Is China’s increased investment elevating Latin America’s risk profile?
As Chinese investment pours into Latin America, Drew Costello, Jordan Basich and Brian Ross assess potential cases of corruption across the continent
Economic initiatives within the Latin America region over the past two decades have led to a dramatic increase in investment from China, particularly within critical industries such as energy, infrastructure, telecommunications and healthcare. China’s Belt and Road Initiative (“BRI”) and more recently the Covid-19 pandemic response have dramatically increased China’s influence in the region, overtaking that of the United States on a trade value basis.
While this investment has helped advance certain economic objectives, the large influx of money has arguably increased an already elevated risk profile for companies operating in the region. Trade between China and Latin America has grown from $12 billion in 2000 to $315 billion in 2020, with experts predicting this to more than double and reach $700 billion by 2035.
Chinese business activity within Latin America has been concentrated within strategic industries such as energy, mining, and infrastructure, which align with the region’s abundance of natural resources and appetite for new infrastructure projects.
Several current corruption investigations involve Chinese companies who have won energy, mining, and infrastructure contracts across Latin America. While U.S. regulators are not yet directly involved, below are several ongoing corruption cases which should raise alarms for companies operating around the region.
China Harbour Engineering Company (“CHEC”) allegedly paid a $2.7M bribe in exchange for being favored in a tender to win a $95M Sucre-Yamparáez road widening contract. Bolivian prosecutors are carrying out the investigation, having raided the Bolivian Highway Authority (“ABC”) in September 2022 following allegations that officials accepted the bribes from CHEC. CHEC conducted an internal investigation, finding that employees violated the company code of ethics and disciplinary rules, leading to the dismissal of key employees within management.
Multiple individuals are in custody including the former ABC officials involved in the award of the project. Bolivian authorities have investigated other contracts awarded to CHEC, with some noting that the company could be barred from future tenders. CHEC also has won contracts in Colombia ($3.1B), Chile ($140M), and Panama ($1.5B). It is expected that governments across Latin America will review CHEC tenders and award guidelines. Approximately $6B in contracts were awarded to Chinese firms in Bolivia from 2008-2019
In September 2022, Sinohydro, a Chinese state-owned hydropower company, had its offices searched as part of a bribery investigation targeting former government officials. Sinohydro completed a $2.5b hydroelectric plant in 2016, the largest hydroelectric plant ever built by a Chinese company. The project was the Coca Codo Sinclair hydroelectric project. The investigation is part of the “Ina Papers case,” which is a probe into former high ranking government officials stemming from a leaked cache of documents. The documents allegedly contained evidence that Sinohydro paid bribes to friends of government officials via offshore companies in Panama to win the contract for the Coca Codo Sinclair hydroelectric project. The bribes had allegedly been delivered by Sinohydro throughout the life of the project and were channeled through third parties.
In 2018, the New York Times noted that most Ecuadorian government officials involved in the project are in jail or are being investigated for bribery. The Ecuadorian government sued Sinohydro in 2021 for shoddy work on the dam, resulting in harm to the environment and economy. The dam reportedly has 7,000 cracks, is causing erosion along the Coca River, and is running below its promised capacity. Sinohydro allegedly did not conduct a vulnerability or risk study on the project, and ignored findings from a 1992 feasibility study. The U.S. Army Corps of Engineers is working to mitigate the effects of erosion.
In 2018, a court found Chinese companies paid at least $100M in bribes to Venezuelan officials to secure a contract for a rice production facility that was awarded to China’s CAMC Engineering. Since 2007, China invested more than $50B in Venezuela, mostly in the form of oil-for-loan agreements. Many development projects have been slowed due to corruption, poor management, and lack of supervision according to those familiar with the projects.
In 2014, HKND obtained authorization to construct a $100B canal across the country. The canal is expected to challenge the Panama Canal and transform the shipping industry. The project involved highly questionable non-transparent relationships between Nicaragua’s ruling family and the Chinese telecom billionaire owner of HKND. The U.S. Embassy expressed concerns over a lack of transparency and the potential involvement of Chinese government officials. The U.S. embassy has asked for disclosure of environmental studies, tenders, and other project details.
