Chinese Investment In Latin America Raises Corruption Risks

As featured in Law360

Over the past 20 years, Chinese investment in Latin America has risen significantly.

Industries including energy, infrastructure, telecommunications and health care have been the primary recipients for Chinese investment.

China's foreign direct investment, or FDI, the Belt and Road Initiative, or BRI, and the COVID-19 pandemic response have yielded a dramatic increase in their influence on the region.

While the U.S. relationship with Latin America has been paramount to the region's economic initiatives and growth in the past, this dynamic is changing.

China's strategic interest in the region can be seen with its FDI in Latin America just last year amounting to somewhere between $7 billion and $10 billion, which was on par with or exceeded China's investments in the U.S. and Europe.

Prior to FDI funding, China used lending to expand its relationships and influence in the region.

Between 2005 and 2020, the China Development Bank and Export Import Bank of China have extended a total of $138 billion in loans to various countries in Latin America and the Caribbean, attached with requirements to pay back amounts owed with commodities such as oil, through the purchase of Chinese products, or by providing access to industries such as telecommunications and energy.

The BRI was introduced in 2013 as a project to originally link Asia and Europe, but was extended to Latin America more recently with agreements or active projects in 21 out of 24 Latin American and Caribbean countries as of December 2022.

Additionally, it was mostly China — not the U.S. — that stepped up and provided needed medical personnel, protective equipment, devices and an estimated 400 million vaccines in response to the COVID-19 pandemic.

The collective results of these efforts accelerated trade and economic alliances between China and Latin America. China has now become South America's largest trading partner, growing 26-fold from $12 billion in 2000 to $315 billion in 2020.

Inevitably with economic gains comes equivalent gains in influence and geopolitics. It's fair to say that China's strategic moves are paying off as some Latin American countries have pivoted decisions to favor its political agenda.

Recent decisions made by several countries over the past few years reflect an alignment with China, such as dropping recognition of Taiwan as a sovereign country.

This has not gone unnoticed in Washington, as recent actions suggest an interest in maintaining strong relationships throughout South America.

In June 2022, the U.S. announced the Americas Partnership for Economic Prosperity — a framework to deepen economic ties within Latin America.

Key tenets of APEP include increasing levels of private investment, enhancing supply chains, broadening anti-corruption efforts, making infrastructure investments, promoting clean energy initiatives, and bolstering trade between the parties.

The strong U.S. push for wide APEP adoption has been unsuccessful thus far, with only 10 Latin American countries agreeing to participate.

Despite this, the U.S. remains strategically important to Latin America given its close proximity, but China undoubtedly has loosened the grip on its preferred partner status and regional influence.

Another offshoot of this shifting landscape in Latin America relates to the impacts of corruption and fraud risk. The wave of new money from China has arguably increased an already elevated risk profile for companies operating in the region.

Compliance professionals would be wise to take note as Chinese business carries a greater risk of bribery and corruption when compared to the U.S.

In fact, China's ranking in Transparency International's annual Corruption Perception Index has fluctuated over the past 20 years, ranking 59 in 2002, 80 in 2012, and 65 in 2022. By comparison, the U.S. ranked 16, 19 and 24, respectively.

Additionally, U.S. Foreign Corrupt Practices Act enforcement activity continues to suggest that bribery and corruption remain a problem for China.

According to the FCPA Clearinghouse — a collaboration between Stanford Law School and Sullivan & Cromwell LLP — there have been 43 enforcement actions involving an improper payment in China since 2014, well ahead of every other country, as Brazil is second with 24.

Allegations of Corruption Involving Chinese Companies in Latin America

There have been several issues involving Chinese companies who have contracts in Latin America.

U.S. law enforcement is not directly involved but certainly keeping a close eye, and companies in the region should follow suit to understand the risks emerging from such cases.

Bolivia

China Harbour Engineering Company Ltd. allegedly paid a $2.7 million bribe in exchange for being favored in a bid to win a $95 million Sucre-Yamparáez road-widening contract.

The Bolivian prosecutors have actively investigated the alleged misconduct since September 2022, with several arrests already made, including of a Bolivian highway authority official.

Ecuador

In September 2022, Sinohydro Corp., a Chinese state-owned hydropower company, had its offices searched as part of an Ecuadorian bribery investigation targeting former government officials.

Sinohydro completed a multibillion-dollar hydroelectric plant in 2016: Coca Codo Sinclair, the largest hydroelectric project in Ecuador.

