I. Introduction
When economic crimes are alleged to have occurred in an investor–State dispute, the State is not only a party to the arbitration but is also the entity which regulates, investigates, adjudicates and enforces in relation to such crimes within its territory.Footnote 1 Investigating and prosecuting economic crimes might, however, breach a State's international obligations, giving rise to a legal claim against it from investors. Moreover, State representatives may themselves be involved in committing economic crimes such as bribery or money laundering.Footnote 2
Although it is not the task of investor–State tribunals to prosecute investors for crimes, allegations of economic crime may have a profound impact on the disputes before them. Arbitration tribunals may decline jurisdiction or the admissibility of claims due to the investor's alleged involvement in economic crimes.Footnote 3 On the other hand, the largest ever investor–State award, of $50 billion in Yukos v Russian Federation, primarily concerned a criminal investigation of alleged tax evasion, fraud and embezzlement by the then largest Russian oil company.Footnote 4 The tribunal held that Russia's main objective was not to collect taxes but to bankrupt the investor and appropriate its valuable assets.Footnote 5
The types of economic crimes which arise in investor–State disputes include bribery, tax evasion, bank, accounting and securities fraud, and other forms of misconduct.Footnote 6 Allegations of money laundering occur in the context of claims concerning the proceeds of crime, fake asset sales, intentional selling of overpriced goods, and reimbursement scams.Footnote 7 States can also initiate criminal proceedings as a defensive measure (eg to avoid jurisdiction or as a form of retaliation) and illegality may only be unearthed when a claim is asserted against the State.Footnote 8
The initiation of criminal investigations is a sovereign act, but if such proceedings breach international legal standards, the State can be liable to pay damages.Footnote 9 Investor–State tribunals need to decide at the outset whether they have jurisdiction in cases where the underlying investment was acquired by illegal means, how far they should go in examining allegations of economic crimes, and what are the limits of their deference to proceedings and decisions of domestic courts.Footnote 10 Tribunals may also need to interfere with domestic criminal processes by recommending provisional measures which can be difficult to enforce.Footnote 11
Domestic criminal proceedings may result in indirect expropriation,Footnote 12 denial of justiceFootnote 13 or breach of the fair and equitable treatment standard.Footnote 14 But without the investigatory machinery of domestic law enforcement agencies, tribunals face challenges in obtaining evidence related to economic crimes. When the commission of an economic crime is proved, either by the investor or the State, how should this affect a tribunal's decision? Overall practice is inconsistent, ranging from exonerating the State from its responsibility for involvement in an economic crime to awarding investors significant amounts of compensation.
Corruption remains a major rule of law concern for investors deciding where to invest.Footnote 15 Over the last two decades, the international community has paid increasing attention to tackling economic crimes, including in the context of foreign investment at the regionalFootnote 16 and global levels.Footnote 17 In addition to multilateral international conventions combating economic crimes, some States have recently concluded bilateral investment treaties with provisions expressly aimed at the prevention of economic crimes.Footnote 18
Despite the international consensus that corruption, bribery, and money laundering constitute economic crimes, some tribunals have held that international regulations lack necessary detail or binding force.Footnote 19 As a result, tribunals often rely solely on national law to determine the impact of economic crimes on investor–State disputes. This article argues that treaty-makers and investment tribunals should rely not merely on domestic law but also on international law when determining the rights and obligations of States and investors. This would strengthen the legitimacy and predictability of the system of investor–State disputes.
This article explores the different approaches found in international investment law towards economic crimes and examines them in light of the public international law rules of State responsibility. Part II focuses on procedural questions, including issues of jurisdiction and admissibility, the standard of review and the standard of proof, as well as the issue of applicable law. Part III analyses the interaction between domestic criminal proceedings and international arbitration, with a particular focus on provisional measures. Parts IV and V look at States’ international legal obligations concerning economic crimes, the attribution of misconduct to State officials and the contributory fault of investors. Part VI concludes by calling for treaty-makers and international tribunals to place greater reliance on international law relating to economic crimes to make the system of investor–State disputes more coherent and predictable.
