Boeing has agreed to pay over $2.5 billion as part of a three-year deferred prosecution agreement (DPA) entered into with the Department of Justice on Thursday to resolve a criminal charge related to the commercial aerospace manufacturer’s 737 MAX scandal.
The DOJ accused Boeing of conspiracy to defraud the Federal Aviation Administration’s Aircraft Evaluation Group (FAA AEG) during evaluation of the aircraft. Under the agreement, Boeing will pay a criminal penalty of $243.6 million and provide $500 million in additional compensation to the families of passengers killed in two 737 MAX crashes. The remaining $1.77 billion will be paid to airline customers for financial losses resulting from the grounding of the aircraft.
In an 8-K filing with the Securities and Exchange Commission, Boeing recorded an expected charge of $743.6 million to earnings in connection with the agreement’s commitments.
The details: As Boeing admitted in court documents, two of its 737 MAX technical pilots concealed from the FAA AEG material information about a critical part of the aircraft, the Maneuvering Characteristics Augmentation System (MCAS), that impacted the flight control system of the 737 MAX. Because of the pilots’ deception, a key document published by the FAA AEG lacked information about MCAS and, consequently, so did airplane manuals and pilot-training materials for U.S.-based airlines.
In the Lion Air Flight 610 and Ethiopian Airlines Flight 302 crashes of 2018 and 2019, respectively, it was determined MCAS may have played a role in the resulting 346 fatalities.
DPA terms: Under the DPA, Boeing has agreed to continue to cooperate with the Justice Department’s Fraud Section in any ongoing or future investigations and prosecutions and must report any evidence or allegations of violations of U.S. fraud laws “committed by Boeing’s employees or agents upon any domestic or foreign government agency (including the FAA), regulator, or any of Boeing’s airline customers.”
In addition, Boeing has agreed to strengthen its compliance program, meet with the Fraud Section at least quarterly, and submit yearly reports “regarding the status of its remediation efforts, the results of its testing of its compliance program, and its proposals to ensure that its compliance program is reasonably designed, implemented, and enforced so that it is effective at deterring and detecting violations of U.S. fraud laws in connection with interactions with any domestic or foreign government agency (including the FAA), regulator, or any of its airline customers,” the DOJ stated.
The DOJ ultimately determined the appointment of an independent compliance monitor was unnecessary.
Compliance lessons: The DOJ credited Boeing with engaging in several remedial measures following the misconduct, including:
- Creating a permanent aerospace safety committee of the board of directors to oversee the company’s policies and procedures governing safety and its interactions with the FAA and other government agencies and regulators;
- Creating a product and services safety organization to strengthen and centralize the safety-related functions that were previously located across Boeing;
- Reorganizing the engineering function to have all Boeing engineers, as well as the flight technical team, report through the chief engineer rather than to the business units; and
- Making structural changes to the flight technical team to increase the supervision, effectiveness, and professionalism of technical pilots.
“I firmly believe that entering into this resolution is the right thing for us to do—a step that appropriately acknowledges how we fell short of our values and expectations,” Boeing President and CEO David Calhoun said in a note to employees. “This resolution is a serious reminder to all of us of how critical our obligation of transparency to regulators is, and the consequences that our company can face if any one of us falls short of those expectations.”