Corrupting Investor-State Arbitration? The Role of Corruption Allegations in IIA Proceedings

Investment Claims Webinar February 20, 2015

Moderator:Mr. Ian Laird, Crowell & Moring; Editor-in-Chief, Investment Claims

Panelists:Dr. Aloysius Llamzon, King & Spalding LLP, New YorkMr. Teddy Baldwin, Baker & McKenzie, Washington, DCMr. Brody Greenwald, White & Case, Washington, DCProf. Amy Westbrook, Washburn Law School, KS, USA

Decisionmaking on Investor Wrongdoing: One View

CorruptionBIT “Legality

Clause” Jurisdiction

Admissibility

Unclean Hands

Transnational

Public Policy

Legal PrinciplesCategory of Wrongdoing Consequences

Other Illegality

Fraud

TYPOLOGY OF INVESTOR WRONGDOING

“An 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; or if its creation itself constitutes a misuse of the system of international investment protection under the ICSID Convention. It will also not be protected if it is made in violation of the host State’s law.”

- Hamester v. Ghana, ICSID ARB/07/24, Award,

18 June 2010, para. 123

WRONGDOING NATURE HOW PLED IN ARBITRATION

CORRUPTION Bilateral:Investor + Public Official

Covert, but with public manifestation:•Violation of Host State Law (variance bribe)•Discretion exercised to favor investor (quid pro quo)

Shield (mostly):Bribery

Sword (sometimes):Extortion, Corrupt Solicitation (unconsummated)

FRAUD Unilateral: investor alone

Misrepresentation + deceitful intent + reliance

Shield (almost always)

OTHER ILLEGALITY UNDER HOST STATE LAW

Unilateral

intent sometimes unnecessary

Shield

BILATERAL: Corruption in Foreign Investment

Investor Host State

Public official(Local)

Employee

Claimant Respondent

Intermediar(ies)

AGENCY STATE RESPONSIBILITY

State Responsibility for Corruption

Q: Should States be held to account for the corruption of its public officials in the same way Investors are accountable for corruption of its officials?

ILC Articles on State Responsibility: attribution to State even when public official “exceeds [his] authority or contravenes instructions” [Art. 7] BUT: Investor knowingly participates in corrupt

act

Should State be required to show that effective steps taken to prosecute public officials as a condition to the defense? (estoppel, acquiescence)

STATE RESPONSIBILITY FOR CORRUPTION

So far, “responsibility” of State only found in costs decisions:

“The law is clear – and rightly so – that in such a situation [of an investment tainted by corruption] the investor is deprived of protection and, consequently, the host State avoids any potential liability. That does not mean, however, that the State has not participated in creating the situation that leads to the dismissal of the claims. Because of this participation, which is implicit in the very nature of corruption, it appears fair that the Parties share in the costs.”

-- Metal-Tech v. Uzbekistan (2013), para. 422

Corruption in Investment Arbitration: Some Facts

Estimated US$1 trillion corrupt payments every year (World Bank)

20+year body of investment jurisprudence, mostly at ICSID SPP v. Egypt (1992) through Metal-Tech v. Uzbekistan

(2013)

Very few instances where corruption was found Admissions during arbitration:

World Duty Free v. Kenya (admissibility, merits) Metal-Tech v Uzbekistan (jurisdiction) Azpetrol v. Azerbaijan (withdrawn)

Findings by national courts/regulators affecting arbitration: Siemens v. Argentina (withdrawn by investor) Niko Resources v. Bangladesh (tribunal adopted

national court finding)

“Mudslinging”

T. Wälde, sep op., Thunderbird v. Mexico:

“It is therefore particularly important for a tribunal not to get influenced, directly or indirectly, by “insinuations” meant to colour and influence the arbitrators’ perception and activate a conscious or subconscious bias, but to make the decision purely on grounds that have been subject to a full and fair hearing by both parties. Cards should be placed, “face up”, on the table rather than be waved around, with hints and suggestions.”

Corruption often alleged at the outset, hoping for additional evidence via the proceedings (discovery, cross-examination) and with the aid of the tribunalParty often does not pursue corruptionBUT: same result through other means?

Proof of Wrongdoing: How much evidence necessary?

