Corruption

(This Note concerns corruption in relation to the subject-matter of arbitration.  Corruption of arbitrators or of factual and expert witnesses in arbitration proceedings are not within the scope of this Note.)

Originating from the Latin term “corruptio”, corruption is an “illegal, bad, or dishonest behaviour.”¹ International anti-corruption instruments² seldom define corruption or define it by reference to prohibited corrupt practices. For instance, the African Union Convention on Preventing and Combating Corruption defines “corruption” as “the acts and practices including related offences proscribed in this Convention.”³ Arbitral tribunals often follow the same approach or refer to local law prohibiting relevant corrupt practices.⁴ The following practices are often cited as recognized forms of corruption: bribery in the public and private sectors, money laundering, embezzlement, misappropriation or other diversion of property by a public official, obstruction of justice, trading in influence, abuse of functions, illicit enrichment, embezzlement of property in the private sector, false accounting and auditing, and concealment of property resulting from corruption.⁵

Although there appears to be a broad consensus on criminalizing certain forms of corruption, including bribery,⁶ certain other conduct may not be universally criminalized. For example, the use of intermediary agreements in relation to public procurement is prohibited in certain States⁷ but not in others.⁸ An intermediary agreement, for instance, may be valid under the lex contractus, but null and void pursuant to the law of the place of the agreement’s performance.⁹

Generally, tribunals have relied on international law,¹⁰ national law, and the parties’ agreements containing anti-corruption clauses when ruling on corruption allegations, depending on the applicable law rules applying to the dispute. However, they have refused to take into consideration local customs which render corruption legal.¹¹

A number of investment tribunals¹² and commentators have increasingly classified corruption as contrary to and in violation of international and transnational public policy.¹³

The tribunal in World Duty Free v. Kenya was faced with the question whether a transnational public policy against bribery existed and how this principle could affect the proceedings. The tribunal used the term “international public policy” to signify “an international consensus as to universal standards and accepted norms of conduct that must be applied in all fora,” what is often referred to as transnational public policy.¹⁴ The tribunal concluded that “bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy”.¹⁵ The tribunal noted that as far as public policy is concerned, the law protects not the litigating parties but the public, i.e. the mass of tax-payers and other citizens.¹⁶ 

Some tribunals have even decided that where new evidence has been introduced, international public policy requires tribunals to rule on allegations of corruption even when they have already been addressed by another tribunal, despite the principle of res judicata.¹⁷ Moreover, a tribunal which has already found itself competent, is bound to re-examine its jurisdiction, in light of new evidence of corruption.¹⁸

In addition, in the landmark ICC Case No. 1110, the arbitrator Gunnar Lagergren ruled that an agreement whose object was the payment of a bribe to obtain a public contract from the Argentine government was contrary to French and Argentine law. He found that agreements in serious breach of good morals or international public policy are null and void and thus cannot be performed.¹⁹ In a series of decisions, French courts have also examined the merits of arbitral awards whose enforcement had been challenged on corruption grounds.²⁰ For example, in SA Alstom Transport SA and Société Alstom Network UK Ltd v. Société Alexander Brothers Ltd (ABL), the French Court of Appeal found that the enforcement of an ICC award rendered in Switzerland awarding ABL payment of bribes based on intermediary agreements concluded between Alstom and ABL to secure public contracts in China was contrary to international public policy.²¹ A similar decision was reached in Sorelec v. Libya.²² Other jurisdictions follow a similar pattern of setting aside arbitral awards on international public policy grounds because of corruption.²³ See further Transnational public policy, Section II.B.

According to arbitral practice, investment must be made or acquired in good faith in order to receive investment treaty protection.²⁴ In Hamester v. Ghana, the tribunal reasoned that “[a]n investment will not be protected if it has been created in violation of national or international principles of good faith; by way of corruption, fraud, or deceitful conduct […],"²⁵ while the tribunal in SAUR v. Argentina considered that the purpose of the system of investment arbitration is to protect only legitimate and bona fide investments.²⁶ Additionally, tribunals have weighed the parties’ good faith against the public interest to fight corruption.  In World Duty Free v. Kenya, the arbitral tribunal held that Kenya had not lost its right to seek annulment of the transaction because the corrupt acts of its President were not attributable to Kenya, finding that the investor’s claims for damages were contrary to international and national public policy pursuant to Kenyan and English law.²⁷ See further Good faith and Unclean hands. 