II. Procedural aspects of economic crimes in investor–State disputes
A. Issues of Jurisdiction and Admissibility
The boundary between jurisdiction and admissibility has become a controversial topic. Some tribunals have highlighted that allegations of economic crimes, such as corruption and money laundering, require close examination at the merits rather than dealing with them at the jurisdictional phase.Footnote 20 Other tribunals, struggling with the distinction between jurisdiction and admissibility, have avoided distinguishing between them at all. As one tribunal explained, there was ‘no need to go into the possible—and somewhat controversial—distinction between jurisdiction and admissibility’ because the tribunal would, in any event, need to resolve the case on the basis of the objections raised by one of the parties.Footnote 21
Another tribunal, in response to a challenge by the respondent to the admissibility of the claim, emphasized that it had no express power to dismiss a claim on the grounds of ‘inadmissibility’ under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules or Chapter 11 of the North American Free Trade Agreement (NAFTA).Footnote 22 This approach has its merits, since arbitration regulations do not mention expressly the term ‘admissibility’ when referring to the claims of the parties. References to admissibility in arbitration rules usually relate to admissibility of evidence.Footnote 23 The International Law Commission's Articles on Responsibility of States for Internationally Wrongful Acts (the ILC Articles on State Responsibility) provide that claims may be inadmissible if they are not brought in accordance with applicable rules relating to the nationality of claims, or if the rule concerning the exhaustion of local remedies applies and is available and effective local remedies have not yet been exhausted.Footnote 24
Some authors distinguish between jurisdiction and admissibility, arguing that jurisdiction concerns the scope of the tribunal's authority,Footnote 25 based on the State's consent to arbitrate, while admissibility concerns ‘the power of a tribunal to decide a case at a particular point of time in view of possible temporary or permanent defects of the claim’.Footnote 26 According to this view, admissibility refers to the question of whether the claim is ready for decision at this stage. This approach to admissibility appears similar to ratione temporis jurisdiction requirements in some investment treaties, which impose certain preconditions for the commencement of the arbitration.Footnote 27
Timing is important when distinguishing between jurisdiction and admissibility. Several tribunals have suggested that if fraud arose at the stage of acquiring an investment in a host State, investors might be barred from seeking protection before an investment arbitration tribunal as a jurisdictional matter.Footnote 28 The logic of this approach is that the State would never have approved the investment if it had known the facts which were misrepresented by the investor.Footnote 29 For example, in Inceysa v El Salvador, the tribunal determined that the investor had made a fraudulent misrepresentation by presenting false financial information during the initial bidding process.Footnote 30 It concluded that the ‘investment’ did not meet the condition of legality established in the articles setting out the scope of protection of the relevant bilateral investment treaty (BIT) and therefore declined jurisdiction.Footnote 31
The distinction between jurisdiction and admissibility becomes less controversial if the alleged economic crime occurred after the investment had been made. According to the logic of the Yukos tribunal, if the investor acted illegally after making the investment, the host State can respond by using domestic law sanctions.Footnote 32 If the investor challenges the legality of such sanctions, it must have the possibility of doing so in accordance with the relevant investment treaty:
It would undermine the purpose and object of the ECT to deny the investor the right to make its case before an arbitral tribunal based on the same alleged violations the existence of which the investor seeks to dispute on the merits.Footnote 33
In other words, if the relevant misconduct occurs after the establishment of the investment, or if the relevant instrument contains no legality requirement, then the matter as a question of admissibility is decided at the merits phase rather than the jurisdictional phase.Footnote 34 For example, in Plama v Bulgaria, the tribunal did not rely on a legality requirement in the Energy Charter Treaty to exclude the investor's application on jurisdictional grounds and decided to hear the allegation of fraudulent misrepresentation on the merits.Footnote 35 Similarly, the tribunal in Europe Cement v Turkey dealt with allegations of fraud concerning an ownership interest in the investor companies at the merits phase.Footnote 36 In Churchill Mining v Indonesia, Footnote 37 all claims relating to obtaining mining rights were found to be inadmissible because a fraudulent scheme of forged documents permeated the investments.Footnote 38
When the relevant treaty is silent on the issue of the investment's legality, tribunals tend to consider allegations of economic crimes at the merits rather than jurisdictional phase. In some cases, tribunals have ruled that there was an implicit requirement of ‘clean hands’ in order to benefit from treaty protection,Footnote 39 or that some economic crimes, such as bribery, constitute a breach of international public policyFootnote 40 or ‘breach of public policy’.Footnote 41 In other cases, tribunals concluded that the ‘clean hands’ doctrine had not crystallized into a general principle of international law which would bar an investor's claim in the absence of treaty provisions.Footnote 42
Even if the relevant treaty contains a legality requirement which has been breached, this does not automatically lead to a lack of jurisdiction. In Al Warraq v Indonesia, the tribunal concluded that the investor had breached its obligations under a regional investment agreement,Footnote 43 which explicitly established an obligation to refrain ‘from all acts that may disturb public order or morals or that may be prejudicial to the public interest’, by committing ‘acts prejudicial to the public interest’.Footnote 44 Therefore, the investor was not entitled to recover damages in respect of the host State's breaches of the fair and equitable treatment standard.Footnote 45 The tribunal found that the investor's conduct fell within the scope of application of the ‘clean hands’ doctrine. Therefore, the investor's claim was inadmissible rather than was outside the tribunal's jurisdiction, making the investor unable to benefit from the protection afforded by its investment agreement with the State.Footnote 46
Tribunals considering allegations of economic crimes often seem to fail to apply the concept of the separability of the arbitration agreement from the treaty or investment contract. This principle is recognized in many international treaties, arbitral rules and in the practice of investor–State tribunals.Footnote 47 According to this principle, the invalidity of the main contract does not lead to the invalidity of the arbitration agreement, which is regarded as separate and autonomous. In other words, the arbitration clause survives, thereby enabling the tribunal to determine the parties’ rights and obligations under the arbitration agreement, including the consequences of the invalidity of the main contract.Footnote 48 Investment treaties contain an offer to arbitrate disputes with eligible investors rather than the arbitration agreement (after all, investors cannot be parties to international treaties). The arbitration agreement is perfected only when the eligible investor accepts the offer, creating a separate arbitration agreement between the State and the investor. Denying jurisdiction even when the relevant treaty contains provisions on legality may breach the principle of separability.
