027: Boeing fined $2.5 billion for conspiracy to defraud

027: Boeing fined $2.5 billion for conspiracy to defraud 027: Boeing fined $2.5 billion for conspiracy to defraud

Purpose

Train professionals on the importance of compliance with federal regulations and show the importance of training team members on compliance.

Learning Objectives

Upon completion of this Case Study, participants should:

Understand compliance and how noncompliance may lead to legal problems.
Learn how employees’ actions and bad decisions can lead to a federal investigation;
Describe a deferred-prosecution agreement;
Identify ways to avoid becoming the target of a federal investigation; and
Explain how a written internal compliance program can influence prosecutorial decisions.

Intended Audience

Corporate professionals, business owners, business leaders, and white-collar professionals working in an office environment.

Key Terms

Boeing, Criminal Information, Deferred Prosecution Agreement, Conspiracy to Defraud, Compliance Plan, Compliance Mitigation

State of the Industry

Regulators at the Federal Aviation Administration’s Aircraft Evaluation Group routinely evaluate new aircraft for safety and reliability concerns. The FAA governs all airlines that operate in the United States. The FAA requires all airlines to test their aircraft and provide the results to the FAA.

This case study profiles two employees of a large multinational corporation. Two airplane crashes killed 346 people, leading to hundreds of millions of dollars in fines for the company. The two employees engaged in a cove-up.

Background and Analysis

In this case study, we focus on the Boeing Corporation and the fallout from two deadly plane crashes involving Boeing’s 737 Max aircraft. All the information in this case study comes from numerous sources: an FAA press release, a criminal information filed by the Federal Aviation Administration against Boeing, a deferred-prosecution agreement, and a newspaper article.

Federal prosecutors in New York submitted a charging document called a “Criminal Information” against Boeing. The Information describes criminal charges against the corporation and the factual basis for those charges. Unlike an indictment, however, a criminal information does not require the empaneling of a grand jury. Instead, the information authorizes prosecutors to present the case to a judicial officer, usually a magistrate judge. The judge examines the information and decides whether probable cause exists to advance the case.

Congress created the FAA in 1958 and gave the agency power to regulate all aspects of civil aviation in the United States. The FAA’s duties include the construction and operation of airports, air traffic control, certification of personnel and aircraft. The agency also oversees commercial air carriers.

The FAA developed The Aircraft Evaluation Group as a division within the FAA; this group regulates and evaluates new aircraft or service. As part of certifying a new airliner, the FAA requires airlines to flight-test their aircraft and report on the results.

Early in the development of Boeing’s 737 Max, engineers received unfavorable data. Tests showed that moving engines forward on the wing brought more risk. The design brought a tendency for the aircraft to pitch up during maneuvers.

Engineers attempted to fix the problem with small physical changes to the airframe. Those changes did not correct the problem.

In response, Boeing developed software called Maneuvering Characteristics Augmentation System (MCAS) to correct these problems. After the two crashes, investigators and engineers discovered the MCAS system gave false signals to the pilots. Those false signals created a dangerous situation.

Investigators and engineers found the MCAS had too much control and could make in-flight adjustments without the pilots’ knowledge or input.

Investigators at the FAA charged Boeing with conspiracy to defraud. According to investigators, two Boeing employees conspired to hide information from the FAA after Lion Air Flight 610 crashed in 2018 and the Ethiopian Airlines Flight 302 crashed in 2019.

Boeing admitted that two of its 737 Max technical pilots concealed material information about the MCAS that impacted the flight control system in all 737 Max aircraft. Because of the pilots’ deception, the FAA published a vital document that lacked information about MCAS. As a result, the airplane manuals and pilot-training manuals did not offer the information.

The FAA and Boeing settled. That settlement led to a deferred-prosecution agreement (DPA). DPAs are agreements between the Department of Justice (DOJ) or other governmental investigative agencies and a corporation facing a criminal investigation. Under a DPA, the agency files a charging document with the court; simultaneously, prosecutors request the court to postpone the prosecution, allowing the defendant to demonstrate its good conduct.

In exchange, DPAs generally require the defendant to agree to:

Pay fines and costs to the government as punishment for the illegal conduct,
cooperate with the government’s investigation,
admit all relevant facts regarding the case.

Finally, DPAs typically require the corporation to mitigate misconduct with remedial actions. For example, a corporation may agree to charitable efforts, and it may employ more compliance monitors. After an agreed-upon time, if the corporation complies with all the sections of the DPA, the government will ask the court to dismiss the charges. If the corporation fails to comply with all aspects of the DPA, the government can reinstitute the criminal case.

According to the DPA in this case, Boeing will pay more than $2.5 billion, comprised of the following requirements:

$243.6 million in fines for criminal behavior
$1.77 billion in compensation payments to airline customers
$500 million for the establishment of a crash-victim compensation fund.

After the parties reached this settlement, federal prosecutors credited Boeing with starting several new policies and procedures. Some of those changes included:

making significant changes to senior leadership,
appointing a Chief Compliance Officer,
combining its internal legal and compliance teams,
creating a permanent internal aerospace safety committee to oversee the company’s policies and procedures governing safety and its interactions with the FAA and other government agencies and regulators,
creating a product and services safety organization to strengthen and centralize the safety-related functions that has been previously located across Boeing,
reorganizing the engineering function to have all Boeing engineers, as well as the flight technical team, report through the chief engineer rather than to the business units, and
making structural changes to the flight technical team to increase the supervision and effectiveness.

In addition, Boeing agreed to continue cooperating with the Justice Department’s Fraud Section in any ongoing or future investigations. Boeing also agreed to strengthen its compliance program, meet with the Justice Department’s Fraud Section at least quarterly, and submit annual reports on the status of its remediation efforts. Further, Boeing agreed to submit the results of its testing of its compliance program, and its proposals to ensure that its compliance program has been reasonably designed, implemented, and enforced.

Recommendation

Boeing admitted the wrongdoing by two of its employees and cooperated with federal investigators. In doing so, Boeing opened the door to the deferred-prosecution agreement which allowed Boeing to pay the necessary fines but resolve the charges and make important changes to its corporate compliance efforts.

Compliance with federal laws should be at the top of the list of importance for all businesses. Even though Boeing has its own internal compliance policies, Boeing employees still covered up defects in its 737 Max planes and deceived federal investigators.

Strong written internal compliance plans lower vulnerability to problems. Training team members on internal compliance plans may also help.

If people do not understand the importance of complying with federal laws, they can make mistakes. Those mistakes can lead to high fines and threaten a company’s viability.

At Compliance Mitigation, each of our professionals have personally experienced federal investigations. Our experiences help business leaders avoid bad decisions. We recommend that leaders write compliance plans and effective training resources to train team members. For more information, see our free course, Compliance 101.

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027: Quiz – Boeing fined $2.5 billion for conspiracy to defraud

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