Optimists see opportunities; pessimists see risk. Your counsel should see both.

IMEC

In September 2023, France, Germany, India, Italy, the United Arab Emirates, the United States, and the European Union entered into a memorandum of understanding¹ (MOU) to establish IMEC. IMEC’s east corridor will connect India to the Arabian Gulf and its northern corridor will connect the Arabian Gulf to Europe. Beyond the MOU signatories, countries like Cyprus, Greece, Israel, Jordan, and Saudi Arabia, to name a few, are expected to participate.²

The participating governments agreed to build a cross-border rail network and a rail-to-ship transit network. Along the railway route, IMEC will lay cables for electricity and digital connectivity as well as pipeline for clean hydrogen transportation. Investment opportunities for construction, rail, telecom, shipping, logistics and energy companies will include building and operating the core IMEC infrastructure. Beyond this, IMEC is expected to ripple across most economic sectors in the regions it traverses, generating opportunities across the board.

Participating governments have historically also adopted, or are in the process of adopting and enforcing, anti-corruption, anti-money laundering, ESG, and trade sanctions and export control laws. Integrity risks that may run afoul of these laws are prevalent in many IMEC countries.

In this article, we first analyze these integrity risks as well as the enforcement priorities of jurisdictions that IMEC traverses; we then look at the enforcement priorities of other IMEC participating governments.

Integrity Risks and enforcement priorities

India

India slipped in the latest Transparency International Corruption Perceptions Index to a score of 39 out of 100 and a rank of 93 out of 180 countries. There is a general sentiment that perceived public-sector corruption is widespread.

Public-sector corruption aligns closely with a similar culture in the private sector. Large-ticket corruption schemes in India in the last decade have occurred in industries as diverse as energy, infrastructure, and pharmaceuticals. Smaller-scale private-sector investors, both local and international, have suffered losses from local corruption through a variety of ways. Examples include undisclosed conflicts of interest involving directors and employees, who may collude with vendors or suppliers that extract value from the investee company. Other forms of corruption include the unauthorized use of assets and funds, and the attendant fraud of books and accounts.

Investment in India is likely to intersect with government officials, and strong standards in the private sector mitigate risks that may persist in elements of the public sector. But such efforts can be hampered by cultural issues within businesses across these industries, where operations are tightly controlled by managers at the top of the local business whose behaviors might not be in line with company or global integrity norms. Employees that have spoken out have been marginalized and ostracized, and eventually left.

Importantly, the lack of substantive whistleblower legislation in India has resulted in a limited corporate emphasis on facilitating and protecting whistleblowing complaints. Retaliation within companies against whistleblowers is commonplace, complicating attempts to investigate potential misconduct.

In parallel, public-sector enforcement of white-collar crime has become far more proactive in India. Public-sector corporate investigations have generally focused on bribery of government officials and fraud. These investigations are led by several enforcement bodies, each with a different mandate, resulting in increasingly complex, overlapping investigations. There has also been an increasing focus on individuals, with a greater willingness to pierce the corporate veil than in other jurisdictions.

There are also active investigations by the U.S. Department of Justice (DOJ) in India: in life sciences, in the renewables space, and in the technology sector, which are largely connected to sectors touched by IMEC. With U.S. investment increasing with IMEC, the specter and nexus of the U.S. Foreign Corrupt Practices Act (FCPA) looms larger.

Two priorities confront foreign companies conducting business in India: to ensure compliance with local and global anti-corruption laws; and to protect the company’s own interests from the risks of potential corrupt actors in the local business environment. As India’s economy continues to grow, we expect to see greater evolution of India’s domestic anti-corruption laws, alongside enforcement by overseas regulators relating to business in India.

Middle East

Money laundering, corruption, and – increasingly nowadays – trade sanctions are typical integrity risks that business face in the Middle East. The region has traditionally been vulnerable to money laundering and corruption; this has included the real estate sector (which has been a safe haven for laundering cash), as well as with respect to tender processes for large infrastructure projects. The region also faces significant cybercrime risks. and As a frequent transit point for Russian-linked funds, trade sanctions present another integrity risk in the region.