Who invokes corruption; what result

Cases

Host State invokes corruption as a defense  and all Investor claims dismissed

(same result as if corruption allegations were sustained)

• World Duty Free v. Kenya (2006)*• Metal-Tech v. Khazakhstan (2013)*• Siemens v. Argentina (Discontinued 2009)• Azpetrol v. Azerbaijan (settled 2009)• Lucchetti v. Peru (2005)• Thunderbird v. Mexico (2005)• Inceysa v. El Salvador (2006)• Fraport v. Philippines (2007)• African Holdings co. v. DRC (2008)• TSA Spectrum v. Argentina (2008)

Host State invokes corruption as a defense  but Investor claims upheld (at least substantially) 

1. SPP v. Egypt (1992)2. Wena v. Egypt (2000)3. Tanesco v. IPTL (2001)4. Siag v. Egypt (2009)•Niko v. Bangladesh (2013; pending)* 

 Investor raises corruption as a claim But all Investor claims dismissed 

1. Methanex v. U.S. (2005)2. F-W Oil v. Trinidad & Tobago (2006)3. EDF (Services) v. Romania (2009)4. RSM v. Grenada (2009) 

Investor raises corruption as a claim  and claim upheld (at least substantially) 

1. Rumeli v. Kazakhstan (2008)

TEXT OF LEGALITY CLAUSES HAVE SPECIFIC MEANING

• Many so-called “legality” clauses were not designed to prevent jurisdiction based on alleged corruption.

• Clauses typically refer to act of “admittance” or “acceptance” by host state.

• These clauses for action by the host state: i.e, only the host state can admit or accept the investment

• Understood to be admittance or acceptance requirement by host state

• Cf. “made in accordance with law”

• This does not require act of host state but involves act of investor

*

HISTORICAL MEANING OF “ILLEGALITY” CLAUSES

Example from German-Phillipines BIT

•Article 1(1): investment means “asset accepted in accordance” with host state laws

•Travaux préparatoires from BIT sheds light on provision

• German Note Verbale:

• “The Philippine proposal that the term ‘investment’ shall mean any kind of asset accepted in accordance with the laws and regulations of either contracting party is acceptable […] if it is clear that this refers to the admission reservation made in Article I, paragraph 1 of the draft agreement.”

• Philippine Note Verbale

• “The Philippine side refers to the admission of these “investments” with the provision ‘accepted in accordance with the respective laws and regulations of either Contracting Party.’

*

ADMISSIBILITY MAY NOT BE A VIABLE DOCTRINE

Tribunals have historically been reluctant to dismiss for corruption on the basis of admissibility alone

•Some cases where admissibility was a basis for dismissal

•Inceysa v. El Salvador relied on treaty language and doctrine of admissibility to dismiss claim

• “It is far from certain, therefore, that the decision in Inceysa stands for the general proposition that an investor must make or acquire an investment in good faith in order for an investment treaty tribunal to assert jurisdiction, since the case can be confined to the specific application of the El Salvador-Spain BIT . . . .”*

•World Duty Free v. Kenya involved an almost comical admission of bribery. Claimant’s own testimony:

• “When we entered the room where the President received us, he put the briefcase [filled with cash] by the wall and left it there. After the meeting we collected the briefcase from where we had left it. On the departing journey I looked in the briefcase and saw that the money had been replaced with fresh corn.”

**Investor Wrongdoing In Investment Arbitration, A. Llamzon And A.Sinclair, at 5.

CORRUPTION CAN BE GERMANE TO MERITS

• Tribunals may want to consider dealing with corruption allegations in deciding on the merits

• Such allegations can be (in some circumstances) highly relevant

• If an investor acted in bad faith with regard to the creation or management of its investment, such behavoir could be relevant to what expectations the investor had to be treated fairly and equitably by the state

• For a direct expropriation, bad faith could be relevant to the supposed ongoing value of the expropriated enterprise

• For an indirect expropriation, regulatory or tax actions of the state could be justified as a result of an investor’s bad faith

*

STATE’S FAILURE TO PROSECUTE CORRUPTION

• A state’s failure to prosecute corruption, and/or an indictment or conviction by the state, will play center stage in an arbitration involving corruption allegations

• These facts alone, however, may not be so probative

• The timing and circumstances of the investigation and prosecution reveal perhaps more information as to the validity of the allegations:

• If the investigation or prosecution occurs years after the alleged acts, and comes only after an arbitration has been lodged, tribunals may be more willing to disregard the allegations

• If the state never prosecutes due to a weak criminal justice system, or for some other justifiable basis, tribunals may be more willing to disregard the failure to prosecute

*

NO REQUIREMENT TO PROSECUTE IN ARBITRAL PRACTICE

*

• No requirement to prosecute in practice:

• World Duty Free v. Kenya, ICSID Case No. ARB/00/7

• Metal-Tech v. Uzbekistan, ICSID Case No. ARB/10/3

• Fraport I v. Philippines, ICSID Case No. ARB/03/25

• Fraport II v. Philippines, ICSID Case No. ARB/11/12

• Requirement only suggested in dicta:

• Wena Hotels v. Egypt, ICSID Case No. ARB/98/4

• Congo v. Commisimpex, Paris Court of Appeal

TRIBUNAL NOT BOUND BY DOMESTIC DECISIONS

*

• No jurisdiction if an investment is made in violation of law

• Decisions of local authorities – to prosecute or not – are not dispositive

• The tribunal must evaluate the evidence presented and decide whether jurisdiction is established

• ICSID Convention, Article 41(1): “The Tribunal shall be the judge of its own competence.”

