The Viability of Corruption Defenses in Investment Arbitration When the State Does Not Prosecute

Corruption has become a focal point in international investment arbitration, as investors and respondent States both have alleged corruption as the basis for claims and defenses in a number of recent investment arbitrations. Decisions in cases such as World Duty Free v. Kenya and Metal-Tech v. Uzbekistan confirm that corruption is contrary to international public policy and the laws of nearly all nations. Accordingly, if an investment tribunal finds that the investor obtained its investment through corruption, the tribunal will conclude that it lacks jurisdiction over the dispute or that the investor’s claims are inadmissible.

Certain commentators have suggested, however, that respondent States should be required to prosecute the allegedly corrupt parties in order to raise defenses based on corruption. A threshold question thus is whether a State should be deemed to have acquiesced in the alleged corruption and thus be estopped from asserting any related defenses, if it failed to prosecute the allegedly responsible individuals.

As early as 2000, the tribunal in Wena Hotels v. Egypt remarked that it was “reluctant to immunize Egypt from liability in this arbitration,” because the government of Egypt had been aware of the consulting agreement that allegedly was used to conceal corrupt payments, and had “decided (for whatever reasons) not to prosecute” the consultant (para. 116). More recently, in the set-aside proceeding of Congo v. Commisimpex, the Paris Court of Appeal held that Congo’s mere allegations of a general climate of corruption within the government administration, without indicating the persons likely to be involved in the corruption or prosecuting the alleged beneficiaries of the corruption, were an insufficient basis to set aside the award against Congo. Notwithstanding the comments in these decisions regarding the State’s failure to prosecute, the State’s failure to prosecute was not dispositive in either case, because neither the Wena tribunal nor the Paris Court of Appeal was presented with persuasive evidence of corruption. As the Wena tribunal explained, Egypt bore “the burden of proving such an affirmative defense” of corruption, and had “failed to present any evidence that would refute Wena’s evidence that the [consulting agreement] was a legitimate agreement. . . .” (para. 117).

To date, States have not been required to prosecute the alleged wrongdoers in order to raise successful jurisdictional and admissibility defenses based on corruption or other violations of law. In both World Duty Free (paras. 180-181) and Metal-Tech (paras. 308, 336), the tribunals held that corruption was proven and thus dismissed the claims on that basis, even though neither respondent State prosecuted the accused government officials or the individuals who allegedly made the corrupt payments. In Fraport v. Philippines, moreover, two separate ICSID tribunals found that they lacked jurisdiction because the investor had made its investment in violation of Philippine law, even though no one was successfully prosecuted. Indeed, the tribunal in the resubmitted Fraport arbitration rejected the investor’s arguments that the Philippines should be estopped from raising such an illegality defense as a result of the lack of prosecution, even though that case was decided seven years after the relevant facts were revealed during the first arbitration (paras. 377, 385-386).

There is no clear legal theory that would lead to a different result. Some commentators have suggested that because an official of the State necessarily is complicit in any corruption, the corruption should be attributed to the State, and the State should be prevented from raising a defense based thereon. Under Article 7 of the ILC Articles on State Responsibility, States may be held responsible for the ultra vires acts of their officials in certain circumstances:

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.

The ILC’s 2001 Commentary to Article 7 clarifies, however, that the State is responsible for the unlawful conduct of its officials only where it is “cloaked with governmental authority,” but not “where the conduct is so removed from the scope of their official functions that it should be assimilated to that of private individuals, not attributable to the State” (p. 46). The acceptance of a bribe is never cloaked with governmental authority, as such conduct manifestly involves the subversion of the government’s interests for the personal and illicit benefit of the corrupt official and the bribe-giver. Judge Crawford, the ILC’s Special Rapporteur on State Responsibility, thus notes in his treatise on this topic that the Iran-US Claims Tribunal did not hold the State responsible for a public official’s solicitation of a bribe in Yeager v. Iran, because the relevant official acted in his private capacity rather than on behalf of the State (pp. 137-139).

