Foreign Corrupt Practices Act

Renewable energy generation continues to rise globally, as more countries and regions of the world begin the lucrative transition to green energy. With the renewable energy industry still in its infancy, now is an opportune time to explore all the potential corruption risks that lurk if they are to be proactively mitigated.

While renewable energy can take many forms, it is at its core power derived from the earth’s natural sources—water, wind, sun, geothermal, and bioenergy. According to data provided by the International Renewable Energy Agency (IRENA), at the end of 2021 (the most recent data available), global renewable generation capacity increased by 257 gigawatts (GW) to 3,064 GW, a nine percent growth in 2021 overall. To put that into perspective, 1 GW is roughly 3.1 million photovoltaic (PV) panels, 333 utility-scale wind turbines, or 100 million LEDs, according to the Department of Energy.

“Solar and wind energy continued to dominate renewable capacity expansion, jointly accounting for 88 percent of all net renewable additions in 2021,” IRENA stated. The agency further noted that to achieve net zero emissions by mid-century, “renewables would have to scale-up massively across all sectors, from 14 percent of total energy today to around 40 percent in 2030.”

This global push to scale up green energy heightens corruption risk in the renewables sector. “It is a great time to be in the energy industry, because the demand is high,” said Tom Hollobone, managing director in Kroll’s compliance, risk, and diligence practice in London. The incentive rewards are high as well, but that is also what drives higher risk taking, he said.

The potential risks that lurk in the renewable energy sector are numerous, and it is not practical to list them all. However, below is a non-exhaustive list of potential risk areas that deserve careful consideration by legal and compliance professionals.

Bribery risk: As is common in most industries, the potential of corrupt government officials demanding bribes in exchange for issuing renewables contracts or licenses is a major risk in the renewables energy sector. While renewable energy resources themselves are abundant, the heavily regulated energy sector means government officials around the world have a heavy hand in controlling who is awarded such permissions.

Furthermore, the risk of third parties or the use of agents as a means to offer or pay bribes to influence public officials involved in the process of deciding who to award renewables contracts or licenses to is another potential risk area, noted Edward James, a partner at Pinsent Masons.

Time pressures: “What creates additional risk for the renewables sector is the element of time pressure and the large amount of funds being allocated to the transition to renewables,” James said. “The combination of scarcity of permissions and lucrative contracts creates heightened risk of corruption, as we have seen before in the context of oil and gas exploration and in spectrum auctioning in telecoms.”

Rent seekers: And because many renewable projects are time sensitive, that creates further risk that “where other permissions are needed from local officials, the officials may become ‘rent seekers’ by delaying permissions—such as land use permission—to try and solicit payments,” James added. “The same could occur when trying to import critical components, and customs officials may hold up the delivery of components when they reach ports,” he said.

Third-party risks: Further heightening bribery and corruption risk are the various key stakeholders that make up the renewable energy supply chain, starting at the source with the extractives sector, the third parties who extract the raw materials—like polysilicon for solar panels and iron ore for wind turbines—necessary to make components for renewable energies.

Other key stakeholders include, but are not limited to, original equipment manufacturers, who develop the physical components for renewable energy products—such as PV panels, solar panels, and wind turbines; developers and operators who build and maintain the projects; and officials who provide the necessary funding to move renewable energy projects forward.

Bid-rigging and collusion: Bid-rigging and collusion pose another high risk in the renewables sector, as competitors may collude to keep prices high, or corrupt government officials may attempt to drive out certain bids in favor of preferred business partners. This is particularly the case when a limited number of countries dominate a key market. For example, just three countries—China, South Korea, and Japan—dominate battery manufacturing globally, according to data from research provider BloombergNEF.

Geographic risks: To assess each country’s own unique level of corruption risk, commonly used benchmarks that many legal and compliance professionals rely on are Transparency International’s annual Corruption Perceptions Index and the TRACE Bribery Risk Matrix, to name just a couple. But to understand the actual level of corruption in any particular country, “further steps should be taken to consider the specific context and circumstances of the country and how corruption could specifically arise in the context of a renewable energy project,” James advised.

Compliance measures

As in any industry, properly mitigating bribery and corruption risk requires having in place a comprehensive anti-bribery/anticorruption compliance program. And there are no shortage of resources on what those compliance elements should include, such as the Department of Justice’s “Evaluation of Corporate Compliance Programs” and the “FCPA Resource Guide.”

“The single most important step that renewables companies should be taking is conducting comprehensive anti-bribery and corruption risk assessments, and then using those risk assessments to determine what controls to put in place,” James said.

In having conversations with clients in the renewables sector, Hollobone said a lot of the concerns are around “moving into jurisdictions that they are not familiar with and not knowing the standard business practices in those countries.” He described scenarios in which a renewable investment opportunity presents itself, in which the planning commission may have been obtained already, for example, or the license may have been obtained already, and the client does not know how that happened.

“The fear that they have is that they buy an asset from someone, and then they uncover evidence that makes that asset toxic to them in that unethical or illegal activity has taken place to get those licenses, assurances, or power purchase agreements,” Hollobone said.

“That is where some serious questions need to be asked,” he added. “If the local permits have already been obtained, how were they obtained? How was the land for the renewable energy project acquired? If they have a production license already, how was the license acquired? Was it done transparently or behind closed doors? Were there multiple bidders?” Getting answers to those questions is essential in making risk-based decisions “in order to become comfortable working in the future with those various different renewable energy projects,” he said.

Indirect ESG risks

Bribery and corruption risk addresses part of the ‘G’ element in the overall scope of environment, social, and governance (ESG) risks, but the potential broader indirect environmental and social risks relative to renewable energy projects must be considered as well, Hollobone stressed.

For example, if a company is proposing to put up a solar farm, consideration must also be given to how the land was previously being used. Have people been displaced? Was the solar farm put up at the cost of cutting down huge swaths of rainforest? Was vegetation destroyed that now puts entire towns and villages downriver at greater risk of being ruined by flood waters?

“These issues are important to our clients, because as well as wanting to do the right thing, they also represent a reputational risk and a regulatory risk further down the line,” Hollobone said.

At the end of the day, the whole intent of renewable energy is to find more innovative ways to address the ‘E’ in ESG risks. “But as someone once said to me,” Hollobone said, “it is hypocritical to ignore the other [environmental and social] elements of ESG when trying to create renewable energy.”

ACI will be holding a conference on January 25-26 in Houston, Texas that will feature expert speakers from Energy Industry. For more information, please visit: https://www.americanconference.com/fcpa-houston/

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