AAR Settles Intriguing FCPA Case

Here’s a Christmas present for compliance professionals! AAR Corp., an aviation services company, has agreed to pay $55.6 million to settle civil and criminal charges that the company bribed government officials in Nepal and South Africa in the 2010s — and is giving the rest of us some points to ponder on Justice Department credit for self-disclosure.

The Securities and Exchange Commission and the Justice Department announced the settlement on Thursday. AAR Corp. will pay $26.3 million in a criminal penalty to the Justice Department, plus $29.2 million in disgorgement and interest to the SEC. The company also received a non-prosecution agreement that will last only 18 months, and promised to make a suite of improvements to its compliance program. 

The Justice Department has also charged two individuals personally for their involvement. Deepak Sharma, a former AAR subsidiary executive, pleaded guilty in August to FCPA charges for his role in the Nepal scheme; and Julian Aires, an agent of AAR, pleaded guilty in July to for his role in the South Africa scheme; both men will be sentenced sometime next year. The SEC also fined Sharma $185,000, although most of that was forgiven as part of his plea with the Justice Department.

“The Justice Department continues to hold companies and individuals accountable for engaging in international corruption,” Brent Wible, a senior official in the Justice Department’s Criminal Division, said in a statement. “Today’s resolution also demonstrates how companies that proactively report misconduct, extensively cooperate, and timely and appropriately remediate will receive credit under the Criminal Division’s Corporate Enforcement and Voluntary Self-Disclosure Policy, including in the form of the agreement, the amount of cooperation and remediation credit, and the length of the term.”

Wible wasn’t kidding. The details of the AAR settlement offer a fascinating glimpse into the Justice Department’s evolving stance on voluntary self-disclosure, so let’s take a look.

All the Usual FCPA Tropes

As described in the SEC settlement order and the Justice Department’s non-prosecution agreement, AAR had two separate corruption schemes happening at the same time. 

In Nepal, Sharma worked with a well-connected Nepalese intermediary in the mid-2010s to bribe government officials into buying two Airbus A330 aircraft worth roughly $210 million. At first, Sharma arranged for the intermediary to work on a 7 percent sales commission; the money would be wired to the intermediary’s bank account in Hong Kong. 

Then, plot twist! The Hong Kong bank declined to process the transaction because the deal didn’t pass the bank’s Know Your Customer procedures. Sharma and the intermediary then restructured the transaction so that a second front firm based in Dubai would receive the bribe money.

Long story short, the bribes were paid, Nepal’s national airline bought the two A330 jets, and AAR received $6 million in ill-gotten profits. All the usual red flags (backdated contracts, agents paid on percentage sales commissions, damning emails) were present.

The South Africa scheme wasn’t much different. This time around, Sharma worked with Aires, a U.S. citizen employed by an aircraft services company in South Africa that did business with AAR. Aires’ company and AAR teamed up to bid on a services contract for South African Airways, where Aires’ business would receive a 5 percent “success fee” from AAR for every contract secured. 

Sharma arranged for that success fee (which was eventually pushed up to 6.5 percent) to be paid, and South African officials quietly funneled inside information to both Aires and Sharma on how to win the South African Airways contract, including notes of competitors’ bids and pricing. “AAR knew it was receiving inside information to secure the award of the bid but did not inquire as to how that information was obtained,” as the SEC said in its settlement order.

Ultimately AAR paid Aires’ business $5.4 million (including $1.24 million in those “success fees”) and in return, AAR reaped $17.4 million in ill-gotten profits.

Intermediaries, poor internal controls, incentive schemes geared for corruption — we’ve heard all that before, and can go deeper into the details another day. The real news here is the settlement AAR received and what that tells us about the Justice Department’s current posture on resolving FCPA cases. 

Attempt at Self-Reporting

The good news for AAR is that the company did self-report its misconduct to the Justice Department and SEC in 2019. The bad news, however, is that local media in both Nepal and South Africa had already broken the news of corruption in both countries, including AAR’s probable involvement. Plus, 12 days before AAR reported its troubles to the Justice Department, some other source tipped off  prosecutors about the Nepal misconduct.

That meant AAR would not qualify for voluntary self-disclosure credit under the Justice Department’s Corporate Enforcement Policy, since a company could only receive that credit if it was news the Justice Department hadn’t already heard.

On the other hand, prosecutors were impressed with AAR’s cooperation during the investigation, which included lots of document production and promptly providing information to the feds that AAR discovered during its own internal investigation. Prosecutors also gave AAR points for substantial improvements to its compliance program. That remediation included steps such as reducing its use of overseas sales agents; hiring a chief compliance officer and beefing up the compliance team overall; implementing a new compliance risk assessment program; and “beginning to roll out” a tool to preserve instant-message communications. 

So AAR tried for voluntary self-disclosure but missed thanks to bad timing; and did everything else right that prosecutors like to see. Given all that effort, prosecutors decided to reduce AAR’s possible criminal penalty by 45 percent. Plus, as we mentioned earlier — non-prosecution agreement, no compliance monitor, and a term of only 18 months rather than the usual three years. (Although the CEO and CCO do need to certify the effectiveness of AAR’s compliance program at the end of those 18 months.)

All told, this settlement reflects recent statements the Justice Department has made about trying to be more thoughtful on companies’ self-disclosure; and specifically to do something for companies that at least made a good-faith effort to self-disclose but didn’t precisely meet the criteria outlined in the Corporate Enforcement Policy. 

Consider this statement from Criminal Division boss Nicole Argentieri on Nov. 22 (emphasis added by me):

Specifically, where a company’s self-disclosure does not meet the definition of “voluntary self-disclosure” as articulated in the [Corporate Enforcement Policy], but the company has demonstrated that it acted in good faith to self-report the misconduct — and that it fully cooperated and timely and appropriately remediated — prosecutors will consider the company’s self-disclosure in determining the appropriate resolution, including the appropriate form, the appropriate monetary penalty, and the length of the term of the agreement.

That fits the AAR case perfectly. (In all likelihood, the settlement was already just about done when Argentieri made her statement.) So we have yet another accommodation for companies trying to do the right thing when they discover corruption. Bring that up in your next meeting with the board.