That said, the enforcement landscape in the region is evolving. The UAE and Saudi Arabia have been at the forefront of developing their enforcement capabilities, but other jurisdictions across the Gulf Cooperation Council and North Africa have also been enacting legislation and establishing specialized regulatory and enforcement authorities.

The UAE, in particular, has shown a keen interest in being perceived as a safe and reliable jurisdiction for international business.³ This is evidenced by increased new investigations and the strengthening of regulatory bodies aimed at combating financial crimes. These efforts have resulted in the removal of the UAE from the Financial Action Task Force’s (FATF’s) ‘grey list’ – a significant endorsement of the regulatory environment in the UAE.

However, a significant challenge remains in the form of whistleblower reticence. Despite the adoption of some whistleblower protections, further work is required; potential whistleblowers may still prefer to report to more established regulators, for example in the U.S. and EU, where there is a longer history of protection and incentives. Resulting joint enforcement actions with international regulators would serve as a demonstration of the UAE’s commitment to enforcement and also amplify the risk of sanctions for multinational companies.

Southeastern Mediterranean and the Balkans

Favoritism and shadow ownership are concerning signs of procurement fraud, corruption, and conflicts of interest in Southeastern Mediterranean and the Balkans, IMEC’s gateway into Europe.

Procurement officials in the region often participate in procurement-related schemes, such as bid rigging and unauthorized bidding, and steer lucrative contracts to their “favorite” bidders (usually personal and family connections). Experience tailoring around the credentials of these bidders and their use as false tender agents, often without authorization, are not uncommon.

Shadow ownership -- indirect control of companies through intermediaries – is another tactic used to corrupt ends. The individuals in practice controlling and benefitting from the proceeds of a company are not the one’s listed in the company’s official documents. This concealment can be used for example to participate in procurement processes with multiple companies controlled by the same individual with seemingly competing bids or artificially inflate prices or in furtherance of bid rotation schemes. Sometimes, the shadow owners are government officials entrusted with decision-making authority corruptly directing public contracts to their own companies. Shadow owners can also use the companies under their control to market products manufactured by competitors, which may lead to loss of trade secrets and intellectual property, as well as raise antitrust concerns. Other times, shadow ownership is used to evade taxes, legitimize illicitly obtained wealth, or breach trade sanctions and export control regulations.

Although regulators in this region do not have a concrete track-record of domestic enforcement actions, they typically support investigations by their international counterparts, which may expose companies to liability in their home jurisdictions.

France

The fight against corruption and other integrity offenses, such as influence peddling, misappropriation of public funds, and favoritism has been a significant priority for France’s for the past several years. French companies and companies with French touch-points that plan to participate in IMEC-related projects should proactively assess and enhance their integrity programs to avoid criminal violations and regulatory fines, including to their management individually.

The Act of 9 December 2016 (“Sapin II Law”) introduced into French criminal law a new transactional procedure instrument, the Judicial Public Interest Agreement (“convention judiciaire d'intérêt public, CJIP”). The CJIP is comparable to the U.S. Deferred Prosecution Agreement, whereby a company under suspicion of integrity violations admits the facts and agrees to pay a public interest fine in return for the suspension of criminal prosecution. The cooperation of a company in the criminal investigation and voluntary self-reporting of the offenses to prosecutors are decisive factors, both in terms of the choice to use the CJIP procedure and as a factor reducing the amount of the public interest fine imposed.

The French Public Prosecutor may use the CJIP to resolve a criminal investigation for active and passive corruption or influence peddling, tax fraud, money laundering, or any related offences. CJIPs have been recently used in transnational corruption cases, involving foreign public officials, judges and international civil servants, in cooperation with foreign prosecution authorities, in the construction, rail, shipping, logistics, and telecom industries – all expected to significantly grow with the establishment of IMEC.