The separability principle means that the arbitration agreement will be invalid, leaving the tribunal without jurisdiction, only if the agreement itself has a fundamental defect (eg because of a forged signature, incapacity of one of the parties or mistaken identity).Footnote 49 If the arbitration agreement is valid, the tribunal should have jurisdiction to determine the consequences of an economic crime or other illegal activities, including when calculating any award of damages.
To sum up, the language of the treaty, or other instrument, in which the parties consent to arbitration, plays an important role in distinguishing jurisdiction from admissibility. If such an instrument includes a ‘legality requirement’ as a condition of the tribunal's jurisdiction, it will usually be considered as a jurisdictional issue. Otherwise, the commission of economic crimes when acquiring the investment may lead to the claim being inadmissible at the merits phase. It appears, however, that the autonomous nature of the arbitration agreement means that tribunals should assert their jurisdiction, even if the investor breached its obligations when acquiring the investment.
B. The Standard of Review
The standard of review concerns the measure of deference given by international tribunals to the decisions of domestic courts in criminal proceedings. The standard of review in investment arbitration may vary from full deference, where the substantive determinations of the decision-makers are not questioned, to no deference, which amounts in effect to a new trial in which the reviewing body re-examines and revaluates the evidence, and takes the decision anew.Footnote 50 Treaties are usually silent on the standard of review and, accordingly, tribunals must determine this for themsleves.Footnote 51
1. Raising economic crimes sua sponte
One of the most controversial issues is whether investor–State tribunals ought to raise and investigate allegations of economic crimes on their own motion (sua sponte), in the absence of any allegations made by the parties. On the one hand, the arbitrators have a duty to render an enforceable award.Footnote 52 If they overlook the possibility of corruption, the award may face challenges based on public policy violationsFootnote 53 or even charges for aiding a criminal offence.Footnote 54
Domestic law related to economic crimes constitute a part of the mandatory law which tribunals cannot ignore. However, raising such issues sua sponte as a matter of international public policy may also lead to allegations that the tribunal is going beyond its mandate and consequently opening the door to annulment proceedingsFootnote 55 or challenges to the award.Footnote 56
Investor–State tribunals take different approaches to raising economic crimes sua sponte. In World Duty Free v Kenya, the investor itself submitted the necessary materials which enabled the tribunal to find there had been corruption.Footnote 57 In Metal-Tech v Uzbekistan,Footnote 58 the tribunal noted that during a pre-hearing phase facts of which it had not been aware had come to light and which apparently raised suspicion.Footnote 59 The Metal-Tech tribunals’ decision to order the parties to submit further evidence and to examine the possibility of economic crimes having been committed was therefore its own initiativeFootnote 60 resulting from circumstantial evidence,Footnote 61 unlike the decision in World Duty Free where the findings emerged from the investor's own evidence.
When raising the issues of economic crimes on their own initiative, tribunals need to balance, on the one hand, the risk of ignoring important domestic law and public policy considerations relating to economic crimes and, on the other hand, the risk of potential challenges for going beyond their mandate.Footnote 62
2. Approaches to the standard of review
In general, investor–State tribunals are not meant to determine issues of criminal liability as neither the ICSID Convention nor investment treaties regulate these matters.Footnote 63 Tribunals do not have the necessary expertise, powers and resources to conduct independent criminal investigations. In Tecmed v Mexico, the tribunal held that due deference to the State did not prevent the tribunal from examining whether measures taken ‘were reasonable with respect to their goals, the deprivation of economic rights and the legitimate expectations of who suffered such deprivation’.Footnote 64
Tribunals have preferred not to engage in what they consider to be purely domestic, general law disputes. For example, Amco Asia v Indonesia—one of the oldest ICSID awards—distinguished between ‘general law’ disputes, which should be decided by the relevant domestic authorities, and disputes falling under the ICSID Convention, which should be decided by arbitration.Footnote 65 The tribunal regarded the obligation not to engage in tax fraud as clearly a general legal obligation in the host State, which was not specially contracted for in the investment agreement.Footnote 66 The claim of tax fraud did not arise directly out of the investment and, therefore, was beyond the tribunal's jurisdiction.
When it comes to crimes related to corruption, it seems useful to distinguish between petty corruption, grand corruption and political corruption.Footnote 67 Petty corruption refers to everyday abuse of powers exercised by low and mid-level public officials in their interactions with ordinary citizens, who are often trying to access basic goods or services in places such as hospitals, schools, police departments and other agencies.Footnote 68 Petty corruption issues, as a matter of general law, should be decided by appropriate domestic authorities, in accordance with the Amco Asia v Indonesia logic.