Chinese companies are also reportedly pursuing deep water ports in Jamaica, Dominican Republic, El Salvador, Argentina, and elsewhere, and have an increasing presence near the Panama Canal and Colon Free Trade Zone. In Colombia, Chinese companies have been awarded contracts across the spectrum of infrastructure projects, including the construction of ports, highways, mining operations, oil and gas pipelines, hydroelectric dams, solar farms, train lines, and airports – all under a cloud of secrecy around how China gained control over Colombia’s infrastructure.
Latin America's corruption history
To those familiar with the region, it may not be a large surprise to see corruption present within the aforementioned Chinese projects, as Latin America has a long track record of corruption issues. Several of the highest profile corruption scandals in the past decade have hit many Latin American countries, yielded some of the largest corruption penalties, and led to the arrests of key government personnel in multiple countries across the region. Further deteriorating the situation are the efforts of numerous countries within the region to intentionally unwind existing anti-corruption initiatives.
Several Latin American countries such as Venezuela, Haiti, Nicaragua, Honduras, and Guatemala, continue to be ranked by TI amongst the most corrupt countries in the world with little improvement in CPI score in the last five years. TI noted only Guyana and Paraguay had made noteworthy improvements in the fight against corruption in the past 10 years. “In countries like Brazil , Venezuela , El Salvador and Guatemala , governments used intimidation, defamation, fake news and direct attacks against civil society organisations, journalists and activists – including those fighting corruption – as a way to discredit and silence critics.”
Some of these countries have taken rather overt steps to counteract past anti-corruption agencies and individuals tasked with prosecuting crimes. For example, El Salvador, Guatemala, and Honduras have each recently disbanded agencies focused on corruption with El Salvador taking it a step further by recently opening an investigation into the prosecutors who had been involved in a corruption investigation of pandemic relief funds. Underpinning some of these efforts are political regimes and leaders who themselves have recently been tied to allegations of corruption. For example, a Guatemalan official was investigated by anti-corruption prosecutors over bribery allegations tied to a Russian mining company. In May 2022, the acting U.S. Secretary of State designated a high-level Guatemalan official in charge of prosecuting corruption within the country, as an individual with “Involvement in Significant Corruption and Consideration of Additional Designations,” as the official “repeatedly obstructed and undermined [U.S.] anticorruption investigations in Guatemala to protect the official’s political allies and gain undue political favor.”
Many of the examples above are within smaller Latin American countries and economies but a few of the higher profile corruption scandals and pending cases show the conduct is deeply ingrained in the region and has ensnarled some of the largest countries and economies in Latin America.
The largest corruption scandal to hit Latin America, and arguably the biggest and widest reaching corruption scandal in history, is Lava Jato, the Brazilian Car Wash case, which exposed a web of corruption across Latin America at the highest levels of the government. The case began in 2014 with a money laundering investigation, but quickly exploded when investigators found ties to an executive at Petroleo Brasileiro (Petrobras), a Brazilian state-owned oil company. Petrobras directors funneled money and luxury items (ranging from wine and jewelry to yachts and helicopters) to politicians and their political parties.
The case reached countries and companies around the world, uncovering more than $5B in illicit payments to government officials and company executives. This resulted in nearly 300 arrests and 278 convictions, including former presidents and family members, vice presidents, ministers, and other public officials in Antigua and Barbuda, Argentina, Bolivia, Brazil, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Mexico, Panama, Paraguay, Peru, and Venezuela. Notable companies involved in the scandal include Petrobras, Odebrecht, Corficolombiana, and Pemex.
Brazil shut down the task force responsible for investigating Lava Jato in February 2021 in a rather controversial move. Former government officials and executives from implicated companies continue to be charged in courts around the world.
