On 30 May, the University of Basel’s Competence Centre - Arbitration and Crime and the Basel Institute on Governance (a not-for profit organisation) jointly published a toolkit to assist arbitrators dealing with issues or corruption and money laundering. The toolkit is the product of a 2-year consultation process involving regulators, arbitrators, lawyers, forensics, and academics.
It is commonplace to say that arbitrators confronted with allegations or suspicions of economic crime face difficult challenges as they must balance their duties to the parties with public policy rules and lack the investigative powers of the state. The purpose of the toolkit is to help arbitrators address these challenges in a comprehensive manner and find solutions in accordance with applicable laws. This article summarises its key aspects.
Identifying and investigating illicit conduct
Identifying illicit conduct can be challenging when it is in both parties’ interests to conceal that conduct. However, the facts of the case may provide an indication of whether criminal behaviour is likely to have occurred. To assist arbitrators, the toolkit sets out a list of “red flags”.
A method commonly used to conceal the payment of bribes is to bid or contract for services via agents. Red flags relevant to this situation will include:
- the payment of commission bearing no relation to the services provided;
- using intermediaries with no staff, no transparent structure or clear financial organisation; and
- the existence of personal connections between the agents and decision-makers of the foreign states.
Other red flags of corruption listed in the toolkit include:
- the prevalence of corruptive behaviour in the country where services are performed; and
- the lack of code of conduct or anti-corruption policy at the service provider.
In respect of money laundering, the toolkit distinguishes between arbitrations conducted for the purpose of laundering money (i.e., sham arbitrations) and real disputes involving funds that are proceeds of crime. Red flags relevant to the first scenario will include:
- the lack of participation of the respondent in the dispute;
- the lack of meaningful defence to the case; and
- the lack of documentation for the background of the dispute.
In the latter scenario, indicators of money laundering will include:
- the use of shell corporations;
- the involvement of politically exposed persons; and
- unknown origin of funds at stake, etc.
In order to identify potentially illicit conduct, the toolkit also recommends using the definitions contained in the following international instruments:
- in respect of corruption, the 2003 UN Convention against Corruption and the 1997 OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions;
- in respect of money laundering, the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the 2000 UN Convention against Transnational Organised Crime.
If the facts raise suspicions of illicit conduct based on the above red flags, arbitrators must tread carefully not to make determinations likely to exceed their mandate or which may violate due process. As a first step, the toolkit recommends a sua sponte investigation into the facts, e.g. by way of request for information from the parties. When evidence is not provided, adverse inferences may be drawn, although the toolkit suggests doing so carefully, when the inference is consistent with the facts and logically related to the nature of the evidence withheld.
Identifying the applicable laws
When allegations of a criminal nature are made in arbitration, the relevant laws may not solely be limited to the law chosen by the parties to govern their contract (which will determine the contractual consequences). The tribunal will also have to determine whether the conduct is actually illegal so as to provide a basis for invalidating a transaction. This may involve the criminal laws of the countries which have a connection with the facts of the case or the identity of the parties. The toolkit recommends a two-stage approach:
- as a first step, identify the applicable international treaty provisions and national contract law provisions that declare contracts to be void if they are contrary to the law or public policy; and
- as a second step, identify the applicable criminal law by reference to provisions of relevant national or international law according to which bribery is illegal, including rules which may apply according to criminal law principles of territoriality and nationality.
Setting the standard of proof
It is a hotly debated topic whether tribunals should apply criminal law standards or civil law standards of proof to allegations of corruption or money laundering.
Whilst the toolkit does not settle that debate, it also notes that three main options are available to arbitrators (subject to the relevant applicable law):
- the balance of probability or preponderance of evidence standard;
- the clear and convincing evidence standard, which is a higher standard of evidence; and
- the “inner conviction” standard, often used in civil law jurisdictions.
Consequences of corruption or money laundering being established
A finding of corruption or money laundering can have consequences on the tribunal’s jurisdiction, the admissibility of the claim and the merits of the case. The toolkit sets out general guidelines on how arbitrators should assess such consequences.
A finding that an investment was procured by corruption may lead to the conclusion that the tribunal lacks jurisdiction or that the claim is inadmissible, either on the basis of the legality requirements in the relevant treaty or the “unclean hands” doctrine.
However, the toolkit also recommends considering whether other concepts such as attribution, acquiescence and estoppel may counterbalance the effect of such finding.
The toolkit reflects the consensus that, in commercial arbitration, the illegality if the main contract does not in itself affect the jurisdiction of the tribunal due to the principle of separability of the arbitration agreement.
As regards the consequences on the merits, the toolkit offers little guidance other than applying the relevant principles of the governing law.
Allegations or suspicions of economic crime raise difficult legal and procedural issues at almost every stage of the arbitral process. The toolkit does not purport to provide a one-size fits all solution to these issues but provides a general framework for dealing with them in a predicable fashion.
The toolkit sets out important guidelines to ensure arbitration is not used to facilitate or enforce corruption and money laundering. Equally, there is also an understanding reflected in the guidelines that allegations of corruption can be used abusively by parties to escape obligations freely entered into. It is welcome that appropriate safeguards have been built to tackle such behaviour.