FCPA: Internal Controls Involving Third Parties

In terms of anti-bribery compliance, whether or not mandated by a regulatory regime, internal accounting controls can play a critical role in an anti-bribery compliance program.  This is particularly the case with respect to internal controls involving third parties.  Much can be learned in this regard in reviewing dispositions of FCPA investigations involving internal controls violations.

The deferred prosecution agreement associated with the U.S. Department of Justice’s resolution with Embraer, a Brazilian aircraft manufacturer, involved internal control violations.  Embraer is an issuer with American Depository Receipts (“ADRs”) listed on the New York Stock Exchange.  The information laid out a conspiracy to violate the anti-bribery provisions as well as the record-keeping provisions.1  But, in particular, the information identified with greater clarity than is customary the specifics of internal control violations.

The information alleged that Embrear had

no internal accounting controls that, among other things, (a) required adequate due diligence for the retention of third-party consultants and agent; (b) required a fully executed contract with a third-party before payment could be made to it; (c) required documentation or other proof that services had been rendered by a third-party before payment could be made to it; or (d) implemented oversight over the payment process to ensure that payments were made pursuant to appropriate controls, . . . .,2

As opposed to rather vague generalizations, the information then listed specific examples of internal control violations:3

    1. For example, in connection with the Dominican Republic bribery scheme, EMBRAER made payments to one of the shell companies identified by Domincan Official, even though a foreign official had told EMBRAER to which company to make agency payments, and EMBRAER had conducted no diligence on the shell company, did not have a signed contract with the shell company, and knew that the shell company had not performed any legitimate services in exchange for the payment.
    1. Also in connection with the Dominican Republic bribery scheme, EMBRAER made payments to Agent A for services purportedly rendered in connection with an aircraft sale to the Jordanian Air Force, even though EMBRAER never sold any aircraft to the Jordanian Air Force, and EMBRAER knew that Agent A had rendered no services in connection with any attempted sale to the Jordanian Air Force, and even though an internal EMBRAER memorandum indicated that the payments were related to the commission owed for the Super Tucano aircrafts sold to the government of the Dominican Republic, not potential sales to the Jordanian Air Force.
    1. Further, in connection with the Saudi Arabia bribery scheme, EMBRAER made payments to Agent B, even though it had conducted minimal due diligence on Agent B, did so almost exclusively on the basis of information Embraer Executive B personally provided to its contracts and legal departments, and did not require any proof of services from Agent B before making payment.
    1. Similarly, in connection with the Mozambique scheme, the only due diligence that EMBRAER conducted on Agent C’s company was limited to collecting the company’s registration documents, corporate by-laws, and board minutes from Agent C himself, and EMBRAER did not require any proof of services from Agent C before making payment.

The examples spelled out in the information consistently demonstrate a failure to conduct due diligence on the third parties and the type of consequences that may flow from such a failure.  Moreover, the examples also demonstrate how authorizing payments without proof that services had been performed may be suggestive of red flags improper conduct.  In each of these situations, improper payments were made through these third parties.  The Embraer information provides graphic examples of the consequences of the failure to engage in due diligence and sufficient oversight when engaging third parties.

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1Information, at ¶ 75, United States v. Embraer, No. 16-cr-60294 (S.D.Fl., filed Oct. 24, 2016).

2Id. at ¶ 68.

3Id. at ¶¶ 69-72.

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