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Latin America Renewable Energy: The FCPA Risks
The renewable energy market is booming, but also poses potential FCPA issues.
LATINVEX SPECIAL
WilmerHale
The renewable energy market in Latin America is booming, and the region’s natural resources make it one of the most attractive areas in the world for investment. Latin American countries, including Brazil, Mexico and Chile, have been recognized as some of the top global renewable energy markets. Between 2010 and 2015, $80 billion was invested in green energy in Latin America, excluding large-scale hydropower. Further regulatory and policy developments, such as the deregulation of national energy markets and the desire to meet the goals of the Paris Climate Accord, have only increased this trend. Prior to the onset of the COVID-19 pandemic, 2020 had been a banner year for renewable energy development in Latin America. Experts predict that in 2020, Mexico will see 11 new wind farms begin operation, representing a $1.6 billion investment. In Brazil, approximately 3.2 GW of unsubsidized solar projects have been permitted and are currently in development. Not to be outdone, Colombia recently announced that there are 9.47 GW of solar projects currently underway. While the COVID-19 pandemic has upended the global economy—including the renewable energy market globally and in Latin America—the region’s economic, political and geographic characteristics suggest that wind and other renewable power sources will have an increasingly important role to play in its energy mix.
However, this opportunity is not without risks. Continuing government involvement in project finance, partial government ownership of utilities, and the importance of major construction, mining and industrial companies as institutional consumers of renewable energy all pose potential Foreign Corrupt Practices Act (FCPA) compliance problems for foreign companies looking to invest in the region. These risks have been made all the more notable by the unique conditions posed by the ongoing pandemic.
Renewable Energy and Foreign Investment Opportunities
Much of Latin America’s renewable energy development relies on partnerships with foreign companies. For example, some of the larger solar plants in Colombia are being developed by foreign companies such as Chicago-based Invenergy, Spanish developer Diverxia, and an Anglo-Colombian partnership between Cubico and Celsia. In Chile’s Atacama desert—uniquely suitable for large-scale solar power as one of the most irradiated areas of the world—Miami-based Atlas Renewable Energy is investing $450 million in a massive 854 MW solar plant, and Spanish developer Ibereolica Renovables and Italian energy giant Enel are each developing solar projects that will generate approximately 500 MW. In 2018, foreign backers invested nearly $6.9 billion in renewable energy projects in Latin America.
Like much of the rest of the global economy, Latin America’s renewable energy industry has been hard hit by COVID-19. Brazil and Mexico are expected to be particularly challenged, as the rapid depreciation in their respective currencies could lead to a sharp increase in the cost of projects already in development. Time will tell whether this slump will be short-lived, and Latin American governments are seeking to breathe life back into their economies. Governments across Latin America also remain committed to their ambitious decarbonization goals, and the clean skies in the region’s cities—prompted by factory closures and reduced car traffic—are showing that a future with clean air is indeed possible.
Finally, despite the opportunity it presents, renewable energy does face political opposition in the region. For example, Mexico’s president Andrés Manuel López Obrador used a recent press event at La Rumorosa Wind Farm in Baja California to decry wind farms as “visual pollution” and to declare that the government will not grant permits to new projects that impact the environment. Whether this is political posturing or marks a genuine change in government policy remains to be seen.
FCPA Risks
Although the Latin American region offers a unique business opportunity for renewable energy investment, companies must also be aware of FCPA risks.
First, despite the deregulation of much of the region’s electricity industry over the past several decades, governments remain major players in the sector. Government-run development banks have been an important component in project finance, and these government-backed loans are often conditioned on the developer hiring local contractors or manufacturers. Arrangements where contracts require foreign companies to hire preferred local contractors should ring compliance alarm bells, as without proper supervision these preferred local operators may present FCPA risks.
Of course, organizations should be proactive about managing relationships with all third parties in Latin America. In recent years, companies have faced significant FCPA exposure due to the conduct of third parties that they hire to facilitate their operations. This is especially significant in Latin America, where the success of a project may depend on relationship building and local contacts. Companies looking to develop renewable energy projects in Latin America would be well advised to consult with counsel experienced in FCPA matters to develop adequate compliance programs governing these projects well in advance of taking any significant project steps.
