JBS, Internal Controls, and the FCPA

Meat-processing giant JBS has agreed to pay $283.3 million to settle a brazen FCPA bribery scheme, with fascinating lessons for the compliance professional if you can endure the headache-inducing facts of the case. 

The Justice Department and the Securities & Exchange Commission announced the settlement Wednesday. JBS’ parent company J&F Investments, headquartered in Brazil, pleaded guilty to one criminal count of violating the FCPA and agreed to a three-year cooperation deal, presumably as prosecutors seek further charges against individuals in the case. No deferred-prosecution agreement, no compliance monitor.

The monetary damages include a $256.5 criminal penalty to the Justice Department, although the feds will credit half of that toward a separate $1.4 billion penalty JBS is paying in Brazil; plus another $26.8 million JBS’ U.S. operation will pay in disgorgement and interest to the SEC. 

The case runs from Sao Paolo, where JBS is based; to Greeley, Colo., home of chicken producer Pilgrim’s Pride. JBS acquired Pilgrim out of bankruptcy in 2009, and managed the business through a thicket of overlapping legal entities. That’s the headache-inducing part as we work our way through the facts included in SEC and Justice Department settlement documents. 

The key individuals involved are Joesley and Wesley Batista, brothers who ran J&F Investments in the 2000s and 2010s. J&F owned JBS, which started trading on U.S. stock exchanges in 2009. The Batistas were business royalty in Brazil, routinely hobnobbing with government ministers, lawmakers, “and several sitting presidents,” as the SEC settlement order phrased it

So what happened? In 2009, the Batistas were expanding into the United States by acquiring meat businesses here. They established JBS USA as an American holding company, and wanted to acquire a majority stake in Pilgrim’s Pride, then in bankruptcy. They needed funding to do that. 

The bribery scheme itself was fairly straightforward. From 2005 through 2017, the Batistas funneled $148 million in bribes to senior officials at BNDES, a state-controlled investment bank in Brazil; and several other state-run banks or businesses. In exchange, BDNES provided $2 billion in financing to JBS. That allowed JBS to acquire a 64 percent stake in Pilgrim’s as it emerged from bankruptcy in 2009, increasing to 78 percent by 2012. (Pilgrim’s trades on the Nasdaq today. JBS trades on the OTC exchange.) 

How the Bribery Happened

The money for that $148 million in bribes at least partly came from Pilgrim’s Pride cash flows. How did Pilgrim executives not notice the misconduct? That’s where we get to the ownership structure of Pilgrim’s and the JBS empire — an org chart so convoluted it sounds like a Jackson Pollock painting. Consider this description from the SEC: 

Pilgrims was majority-owned and controlled by JBS through JBS USA. Joesley Batista was the CEO and a board member of J&F, CEO and chairman of the board of JBS, member of the JBS USA board of directors, and member of the Pilgrims’ board of directors. Wesley Batista was a board member of JBS, CEO and a board member of JBS USA, and chairman of the Pilgrims’ board of directors and compensation committee.

Because the Batista brothers exerted so much control over Pilgrim’s Pride, almost by definition the company had ineffective internal accounting controls that couldn’t identify or prevent the bribery scheme. 

For example, Pilgrim’s Pride and JBS USA shared office space, financial reporting IT systems, accounting policies, training materials, and several key executives (beyond the Batistas) who held roles in both businesses. Six of nine people on Pilgrim’s board in the first half of the 2010s had ties to JBS business entities. Until 2015, both businesses even relied on the same Code of Conduct — supplied by JBS. 

So it’s fascinating to read that Pilgrim’s Pride, a sophisticated business with more than $8 billion in annual revenue at the time, allegedly had no clue about the bribery happening right under its nose for years. 

Then again, Pilgrim’s had shortcomings of its own. For example, the company didn’t implement its own Code of Conduct in 2015, five years after the Batistas took control. As late as 2018 — nine years after the JBS deal! — Pilgrim’s still hadn’t finished implementing a formal anti-bribery program. Nor did the company have compliance personnel. Which partly explains how the Batista brothers signed the code of conduct prohibiting bribery, even though they never received any anti-corruption or ethics training.

Pilgrim’s also just settled a separate price-fixing case with the Justice Department, where the company will pay $110.5 million. Prosecutors say Pilgrim’s conspired with other meat producers to fix the price of chicken from 2012 into 2019. So clearly the company had numerous compliance program weaknesses throughout the last decade.

Digesting the Details

The rest of the JBS bribery scheme isn’t anything compliance professionals haven’t heard before. The Batistas used shell companies to transfer payments to Brazilian government officials. The paper trail was covered up with fake invoices and other false documentation. So we have poor documentation controls, poor due diligence, and so forth. That’s not news for cases like this.

How did it all end? The Batista brothers eventually began cooperating with Brazilian law enforcement in separate corruption probes in that country; and admitted their actions to Pilgrim’s Pride executives in 2017. Both brothers left the company that year. As part of the SEC settlement, each brother is also paying a $550,000 civil penalty.

So often we encounter FCPA cases where a company fails to find corruption in a merger target. Here we have the reverse: the acquiring business was the corrupt partner, and dragged Pilgrim’s into its morass. 

One telling item from the Justice Department was this line: as part of the settlement, “for a three-year period, J&F agreed to continue to cooperate with the U.S. government in any ongoing or future criminal investigations concerning J&F, its executives, employees, or agents.” 

I suspect we haven’t heard the last of this case and the individuals who participated in it.

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