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.

Venezuela

In 2018, an Andorran high court found Chinese companies paid at least $100 million in bribes to Venezuelan officials to secure a contract for a rice production facility that was awarded to China's CAMC Engineering Co. Ltd.

Since 2007, China has invested more than $50 billion 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.

The Angola Model

China reportedly pushed the resource-for-infrastructure investment arrangement at scale in Latin America and Africa from the early 2000s to 2020.

This approach, known as the Angola model, has helped China build influence in the developing world and create opportunities for Chinese contractors.

The Angola model's ties to bribery and corruption were explored in a recent Wall Street Journal article titled "Court Papers Open Rare Window Into Role of Graft in China's Overseas Lending."

The article details a bribery and kickback scheme involving Dai Chunning, a former Export Import Bank of China executive; Sinohydro, mentioned in a separate Ecuador scheme above; a few Hong Kong businessmen; and a variety of infrastructure projects in Angola in the early 2000s.

In fairness, China has made strides to address corruption during Chinese President Xi Jinping's leadership, including convicting Chunning.

The extent of historical corruption cleanup underway or needed within China is largely unknown due to its censorship and tight controls of the media.

Whether these initiatives will have a meaningful impact going forward is also unknown and will be extremely difficult to quantify given these dynamics.

Corruption History in Latin America

Latin America has a long history of corruption issues. In the past decade, political instability and frequent turnover of leadership has unfortunately been more of the norm than not.

Several recent administrations have been plagued with corruption scandals leading to removal from power, such as Peru and Bolivia, or prolonged corruption trials after losing elections.

Some of the trials have resulted in convictions, while others went unproven and mostly served as a political weapon for the other party's electoral gains.

With the lack of consistency in leadership, anti-corruption efforts are often stymied and ineffective.

In general, smaller economies in Latin America, such as Venezuela, El Salvador, Nicaragua, Honduras and Guatemala, struggle the most with containing corruption.

However, larger economies are not immune, as represented by the so-called notebook scandal in Argentina and Lava Jato in Brazil.

Lava Jato, also known as Operation Car Wash, was the largest corruption scandal to hit Latin America, and arguably the biggest and widest reaching corruption scandal in history. The scandal exposed corruption across Latin America at the highest levels of the government.

The case began in 2014 with a money laundering investigation, but quickly exploded to uncover a web of corruption at Petroleo Brasileiro SA, or 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.

In the midst of this turmoil, Latin America has made some notable gains in corruption enforcement by establishing multilateral treaties and financial intelligence units, as well as a propensity for international enforcement cooperation in Brazil and, more recently, Ecuador.

From the U.S. enforcement perspective, the Biden administration has been aggressive in the

fight against corruption in Latin America, both in words and actions, with approximately 66% of enforcement actions coming out of the region from 2021 to 2022.

Some of the notable 2022 settlements included Glencore PLC and Stericycle Inc.Glencore settled with the U.S. Department of Justice in May 2022 for $1.1 billion over bribes paid to government officials in various countries, including Brazil and Venezuela and several other countries in Africa.

In April 2022, Stericycle paid over $84 million to resolve coordinated parallel investigations by U.S. and Brazilian authorities related to bribery of foreign officials in Brazil, Mexico and Argentina.

How Companies Can Mitigate the Risk of Bribery and Corruption

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 U.S. 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 third parties are among the highest risk of bribery and corruption.

In fact, third parties remain the predominant culprit in U.S. bribery and corruption cases, with nine of the 10 FCPA enforcement matters initiated in 2022 involving bribes facilitated through a third party.

This continues a pervasive trend as approximately 85% of FCPA settlements over the past five years have involved the use of a third party.

With the stakes this high, chief compliance officers overseeing Latin America operations —particularly those from U.S. multinational companies — must be certain their compliance program is well designed and operating effectively for adequate protection.

At a minimum, each compliance program needs three fundamental components in the prevention of bribery and corruption: (1) risk assessment, (2) third-party due diligence and (3) 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. They also give the company insight into the areas that 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, companies must ensure they have contracts with each third party that clearly detail the services to be performed, provide for 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 life cycle.

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.

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 America will be challenged in the current economic and geopolitical environment.

The next decade will be interesting to follow as China and the U.S. battle for regional influence. A safe assumption is that the result will assuredly include plenty of corruption enforcement activity, so companies would be wise to bolster their compliance programs.