Argentina’s Cuadernos (“Notebooks”) scandal resulted in dozens of arrests after physical notebooks, which detailed bribe payments between 2003 and 2015, were passed to a newspaper and later turned over to judicial authorities. A driver of a government official in the planning ministry, maintained the notebooks detailing the times, value, weight, and delivery addresses of bags of cash delivered around Buenos Aires. Reporters estimated the payments totaled $56M but some say it could have been nearly triple that amount. Several arrests included executives in construction and energy industries.
Beyond the Lava Jato and Notebooks scandals, Latin America currently has several ongoing high profile corruption cases involving the highest levels of government. High ranking government officials in Argentina and Peru have been charged and imprisoned as a result of the investigations; however, the cases remain open and are still pending the appeals processes.
US focus on corruption
While enforcement of bribery and corruption issues may vary depending on the country within Latin America, multinational organizations can still find themselves in the crosshairs of global regulators, particularly the United States, for improper activity taking place within Latin America. The Biden Administration has reinforced the need to fight corruption around the world, particularly in Latin America – as approximately 66% of DOJ enforcement actions from 2021 to 2022 were related to Latin America. In October 2021, the DOJ launched a tip line to help assist anti-corruption efforts in El Salvador, Guatemala, and Honduras. More recently, the U.S. has worked with many Latin American authorities in cross-border investigations and has focused developing relationships with investigators around the world.
Additional enforcement activity is likely on the horizon as the DOJ has recently subpoenaed several companies operating in the region. These include insurer Arthur Gallagher & Co related to its Ecuador operation and Millicom International Cellular SA related to its business in Guatemala and other Latin American countries amongst others.
Companies operating within Latin America should be mindful of these events as it appears that a ‘perfect storm’ of risk may be brewing within the region. As China continues its expansion within the area and the United States works to counter through investments of its own, the resulting business environment will likely be highly competitive. Companies may feel pressure to curry favor with decision makers by partnering with a Chinese company or sales agent to secure work. Such partnerships with these dynamics are amongst the highest risk of bribery and corruption.
With the stakes this high, companies in the region must ensure their compliance program is well designed and operating effectively for adequate protection. At a minimum, each compliance program should have three fundamental components in the prevention of bribery and corruption: risk assessment, third party due diligence, and risk-based monitoring.
A comprehensive and periodical risk assessment detailing each risk the company faces with an assigned score indicating the likelihood and potential impact will be a key driver of prevention. Risk assessments are one of the main factors the DOJ considers when determining the effectiveness of a compliance program and also gives the company insight into the areas which provide the greatest threat and require attention through the implementation of internal controls to mitigate risk.
While third party due diligence is certainly not a new concept, it remains a must have for any compliance program. Third parties remain the predominate culprit in bribery and corruption matters – all 10 FCPA enforcement actions in 2022 involved bribes facilitated through a third party. This continues a pervasive trend as approximately 86% of FCPA settlements over the past five years have involved the use of a third party. Companies must ensure they have contracts with each third party which clearly detail the services to be performed, reasonable compensation, and include compliance language and audit rights. These relationships not only need to be vetted upon engagement but also require ongoing monitoring through the engagement lifecycle.
Compliance monitoring has traditionally included reviewing activities as they occur or transactional detail shortly thereafter. Now, the DOJ expects compliance teams to leverage data analytics and technology as part of their risk monitoring efforts. The DOJ does not expect the “shiniest tool” but does want compliance teams to understand and have access to all data within a company and have a risk-based plan to leverage in spotting potential problems. As such, companies should consider what information may be available relevant to operations in Latin America and how it could be analyzed to identify risks and potential wrongdoing.
Even the best efforts in implementing a culture of compliance in Latin American operations will be challenged in the current economic and geopolitical environment. The next decade will be interesting to follow as China and the United States battle for regional influence. A safe assumption and result of this will assuredly be plenty of corruption enforcement activity so companies would be wise to invest in and enhance their compliance programs.
Drew Costello is a partner, Jordan Basich is an associate director and Brian Ross is an associate director at Forensic Risk Analysis forensicrisk.com
This article was originally published in the International in-House Counsel Journal