- Airbus S.E. (Airbus) recently agreed to pay nearly $4 billion to simultaneously settle anti-corruption charges brought by the United States, United Kingdom and French authorities arising out of multiyear investigations and involving a number of airlines around the world.
- The Airbus case follows a number of recent major anti-corruption cases in the aviation industry, ranging from aircraft, engine and component manufacturers, to airlines, and maintenance and repair organizations (MROs).
- This case and others should serve as a clear wake-up call to company compliance officers to reexamine anti-corruption policies and procedures, on paper and in practice.
In late January 2020, Airbus agreed to pay nearly $4 billion and to take a number of remedial measures in order to resolve alleged corruption violations with the French National Financial Prosecutor's Office (PNF), the United Kingdom's Serious Fraud Office (SFO), as well as the U.S. Department of Justice (DOJ) and U.S. Department of State. This represents the largest combined anti-corruption settlement to date, and the alleged corrupt conduct involves a number of airline and government customers. While much has been written about the settlements, this Holland & Knight alert seeks to distill practical lessons learned and examples that can be used by aviation companies to help identify external and internal red flags of corruption, and strengthen their own compliance programs.1
The Lack of Compliance Culture Is a Fatal Flaw
On paper, it appeared that Airbus had robust anti-corruption compliance procedures. For example, Airbus had created a special marketing organization (SMO) responsible for selecting and monitoring consultants and ensuring that commercial intermediaries were independent from Airbus customers. The SMO had its own compliance officer and general counsel, and Airbus had a selection committee at the group level for approving consulting contracts. However, while there are instances where compliance officials were able to turn off questionable consulting arrangements, the system was flawed, and, in numerous instances, approved consulting arrangements (and payment schemes) had clear red flags. In some cases, approval was granted notwithstanding concerns raised by the compliance department. Moreover, the DOJ alleges intentional acts by Airbus employees to disguise payments including:
- use of bank accounts not directly related to Airbus to funnel payments to customers
- creating fraudulent contracts purposed to provide services that were never provided
- creating fake activity reports for consultants
- using fake non-reimbursable loans as a means of paying business partners
While the term "compliance culture" or "tone from the top" may seem sophomoric, reading between the lines of the settlement agreements, the numerous counts paint a picture of an organization that, at best, tacitly tolerated repeated questionable conduct and actively evaded the compliance review and approval processes set up to protect the company.
Consultants, Brokers and Agents Remain the Weakest Link in Preventing Corruption
A number of charges against Airbus related to "commissions" paid to third parties as broker, consultant or agent, who were linked directly or indirectly to executives of Airbus customers or their family members. In a number of instances, there were clear corruption red flags. For example, in one case, the consultant company had little experience in aviation, was set up in a third country and was owned by the wife of a senior airline officer.
As a large percentage of anti-corruption cases arise out of activities of brokers, agents or consultants of the company, it is critical that company compliance programs have clear procedures for vetting third parties and approving agreements and commissions with such parties.
Financial Institutions and Other Counterparties Are Diligencing Deals More Closely for Corruption Risk
It appears that the original notification (i.e., voluntary disclosure) by Airbus to the SFO was prompted by concerns raised by an export credit agency (ECA) during diligence of a sale leaseback transaction of aircraft ordered by a Sri Lankan airline from Airbus (involving an unnamed leasing company). The ECA required disclosure of any agents or consultants involved in the purchase of the aircraft. The ECA was concerned that the consultant was in a third country and had little aviation experience, and eventually discovered that the Brunei consultant was in fact a company owned by the wife of a senior Sri Lankan airline executive. In fact, Airbus had entered into the consulting agreement agreeing to pay the consultant more than $16 million in commissions, and had entered into the agreement over the concerns raised by Airbus' compliance staff. Similarly, in the counts related to payments made indirectly to executives of an Indian airline, an Indian bank repeatedly questioned the source of funds being paid to a Bermuda company owned by the wife of an Indian airline executive.
This highlights the fact that banks, lessors, investors and other financiers are now asking about brokers and consultants in major aircraft transactions. Thus, discovery of questionable payments to consultants could not only cause the financer to reject the deal, but also may trigger reporting obligations to their regulators, such as Suspicious Activity Reports (SARs) for U.S. financial institutions or the equivalent obligations for European Union (EU) entities under EU anti-money laundering directives.
Enforcement Authorities Are Prosecuting "Commercial" Bribery Aggressively
This Airbus case, like some previous cases brought by the UK SFO, highlight that authorities will aggressively enforce "commercial" bribery, even where there is no foreign government official or foreign government entity involved. In particular, several of the major counts brought by the SFO were under the commercial briberies provisions of the UK Bribery Act.
