Renewable Energy and Low-Carbon Technologies: Anti-Corruption Lessons Worth Billions
Investments in renewable energy and low-carbon technologies are growing at unparalleled levels globally. Despite the pandemic’s challenges, last year saw one of the world’s largest-ever annual increases in renewable power generation. Investments focused on wind; solar; hydrogen; carbon capture, use and storage (CCUS); biofuels; vehicle charging; energy storage; and other technologies are enjoying tremendous growth. Indeed, Iraq’s Deputy Prime Minister days ago made what has been described as an unprecedented call to diversify oil-producing economies into renewables, observing that "the world’s demand for oil will need to decline from more than 90 [million] barrels a day to less than 25 [million] by 2050.”1
Much of the recent expansion in renewable power and low-carbon investments has occurred in countries that pose high risk under global anti-corruption laws such as the US Foreign Corrupt Practices Act (FCPA) and UK Bribery Act. Because of this rapid, cross-border growth, companies that have previously worked domestically are quickly moving into international markets, with (i) employees who are unaccustomed to the legal, financial, operational, and business risks that these new locations pose; (ii) processes that are not equipped to manage these risks; and (iii) local market participants who understand the opportunities at the intersection of capital, urgency and inexperience. International expansions under similar circumstances have resulted in billions of dollars in anti-corruption fines for other industries, providing valuable lessons for what renewable energy and low-carbon technology companies can avoid in their own growth.
Companies need to maintain speed and flexibility for rapid growth while managing anti-corruption risk in a way that protects them and their boards, investors, executives, and employees. This will often involve taking a proportionate approach focused on operational points where money, urgency and higher-risk participants such as government officials are present. For renewable energy and low-carbon technologies, this may include:
- Land acquisition, leasing and access. Local land transactions associated with renewable projects present opportunities for corruption, fraud and self-dealing by employees and agents. This may include: payments to officials regarding government-held land rights; commercial bribery in private sale, lease or access transactions; or fraud and self-dealing by a company’s employees or agents who acquire land from a related party, hold an undisclosed interest in a seller or receive kickbacks for confidential information.
- Local agents. Building a local presence quickly requires resources on the ground who are steeped in the market. Often this necessitates local agents with which a company has limited experience. This presents risk because companies are frequently held responsible for those agents’ conduct under anti-corruption laws. Poorly vetted and monitored agents have the potential to taint an entire transaction or project from the outset.
- Local partnerships and ventures. Similar to agents, local partners can add value to projects given their knowledge of the market and legitimate connections to local decisionmakers. But, those partners may be scrutinized by regulators as a potential conduit for improper payments. This is especially true where the partners’ legitimate purpose is unclear, they do not share risk or contribute capital, experience or personnel, or they were recommended by a government official or other key decisionmaker.
- Permitting, approvals and community engagement. Renewable projects often require an array of permits, certifications and other approvals at the national, provincial and local level. Even in the absence of a requirement, securing the acquiescence of local officials and communities who could stand in the way of a project requires careful management, particularly if a company might be making community contributions (e.g., scholarships, building projects, donations).
- PPAs, interconnection and infrastructure. A project’s success often turns on the power purchase agreements (PPAs) and interconnection/infrastructure access that it secures. In many countries, these critical points are negotiated with federal, provincial and local officials, and/or state-owned utilities, distribution companies or energy consumers. Again, missteps here by a company or its representatives have the potential to taint the entire revenue stream or transaction that follows, especially given the long-term nature of many of these contracts.
- Supply chain. Renewable projects often require the acquisition of goods and services that pose higher risk under anti-corruption laws, such as construction and associated subcontracting, freight forwarding, customs clearance, logistics, and shipping. They also rely on local companies that may not be attuned to the anti-corruption requirements that the project needs them to follow.
- Labor. Similarly, projects may require negotiations with unions or more informal organizations that represent workers. Even though these organizations may be nongovernmental, companies have run afoul of anti-corruption laws by providing improper benefits to union officials or other worker representatives.
- Sales and distribution. Low-carbon technology companies may rely on business development representatives or a network of distributors and salespeople. Companies can be responsible for their actions under anti-corruption laws, including in sales to governments, government-owned companies and private enterprises.
These risk points can be managed with early identification and planning, targeted controls and monitoring, adequate training, and prompt responses to potential issues. In doing so, it is important to recognize that regulators often seek to hold a company liable for improper payments that benefit the company and are made by its agents, joint venture partners, suppliers, salespeople, business partners, or other representatives, even if the company had no knowledge of their actions. Frequently, the best defense is that the company took reasonable and risk-based steps to vet, instruct and monitor these parties; maintained robust controls over transactions, assets and money flows; and promptly sought the advice of counsel regarding high-risk contracts, transactions, counterparties, and allegations of improper payments.
Thus, it is useful for boards, general counsels, chief compliance officers, and other executives to ask: if a year from now a regulator alleged that improper payments were made for your company’s benefit, (i) what would you wish you had done to prevent this and (ii) what is the compelling story that you would want to be able to tell about the actions that you took to do so? Thinking now about how to answer these questions—and the risk areas above that might prompt them—can allow companies to grow quickly in challenging markets while protecting the organization and its executives, board, investors, and employees from a costly investigation and potential criminal and civil liability.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
Ali Allawi and Fatih Birol, “Without Help for Oil-Producing Countries, Net Zero by 2050 Is a Distant Dream,” The Guardian (September 1, 2021).