Grand corruption involves acts committed at high levels of government that distort policies or the central functioning of the State, enabling leaders to benefit at the expense of the public good.Footnote 69 Political corruption is the manipulation of policies, institutions and rules of procedure in the allocation of resources and financing by political decision-makers who abuse their position to sustain their power, status and wealth.Footnote 70 It is not surprising that a number of investor–State disputes involve allegations of grand corruption or political corruption.Footnote 71
Tribunals often emphasize that they do not function as courts of final review over a host State's criminal justice system.Footnote 72 They often defer to decisions of domestic authorities and refrain from finding States liable when investors allege an improper use of criminal proceedings, in the absence of a malicious campaign against the investor.Footnote 73 For instance, in Tokios Tokelés v Ukraine, the tribunal did not find a denial of justice in a situation where criminal charges for tax evasion were discontinued, then twice revived and remained pending three years after the alleged misconduct.Footnote 74 The tribunal did not rule out the possibility that the charges were intended to put pressure on the investor to settle an expensive arbitration and yet still did not find that there had been a denial of justice.Footnote 75
The decision in Kim v Uzbekistan proposed a three-step test to determine whether illegal acts, such as corruption, deprive the investor of the BIT protection. The tribunal examined the importance of the law allegedly breached, the seriousness of the alleged breach, and whether the combination of these two elements would compromise a significant interest of the host State and, hence, justify the harshness of moving the investment outside the BIT protection as a proportionate consequence.Footnote 76
This analysis suggests that tribunals usually remain deferential to the decisions taken by domestic authorities in criminal proceedings, but are not completely deferential in their approach.Footnote 77 Tribunals typically review ‘the totality of alleged conduct’ to see if the investor has proved that the host State breached its treaty obligationsFootnote 78 and whether the actions of the State should follow a certain underlying pattern or malicious purpose rather than being ‘a scattered collection of disjointed harms’.Footnote 79
In deciding whether the investor's claim should be outside the BIT protection, either as a matter of jurisdiction or admissibility, it is submitted that the importance of the law breached, the seriousness of the breach and the proportionality of depriving the investor of treaty protection should be the key considerations.
C. The Standard and Burden of Proof
Economic crimes, such as bribery, are very difficult to prove. The legal concept of the burden of proof helps resolve uncertainty and induces parties to present evidence in support of their claims.Footnote 80 Compared to domestic courts, investor–State tribunals lack the tools and powers to properly investigate crimes and rely upon the submissions of the parties. Some tribunals avoid examining in detail allegations of economic crimes, such as money laundering, because of the lack of evidence.Footnote 81 Others look at the ‘probative and substantial evidence’ of the investor's active involvement in an alleged economic crime, to decide whether the claim may be defeated because ‘investment protection is not intended to benefit criminals or investments based on, or pursued by, criminal activities’.Footnote 82
In a typical breach of contract situation, the burden of proof rests with the aggrieved party.Footnote 83 In criminal law, however, the prosecution usually must prove the suspect's guilt.Footnote 84 This is further complicated when both the investor and the State representative have participated in an alleged economic crime such as bribery. Tribunals seem to adopt the approach that the party asserting the fact has the burden of proof as a general principle of law.Footnote 85 However, this rule is not set in stone and investment arbitration decisions reveal that the burden of proof may shift from one party to the other,Footnote 86 or even vanish altogether for the claimant.Footnote 87 One tribunal highlighted that if the State, with all its resources and powers, failed to prove allegations of economic crimes in its domestic courts, tribunals would tend to be sceptical about considering such obligations in the context of international arbitration, unless the evidence presented was ‘concrete and decisive’.Footnote 88
When it comes to the standard of proof relating to economic crimes, tribunals have applied both a ‘reasonable certainty’ standard to suspected corruption,Footnote 89 a ‘clear and convincing evidence’Footnote 90 standard or ruled that both standards were equivalent.Footnote 91 Because national law is often the main source of obligations of foreign investors, allegations of economic crimes, including issues of burden of proof and standard of proof, are often dealt with in accordance with national laws.Footnote 92 However, in the case of a conflict between domestic law and international law, international law should prevail.Footnote 93 In other words, although evidence in domestic criminal proceedings may be relevant to proving facts in arbitration, determinations of domestic courts are not binding on international tribunals.Footnote 94
For example, States may invoke privileges, such as cabinet privileges, secret diplomatic negotiations, State secrets or the secrecy of law enforcement investigations.Footnote 95 In one case, the tribunal rejected a State's invocation of its domestic law on evidentiary privileges by relying on the general international law principle that a State may not invoke its own internal law to avoid international responsibility.Footnote 96 Tribunals also appear reluctant to accept political sensitivity as a justification not to produce evidence.Footnote 97
III. Domestic Criminal Proceedings and Provisional Measures
Domestic criminal proceedings may adversely affect arbitral proceedings, in particular by complicating the availability of evidence and witnesses. Investors may request provisional measures to protect their procedural rights. Under the ICSID regime, provisional measures maintain the status quo between the parties and prevent the aggravation of the dispute.Footnote 98 In the context of economic crimes, provisional measures play a particularly useful role in protecting the arbitral process where the investor finds itself subject to a criminal investigation which interferes with its claim.
