Brazilian aircraft manufacturer Embraer SA said Friday it booked a $200 million loss contingency in connection with “allegations of non-compliance with the U.S. Foreign Corrupt Practices Act.”
The reserve for a possible settlement of an FCPA enforcement action caused the world’s third largest commercial aircraft manufacturer to report a surprise quarterly net loss of about $102 million.
Embraer trades on the NYSE under the symbol ERJ.
The company said talks with the DOJ and SEC have “significantly progressed.” It said any resolution could include monetary penalties that it estimated at $200 million, and a deferred prosecution agreement with an independent compliance monitor.
Three years ago, Embraer disclosed an investigation for possible violations of the Foreign Corrupt Practices Act. It said in U.S. filings that it received a subpoena from the SEC in September 2010.
In late 2014, Brazil prosecutors filed a criminal action 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.
Embraer said that case is under seal and it couldn’t comment.
In June, Embraer said in an SEC filing its CEO, Frederico Curado, 55, was departing after leading the company for nine years.
In a statement emailed to the FCPA Blog, the company said: “Embraer reinforces that the CEO succession is a planned process, and there is no relationship between that theme and the mentioned investigations.”
The Wall Street Journal said the DOJ and SEC were investigating Embraer’s sales practices in the Dominican Republic and other countries. The U.S. agencies shared the evidence with law enforcement authorities in Brazil, the report said.
Embraer said Friday the allegations involve three countries. It didn’t name them.
The company said it has enhanced compliance by appointing a chief compliance officer reporting to its general counsel. It has also developed a whistleblower procedure and “a comprehensive training and education program.”
* * *
Embraer’s full FCPA disclosure in its Q2 2016 earnings release (pdf) said:
The Company received in September, 2010 a subpoena from the SEC and associated inquiries from the U.S. Department of Justice, or DOJ, concerning possible non-compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, in relation to certain aircraft sales outside of Brazil. In response, the Company retained outside counsel to conduct an internal investigation of sales in three countries.
In light of additional information, the Company voluntarily expanded the scope of the internal investigation to include sales in other countries, reported on these matters to the SEC and the DOJ and otherwise cooperated with them. In May 2015, the Company has begun discussions with the DOJ for a possible resolution of the allegations of non-compliance with the FCPA. In 2016, the negotiations with the U.S. authorities for the settlement of the allegations of non-compliance with the FCPA have significantly progressed, to the point that Embraer recognized a US$200 million loss contingency in the quarter ended June 30, 2016, reflecting the likely outcome of this matter. The amount of the contingency is an estimate and has not been finally determined.
In addition to the monetary consequences, a final settlement with the DOJ and the SEC is likely to include: (1) a deferred prosecution agreement (DPA), under which the prosecution of criminal charges against Embraer will be deferred for the term of the DPA, and dismissed upon the expiration of the term of the DPA, and (2) an imposition of an independent monitor to assess the Company’s compliance with the terms of any agreement that may be reached with the U.S. authorities. These may not be the only non-monetary consequences contained in any final settlement. The negotiations with the U.S. authorities are ongoing and thus subject to change. There is no assurance that Embraer will ultimately reach a final settlement of these matters with the U.S. government agencies.
Related proceedings and developments in other countries are ongoing and could result in additional fines, which may be substantial, and possibly other substantial sanctions and adverse consequences.
The Company believes that there is no adequate basis at this time for estimating accruals or quantifying any contingency with respect to these matters.
The Company will continue to cooperate with the governmental authorities, as circumstances may require. In light of the internal investigation, we embarked on a comprehensive effort to improve and expand our compliance program worldwide.
This multi-year task involved reexamining every aspect of our compliance systems, and where appropriate, redesigning or adding to them. Some of the key enhancements include the creation of a Compliance Department; the appointment of a Chief Compliance Officer reporting to Embraer’s general counsel, which, for these matters, reports directly to the Risk and Audit Committee of the Board of Directors; the development of a program to monitor engagement of and payments to third parties; improvements to compliance policies, procedure and controls; the enhancement of anonymous and other reporting channels; and the development of a comprehensive training and education program designed to maintain and reinforce a strong compliance culture at all levels of Embraer globally. The Company will continue to promote enhancements and update its compliance program.
Richard L. Cassin is the publisher and editor of the FCPA Blog. He’ll be the keynote speaker at the FCPA Blog NYC Conference 2016.