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From Securities Regulation Daily, July 25, 2016

Latam Airlines to pay $22M for bribing its way into Argentina

By Anne Sherry, J.D.

LAN Airlines, now known as LATAM, agreed to settle SEC and DOJ charges that it violated the Foreign Corrupt Practices Act by funneling bribes to labor union officials in Argentina. LAN allegedly entered into a sham consulting agreement in 2006, at which time it did not have adequate internal controls or an anti-corruption policy. The airline will pay $9.4 million in disgorgement and interest to settle the SEC's charges and a $12.75 million penalty to defer prosecution by the DOJ (U.S. v. LATAM Airlines Group S.A., July 25, 2016).

According to the DOJ's information and the SEC's order instituting proceedings, LAN entered the Argentine airline market in 2005 by acquiring shares in a non-operating airline, AERO 2000. As part of the deal, LAN agreed to hire workers from two other airlines to operate AERO 2000. LAN immediately faced regulatory and practical hurdles, particularly with respect to the labor unions representing the employees it inherited. The unions threatened to enforce a single-function rule in their collective bargaining agreements, which would have required LAN to double its work force.

Anti-bribery violations. A cabinet advisor in Argentina's Department of Transportation offered to assist LAN, making it clear that he would both expect payment himself and make payments to third parties with influence over the unions. LAN and the consultant entered into a sham agreement describing a $1.15 million payment for a study of air routes in Argentina and the regional market. Payments were made through an unrelated LAN subsidiary.

Internal controls violations. According to the SEC, internal controls at LAN were deficient. Executives and managers approved and made the payments to the consultant while ignoring numerous red flags, the legal department raised no concerns on review of the sham contract, and the accounting division required no proof of services before making the payments. LAN did not implement even basic compliance controls until 2008, and only implemented a comprehensive compliance program in 2014. The settlements with both agencies require LAN to engage an independent compliance monitor.

The case is No. 16-cr-60195.

Companies: LAN Airlines S.A.; LATAM Airlines Group S.A.

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