ICSID tribunals have the power to recommend provisional measures to preserve the respective rights of the parties.Footnote 99 As one tribunal put it, ‘criminal investigations may not be totally excluded from the scope of provisional measures’.Footnote 100 In the context of ICSID arbitration, tribunals are also expected to protect the exclusivity of ICSID proceedings.Footnote 101 Although criminal proceedings as such do not threaten this exclusivity,Footnote 102 a breach of the ICSID Convention may occur if a claim, or if a right forming part of the subject matter of proceedings, also constitutes the object of parallel proceedings in another forum.Footnote 103
Tribunals readily acknowledge a State's inherent prerogative to conduct domestic criminal proceedings against foreign investors suspected of criminal activity.Footnote 104 Conscious of interfering with domestic criminal proceedings, tribunals will only stay criminal proceedings if it is necessary, urgent and meant to protect certain existing rightsFootnote 105 and if it meets the criteria for the issuance of provisional measures.Footnote 106 According to a recent order for provisional measures, tribunals evaluate the severity of the impact of domestic proceedings on the arbitral process and tend to only recommend ‘the minimum steps necessary to meet the objective set out in the [ICSID] Convention’.Footnote 107 The threshold for considering provisional measures to be necessary includes cases where the investor was the victim of harassment or intimidation, or was directly prevented from presenting its case to the tribunal.Footnote 108
Domestic criminal proceedings may also overlap or interfere with the presentation of evidence in international arbitration.Footnote 109 In several cases, tribunals have ordered the stay of criminal proceedings for the purpose of preserving important evidence.Footnote 110 In one case, a tribunal ordered the suspension of proceedings relating to money laundering because of the risk that key individuals and witnesses on the investor's side might be incarcerated, which would have affected the investor's ability to adequately present their evidence and participate in the arbitration.Footnote 111 In contrast, if the measures taken by the State do not hamper the arbitration process, the tribunal will not grant the investor's request to stay the domestic proceedings.Footnote 112
Extradition proceedings may also jeopardize the participation of key witnesses. In Nova v Romania, the investor requested provisional measures to guarantee the participation of its key witness in the arbitral proceedings.Footnote 113 The tribunal acknowledged that an arbitral tribunal could enjoin domestic proceedings but did not find the circumstances required it to do so, bearing in mind the need for necessity, urgency and proportionality.Footnote 114 The tribunal eventually imposed a series of requirements to ensure that the witness did not flee to a jurisdiction from which he could not be extradited to Romania.Footnote 115
In other cases tribunals have denied provisional relief, despite an apparent connection between the submission of arbitration claims and the initiation of subsequent criminal investigations.Footnote 116 Those decisions stand in contrast with the approach taken in Quiborax v Bolivia,Footnote 117 where the tribunal concluded that the initiation of criminal proceedings for alleged forgery amounted to a ‘defence strategy’.Footnote 118 It instructed the State to execute its prosecutorial powers ‘in good faith and respecting Claimants’ rights, including their prima facie right to pursue this arbitration’Footnote 119 The tribunal highlighted that these proceedings threatened the procedural integrity of the arbitration, in particular, the investor's right of access to evidence through witnesses.Footnote 120 However, the tribunal rejected the investor's contention that criminal proceedings threatened the exclusivity of the arbitration or aggravated the dispute.Footnote 121
Orders for provisional measures can be seen as imposing an international obligation upon the host State which would be violated by a failure to comply.Footnote 122 However, in practice provisional measures may lack teeth. Under the ICSID Convention and the New York Convention, interim measures do not enjoy the same enforceability as final awards.Footnote 123 As a result, investors face various practical hurdles in enforcing provisional measures, whether they seek enforcement from the respondent StateFootnote 124 or from a foreign State not involved in the dispute.Footnote 125
Although the debate surrounding the legal authority of provisional measures has resurfaced, ICSID decisions have emphasized that orders of provisional measures are as binding as final awards, despite the use of the term ‘recommend’.Footnote 126 The underlying binding power of provisional measures derives from the general obligation not to frustrate the object of the arbitral proceedings.Footnote 127
The drafters of the ICSID Convention consciously rejected a proposal to empower tribunals to ‘prescribe’ provisional measures, fearing that this would make those measures binding and would lead to complications in case of conflict with domestic law.Footnote 128 During the debates, Aron Broches, chairman of the drafting committee, noted that there was ‘no way for a private investor to obtain [the] specific enforcement [of provisional measures] against the government’.Footnote 129 Therefore the drafters decided that the tribunal's power would be limited to ‘recommending’ provisional measures.Footnote 130 The drafters also rejected a proposal explicitly granting tribunals the power to reflect non-compliance with provisional measures in final awards.Footnote 131 The chairman ‘assumed the majority was opposed to any specific mention of the effect of non-compliance with the recommendation, but that naturally the Tribunal would normally have to take account of this fact when it came to make its award’.Footnote 132
Practice shows that arbitral tribunals may draw adverse inferences from non-compliance with provisional measures. Higher monetary compensation may be allocated to the aggrieved partyFootnote 133 or tribunals may find that the non-complying party breached its obligations under the ICSID Convention.Footnote 134 However, at the merits phase of arbitral proceedings, tribunals are not required to reflect non-compliance in the amount of compensation. For example, in Quiborax v Bolivia, Bolivia had failed to comply with the recommended measures but ‘under the facts of this case this breach did not entail a violation of the duty to arbitrate in good faith’.Footnote 135 The tribunal added that although provisional measures are binding per se, a failure to comply with them necessarily gives rise to a breach of the underlying right that the measures seek to preserve.Footnote 136
As the above analysis demonstrates, investor–State tribunals seek to protect the integrity of the arbitration process without intruding on the sovereign right of States to conduct criminal proceedings. The practical enforcement of provisional measures in relation to economic crimes, much like any kind of provisional measure, faces its own difficulties. Despite this, tribunals may factor non-compliance with these measures into the calculation of damages.