The burden of proof generally lies with the party alleging corruption.²⁸ The same rule applies to corruption-related defences, including jurisdictional objections.²⁹ Although obtaining direct evidence to prove corruption is very difficult,³⁰ shifting the burden of proof in corruption cases is controversial. Some tribunals have posited that shifting the burden of proof could be possible in certain conditions³¹ while others have refused.³²

Rather, arbitral tribunals have relied on indirect or circumstantial evidence of corruption.³³ The following signals may be considered “red flags”: unusual payment modalities (cash payment, bank transfers to third parties), corporate structures (use of intermediary companies and off-shore companies), as well as disproportionate intermediary fees, the absence of a compliance programme, internal audit or management of risks, or even the absence of due diligence in selecting subcontractors or agents, etc.³⁴ However, tribunals are reluctant to take into consideration the general argument that a State is generally known as having corruption issues³⁵ and agree that mere unsubstantiated insinuations of corruption should be disregarded.³⁶

National courts in annulment and enforcement proceedings have also relied on red flags of corruption, including disproportionate intermediary fees, unusual speed of the bidding process, use of shell company with no previous activity and its suspicious cash flows, investigation by national, foreign authorities, and Interpol, irregular public procurement process, conflicts of interest by external auditor, imposition of fines due to failure to implement anti-money laundering measures, the volume of bank transactions surpassing a country’s GDP.³⁷

In some cases, investment tribunals, conscious of the seriousness of corruption offenses, have on their own initiative examined alleged acts of bribery and corruption without being restricted by specific allegations of one the parties³⁸ as provided by Article 43 of the ICSID Convention and the ICSID Arbitration Rules.³⁹ For instance, in Infinito v. Costa Rica the tribunal held that it had ex officio powers to “engage in its own inquiry on the basis of the evidence in the record” under the 2006 ICSID Arbitration Rule 41(2).⁴⁰

Investment tribunals have also drawn adverse inferences from an impugned party’s failure without sufficient justification to provide evidence requested by the tribunal.⁴¹ However, commentators warn that the tribunal must be cautious before drawing any adverse inference and that such inference should only be drawn if it tips the preponderance of evidence in favour of the existence of corruption.⁴²

As to commercial arbitral tribunals, in the ICC Case No. 8891, an intermediary did not submit sufficient evidence on the activities of the consultants it used, whereas in the ICC Case No. 6497, an intermediary had initially refused to produce bank statements showing transfers to a third party. The tribunals drew relevant adverse inferences as a consequence of these failures.⁴³

Several tribunals have applied a balance of probabilities (or preponderance of evidence)⁴⁴ standard of proof with caution, often requiring robust evidence of corruption.⁴⁵ Some tribunals applied a “high[tened]” standard of proof for allegations of corruption or required “clear and convincing” evidence of corruption.⁴⁶ Fewer tribunals have applied a criminal law standard of proof “beyond reasonable doubt."⁴⁷ Finally, others have adopted a less-formalistic approach and chose to refrain from applying a specific standard of proof.⁴⁸

Generally, tribunals have considered that the party alleging corruption must prove a causal link between the corruption and the investment.⁴⁹

In contract-based arbitration, tribunals may find that they lack jurisdiction when the arbitration agreement was procured by corruption.⁵⁰ However where the arbitration clause itself is not a product of corruption, allegations of bad faith have been found to be a question for the merits.⁵¹

In arbitrations based on treaties with an investment legality requirement (e.g. that the investment be made in accordance with host State’s law) a finding of corruption may lead to the tribunal dismissing the claims for lack of jurisdiction.⁵² In Metaltech  v. Uzbekistan, for instance, the tribunal found itself without jurisdiction as corruption placed the investment outside the protection of the BIT. It reasoned that corruption existed “to the extent sufficient to violate Uzbekistan law in connection with the establishment of the Claimant’s investment in Uzbekistan."⁵³

In relation to the jurisdictional implications of corruption, some tribunals have distinguished illegal acts taken in the performance of an investment from those taken in the establishment of the investment, finding that only the latter barred jurisdiction.⁵⁴ Finally, some tribunals, relying on the international ordre public, have ruled that corruption should lead to loss of treaty protection, even in the absence of an express legality requirement.⁵⁵ See further Legality of investment, Sections IV and VI.