While the U.S. Foreign Corrupt Practices Act (FCPA) bribery provisions only apply to bribery of foreign officials, the DOJ may prosecute commercial corruption under other statutes, such as the Travel Act. Further, the DOJ would consider officials of foreign government-owned airlines as foreign officials.
Sponsorships and Other Marketing Related Payments May Constitute "Bribery"
The enforcement authorities flagged a number of payment mechanisms used by Airbus employees to a engage in corrupt conduct.
For example, Airbus allegedly paid in total $50 million to sponsor a car racing team owned by two executives of a Malaysian airline. Although Airbus did get its name on race cars, the SFO found evidence that these sponsorships were a quid pro quo for airline executives signing off on purchases of Airbus aircraft by the airline. Further, it appears that Airbus struggled internally to justify the value being received for these expensive endorsement contracts. While it is certainly legitimate for aviation companies to sponsor sports teams as a legitimate means of marketing and market penetration, companies need to properly diligence the team and its owners to identify any potential corruption or ethical issues.
One of the FCPA counts against Airbus related to payments made by Airbus China into a joint fund with a Chinese government-owned customer ostensibly to be used for pilot education facilities and aviation education, but which in part was used to host social events. It should be noted that the same concerns arise where a customer's executive requests substantial donations to a favored charity of an executive of a counterparty and there is any hint of quid pro quo.
The PNF settlement notes several schemes to disguise bribes proposed by Airbus executives that were rejected by Airbus' internal review committee, including: 1) having Airbus purchase a company owned by an airline executive, and 2) buying luxury real estate to put at the disposal of the foreign airline executive. However, another complex method not blocked was for Airbus to invest in a mining operation in Africa in which a Taiwanese airline executive had a financial interest.
Sponsored Educational Seminars Need to Be Carefully Vetted
One of the FCPA counts related to Airbus hosting executives from airlines, including state-owned airlines, at luxury resorts, such as an event in Hawaii where the only business was a half-hour daily presentation each morning, and certain side meeting with individual customers, and the rest of the agenda was leisure and entertainment. While sponsored educational events can be effective and a legitimate way to strengthen business relationships, the events need to be carefully vetted by compliance, and efforts made to ensure that the guests are authorized under their local law or company policy to receive the benefits provided.
The Potential Fallout from the Airbus Case Goes Well Beyond the Dollar Settlement
There are reports that Airbus terminated more than 100 employees as a result of these investigations, brought changes in leadership and eliminated the use of third-party consultants.
This has also affected the airlines and executives mentioned in the Airbus settlements. Executives of several airlines implicated in the settlements have been suspended from their positions. In addition, this is likely to spawn investigations by local authorities. For example, it is believed that with respect to the Malaysian airline, in addition to an investigation by the Malaysian anti-corruption commission and aviation authorities, the Malaysian Securities Commission is investigating the transactions for possible noncompliance with securities laws. Thus, particularly to the extent that the alleged bribery relates to aircraft orders that have not yet been delivered, the customers may seek to modify or terminate such contracts.
What Should Aviation Companies Be Doing in Light of This Case?
The size of the penalty and the breath of the case should serve as a clear wake-up call to the industry to reexamine its anti-corruption policies and procedures, on paper and in practice. U.S. enforcement officials have clearly signaled that having a robust compliance program will be a major mitigating factor in FCPA cases, and under the UK Bribery Act "adequate measures" is an affirmative defense. Specific actions that company compliance officers can take include:
- use this and other aviation cases to highlight the specific corruption risks in the aviation industry in trainings and briefings to senior management
- examine their processes for vetting third-party consultants and consulting agreements to make sure they are robust and being properly followed
- to the extent that the company has past/ongoing dealings with entities identified in the settlements, the company may benefit from an internal review to ensure that it has not engaged in any unethical conduct in dealing with such parties
For additional information on how to improve your policies or internal processes, please contact the author.
1 This alert is not intended to be a comprehensive or exact summary of claims and should not be construed as legal advice. For readability, we have omitted citations, but the alert is based on three main source documents. The Judicial Public Interest Agreement between the PNF and Airbus SE, Paris Court of Appeals, PNF-16 159 000 839 (29 Jan. 2020); the SFO Statement of Facts Prepared Pursuant to Paragraph 5(1) of Schedule 17 of the Crime and Courts Act of 2013, inRegina v. Airbus S.E., Crown Court of Southwark, Case No. U20200108; and the Criminal Information filed by the U.S. Department of Justice in U.S. v. Airbus S.E., U.S. District Court for the District of Columbia, Case No. 1:20-CR-0021 (Jan. 28, 2020).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.