The Sapin II Law also imposed new obligations on private entities located in France to set up and implement procedures for preventing and detecting corruption within their group, including their foreign subsidiaries. The French Anti-Corruption Agency (AFA), created to implement these obligations, audits the quality and effectiveness of procedures for preventing and detecting corruption. The AFA can impose fines up to €200,000 on the relevant CEO and up to €1 million on the relevant company in case of inadequate measures, irrespective of any corrupt acts.

Finally, companies located in France are under a duty to set up a dedicated whistleblower system within their group and to afford protection to whistleblowers. While French law largely follows the EU Whistleblower Directive, it imposes stricter requirements. Under French law, no sanctions or retaliatory measures are permitted against the whistleblower for having filed the disclosure; and the whistleblower is not criminally liable for breaching a secret protected by law if the disclosure was necessary and proportionate to safeguard the interests concerned. Any form of retaliation against a whistleblower, including threats thereof, may be punished by a three-year prison sentence and a €45,000 fine.

Germany

In Germany, the introduction of the new Corporate Sustainability Due Diligence Directive (CSDDD) will necessitate amendments to the existing German Supply Chain Due Diligence Act (SCDDA). The scope of regulation is set to expand significantly, requiring companies to exercise due diligence to prevent adverse human rights and environmental impact throughout their entire supply chain, which is typically intricate and broad in the sectors that are set to build IMEC’s infrastructure. The range of potential sanctions for violations of the SCDDA will increase to up to five percent of a company’s net annual revenue.

Heightened attention is also being directed towards combating money laundering, particularly with the establishment of the EU Anti-Money Laundering Authority (AMLA) headquarters in Frankfurt. AMLA is scheduled to commence operations in 2025 with an estimated workforce of approximately 500 employees. This initiative was prompted by the escalating incidence of money laundering, particularly in the context of terrorism financing. For the first time, a single authority will lead anti-money laundering supervision in the EU. This initiative aims to foster collaboration with national authorities and enhance cooperation among financial intelligence units, with a focus on the "follow the money" approach, which deviates from previous strategies.

Finally, with the ongoing war in Ukraine, efforts to enforce EU sanctions, particularly those targeting Russia, have significantly intensified. Both the German Federal Prosecutor General and local Public Prosecutor’s Offices have launched criminal investigations into prohibited transactions, which present a substantial risk in IMEC jurisdictions. In February 2024, there was a substantial expansion of the sanctions list, resulting in over 2,000 listings. The focus has primarily been on the military and defense sector, with a concerted effort to thwart sanctions evasion.

Italy

Corruption has historically been a challenge for companies and businesses operating within the Italian market across a wide range of industries, including those likely to be involved in IMEC. Recent initiatives, however, indicate a notable shift towards enhanced transparency and compliance. The latest Transparency International Corruption Perceptions Indices highlight Italy’s substantial progress over the past decade in the fight against corruption.

A key role in this anti-corruption drive has been assigned to the National Anti-Corruption Authority (ANAC), established to actively monitor integrity risks, particularly those related to corruption, in both public and private entities. ANAC was recently designated as the supervisory authority for the Italian Whistleblowing Law, a legislation that ANAC has advocated for since the EU Whistleblower Directive was enacted. Reflecting an increasing emphasis on integrity and transparency, the Italian Whistleblowing Law applies to a broader range of companies and expands the scope of potential whistleblowers and types of reportable misconduct as compared to other EU Member States. For example, whistleblowers may report breaches of the compliance programs adopted under Italian law on corporate quasi-criminal liability (“Decree 231”) and on any form of corruption, including private and foreign bribery⁴.

Although the Organization for Economic Co-operation and Development’s (OECD’s) Working Group on Bribery in International Business Transactions recently acknowledged Italy’s efforts in tackling corruption, it also highlighted several regulatory and enforcement criticalities that would hinder progress in effectively combatting foreign bribery. As a result, the OECD Working Group recommended that Italy develop a comprehensive national strategy to combat international corruption and to encourage companies to adopt compliance programs under Decree 231. Italy is expected to update OECD on its enforcement actions related to foreign bribery in line with these recommendations by October 2024.