To illustrate recent treaty-making practice, Articles 17.2 and 17.3 of the Morocco-Nigeria BIT (2016) set forth the investors’ obligation not to engage in and not to be complicit in corrupt practices; a breach of which obligation is deemed “a breach of the domestic law of the Host State Party concerning the establishment and operation of an investment” under Article 17.4. This expressly links the investors’ obligation to the ratione materiae jurisdictional requirement set forth in Article 1 of this BIT defining “investment” as “an enterprise established, acquired, expanded or operated, in good faith, by an investor of the other State in accordance with the laws” of the host State.⁵⁶ The Morocco’s Model BIT (2019) expressly provides in Article 19.4 that a host State can raise as a jurisdictional objection a breach of Articles 19.1 and 19.2 on the prohibition of corrupt practices.⁵⁷

A finding of corruption could also be fatal to the claims as regards to their admissibility⁵⁸ and merits,⁵⁹ as a matter of international public policy.⁶⁰ In Al Warraq v. Indonesia, for instance, the tribunal found that allegations of criminal conduct, which included corruption and money laundering were not questions of jurisdiction but of the merits phase.⁶¹ Proven instances of corruption may have implications for both parties, including award of costs or damages against the implicated State⁶² and finding of a breach under the relevant treaty.⁶³ On the other hand, unsubstantiated allegations of corruption by a party may lead to consequences in terms of costs allocation.⁶⁴

In addition, some international tribunals have reasoned that if proven, corruption would constitute a grave violation of the fair and equitable standard.⁶⁵ The tribunal in EDF v. Romania noted that “a request for a bribe by a State agency is a violation of the fair and equitable treatment obligation owed to the Claimant pursuant to the BIT” and that “exercising a State’s discretion on the basis of corruption is a […] fundamental breach of transparency and legitimate expectations."⁶⁶ Corruption may also impact the legitimacy of an investor's expectations.⁶⁷

Born, G.B., International Commercial Arbitration, Wolters Kluwer Law & Business, Second ed., 2014

de Fontmichel, A.C., L’arbitre, le juge et les pratiques illicites du commerce international, LGDJ, 2004

Hwang, M., Lim, K., Corruption in Arbitration — Law and Reality

Khvalei, V., Using Red Flags to Prevent Arbitration from Becoming a Safe Harbour for Contracts that Disguise Corruption, in Special ICC Supplement: Tackling Corruption In Arbitration, 2013, pp. 15 et seq 

Lamm, C.B., Pham, H.T., and Moloo, R., Fraud and Corruption in International Arbitration, in M.A. Fernandez-Ballesteros and David Arias, Liber Amicorum Bernardo Cremades, pp. 699 et seq

Llamzon, A. and  Sinclair, A.C., Investor Wrongdoing in Investment Arbitration: Standards Governing Issues of Corruption, Fraud, Misrepresentation and Other Investor Misconduct, in Albert Jan Van den Berg (ed.), Legitimacy: Myths, Realities, Challenges, ICCA Congress Series, Volume 18, pp. 451 et seq 

Lalive, P., Transnational (or Truly International) Public Policy and International Arbitration, in Pieter Sanders (ed.), Comparative Arbitration Practice and Public Policy in Arbitration, ICCA Congress Series, 1986 New York Volume 3, pp. 258 et seq

Sayed, A., Corruption in International Trade and Commercial Arbitration, Kluwer, 2004;

Scherer, M., Circumstantial Evidence in Corruption Cases Before International Arbitral Tribunals, 1(3) Transnational Dispute Management, 2004;

Vincke, F., Recent Anti-Corruption Initiatives and their Impact on Arbitration, ICC Bulletin Special Supplement 2013: Tackling Corruption in Arbitration.

Besson S., Corruption and Arbitration - Impact of Criminal Investigations, in Baizeau D., Kreindler R., (eds.), Addressing Issues of Corruption in Commercial and Investment Arbitration, ICC Institute Dossier XIII, Paris, 2015, pp. 103-113

Bishop, D., Toward More Flexible Approach to the International Legal Consequences of Corruption, ICSID Review, Foreign Investment Law Journal, Vol. 25, No. 1, 2010, pp. 63-66

Cremades, B.M., Corruption and Investment Arbitration, in Aksen, G., Böckstiegel, K.H., Patocchi, P.M., Whitesell, A.M., (eds.), Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honor of Robert Briner, ICC Publication, 2005, pp. 203-220

Devendra, I.C., State Responsibility for Corruption in International Investment Arbitration, Journal of International Dispute Settlement, Vol. 10, 2019-2, pp. 248-287

Donoghue, J.E., The Corruption Trump in Investment Arbitration, ICSID Review, 2015, pp. 756-761

Gaillard, E., La corruption saisie par les arbitres du commerce international, Revue de l’arbitrage, 2017-3, pp. 805-838

Goldenbaum, D., L’arbitre international face à la corruption, Revue de règlement des différends de McGill, Vol. 2, 2015-2016, pp. 82-107