IV. International Law Obligations of States related to economic crimes
A. Sources of International Law Obligations of States
International investment agreements are typically silent on economic crimes generally and specific offences. It is only in recent years that some countries have started to include provisions relating to economic crimes in international investment agreements.
For example, Japan includes provisions in its newly-concluded treaties imposing an obligation on States to ‘ensure that measures and efforts are undertaken to prevent and combat corruption … in accordance with its laws and regulations’.Footnote 137 In the same vein, Canada includes in its BITs anti-corruption principles as an element of corporate social responsibility which should be encouraged by the contracting parties.Footnote 138 Some BITs also mention money laundering, terrorism financing and general criminal law offices in the context of restrictions which the State can impose on the investor's transfer of funds.Footnote 139 Preambles of several recently concluded BITs emphasise ‘the necessity for all governments and civil actors alike to adhere to United Nations and Organisation for Economic Cooperation and Development (OECD) anticorruption efforts, most notably the 2003 UN Convention against Corruption.’Footnote 140
When it comes to practice, international investment tribunals, despite being created by investment treaties, usually rely on domestic law rather than on international law reflecting an international consensus on economic crimes.Footnote 141 Tribunals have only referred to the UN Convention against CorruptionFootnote 142 and the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in a handful of cases.Footnote 143 One example is the decision in Kim v Uzbekistan, which referred to the OECD Convention and the UN Convention against Corruption when ascertaining the content of an international public policy rule against corruption and concluded that domestic criminal law followed the same approach.Footnote 144 In Al Warraq v Indonesia, the investor advanced several arguments based on the alleged failure of Indonesia to implement the UNCAC.Footnote 145 The tribunal held that the convention only established a general obligation on State parties to adopt legislation criminalising the bribery of public officials and bribery in the private sector, rather than setting out elements of corruption and money laundering.Footnote 146 The tribunal did not examine other international law sources in order to determine the State's international obligations.
Tribunals which primarily decide on the compliance of States with their international obligations should pay more attention to sources of international law relating to economic crimes. This is particularly important in the disputes involving States in which the rule of law is weak and in which the general environment is conducive to economic crimes. Tribunals could also rely on the detailed guidance of instruments developed by various international organizations, provided these instruments reflect international consensus on best practices.
One universally accepted instrument concerning money laundering are the 40 recommendations issued by Financial Task Force on Money Laundering (FATF) covering the use or concealment of funds from all criminal offences.Footnote 147 The FATF developed a detailed methodology to test compliance with the recommendations.Footnote 148 Subsequently, States adopted other conventions and initiatives to combat money laundering covering the use or concealment of funds from all criminal offences.Footnote 149
The United Nations Convention against Transnational Organized Crime promotes cooperation to prevent and combat transnational organized crime and provides measures to combat money-laundering.Footnote 150 Regional conventions also contain specific obligations on combating money laundering.Footnote 151 Efforts on the international level have recently resulted in an important convention relating to tax evasion.Footnote 152 Other notable instruments relevant to economic crimes, and which are accompanied by detailed methodological documents, relate to banking supervision,Footnote 153 securities regulationFootnote 154 and insurance supervisionFootnote 155 and which also includes instructions on countering fraud and money laundering.Footnote 156
To sum up, tribunals usually analyse domestic law and rarely refer to the public international law obligations of States to combat economic crimes. Alternatively, they argue that international law lacks sufficient detail to determine the rights and obligations of the parties. However, several important international instruments (both binding and non-binding) related to economic crimes reflect an international consensus and include detailed guidance for regulators which could be used by tribunals.