Besides corruption, local regulators and enforcement authorities have recently intensified their focus on offenses such as bid-rigging, labor exploitation, and tax crimes. The growing recurrence of these offenses has been addressed through various means, including (i) their introduction among crimes that – when committed in the company’s interest or for its benefit – may trigger corporate liability under Decree 231, and (ii) prosecution efforts across various Italian regions and industry sectors, with a particular focus on logistics.

Stakeholders involved in initiatives related to IMEC should consider the above risks and trends when engaging with Italian companies. They should also be aware of the increasing emphasis on compliance within the country's regulatory landscape. In this context, it is worth mentioning that foreign companies may face liability under Decree 231 and that, in some cases, judges have required foreign companies' compliance programs to adhere to Italian standards to reduce their exposure to sanctions.

United States

U.S. government agencies such as the DOJ, the Securities and Exchange Commission (SEC), the Departments of Commerce (DOC), and the Department of Treasury (TREAS), are among the world’s most active enforcement agencies of laws and regulations underpinning most facets of corporate conduct. An investor in an IMEC project is likely to be exposed to the U.S. financial and legal system and potentially subject to the jurisdiction of U.S. enforcement agencies.

Most U.S. agencies favor an expansive interpretation of U.S. laws to bolster their extraterritorial reach and bring enforcement action not only against companies and individuals in the U.S., but also against those with indirect U.S. touchpoints. U.S. regulators have also issued extensive guidance on the type of conduct, voluntary disclosure, and cooperation that they expect from good corporate citizens, including U.S. and non-U.S. persons.⁵ And when companies do not comply, U.S. agencies may offer hefty rewards to whistleblowers of corporate misconduct.⁶

The DOJ and the SEC frequently bring enforcement against companies and individuals for bribery of foreign officials under the FCPA, which criminalizes active bribery overseas. The FCPA provisions are interpreted broadly to encompass the forms of misconduct discussed above.

Recently, the Foreign Extortion Prevention Act (FEPA) became law, enabling the DOJ to also prosecute foreign government officials involved in corruption, thereby criminalizing passive bribery abroad.⁷ Notably in the context of large scale infrastructure projects like IMEC, persons acting on behalf of foreign governments fall within the scope of FEPA. This is significant because often governments engage firms to act on their behalf when governments lack the required expertise. A private company employee tasked with overseeing an IMEC project on behalf of a government could therefore theoretically fall under FEPA’s scope.

Extensive interactions with government officials are expected at the countries that IMEC traverses increasing the risk of bribery that companies participating in the project should assess and mitigate. The participation of many enterprises owned by governments further exacerbates this risk.

The DOJ, the DOC, and TREAS’s Office of Foreign Assets Control (OFAC) have also been increasingly enforcing trade sanctions and export control laws and regulations, frequently targeting non-U.S. persons. Several of IMEC’s countries have frequently been cited as intermediary stops for unscrupulous actors who seek to do business with entities and countries covered by U.S. trade sanctions and export controls prohibitions.

Conclusion

Companies that seek opportunities across IMEC should adopt tried and tested measures to prevent, detect, investigate, and remediate integrity risks. This can minimize the risk of enforcement locally, internationally, and extraterritorially.

Engaging counsel who understands the local risks and their interplay with international legal and compliance requirements can effectively minimize the risk of enforcement at home and abroad. Your counsel should:

• think locally to identify and mitigate risks with tried and tested solutions;
• benchmark globally to ensure compliance with international legal and compliance standards throughout the investment cycle; and
• reflect regularly on enforcement trends as well as the evolution of your business and product lines and supply chain.

Hogan Lovells has a deep bench of lawyers experienced in proactively handling integrity risks in IMEC’s regions and in countries that extraterritorially enforcing laws and regulations throughout the investment cycle.

Authored by Stephanie Yonekura, Randall Walker, Nick Williams, Jean-Lou Salha, Christelle Coslin, Olaf Schneider, Philip Matthey, Alessandro Borrello, Khushaal Ved, Han Liang Lie, Gernot Dederichs, and Nikolaos Doukellis.