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Clean Hands, Too?
Clean tech is new: solar, wind, biofuels, water purification. It's exciting, and both the financial and the green communities are optimistic about the possibilities. And yet the industry runs the very ordinary risk of getting bogged down in perhaps the oldest business challenge of all: corruption.
In a nutshell, the U.S. Foreign Corrupt Practices Act (FCPA) prohibits companies and individuals from corruptly paying, offering, or promising to pay anything of value, directly or indirectly, to foreign officials to obtain or retain business or an improper advantage. To comply with the FCPA, clean tech companies must overcome the challenges typical of two of the most bribery-prone sectorsinfrastructure and energyas well as a handful of new challenges.
To understand the costs associated with FCPA violations, clean tech companies should look to the $1.6 billion in fines levied by U.S. and foreign governments against German conglomerate Siemens AG. Involved in energy and infrastructure projects worldwide, including in some particularly challenging countries, Siemens had a strategy of paying bribes to foreign officials to win contracts. Siemens typically paid these bribes using a variety of accounting measures, including off-book accounts and slush funds, to disguise the payments.
Of the $1.4 billion in bribes paid by Siemens during the period for which it was investigated, 200107, well over half were funneled through third parties. Siemens routinely entered into consulting agreements in which the consultants would not perform any services apart from conveying bribes. These are alleged to have included payments to a partially state-owned company in Italy in connection with two power plant projects, payments to a former director of the Israel Electric Company for four contracts to build and service power plants, and payments to government customers in China for the installation of high-voltage transmission lines.
In addition to long-standing issues faced by the infrastructure and energy sectors, the clean tech industry faces some new challenges. A recent Washington Post article highlights such "eco-corruption" cases, exploring the link between massive state subsidies for wind and solar development in Italy and a market ripe for fraud. According to the article, a series of sting operations in Italy have revealed the Mafia's infiltration into the renewable energy sector in that country. Crime families would enlist local officials to expedite application processes and approach foreign investors eager to profit from Italy's subsidies program and sometimes willing to turn a blind eye to corruption.
In spite of these challenges, many clean tech companies, which are often fledgling, start-up companies, fail to make compliance a priority and fail to implement measures that could protect them from both legal and reputational fallout. Why are so many clean tech companies taking a serious regulatory gamble? One theory is that their tepid response is bolstered by the mistaken belief that because they work toward a socially conscious goal, they are somehow exempt from scrutiny by the U.S. government. It's a risky assumption. The enforcement agencies have long focused on the infrastructure and energy industries, levying increasingly heavy fines on these sectors. Given the overlap among these industries, the hybrid clean tech sector may not be far behind in attracting the government's attention.
Lots of funding, few controls: The clean tech industry is awash with funding right now. FCPA compliance concerns are exacerbated by the sheer volume of funding. And because spending is largely on research and development, internal controls should be more, not less, rigorous. In challenging compliance environments like China, funding is routinely allocated at a local level, making meaningful formal controls more challenging. For example, one solar industry expert described a situation in which a foreign minister promoted the possibility of a solar project in his developing country. However, after doing some due diligence, the company discovered that the minister actually owned an interest in the project himself through a shell company.
Clean tech companies should implement measures, such as centralizing accounting systems to ease corporate headquarter review, to ensure that money is both coming from and going to legitimate sources. Companies should also have FCPA controls addressing the use of petty cash; third-party contracts and payments, including sales and marketing agents; contracts for the lease of facilities and equipment; gifts, entertainment, and hospitality payments; and employee status, including current or previous government employment for employees and their immediate family members.
Emerging industry, sometimes opaque regs: Regulations like "energy audits" are often ill-defined and subject to abusive practices. Similarly, government funding and subsidies surrounding projects, particularly in developing countries, can lack regulatory transparency. In challenging markets, clean tech companies can face such risks as confusion over which ministry controls allocation of a project or whether demands from a foreign official are legitimate. Clean tech companies need to have clear FCPA compliance policies in place to deal with opaque regulations and overreaching foreign officials. Antibribery training can also be used to teach employees how to respond to bribe demands. Tone at the top is crucial. Senior management must foster a culture of compliance and let their employees know that bribery will not be tolerated, even if it means walking away from business.
The middleman problem: Many clean tech projects involve extensive dealings with foreign governments, from contract bidding to permitting to environmental review and enforcement. Many of these dealings, some of which involve the discretion of a foreign official, are handled through third parties. Business agents can pose a particular risk, as they might have formerly served in the government or be related to a senior government official. The FCPA specifically bans committing a prohibited action through a third party while knowing that the third party will perform that action. Clean tech companies may be pressured to work with business agents. Companies must balance this pressure to be well connected with the prospect of an agent making an improper payment to secure that connection. Under the FCPA, companies may be vicariously liable for the conduct of their consultants, distributors, sales agents, and other third parties, even if the company lacks knowledge of their wrongdoing.
Companies can take practical steps to protect themselves from the FCPA risks posed by third parties. These include conducting due diligence on all third parties, and elevating the extent of that due diligence based upon the risk posed by the third party, including FCPAspecific representations, warranties, triggered audit rights, and termination rights in all third-party contracts; and training third parties on the FCPA.
Complications, complications: Companies can be held liable for the actions of subsidiaries, joint ventures, and other partners. Even if a clean tech company arrives to the deal quite late, whether as a financier, provider, or other player, on a project won with bribes, the entire project and all of the parties involved are typically tainted. Clean tech companies should make sure FCPA compliance is a standard part of all contracts with partners.
Clean tech companies are also at risk for successor liability in large deals put together by other entities. Due diligence is necessary even if a deal has been purchased and packaged, and seems good. The U.S. government has been clear that successor liability can apply to FCPA violations. The U.S. Department of Justice and the Securities and Exchange Commission recommend that companies conduct preacquisition due diligence to ensure, among other things, that contracts were not obtained illegally and to reduce the risk that the acquired company will continue to pay bribes.
Clean tech companies have the benefit of compliance lessons learned from longer-standing industries. Antibribery compliance need not be ruinously expensive or unduly complicated. Companies should ensure that they have a plan, reasonable resources, internal political will, and the stamina and determination to stay with the plan even when it means slowing the pace of growth.
Alexandra Wrage is the president of TRACE, an organization dedicated to providing smart, cost-effective antibribery compliance tools and services to companies. Email: firstname.lastname@example.org.