B. Attribution of Contributory Fault to States
Investors can assert claims against States for breaches of their international obligations when State representatives themselves participate in committing economic crimes, for example by taking bribes or being accomplices to other crimes. The general principle for determining compensation for breaches of international law obligations is full reparation, which can take the form of restitution, monetary compensation, and satisfaction. Footnote 157 The ILC Articles on State Responsibility provide that:
In the determination of reparation, account shall be taken of the contribution to the injury by wilful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought.Footnote 158
The ILC Articles provide that a State commits an internationally wrongful act when conduct consisting of an act or omission is attributable to the State under international law, and constitutes a breach of that State's international obligations.Footnote 159 Under international law, the conduct of such an organ is considered as the conduct of the State.Footnote 160 Although ‘the conduct of private persons is not as such attributable to the State’, the ILC ArticlesFootnote 161 regulate situations of excess of authority or contravention of instructions:
The conduct of an organ of a State or of a person or entity empowered to exercise elements of the governmental authority shall be considered an act of the State under international law if the organ, person or entity acts in that capacity, even if it exceeds its authority or contravenes instructions.Footnote 162
These provisions suggest that when officials are involved in committing economic crimes such as corruption, the responsibility for such unlawful actions should be attributed to the State. However, international investment tribunals rarely follow this logic. Some tribunals take the view that if economic crimes involve misconduct both of the State and the investor (for example, in case of bribery), this should lead to the dismissal of the case rather than to the responsibility of the State.Footnote 163
The World Duty Free v Kenya case is perhaps the most well-known case criticized for exonerating States from their responsibility for corrupt practices and unfairly leaving investors without the protection which is owed to them under international law.Footnote 164 In that case, the tribunal concluded that a payment to the President of Kenya was ‘a covert bribe and, accordingly, its receipt is not legally to be imputed to Kenya itself’.Footnote 165 This approach differs from the usual approaches to State responsibility under general public international law and human rights law, pursuant to which international law governs the characterization of an act of a State as internationally wrongful;Footnote 166 this characterization is unaffected by whether the same act is characterized as lawful or unlawful under internal law.
It must be noted that tribunals usually do not link the exercise of their jurisdiction to the requirement of domestic prosecution of the State representative for the crime committedFootnote 167 although one tribunal did suggest this.Footnote 168 This is despite the fact that States are under an obligation to combat financial crime, bribery and some other economic crimes under international law, as discussed above.
However, investor-State tribunals have recently started to take into account the involvement of the host State representatives in committing economic crimes. One tribunal explained that a State could, in principle, be held responsible for its organs soliciting bribes, but found that the allegation was unclear and unconvincing.Footnote 169 In Metal Tech v Uzbekistan, the tribunal declined jurisdiction over a claim which involved the corruption of officials but it did reflect, in the allocation of costs, the role of the State in the corruption.Footnote 170 In another dispute involving Uzbekistan, treaty claims were dismissed at the merits stage due to ‘red flags’ of corruption surrounding the investment. Nevertheless, the tribunal did stress the State's own role in the corruption at issue and ‘urged’ it to make a substantial ($8 million) donation to a United Nations anti-corruption fund.Footnote 171
The State's arguments on the illegality of an investment as a bar to jurisdiction or admissibility may also be rejected where the State has itself relied on the misconduct in question.Footnote 172 One tribunal emphasized that when a State was aware, knowingly overlooked and endorsed an investment which breached its domestic law, fairness would require that the government be estopped from raising it as a jurisdictional defence.Footnote 173 Another award rejected the respondent's arguments concerning the illegality of the investment on the basis that the State representatives, prior to the commencement of the arbitration, had declared the contracts in question to be valid.Footnote 174
Summing up, the international law on State responsibility suggests that the conduct of officials, even if it exceeds or contravenes instructions or violates internal law, should be attributable to the State. If this conduct breaches international law, it should result in compensation. However, in practice most tribunals prefer not to award compensation to investors for the involvement of State representatives in economic crimes and deny jurisdiction or the admissibility of claims. This, however, has begun to change as tribunals pay more attention to the obligations of States to combat economic crimes and to general international law principles of State responsibility.
V. Contributory fault of investors
The contributory fault of investors in committing economic crimes can affect their claims. As discussed above, under the general principles of State responsibility, fault can manifest itself in wilful or negligent action or omission.Footnote 175 Although international investment treaties typically do not impose obligations on investors, they have certain obligations under national law as well as international law.Footnote 176
Some investment tribunals have rejected investor's claims because of the investor's negligence, even when the State was also at fault. In one case, the tribunal concluded that despite deficiencies in the government's conduct, such conduct did not breach the provisions of the BIT because the investor was also at fault.Footnote 177 In another case, despite serious shortcomings in the domestic legal system and in the functioning of various State agencies, the tribunal rejected the investor's claims on the basis that the investor should have been aware of this situation in the host State.Footnote 178 It was therefore unreasonable for it to seek compensation for losses suffered when making a speculative, or, at best, an imprudent investment.Footnote 179
In several disputes the investor's fault has prompted tribunals to reduce damages. In MTD v Chile, the tribunal found that whilst the respondent's conduct was contrary to the fair and equitable treatment standard, the investor had contributed to its own injury.Footnote 180 The tribunal thought the investor's failure to properly consider domestic law regulations before making its investment constituted contributory fault and reduced its award of damages accordingly. In the Azurix v Argentina case, the Tribunal also reduced damages because of the investor's negligent business decision to overpay for the concession.Footnote 181
The tribunal in Occidental v Ecuador reduced the damages awarded by 25 per cent due to contributory negligence.Footnote 182 The tribunal stated that a proportionality test meant that ‘any penalty the State chooses to impose must bear a proportionate relationship to the violation which is being addressed and its consequences’.Footnote 183 As in cases of mitigation of damages and contributory negligence, the proportionality test considers the conduct of the investor and, whether its conduct is sufficiently wrong to justify the measures taken by the State.
