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Allegations of Criminal Activity and International Arbitration
Arbitral tribunals in investor-state disputes frequently deal with allegations of breach of domestic legislation, fraud and corruption in jurisdictions traditionally known as having weak rule of law. Depending on the degree of the allegation and jurisdiction, admissibility of the claim and even annulment or enforcement of an arbitral award may be affected.
In these type of cases the ‘clean hands’ doctrine is of utmost importance. The doctrine provides that a court will not lend its help if a claimant’s cause of action derives from an unlawful act. The arbitral tribunal in Inceysa Vallisoletana, S.L. v. Republic of El Salvador summed up the doctrine in the following way:
“No legal system based on rational grounds allows the party that committed a chain of clearly illegal acts to benefit from them.” However, considering the lack of relevant case law, it is difficult to determine the doctrine’s status, let alone the standard to be applied.
The purpose of provisions on the legality of investment is “to prevent the Bilateral Investment Treaty from protecting investments that should not be protected, particularly because they would be illegal”.
The ‘clean hands’ doctrine has found its application in a number of cases where claims were dismissed for the lack of jurisdiction or recognized as inadmissible because they were obtained fraudulently or not in accordance with the law of the host state.
In a number of cases the arbitral tribunals found that they lack the competence to rule on a claim where the claimant has unclean hands. In Phoenix Action v. Czech Republic the tribunal stated that there is no doubt that the requirement of the conformity with law is important in respect of the access to the protection of the investor under the BIT. However, if it is manifest that the investment has been performed in violation of the law, it is in line with judicial authority not to assert jurisdiction.
In other cases, claimants were found to be barred from requesting a remedy (inadmissible claim), despite the tribunal’s assertion of jurisdiction. Finally, even if the tribunal has jurisdiction and the claim is found to be admissible, protection may still be denied. For example, in Al Warraq v. Indonesia the tribunal held that the claimant failed to uphold the host state’s laws, thus his actions fall within the scope of application of the ‘clean hands’ doctrine and, therefore, he cannot benefit from investment protections.
When it comes to ‘clean hands’, a great deal also depends on the host state’s conduct. In Tokios Tokelés v. Ukraine the tribunal decided that the investment was made in accordance with the laws and regulations of Ukraine, despite Ukraine’s objections that registered investments were made in breach of certain laws of Ukraine. The fact that Ukraine registered the underlying investment, despite certain documentary breaches, convinced the tribunal that the investment was legal.
In another case, Saba Fakes v. Turkey, the tribunal stated that in the event that an investor breaches a requirement of domestic law, a host state can take appropriate action against such investor within the framework of its domestic legislation. However, unless specifically stated in the investment treaty under consideration, a host state should not be in a position to rely on its domestic legislation beyond the sphere of investment regime to escape its international undertakings vis-à-vis investments made in its territory.
An allegation of fraud and/or corruption is a serious one. It entails the existence of a commenced criminal investigation into the activities of those involved. Absence of any criminal investigation in the host state is a strong argument in favor of the claimant.
In African Holding v. Congo, the arbitral tribunal dismissed allegations of corruption raised by the state finding that such allegation was very grave and requires a high standard of proof, such as “the evidence required for the investigation or criminal prosecution of corruption in countries where it is considered a criminal offense”.
In Glencore International A.G. and C.I. Prodeco S.A. v. Colombia the arbitral tribunal rejected Columbia’s allegations of an investor’s corruption partially on the basis that Colombian criminal courts and prosecutors did not initiate an investigation into the alleged corrupt practices. Therefore, the evidence did not meet the necessary standard of proof.
By contrast, the ICSID tribunal in Metal-Tech v. Uzbekistan found that it lacked jurisdiction, due to corruption, which tainted the claimant’s investment in Uzbekistan. The tribunal found that the claimant made payments of around USD 4 million to several individuals close to the Uzbek government under the guise of consultancy fees. Interestingly, the tribunal pointed to the fact that “indicators” or “red flags” of corruption in this case arose from the evidence submitted by Metal-Tech itself. The tribunal took into account the amounts in question, any appropriate qualification for the rendering of such services, connections between the involved parties as well as documentary or testimonial evidence in support of the legitimacy of the services — which Metal-Tech was not able to produce. Given that the host state’s actions were also tainted by corruption, the arbitral tribunal ordered each party to bear its own costs.
When it comes to proving the allegations on the part of each side, there is an evident imbalance between a claimant and a host state. Written evidence of corruption is typically scarce. With regard to oral evidence, no party alleged to have given or received bribes is likely to admit to doing so when questioned as a witness before the arbitral tribunal, because he or she risks subsequent criminal prosecution. As to the host state, evidence obtained through the police powers of the state may breach the principles of good faith and equality of arms.
In Glencore the arbitral tribunal made reference to such general inequality between claimants, which are normally private companies, and respondent states. The tribunal further explained that if states were allowed to use their wide powers to coerce evidence from claimants, it would create a perverse incentive: states would initiate all types of administrative proceedings against potential claimants in order to improve their litigation positions.
At the same time, in Awdi v. Romania the tribunal found that the real issue raised was the weight and probative value to be given to the evidence, rather than its admissibility, and that it would be guided by the rule of presumption of innocence when assessing that evidence.
Tribunals have traditionally stated that the allegation of fraud and corruption requires a sufficient degree of confidence and a high threshold of evidence. However, as explained above production of such strong evidence is often impossible. More recent case law shows a trend of transitioning to the balance of probabilities standard applicable in civil cases.
In the latest case, Vale S.A. v. BSG Resources Limited, the arbitral tribunal stated: “it is clear that the applicable standard should be the “balance of probabilities”, albeit that “the fact that fraud is a very serious allegation may be relevant to the inherent probabilities of its occurrence, [though] it does not affect the standard of proof’.”
Finally, if sufficient evidence in support of corruption allegations is discovered or revealed after the award is issued, such evidence may serve as a basis for the annulment of such award.
For example, in Siemens A.G. v. Argentine Republic the arbitral tribunal ruled in favor of the claimant under the Germany-Argentina BIT. However, at a later stage evidence of corruption was procured in proceedings in a German court. Siemens was said to have obtained the underlying contract in Argentina through bribery. Argentina requested the annulment of the award on the basis of newly-discovered evidence. In the end, Siemens withdrew the claim, saving Argentina at least USD 208 million.