• Bin Cheng: International tribunals must “arrive at a moral conviction of the truth and reality of all the relevant facts.”

POLICY CONSIDERATIONS

*

• Law should reflect a policy of eradicating corruption

• Proponents of requirement to prosecute:

• It perversely incentivizes the State to solicit bribes if corruption is a total defense

• It is unfair to punish only one corrupt party (claimant) if the State is not serious enough to prosecute

• Opponents of requirement to prosecute:

• Corruption is an international evil that cannot be sanctioned by an arbitral tribunal or court

• Neither party may seek redress (effect is equal)

PRINCIPLES OF ATTRIBUTION AND ESTOPPEL NOT APPLICABLE

*

• Attribution requires an exercise of State authority; actions in exchange for bribes are unauthorized (ultra vires)

• Estoppel requires: (1) a clear statement of fact; (2) which is voluntary, unconditional, and authorized; and (3) is relied on to the other party’s detriment

• Non-prosecution is not a clear statement of fact where the corruption is concealed

• Even if it is revealed, State laws still prohibit corruption, and there may be valid reasons not to prosecute

• Detrimental reliance on non-prosecution is unlikely

LACK OF CONVICTION DOES NOT EQUAL INNOCENCE

*

• Prosecutorial discretion

• Prosecution may be high stakes and public, whereas arbitration may be confidential

• Different standards of proof

• Inefficient or ineffective criminal investigative bodies

• Lack of resources

• Improper political influence of prosecutors or judges

ARBITRAL DECISIONS: FRAPORT I V. PHILIPPINES

“Assuming that the findings of the Prosecutor had dealt directly with [the relevant criminal conduct] . . . such a finding would not constitute a res judicata because of a difference in the identity of the parties and the claim. . . . The parties were different, the claim (initiation of a criminal action) and the issues that were the ratio of the preliminary decision were different from those which engage this Tribunal.”

-- Fraport I v. Philippines (2007), para. 390

ARBITRAL DECISIONS: FRAPORT I V. PHILIPPINES

"Moreover, holdings of municipal legal institutions cannot be binding with respect to matters properly within the jurisdiction of this Tribunal. . . . [T]he legality of the investment is a premise for this Tribunal’s jurisdiction, the determination of such legality can only be made by the tribunal hearing the case, i.e. by this Arbitral Tribunal."

-- Fraport I v. Philippines (2007), para. 391

ARBITRAL DECISIONS: WORLD DUTY FREE V. KENYA

“It remains nonetheless a highly disturbing feature in this case that the corrupt recipient of the Claimant’s bribe was more than an officer of state, but its most senior officer, the Kenyan President. . . . Although the Kenyan President has now left office and is no longer immune from suit under the Kenyan Constitution, it appears that no attempt has been made by Kenya to prosecute him for corruption or to recover the bribe in civil proceedings. It is therefore not surprising that Mr. Ali feels strongly the unfairness of the legal case advanced by Kenya. . . .”

-- World Duty Free v. Kenya (2006), para. 180

ARBITRAL DECISIONS: WORLD DUTY FREE V. KENYA

“The answer, as regards public policy, is that the law protects not the litigating parties but the public; or in this case, the mass of tax-payers and other citizens making up one of the poorest countries in the world. . . . The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. . . . In other words, if Kenya were guilty of bribery and the claimant in this proceeding, it would likewise fall at the same procedural hurdle, to the benefit of the Claimant as respondent.”

-- World Duty Free v. Kenya (2006), para. 181

Are national/international efforts to curb corruption working?

• U.S. Foreign Corrupt Practices Act• Inter-American Convention Against Corruption• Organization for Economic Cooperation and

Development Anti-Bribery Convention • Council of Europe Civil and Criminal Law Conventions

on Corruption • African Union Convention on Preventing and

Combating Corruption• UN Convention Against Corruption• UK Bribery Act

What is the impact of the U.S. FCPA?

• Increase in enforcement• Increase in scope• Increase in monetary penalties• Lack of dispositive interpretation • Limited to “supply” side

Complement or clash?

What is the relationship between the consideration of corruption in investment arbitration and national/international anti-corruption efforts?•Incentives•Collateral results•Scope and volume•Discretion in interpretation•Process and proof