Corruption in Arbitration
- September 11, 2017
- Posted by: Simon
- Category: Blog
Corruption in international arbitration has a long and chequered history. Justice Lagergren’s famous denial of jurisdiction in a claim in 1963 on the basis that “… a case.. involving such gross violation of good morals and international public policy can have no countenance in any court… nor in any arbitral tribunal” was symptomatic of a widespread reluctance to deal with corruption issues in arbitration. Arbitrators did not, and many still do not, feel comfortable investigating signs of corruption, preferring to leave these thorny issues to the courts.
Judge Lagergren believed that an arbitral tribunal does not have jurisdiction where there is a prima facie case of corruption. This is no longer the accepted view. In disputes involving allegations of fraud or corruption it is now considered appropriate for an arbitral tribunal to assume jurisdiction and to then examine the case to determine whether or not there has been corruption that would render the contract illegal. Tribunals can not leave issues of corruption to domestic courts as problems in enforcement, in particular, and loss of faith in arbitration as a method of dispute resolution, in general, could result.
The case of Valeri Belokon v The Krygyz Republic (2014) shows perhaps how far we have come, and some of the pitfalls present, in this difficult area. This case resulted in an award that was set aside in Paris after it was held that the tribunal had wrongly decided not to investigate an allegation of money laundering raised by Krygystan because “the tribunal is unable to deduce or infer that the Respondent state has proved that… was involved in money laundering activities”. The Paris Court of Appeal ruled that the Claimant was in fact involved in money laundering practices, based largely on the text of the award itself.
Arbitral tribunals generally now recognise that they must deal with the issues themselves in order to ensure their awards can be enforced. This so-called ‘modern’ approach is based on several key principles underlying international arbitration –
1 – if the parties have agreed to have any disputes determined by arbitration, that agreement should be respected
2 – under the principle of ‘kompetenz-kompetenz’, the arbitral tribunal has the power to determine its own jurisdiction (i.e. it is up to the tribunal to determine whether or not a contract is illegal)
3 – under the principle of ‘severability’ of the arbitration clause, any illegality under the main contract does not go to the arbitration clause.
Lest this sound to text-book like, it boils down to the principle that the tribunal is entitled to hear submissions of the parties and receive evidence to determine for itself the question of illegality.
Now, it is one thing to make such a statement but it is another thing to put parties in a position where they can make convincing submissions, or tribunals in a position where they can effectively assess evidence or indications of corruption.
A common situation arises when one of the parties raises an allegation during the course of the arbitration. This is a very delicate situation as the tribunal will need to determine whether this is a tactical claim made on spurious grounds or not. Spurious grounds could include an attempt to escape a bad bargain, to cause delays and cost increases to ‘edge out’ the other side, or to discredit the other side in the eyes of the tribunal. The tribunal will wish to avoid the risk of being perceived as a shelter for corruption and may be, unlike the Valeri Belokon case, reluctant to dismiss such allegations without further investigation. A tribunal that fails to investigate good-faith suspicions of illegality risk facilitating that illegality if suspicions are not investigated but later proved true.
Where none of the parties have raised an allegation, a tribunal may feel obliged to take its own initiative to investigate its concerns ex officio. Typical warning signs that they may be sensitive to are –
- ‘unusually’ high payments or commissions made to individuals or offshore shell companies which show little in the way of identifiable goods or services
- lack of details in expenses or accounting records
- a joint venture partner or intermediary that appears unqualified to provide a particular service
- a joint venture partner or intermediary recommended by an employee working for a government customer
- an agent or commercial party with a poor reputation in the media, or working in a country where corruption is recognized to rife
- ‘silent’ or hidden partners where the beneficial ownership cannot be ascertained
Some of these red flags can appear obvious. Other often are not and it can take a fair amount of ‘street smarts’ to detect them.
Corruption will in most cases have been deliberately concealed, sometimes quite well, and evidentiary trails ‘muddied’. A tribunal’s investigatory abilities are of course limited. In light of this it has been said that some tribunals exercise their discretion to lower the standard of proof and base their decisions on inferences and circumstantial evidence that leads them to conclude a high probability of corruption. Most national arbitration laws and institutional rules leave the standard of proof as a question for the arbitrators and, usually, on the basis of a balance of probabilities, which balance is made on an assessment of the facts available. Here we may stress that it all hangs on the quality of the facts that are available for the tribunal to base its assessment.
But where we have already acknowledged that activities are concealed and evidence hidden or destroyed, it may seem like the discussion chases its own tail – corruption is hidden, a tribunal weighs the balance of probabilities based on an investigation into the matter and collects information… which is hidden…
The need for investigations of a high calibre is self-evident. In short, it all hangs on proof of allegations or suspicions on the balance of probabilities.
At Global Insight we provide the link between allegation and decision by providing the all-important investigation that lays out the best set of facts available on which responsible decisions can be made – decisions that result in enforceable awards.
This is one way that Global Insight assists in international arbitration. Another key way is in asset tracing (pre and post dispute) so that when the award is obtained there is something to enforce it against. We will write a blog piece on this aspect of our services soon.