Inflight entertainment and WiFi provider Panasonic Avionics announced on April 30, 2018 that it had entered into a settlement with the US Department of Justice (DoJ) relating to violations of the Foreign Corrupt Practices Act (FCPA). As part of that settlement, the company agreed to pay $280m in criminal penalties and civil disgorgement. The charges brought by the DoJ related to a $700m contract to win business from an unnamed Middle Eastern state airline. Furthermore, Panasonic Avionics has also agreed in the settlement to submit itself to two years of independent compliance monitoring: a complex and labor-intensive process. Anti-bribery, fraud and other corruption practices and processes have received little focus from those both working in and commentating on the aviation industry, but given recent trends – particularly in emerging markets – that may be set to change.
Panasonic Avionics’ deferred prosecution agreement is only the latest in a series of high-profile corruption, bribery and fraud cases related to the aviation sector around the world. The fines that have been imposed well exceed $1bn and have involved companies across the spectrum of the sector, including aircraft, parts and avionics manufacturers; maintenance, repair and overhaul companies; airport construction companies and operators; and airlines. High-profile settlements include Brazilian conglomerate Embraer, which settled with the DoJ in 2016, agreeing to pay a $107m fine, after admitting to bribery of government officials in the Dominican Republic, Saudi Arabia and Mozambique. Elsewhere, UK engine manufacturer Rolls Royce in January 2017 paid $800m in fines to the US, Brazilian and UK authorities after admitting to bribery of state officials around the world, including officials in Thailand, Brazil, Kazakhstan, Azerbaijan, Angola and Iraq, among others. Even more significantly, pan-European OEM Airbus continues to be under an ever-expanding investigation by the UK’s Serious Fraud Office for various compliance irregularities. In 2017, this led to a temporary freezing of export credit agency financing from several European governments, a key part of selling aircraft. Most recently, low-cost Malaysian carrier AirAsia and its CEO Tony Fernandes have come under investigation by India’s CBI for suspected bribery and corruption.
The civil aviation industry is exposed to a set of risks that intersect with powerful and wide-reaching pieces of anti-corruption, bribery and fraud legislation. These risks are likely to make the industry’s transgressors an increasingly attractive target for regulatory and enforcement bodies. The industry has high levels of government control, particularly in airports and airlines; contracts have a very high-dollar value, both in civilian contracts and foreign military contracts, which can also be very lucrative for private aviation companies; and the industry includes large numbers of former military and government officials who continue to hold informal relationships with current serving government officials.
The key issue is that while the sector faces a perfect onslaught, its defenses are weak. The aviation industry’s anti-corruption, bribery and fraud practices, as well as its attitude toward compliance, lag well behind those of other comparably sensitive and risk-exposed industries. The aviation industry has not been proactive in its approach to anti-corruption and bribery, and has dragged its feet in changing practices in the wake of regulatory enforcement. Contrast this with the financial services industry, which has faced unprecedented fines and settlements in recent years. Between 2010 and 2015, the US levied over $15.1bn in fines against several banks for their involvement in Iran-related business alone, and has imposed several billion dollars more in fines against them for FCPA and sanctions violations. No system is perfect, but it would be difficult to accuse the major banks of not having learned their lesson. They have meaningfully bolstered their AML, KYC, fraud and corruption prevention processes, have hired whole new teams to monitor and investigate suspicious transactions and business, and have empowered these teams with a voice at the very top levels of the organizations.
The aviation industry has not yet been punished in the same way as the financial services industry, but inadequate or too-easy-to-circumvent compliance and control processes have been cited repeatedly in recent high-profile settlements. General advice has been offered most recently in the form of the US Treasury’s Office of Foreign Assets Control’s (OFAC) statement on its settlement with Ericsson over Sudan sanctions violations:
This enforcement action highlights the importance of empowering compliance personnel to prevent transactions prohibited by U.S. economic and trade sanctions. Entities should ensure their sanctions compliance teams are adequately staffed, receive sufficient technology and other resources, and are delegated appropriate authority to ensure compliance efforts meet an entity’s risk profile. Sanctions compliance personnel should be equipped with the tools necessary to review, assess, and proactively address sanctions-related issues that arise with ongoing or prospective transactions, customers, or counter-parties.
Although this statement relates to the telecommunications sector rather than aviation, the two share many of the same compliance risks, particularly the use of third parties and technological export controls. Aviation sector companies should read this statement as a warning and as an opportunity to pre-empt any increase in the aggressiveness and determination of an enforcement spotlight that is no longer restricted to the traditional enforcers and shines more brightly on the activities of companies around the world.
Current trends in the US may point towards an easing of regulation and enforcement; however, there are many other bodies around the world—particularly in emerging markets—that have been empowered by their governments on anti-corruption drives in recent years following new anti-bribery and corruption laws. For example, Indonesia’s Corruption Eradication Commission (KPK) this past February announced the intensification of its investigations into both Airbus and Rolls Royce. In some of these countries, there is also greater potential for this new legislation to be used to gain ancillary political benefits for those in power: a few dolphins always get caught in tuna fishing nets. In these situations, given the level—and sometimes ill-defined nature—of government involvement in aviation, companies can expose themselves to significant partner risk by going into business with local partners, or hiring third-party consultants whose owners are politically exposed or connected, and who fall on the wrong side of government anti-corruption drives. Added to this, governments around the world do not necessarily share the US affinity for deferred prosecution agreements, and are more willing to make an example of company executives with custodial sentences.
By failing to have a robust, comprehensive and risk-led compliance approach to both current and potential growth markets, companies in the aviation sector expose themselves to greater risks. These include regulatory enforcement around the world, uncomfortable headlines, significant loss of business in an ever increasingly competitive market, and even jail time for company employees. In contrast, there is a double advantage in having a robust anti-corruption compliance program: not only does it help to prevent issues from arising in the first place, but in the event that there is a violation, regulatory and enforcement agencies around the world are on record as saying that the quality and robustness of a company’s compliance program is a significant factor in the determination of whether and how aggressively to bring an enforcement action against a company. Indeed, OFAC cited the quality of Ericsson’s compliance protocols as a mitigating factor in this month’s settlement, for example.
Well-staffed, trained compliance departments cannot be formed overnight – one only needs to look at the staffing challenges faced by compliance departments in some of the world’s largest financial institutions to see this. However, as key stakeholders within aviation companies look to bolster their anti-fraud, corruption and money laundering processes and procedures and build the teams to make sure they work, they would do well to seek the advice and assistance of independent risk experts and consultants. These consultants can help to identify gaps in their current practices, and have the global experience and ability to provide vital intelligence, context and analysis relating to country, aviation sector, or counterparty-level risks.
Author
- Oliver Martin-Robinson, Senior Consultant