Raising further FCPA compliance risks is the fact that many power utilities in the region are themselves at least partly owned by the government. State-owned electricity and other energy companies dominate energy markets throughout the region; it is almost impossible to do energy-related business in Latin America without dealing with government officials. For example, the Brazilian government has a majority stake in Eletrobras, one of the country’s largest electricity companies, while some of the company’s shares are also traded on the New York Stock Exchange. Depending on the precise structure of the utility in question, the utility could be a bribery target, an agent facilitating bribes or an issuer regulated by the FCPA—or all of the above simultaneously. These concerns are not unfounded. In 2018, Eletrobras itself had to pay a $2.5 million fine to the Securities and Exchange Commission for violating the books and records provisions of the FCPA Complicating matters further, the definition of a government official under the FCPA is quite broad, extending to employees of minority-owned government ventures and joint ventures with private companies. This can lead to compliance problems in places foreign investors might not expect. For example, the Mexican Constitution requires that power transmission and distribution be handled by the government, although this dictate was significantly relaxed by constitutional amendments in 2014. Under the FCPA, as a result, employees of Mexican power utilities would be considered government officials. Similarly, officials at energy utilities founded by their respective governments and never fully privatized would also be covered by the FCPA.
Finally, some of the region’s largest consumers of renewable energy are major construction, mining and industrial companies—many of which are also state owned. The revelations from Operation Car Wash (Operação Lava Jato) in Brazil, the Cuadernos (Notebook) Scandal in Argentina and other anticorruption probes in Latin America have revealed these industries as some of the region’s worst offenders. For instance, Braskem, a partly state-owned Brazilian petrochemical company, is the largest customer of a proposed expansion to the Serra do Mel solar farms in the Brazilian state of Rio Grande do Norte (currently being developed by French developer Votalia). Braskem was at the center of the largest corruption scandal in Latin American history. In 2016, Braskem and one of its parent companies, Odebrecht S.A., agreed to pay $3.5 billion to regulators in the United States, Brazil and Switzerland to settle bribery charges. Braskem pled guilty to conspiracy to violate the bribery provisions of the FCPA and paid a total criminal penalty of $632 million.
Further, many of the region’s largest state-owned oil companies are involved in energy production and distribution—either directly through subsidiaries or indirectly through a web of trading arrangements. Petrobras, the partially Brazilian-state-owned oil giant, owns several subsidiaries dealing in materials used for energy production. In 2018, Petrobras agreed to pay over $850 million to the Department of Justice to settle FCPA claims arising out of the company’s payment of millions of dollars’ worth of bribes to Brazilian politicians. Other state petroleum giants with similar involvement in energy trading — such as PEMEX in Mexico and PetroEcuador in Ecuador — have become embroiled in similar corruption scandals, reflecting that Latin American energy trading remains a corruption hotbed.
Reducing Corruption Risk in Latin American Renewable Energy Investment
Fortunately, businesses considering—or indeed already involved in, investing in or developing—renewable energy projects in Latin America can take several concrete steps to protect themselves from FCPA compliance risks. Moreover, investors should bear in mind that in addition to the FCPA, local anticorruption laws have in recent years been more vigorously enforced by countries across Latin America as they begin to combat corruption in earnest. Further, anticorruption probes have become increasingly international in scope, as various regulators work across international boundaries to combat international corruption. Some steps that companies can take to mitigate these risks include:
1. Involve counsel early and often: As alluded to above, counsel skilled and knowledgeable in the FCPA can help guide businesses through the process of financing and building green power projects in Latin America and then selling the generated power in the market while steering clear of regulatory risk. They will also be able to help develop functioning compliance programs and spot any risks associated with the partners and government agencies businesses work with on the ground. Early involvement and continuity of communication with FCPA counsel will help reduce or eliminate larger, more resource-intensive concerns.
2. Ensure that internal compliance controls are robust: Adequate internal controls are crucial in preventing bribery from occurring in the first place, and spotting and ending it quickly if it does occur. FCPA lawyers can help craft these policies as businesses seek to invest in Latin America. Even where Latin American operations already exist, FCPA counsel should be engaged on an as-needed basis for in-depth evaluation on the adequacy and function of preexisting policies to ensure they are sufficiently robust. This process may include on-site interviews, document collection and review, analysis of the relative maturity of a program as compared with industry peers, and recommendations for closing any gaps in the policies and programs.
3. Closely monitor local agents and third parties: A consistent theme in FCPA investigations and enforcement actions is liability stemming from a lack of control of agents or third parties on the ground in foreign countries. If a business employs local agents to help it navigate the often complex process of gaining approval and building renewable energy projects in Latin America it must maintain adequate control over their activities, including by requiring them to acknowledge FCPA compliance requirements and to agree to abide by compliance policies. Bad behavior on their part can quickly turn into FCPA liability for the investor or developer.
This article is based on a WilmerHale client alert written by partners John F. Walsh, Alejandro N. Mayorkas, Kimberly A. Parker, Jay Holtmeier and Michael Connor, Special counsel Lillian Howard Potter, senior associate Heidi K. Ruckriegle and associate Noah Guiney.
The article was originally published by Compliance & Enforcement at the NYU School of Law's Program on Corporate Compliance and Enforcement.
Republished with permission from WilmerHale and NYU School of Law's Program on Corporate Compliance and Enforcement.
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