States facing claims under international investment treaties and concession agreements have repeatedly managed to defeat foreign investors’ claims for expropriation or other international law violations by alleging that the investments at issue were obtained through corruption. There is of course no question that corruption is a global scourge antithetical to the international rule of law and that international investment law should not reward corrupt conduct. That said, the “corruption defense,” as currently developed in international investment law, presents a number of difficulties that international investors and practitioners should keep in mind when considering their rights under international investment treaties and similar instruments.
Kenya was the first state to defeat a foreign investor’s claim by arguing that claimants should not be allowed to rely on the arbitral process to uphold rights obtained by corruption. In a 2006 award, World Duty Free v. Kenya, an international arbitration tribunal constituted under the auspices of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) rejected an investor’s claim over the termination of a concession to run duty-free shops at the Nairobi airport because it found that the investor’s CEO had paid a bribe to a former Kenyan president to obtain the concession. As the World Duty Free tribunal explained, “bribery is contrary to the international public policy of most, if not all, states or, to use another formula, to transnational public policy. Thus, claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld.”
Since World Duty Free, states have accused foreign investors of corruption in dozens of investor–state disputes, often with success. Uzbekistan, notably, has twice succeeded in dismissing foreign investors’ claims worth nearly $300 million by using the corruption defense. In both the Metal-Tech (2013) and Spentex (2016) cases, the ICSID tribunals placed the burden on the claimants to prove that payments made to their “consultants” in connection with their investment in the country were not corrupt and, when the tribunals concluded that the burden had not been met, dismissed their claims in toto.
Potential for Abuse?
The corruption defense is sometimes understood as a standing defense. Indeed, many investment treaties specifically protect only “lawful” investments (and some tribunals have argued that investments made with the assistance of corrupt payments were not lawful). In that context, the state’s defense turned entirely on the investor’s conduct—irrespective of the behavior of the state invoking it—and may therefore defeat a foreign investor’s claim even when the defending state has otherwise engaged in serious breaches of its international obligations to foreign investors.
Some commentators have warned that the corruption defense’s all-or-nothing approach may tempt states to level tactical accusations of corruption on flimsy evidence. In the 2016 Customs and Tax Consultancy case, the Democratic Republic of Congo urged an ICSID tribunal to dismiss a U.S. investor’s claims on the theory that the lack of a public tender for the concession had been inconsistent with the United Nations Convention Against Corruption. Similarly, in the 2017 Karkey case, Pakistan accused a Turkish investor of corruption because the investor hired a politically connected representative. These efforts were not successful because—as the Tax Consultancy tribunal explained—they attempted to shift the burden of showing corruption away from the party alleging it. However, this burden-shifting approach was endorsed in Metal-Tech (2013) and Spentex (2016). In any event, all four cases are nevertheless illustrative of the more aggressive ways that states may invoke international anticorruption norms to defend against investor-state claims.
The availability of the corruption defense may therefore create problematic incentives in the context of a host state where the rule of law is not strong because it may encourage accusations of corruption whose primary purpose is to facilitate the breach of foreign investors’ rights without legal consequences. Such accusations may of course arise long before arbitration begins, whether justified or as a pretext for expropriation and possibly to head off disputes. For example, the claimants in an ongoing $5 billion ICSID arbitration between BSG Resources and Guinea allege that the Guinean government revoked their mining rights under the pretext of corruption in order to award the mining rights to political allies of Guinea’s current president.
More troubling still, the all-or-nothing approach to corruption may actually incentivize states to accept bribes in connection with investments because they provide the state with an “option” later to acquire successful projects at no cost (but to allow investors to suffer the consequences of unsuccessful projects). Such incentives are not only perverse but also have the effect of increasing the cost of investments, which has the effect of reducing development in the countries that need it most.
These concerns are all the more problematic when one notes that the states accusing foreign investors of corruption in the context of defending international claims have often failed to make commensurate efforts to prosecute corrupt officials at the national level. Even in the World Duty Free case, the tribunal noted its discomfort with Kenya’s non-prosecution of former president Daniel Arap Moi for the very corruption it was invoking to invalidate the investment contract. Some arbitral tribunals have begun, if cautiously, to take this potential inconsistency into account.
In the recent Kim v. Uzbekistan case, the tribunal weighed the corruption allegations in light of the principle of proportionality and found that it was required to “balance the object of promoting economic relations by providing a stable investment framework with the harsh consequence of denying the application of the [treaty] in total.” As a result, it concluded that the denial of the treaty protections “is a proportional response only” in the event of “noncompliance with a law that results in a compromise of a correspondingly significant interest of the Host State.”
In another recent case, an ICSID tribunal found corruption had occurred and formally urged the respondent state to make a substantial donation to a United Nations anticorruption program because the state’s officials had, before the arbitration, condoned the corruption and failed to prosecute the responsible parties, warning that failure to do so might affect the tribunal’s allocation of costs.
Troublesome incentives are not the only difficulty that the corruption defense to investor–state claims presents in practice. Parties to disputes must also wrestle with uncertainties over the substantive law under which conduct should be determined to have been corrupt or not-corrupt, as well as over the standard of proof. The challenge here is that while “corruption” writ large is unlawful under almost every body of national law as well as international law, the specifics of what kind of conduct is considered unlawful may vary significantly between different bodies of law. Moreover, while some investment treaties explicitly provide for the application of one or more bodies of national law as well as international law, others provide—expressly or by implication—only for the latter.
Tribunals have tried at times to avoid these difficulties—in the Metal-Tech case, for example, the tribunal considered not only the content of the Uzbek Criminal Code but also “international law and the laws of the vast majority of States,” even while other tribunals have placed greater emphasis on “international public policy,” and still others have looked exclusively to national law. For example, in the Kim case, the tribunal applied the Uzbek law even when the parties had not relied on the Uzbek law as the applicable law.
The standard of proof applicable to corruption allegations raised as a defense in investor–state disputes also remains unsettled. Most tribunals have applied a heightened standard of proof to allegations of corruption because of the serious, quasi-criminal character of corruption allegations. In the Karkey case, the tribunal applied the “clear and convincing” standard because Pakistan’s corruption allegations involved “officials at the highest level of the Pakistani Government.” Host states nevertheless frequently argue that the “preponderance of the evidence” typically applicable to the rest of an investor–state arbitration should apply to corruption allegations as well because the claims are brought in civil, rather than criminal, proceedings. At the same time, of course, even “civil” findings concerning corrupt conduct may have serious domestic and international consequences—including criminal ones.
The corruption defense to investor–state claims is rooted in widely shared values and is likely a permanent part of international investment law. That said, the parameters of the defense are far from certain, and international investment law has yet to arrive at a reliable solution to the complex incentives that the defense can generate. Many of these issues will likely be worked through over time, through the iterative development of international investment law. In the meantime, investors should not only implement robust anticorruption and compliance programs but also remain alert to the ways that accusations of corruption, real or perceived, may complicate the enforcement of their rights under international investment treaties and incorporate such considerations into any dispute resolution strategy. Given the propensity of tribunals to shift the burden on claimants to prove an absence of corruption, it is particularly important for investors to ensure that they keep accurate records of expenditures made by consultants and also keep copies of project documents in their home country as well as investments’ host jurisdiction.
Alexander A. Yanos is a partner, Carlos Ramos-Mrosovsky is counsel, and Rajat Rana is senior associate at Alston & Bird