PFI Yearbook 2025

PROJECT FINANCE DEALS AND COMPLIANCE RISKS

Compliance risks can arise in myriad ways in project finance structures . By MARK HUNTING and RONEN LAZAROVITCH , partners at BRACEWELL ( UK ) LLP .
Most commonly , what starts as a legal and compliance risk for one entity , can “ leak ” into becoming a systemic financial or operational risk affecting the project entity or single purpose vehicle ( SPV ), the sponsors / shareholders of the project and , in some cases , the lenders to the project – although the position of lenders is more nuanced and is not expressly discussed in this article .
Compliance risks generally arise from financial crimes such as bribery , money laundering , financial and trade sanctions violations or fraud . This article considers how those risks can materialise and leak through project finance structures to infect project SPVs and sponsors , including through : ( 1 ) allegations of bribery , fraud and tax evasion under the failure to prevent model ; and ( 2 ) the new senior managers regime . We also consider below the practical steps that can be taken to limit such risks .
ALLEGATIONS In the UK and increasingly in other jurisdictions that follow similar models there are broad corporate offences under the failure to prevent model including : ( 1 ) failure to prevent bribery ; ( 2 ) failure to prevent tax evasion ; and ( 3 ) the incoming failure to prevent fraud offences . These apply on an extraterritorial basis , which means projects outside of the UK often come within the scope of such rules .
Each of these offences makes a company liable for the conduct of persons “ associated ” with it : employees , agents and service providers . Practically , this means where an associated person ( corporate or natural ) commits a fraud , bribery or tax evasion offence , the company will be automatically liable regardless as to whether it approved or knew of the misconduct .
This model can be particularly problematic in the project finance space because it can cause liability to pass between entities . Misconduct by construction contractors , construction managers , operations and management contractors , project management consultants and other contractors of the project SPV , as well as their subcontractors – collectively Contractors – to benefit the project , such as a bribe to obtain a necessary permit , can create liability for the project SPV , as well as the sponsors , and the public authority in public-private partnerships .
Such liability is expansive and can quickly become systemic to the entire project SPV and the sponsors . Enforcement authorities generally approach such misconduct on the basis that their jurisdiction is wide , and the tendency for corporates to settle mean this is rarely challenged in the courts . As such , enforcement authorities have argued that employees of Contractors are associated with not only the Contractor as their employer but also with the project SPV and the sponsors .
Sponsors and project SPVs have a defence where they can show that they had in place adequate procedures 1 to prevent the underlying criminal offence . There is guidance on what may amount to adequate procedures ; the essentials are that the parties should : conduct appropriate risk assessments ; have in place proportionate procedures to prevent the underlying offence ; conduct appropriate diligence ; train and communicate their expectations to staff and third parties ( as appropriate ); demonstrate leadership ; and continuously improve the programme .
It is worth noting that many of the risks identified above can occur , even where misconduct is only alleged and did not in fact take place .
In addition to the corporate offences , there are also provisions that make directors automatically liable for the misconduct of the company in circumstances where they connive or acquiesce to the misconduct – this is a low standard in English law .
In this way , an investigation can expand to quickly cover a large proportion of entities and their directors involved , directly or indirectly , in a project . Even where an investigation can be limited in scope , there will be knock on implications :
• Such misconduct can lead to breaches of financial covenants and other funding issues , as well as fundamental breaches of contract that are capable of bringing down a project finance structure .
• Any authority in a public-private partnership is likely to be concerned about such misconduct and may seek to remove parties from having any further involvement in the project and / or recover any assumed or actual losses .
• Managing such investigations is expensive , and can require significant external assistance from lawyers , accountants and other service providers .
• Operationally , such investigations are likely to slow , stop or distract from the project resulting in commercial risk for the project .
• Parties convicted of bribery and some other offences may be disbarred from being able to bid for government contracts , or access funds from international organisations such as the World Bank .
• Other parties in the structure may bring civil actions to protect their interests . Such actions are expensive in themselves , but also complicate the strategy needed to deal with criminal enforcement actions .
It is worth noting that many of the risks identified above can occur , even where misconduct is only alleged and did not in fact take place . Scrutiny from an enforcement authority is generally intense and can take years to resolve . Much of the punishment and risk occurs during the investigation , rather than after any prosecution or conviction .
40 PFI Yearbook 2025