Haugeneder, F., Corruption in Investor-State Arbitration, Global Reflection on International Law, The Journal of World Investment & Trade, Vol. 10, No. 3, 2009, p. 323-339

Haugeneder, F. and Liebscher, C., Chapter V: Investment Arbitration – Corruption and Investment Arbitration: Substantive Standards and Proof, Australian Arbitration Yearbook, 2009, pp. 539-564

Kago, C., Milej, T., Mwaki, F., and Mwangi, S., International Public Policy, Corruption and Investor to State Arbitration, Manchester Journal of International Economic Law, Vol. 17, 2020-1, pp. 122-139

Khvalei V., Standards of Proof for Allegations of Corruption in International Arbitration, Dossier of the ICC Institute of World Business Law: Addressing Issues of Corruption in Commercial and Investment Arbitration, Chapter 4, 2015, pp. 60-67

Klaw, B.W., State Responsibility for Bribe Solicitation and Extorsion: Obligations, Obstacles and Opportunities, Berkeley Journal of International Law, Vol. 33, Issue 1, 2015, pp. 62-113

Kreindler, R.H., Legal Consequences of Corruption in International Investment Arbitration: An Old Challenge with New Answers, Transnational Dispute Management, Vol. 10, 2013-3

Kryvoi, Y., Economic Crimes in International Investment Law, International and comparative Law Quaterly, Vol. 67, Issue 3, 2018, pp. 577-605

Kulkarni, S.A., Enforcing Anti-Corruption Measures Through International Investment Arbitration, Transnational Dispute Management, Vol. 10, 2013-3

Laird, I.A., A Distinction without a Difference? An Examination of the Concepts of Admissibility and Jurisdiction in Salini v. Jordan and Methanex v. USA, in Weiler, T. (ed.), International Investment Law And Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, Cameron May, 2005, pp. 201-222

Lemaire, S., La preuve de la corruption, Revue de l’arbitrage, 2020-1, pp. 185-206

Llamzon, A., State Responsibility for Corruption: The Attribution Asymmetry in International Investment Arbitration, Transnational Dispute Management, Vol. 10, 2013-3

Menaker, A.J., The Determinative Impact of Fraud and Corruption on Investment Arbitrations, ICSID Review, Foreign Investment Law Journal, Vol. 25, Issue 1, 2010, pp. 67-75

Meshel, T., The Use and Misuse of the Corruption Defence in International Investment Arbitration, Journal of International Arbitration, Vol. 30, Issue 3, 2013, pp. 267-282

Miles, C.A., Corruption, Jurisdiction and Admissibility in International Investment Claims, Journal of International Dispute Settlement, Vol. 3, Issue 2, 2012, pp. 329-369

Newcombe, A., Investor Misconduct: Jurisdiction, admissibility or merits?, in Brown, C. and Miles, K. (eds.), Evolution in Investment Treaty Law and Arbitration, Cambridge University Press, 2011, pp. 187-200

Partasides, C., Proving Corruption in International Arbitration: A Balanced Standard for the Real World, ICSID Review – Foreign Investment Law Journal, Vol. 25, 2010-1, pp. 47–62

Pauwelyn, J., Different Means, Same End: The Contribution of Trade and Investment Treaties to Anti-Corruption Policy, in Rose-Ackerman, S. and Carrington, P. (eds.), Anticorruption Policy: Can International Actors Play a Constructive Role?, pp. 247-266, Durham, Carolina Academic Press, 2013

Pietrowski, R., Evidence in International Arbitration, Arbitration International, Vol. 22, Issue 3, Septembre 2006, pp. 373-410

Weiler, T., International Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, Cameron May, 2005

Weiss, D.H, Distorted Mirrors: Perceived Disagreements Obduscate the General Principle of Law that a Heightened Standard of Proof Applies to Corruption Allegations in Investment Arbitration, in Laird, I.A., Sabahi, B., Sourgens, F.G., Weiler, T.J. (eds.), Investment Treaty Arbitration and International Law, Vol. 9, 2016, pp. 291-314

Yackee, J.W., Investment Treaties and Investor Corruption: An Emergent Defense for Host States?, Virginia Journal of International Law, Forthcoming, University of Wisconsin Legal Studies Research Paper No. 1181, 2012, pp. 723-745

Competence Centre Arbitration and Crime and University of Basel and Basel Institute on Governance, Corruption and Money Laundering in International Arbitration - A Toolkit for Arbitrators, 2019.

Corruption Investor-State Arbitration? The Role of Corruption Allegations in IIA Proceedings?, Investment Claims Webinar, 20 February 2015