included details on the criminal charges; a Deferred Prosecution Agreement (DPA); and a Securities and Exchange Commission (SEC) Cease and Desist Order (Order) outlining the civil violations. LATAM’s predecessor-in-interest is LAN Airlines S.A. (LAN).
The cost to LATAM was high. As noted in the Justice Department press release, “As part of the DPA, LATAM agreed to pay a $12.75 million criminal penalty” and under the civil settlement with the SEC the company “agreed to pay $6.74 million in disgorgement and $2.7 million in prejudgment interest. Thus, the company paid approximately $22.2 million in combined penalty, disgorgement.”
The July settlements bookended the civil settlement with current LATAM President Ignacio Cueto reached in February 2016. Under the SEC Cease and Desist Order, Cueto agreed to a civil penalty of $75,000 for both approving an Argentinian official to act as a consultant for the company and approving a payment of $1.15 million to this consultant, understanding at the time “that it was possible the consultant would pass on some portion of the $1.15 million to union officials in Argentina.” In addition to the fine, he agreed to receive anti-corruption training for senior executives of the company.
The company clearly did not take compliance very seriously at the time of the incidents giving rise to this enforcement action; nor did it apparently take seriously any potential FCPA liability. The Justice Department Press Release stated, “LATAM did not voluntarily disclose the FCPA violations” and in not self-disclosing compromised certain evidence in the matter. During the pendency of the investigation, they “did not, however, remediate adequately. LATAM failed to discipline in any way the employees responsible for the criminal conduct, including at least one high-level company executive, and thus the ability of the compliance program to be effective in practice is compromised.”
At some point the company did see the light and began to “cooperate with the department’s investigation after the press in Argentina uncovered and reported the conduct approximately four years after it had occurred. After LATAM began cooperating, it did so fully and provided all relevant facts known to it, including about individuals involved in the misconduct.” In the DPA, it reflected this lack of cooperation in the paucity of discounting factors, noting: “As a result, the company paid a penalty within the U.S. Sentencing Guidelines range instead of receiving a discount off the bottom of the range.”
In the LATAM matter, the company clearly did not meet any of the requirements and the penalty it paid demonstrates the positive effect of the Pilot Program for companies, which follow its prescriptions.
Some have concluded the company violated the FCPA because it paid bribes to Argentinian labor unions. Such a reading belies the resolution documents. The bribe payments were made by a LAN Consultant, who was an Argentine government official, to labor union officials in Argentina to secure labor peace for the airline. This person was only identified as “consultant” in the Information and was further identified in the Order as “a cabinet advisor in the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. On Jan. 31, 2005, the secretary of transportation appointed the consultant as a cabinet advisor “ad-honorem” pursuant to an unpublished Resolution.” This consultant, a foreign government official under the facts of this case, made $1.15 million in corrupt payments to Argentinian labor unions.
The bribery scheme was pedestrian in comparison to some of the schemes we have recently seen in FCPA enforcement actions. The bribery program was probably due to the fact there was no need to hide it from senior management as it involved, according to the information, a “LAN executive” who was a “high-level executive at LAN.” (LAN was the predecessor of LATAM). This LAN executive “negotiated and executed a fictitious $1.15 million consulting agreement with consultant, through a company he owned and operated, in order to funnel bribes to labor union officials.”
This is one of the rare FCPA enforcement actions where a criminal violation of both prongs of the FCPA Accounting Provisions was found: the Books and Records and Internal Controls Provisions. Regarding the Books and Records Provisions, the information stated that LATAM “knowingly and willfully falsified and caused to be falsified its books, records, and accounts.” Regarding the internal controls violations, the company “knowingly and willfully failed to implement a sufficient system of internal accounting controls.” It really could not have been a more intentional bribery scheme.
The company engaged in a trifecta of negative conduct even after the bribery scheme was concluded. First, LAN did not self-disclose the FCPA violations to the Justice Department, only reporting the FCPA violations after press reports in Chile and Argentina reported the initiation of corruption investigations in those countries. Second the company did not cooperate with the Justice Dept. and SEC until some point later in the investigation. Finally, the Justice Department press release said, “LATAM failed to discipline in any way the employees responsible for the criminal conduct, including at least one high-level company executive, and thus the ability of the compliance program to be effective in practice is compromised.” This final statement means the individual referred to as “LAN executive” is still in the company and most probably still an executive.
This enforcement action also saw the re-emergence of the requirement for a corporate monitor. The period of the monitorship was listed as 27 months and is charged with evaluating the effectiveness of the company’s new compliance program and compliance with the FCPA. The monitor is also mandated to assess the board of directors’ and senior management’s commitment to the corporate compliance program. When you see this type of requirement, it is a clear signal the Justice Department did not have confidence that the company would follow through with its agreed terms and conditions under the DPA.
The LATAM/LAN enforcement action stands in sharp contrast to the three FCPA enforcement actions since the announcement of the Justice Department Pilot Program. In the Akamai Technologies Inc., Johnson Controls Inc., and Nortek Inc. FCPA enforcement actions, clear credit was given to the companies for meeting the prongs of the Pilot Program. In the LATAM matter, the company clearly did not meet any of the requirements and the penalty it paid demonstrates the positive effect of the Pilot Program for companies, which follow its prescriptions. The Justice Department communicated the benefits of the Pilot Program in the Akamai Technologies Inc., Johnson Controls Inc., and Nortek Inc. FCPA enforcement actions. The agency is sending just as clear a signal in the LATAM enforcement action.
Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more