Corruption and other crimes in International Arbitration: What should Arbitrators do?

Overview

Maybe I should explain first, how I, as a professor of criminal law, came into contact with our topic: I have for 24 years chaired the OECD Working Group on Bribery, the committee dealing with transnational economic corruption. Over the last fifteen years, the topics of corruption and money laundering have become more and more prominent in the world of arbitration.

My involvement was primarily as an expert – in cases like IPOC[1], Fraport vs Philippines[2], Spentex vs Usbekistan[3] and several commercial arbitration cases. We realized that arbitrators tended to reinvent the rules every time they were confronted with the issues. In fact, early studies demonstrate that standards diverge considerably.

We then decided to draft a “Toolkit for Arbitrators”, finding ourselves confronted with issues of corruption and money laundering. We organised a sequence of workshops on the Toolkit and over one hundred lawyers, many of them well known arbitrators, participated in them. Elena Fedorova has translated the text with the cooperation of Vladimir Khvalei into Russian (electronic version to be found on baselgovernance.org or arbcrime.org[4]).

What are the challenges?

The approach to commercial corruption has changed dramatically over the last 20 to 30 years. Up until 2000 it was normal to allow tax deductibility of bribes and the new laws on transnational bribery, mirroring the US FCPA, only were enacted then. However, their application in many countries is still uncertain.

At the same time, the public policy changing worldwide obviously raised the pressure on arbitrators. Whereas the traditional approach in arbitration was that tribunals were service providers for parties and not guardians of public policy, the general attitude has changed. Of course there had been the occasional older case, where an arbitrator – take Lagergren (in 1963) – refused jurisdiction (or to be precise arbitrability) overall, though, cases where corruption was simply disregarded can be found up to recent times – take the Siemens/Zürich case, where parties agreed that they would not discuss the topic of corruption… (the legal basis to enable that was party autonomy).

Times are changing – World Duty Free vs Kenya was probably the decisive turning point where national law was read together with international public policy.

Of course some arbitrators are still uneasy with these issues – but ignoring corruption or money laundering (like in the Belokon case) is bad for your reputation, since it affects enforceability. 

Of course, even if there should be agreement that corruption and the like are to be taken into account by arbitrators, next to everything remains open.

The international standards are relatively straightforward, if we look at the UN, the OECD and maybe the COE Treaties.

More challenging is the question which national law is applicable:

• The chosen law?

• The lex fori? or,

•  most likely, the law of the criminal act (IPOC)?

We might end up having a very confusing mix of laws. Relying on a specific national law has the advantage of clarity. International law may offer a valid alternative. Increasingly, corruption and money laundering are discussed in the context of transnational public policy.

Considerable challenges are posed in the area of evidence.

A first issue would be, whether arbitrators are obliged to consider alleged or even simply suspected corruption indicae? Of course traditionally no arbitrator would go beyond the petita of parties. However, to prevent annulment or the refusal of enforcement, corruption can no longer be ignored. So, there is a tendency to support even a sua sponte investigation, where indicators point to corruption or money laundering.

Much is being written on the burden and the standard of proof. Whereas it may be relatively obvious that the party alleging corruption would have to prove it, the issue of standards is less clear cut. Staying for a moment with the burden, arbitrators do not have a police force, nor subpoena rights. But, where a prima facie case points to corruption and money laundering, the tribunal may ask the opposing party to cooperate and to rebut the suspicion with concrete evidence. The failure to do so can lead to negative inference and ultimately to corruption being assumed (Spentex vs Usbekistan).

Here, indeed, we have a big chaos. There is no real debate that indirect evidence is just as much evidence as direct evidence. However, there are awards using the civil law standards of preponderance for the criminal law threshold issue, others go to the other extreme and demand criminal procedure “intime conviction”. In my view, the middle ground is gaining acceptance: call it “clear and convincing evidence”.

In the course of our recent workshop it emerged that here the solutions may diverge between investment and commercial arbitration.

In investment arbitration one typically would distinguish between corruption alleging the investment itself and corruption during the performance of an investment.

Where the investment was procured by corruption, radical consequences could follow: Based on a treaty requiring the legality of the investment or other grounds, like the “unclean hands” doctrine, jurisdiction could be denied (cf. Fraport or Spentex). I am aware that this is so radical that many authors are unsure about the consequence – some would prefer the balancing approach used in commercial arbitration. The difficulty is that balancing presupposes state responsibility – a problematic approach after a regime change.

Balancing is, on the other hand, the approach of choice where the corruption merely affects the performance of an investment.

The main contract could have been procured by bribery, or a party could attempt to enforce a bribe contract with the help of the Tribunal. The general position – based on the doctrine of separability – is that corruption does not affect the jurisdiction, it is considered as a merits issue. Of course nullity of the underlying contract is an option, but not in every case, and where both parties are involved in corruption, balancing according to the illegality of the relative behaviour is a valid option.

This is a rough overview over some of the main topics posed – similar questions arise in fraud, bid rigging or money laundering. For more details read the “Toolkit”.

Mark Pieth
Professor of Criminal Law and Criminology at the University of Basel

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[1] URL: https://www.eccourts.org/the-queen-v-ipoc-international-growth-fund-limited/.

[2] URL: https://www.italaw.com/cases/456.

[3] URL: https://www.italaw.com/cases/2252.

[4] URL: https://www.baselgovernance.org/sites/default/files/2020-01/A%20Toolkit%20for%20Arbitrators%20-%20Russian%20version.pdf.
URL: https://arbcrime.org/a-toolkit-for-arbitrators.