Similarly, the doctrine of estoppel would not normally bar a State from raising a corruption defense. Estoppel requires: (1) a clear statement of fact; (2) which is voluntary, unconditional, and authorized; and (3) is relied on to the other party’s detriment (Pan American v. Argentina, para. 160). Bribes, however, are almost always concealed, and corruption is almost universally prohibited. It thus is doubtful that any investor would be able to demonstrate that they relied to their detriment on a clear, unconditional, and authorized statement by the State that it would be lawful to pay a bribe.

A State’s decision not to prosecute, moreover, is not a clear statement of acquiescence in corruption. Prosecutors have considerable discretion, and there may be valid reasons why a State does not or is unable to prosecute. For example, the prosecutor generally will be required to prove its case “beyond reasonable doubt” under domestic criminal law, which is higher than the standard of proof in international arbitration. The prosecutor also must determine whether a high-stakes and public prosecution of the accused government official is likely to succeed, taking into account resources that frequently will be limited. Prosecutors and judges also may themselves be improperly influenced. A State’s failure to prosecute or convict thus is not equivalent to issuing a clear, unconditional, and authorized statement that the accused individuals complied with the law.

Moreover, in many cases, including in both World Duty Free and Metal-Tech, the relevant facts revealing the corruption will become known only during the course of the arbitration, if ever. By that time, the investor has raised all of its claims. Thus, even if the State’s subsequent failure to prosecute could be deemed a clear, unconditional, and authorized statement of approval or acquiescence, the investor will be unable to show that it suffered any of its alleged damage as a result of relying to its detriment on the State’s failure to prosecute.

For these reasons, tribunals have held that a failure to prosecute is not grounds for barring a claim in an arbitration proceeding, even where the allegations were raised and rejected in the domestic courts. The Fraport I tribunal, for example, observed as follows:

Assuming . . . that the findings of the Prosecutor had dealt directly with [the relevant criminal conduct] . . . such a finding would not constitute a res judicata because of a difference in the identity of the parties and the claim. . . . Moreover, holdings of municipal legal institutions cannot be binding with respect to matters properly within the jurisdiction of this Tribunal. . . . [T]he legality of the investment is a premise for this Tribunal’s jurisdiction, the determination of such legality can only be made by the tribunal hearing the case, i.e. by this Arbitral Tribunal (paras. 390-391).

Similarly, the World Duty Free tribunal noted that it was “a highly disturbing feature in this case that the corrupt recipient of the Claimant’s bribe was more than an officer of state, but its most senior officer, the Kenyan President,” and that “[a]lthough the Kenyan President ha[d] now left office and [wa]s no longer immune from suit under the Kenyan Constitution, it appear[ed] that no attempt ha[d] been made by Kenya to prosecute him for corruption or to recover the bribe in civil proceedings” (para. 180). The tribunal nonetheless rejected the claimant’s assertion that it was unfair to grant Kenya’s corruption defense:

The answer, as regards public policy, is that the law protects not the litigating parties but the public; or in this case, the mass of tax-payers and other citizens making up one of the poorest countries in the world. . . . The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. . . . In other words, if Kenya were guilty of bribery and the claimant in this proceeding, it would likewise fall at the same procedural hurdle, to the benefit of the Claimant as respondent (para. 181).

Applying the same reasoning, the tribunal in Metal-Tech not only dismissed the claimant’s claims for lack of jurisdiction as a result of its corrupt payments to obtain its investment, but also held that it lacked jurisdiction over Uzbekistan’s counterclaims, and denied Uzbekistan’s request that costs be assessed against the claimant (paras. 413, 422). These cases offer persuasive reasons for permitting a State to raise jurisdictional and admissibility defenses based on corruption even where the corruption has not been prosecuted in domestic courts.

*The views expressed herein are Mr. Greenwald’s and do not necessarily represent the views of White & Case LLP or its clients. Mr. Greenwald wishes to thank David Riesenberg and Sadie Gardner for their research and assistance.