In investment arbitration, the proportionality test has also been repeatedly applied in cases of expropriation.Footnote 184 Although the cases above did not necessarily involve the commission of economic crimes, their logic can also apply to the determination of contributory fault. This approach was taken in Yukos v Russian Federation: having extensively cited the ILC Articles on State Responsibility and Commentary, the tribunal took account of the investor's tax evasion schemes and apportioned responsibility between the investor (25 per cent) and the State (75 per cent).Footnote 185
It must be noted that host States have also submitted counterclaims, arguing that an investment has been tainted by bribery, embezzlement or money laundering.Footnote 186 Counterclaims by States typically fail because the identity of the parties in domestic and international proceedings does not coincide,Footnote 187 or because the issues raised in counterclaims should be considered by domestic courts rather than international tribunals.Footnote 188
This analysis suggests that tribunals are keen to reduce damages or even to dismiss the claim altogether where the investor is at fault, including by having committed an economic crime. In so doing, tribunals consider the level of the investor's awareness of the situation in the host State, its negligence in business decisions and apply a proportionality test to apportion responsibility between the State and the investor.
VI. Conclusions and recommendations
The system of investor–State disputes has recently been subject to criticism for lacking predictability, legitimacy and for excessively intervening with the exercise of the sovereign powers of States.Footnote 189 States use their criminal law to deal with the most serious economic misconduct and, understandably, want more predictability when international tribunals review their conduct. Investors would also benefit from greater consistency when tribunals deal with issues related to economic crimes.
To facilitate legal certainty concerning the effect of bribery, money laundering and other economic crimes in international investment law, treaties need to include provisions on the effect of economic crimes. States can also issue joint interpretative statements on previously concluded treaties, or replace old treaties with modern bilateral treaties, either one at a time or through regional agreements.Footnote 190
The new generation of investment treaties would do well to reference the specific international law instruments which address economic crimes. Examples of instruments which reflect an international consensus and which could inform both treaty-making and the decisions of tribunals include the ILC Articles on State Responsibility, as well as instruments adopted by the UN, OECD and specialized bodies such as FATF. As discussed above, these non-binding instruments contain detailed guidance for regulators to which many States have voluntarily committed themselves and which often reflect customary international law.
If the treaty or the arbitration agreement includes a requirement that the investment be made in accordance with law, tribunals tend to consider economic crimes at the jurisdictional stage. Otherwise, committing an economic crime when acquiring an investment may result in the claim being inadmissible at the merits phase. It is argued that the commission of economic crimes should not automatically deprive tribunals of jurisdiction and block investors’ access to arbitration. The arbitration agreement, being autonomous from the main contract or treaty, should remain valid even if the main contract is tainted by an economic crime. The task of the tribunal is to determine the effect of such crimes on the rights and obligations of the parties at the merits stage.
It appears that investment tribunals should pay more attention to the principle of contributory fault when representatives of both the State and the investor are complicit in an economic crime. For example, bribery usually entails misconduct of both parties—one party making an illicit payment and the other accepting it. Penalizing only the investor by rejecting its claims or only the State would seem unfair and contradict generally accepted principles of international law, such as those reflected in the ILC Articles on State Responsibility. This approach also ignores the failure of a State to comply with its international obligations, such as the obligation to effectively combat bribery and corruption.Footnote 191 Similarly, the commission of an economic crime by an investor should be reflected in damages awards, as the Yukos tribunal did recently.
It must be noted, however, that investor–State tribunals prefer to examine the obligations of investors in the context of economic crimes on the basis of applicable internal law, and pay little attention to the obligations of States under international law. However, international arbitrators are rarely experts in the domestic laws of the particular State concerned.Footnote 192 The combined effect of the silence of investment treaties on the consequences of economic crimes and the inconsistent application of internal law results in increased uncertainty, excessively expensive proceedings and decisions which are perceived as unfair.
In deciding on the admissibility of claims tainted by economic crimes, tribunals could draw inspiration from national best practices, such as the UK Bribery Act.Footnote 193 While not introducing strict liability on businesses for bribery, the Act reverses the burden of proof and establishes an offence of failing to prevent bribery for all companies, including parent companies.Footnote 194 The Bribery Act also introduces an ‘adequate procedures’ defence to avoid liability for bribery. Thus, under the Act organizations would not be liable for bribes paid on their behalf if they can prove on the balance of probabilitiesFootnote 195 that they had ‘adequate procedures’ in place to prevent them.Footnote 196 The Act's official guidance on the defence of adequate procedures includes engagement by senior management, risk assessment procedures, due diligence, communication and training as well as monitoring and review of existing procedures.Footnote 197 Even if not binding, the Act's logic could help tribunals approach issues not properly regulated in other domestic legal systems and help build consensus on the ‘adequate procedures’ to be expected of States and investors when it comes to bribery, corruption and other economic crimes.
To achieve greater legal certainty and procedural efficiency, a new generation of investment treaties and the practice of investment tribunals should not only draw on applicable domestic law but also on existing sources of international law concerning economic crimes or national best practice. This would help bring more legal certainty to the investor–State dispute resolution system, consistent with the latest UN efforts to reform investment agreements.Footnote 198 It would also help reconcile the combating of economic crime with the protection of foreign investors, as well as improving the legitimacy and predictability of the system of investor–State disputes.
