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Morrison & Foerster Discusses the Foreign Corruption Risks of Electric Vehicle Production

The Biden-Harris administration has been keenly focused on mitigating climate risk, which has resulted in several executive and legislative actions promoting the use of electric vehicles (EVs), with a stated goal of having 50% of all new vehicles sold be EVs by 2030.  Some notable actions the administration has taken in pursuit of this goal are providing a $7,500 tax credit for the purchase of a qualified EV and investing over $25 billion in the U.S. EV charging network, in conjunction with the private sector.  The push appears to be working, with the administration earlier this year touting quadrupled EV sales and a 70% increase in available charging ports.

While the federal government is incentivizing the purchase and production of EVs, automakers, especially those involved in the production of EV batteries, could be facing the wrong type of incentive: the incentive to pay bribes to obtain the raw materials used to power EVs.

EV Battery Production Requires Foreign-Sourced Raw Materials

Increasing the production of EVs inevitably requires increasing the production of EV batteries.  Several automakers have committed significant resources to the in-house production of EV batteries.  Producing EV batteries in-house will require automakers to develop new supply chains to source the key raw materials used in EV battery production: lithium and cobalt.

Today, most EVs use lithium-ion batteries, and the U.S. Geological Survey (USGS) reports that 87% of lithium end-use markets in 2023 were batteries (up from 74% in 2021).  The USGS also reports that consumption for batteries has increased significantly in recent years, specifically because rechargeable lithium batteries are used extensively in the growing market for EVs.  In 2023, the top lithium-producing countries were Australia, Chile, China, Argentina, Brazil, and Zimbabwe.  Because there is only one lithium production operation in the United States, domestic automakers will have to turn to international lithium operations to fulfill their requirements, as several already have.

Aside from lithium, cobalt is the other key raw material used in the production of EV batteries.  The USGS reports that, in 2023, the top cobalt-producing country was the Democratic Republic of the Congo (DRC), accounting for more than 70% of the world’s cobalt production.  As with lithium, U.S. production of cobalt is limited, requiring automakers to fulfill their cobalt requirements through international operations.  In 2021, Glencore, a global natural resource company, announced that it would fulfill the cobalt needs for batteries for a major EV automaker.  The cobalt is to be sourced from the DRC.

Automakers Could Face Anti-Bribery and Corruption Risks

Extractive industries have historically faced high corruption risk.  A report from the Organization for Economic Cooperation and Development (OECD) found that one in five cases of transnational bribery occurs in the extractive sector.  There is no reason to believe that extracting minerals such as lithium and cobalt, which are critical to EV battery performance, is immune to these risks.

Lithium producing countries vary in their corruption risk, from Australia, ranked 14 out of the 180 countries surveyed for their perceived public sector corruption by Transparency International (TI), to Zimbabwe, which ranked 149.  Cobalt presents a much clearer corruption risk.  Most cobalt is mined in the DRC, which ranked 162 on TI’s corruption perceptions index.  As the demand for these raw materials skyrockets, automakers will have to turn to higher-risk countries such as the DRC, Zimbabwe, China (TI rank 76), Argentina (TI rank 98), Brazil (TI rank 104), and Bolivia (TI rank 133), for their raw mineral supplies.

The reliance on foreign sources of lithium and cobalt presents a considerable Foreign Corrupt Practices Act (FCPA) enforcement risk.  U.S. enforcement agencies have historically focused on the extractive industry, and multiple companies in this space have resolved FCPA claims with the U.S. government in recent years.  In March 2023, for example, the U.S. Securities and Exchange Commission (SEC) announced that UK- and Australia-based mining company Rio Tinto had agreed to pay a $15 million civil penalty to resolve alleged violations of the FCPA.  According to SEC, a consultant working for Rio Tinto offered to pay a bribe of at least $822,000 to a Guinean government official in an effort to retain mining rights in the country.  In May 2022, Glencore agreed to pay over $1.1 billion to resolve the U.S. government’s investigations into violations of the FCPA and other laws.  The U.S. Department of Justice (DOJ) alleged that Glencore paid bribes to officials in, among other countries, the DRC.  In December 2016, Brazilian chemical company Braskem S.A. resolved allegations with U.S. authorities that it had bribed Brazilian officials to obtain raw materials at a more favorable price from the country’s national oil company for its products.

As automakers expand their appetite for raw materials for EV batteries, they must confront the risk that their employees or third parties could be tempted to engage in similar conduct: bribing a foreign official to assist in obtaining raw materials, such as lithium or cobalt, for their EV batteries.  Similarly, as automakers expand their in-house production of EV batteries, they need to be cautious about whom they are dealing with and how they are procuring mineral rights and raw materials in high-corruption-risk countries.

Mitigating Anti-Bribery and Corruption Risks

While all companies involved in EV battery production need to exercise FCPA diligence, automakers face a heightened risk, given their need to develop new raw material supply chains.  Automakers in the EV space should revisit and update their third-party due diligence procedures, and other compliance measures, to mitigate corruption risk in their battery supply chains.  The FCPA Resource Guide advises that “[b]usinesses may reduce the FCPA risks associated with third-party agents by implementing an effective compliance program, which includes due diligence of any prospective agents.”  DOJ’s Evaluation of Corporate Compliance Programs elaborates on DOJ’s expectations about the risk-based due diligence that firms should apply to their third-party relationships.  Factors such as industry and geographical region, both of which tend to be higher-risk for EV battery production, are specifically listed as warranting consideration when determining things such as third-party compensation and monitoring.

DOJ has repeatedly expressed the importance of tailoring compliance programs to the specific risks that a company faces.  For automakers focused on the burgeoning EV industry, this means increasing their focus on minimizing the corruption risk associated with foreign raw material procurement, especially in high-corruption-risk jurisdictions.

This post comes to us from Morrison & Foerster LLP. It is based on the firm’s memorandum, “The Foreign Corruption Risks of Electric Vehicle Production,” dated May 1, 2024, and available here. 

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