Risky business: Key features of the ICC’s corruption “red flags” methodology

Background

The decision of the English High Court in Nigeria v Process and Industrial Developments Ltd [2023] EWHC 2638 (Comm) (Nigeria v P&ID) was a notable example of an award infected by fraud and corruption being set aside. While an extreme example, corrupt practices have the potential to damage the reputation of international arbitration as an impartial dispute resolution process. Tribunals also need to tread carefully when alerted to allegations of corruption in the factual matrix of an arbitration. If these allegations are not dealt with properly, the integrity of the arbitral process may be damaged.  

In the context of the increasing frequency of allegations of corruption and the inherent difficulty in substantiating such allegations, the ICC Task Force on Corruption released ‘Red Flags or Other Indicators of Corruption in International Arbitration’ (the Red Flags Document) in November 2024 (link). The Red Flags Document proposes a first-of-its kind framework for analyzing a corruption ‘red flag’ to assist tribunals, judges and institutions to examine red flags when allegations of corruption are raised by the parties or when the tribunal independently develops concerns about possible corruption. The Red Flags Document also recommends steps that tribunals can take to discharge their duties when corruption “red flags” are alleged or arise.

Definition of a red flag

The Red Flags Document defines a red flag as “any fact or circumstance that indicates a potential risk that a corrupt practice, most often bribery involving a public official has occurred.” Tribunals have relied on red flag analysis to establish corruption in several instances. In Metal-Tech v Uzbekistan, ICSID Case No. ARB/10/3, for example, the underlying investment was found to have been procured through bribery in light of numerous red flags, including: 

• The investor engaged the prime minister’s brother and a former government official as consultants.
• The investor made several payments to these individuals. 
• The investor failed to justify such payments.

Overview of methodology

The Red Flags Document proposes a three-step methodology:

Step 1: Identify  

When an allegation of corruption is raised by a party or suspected by a tribunal, the first step is to identify the fact(s) that, if made in the context of the case, may indicate a risk of corruption. These are the relevant “red flags.” 

Red flags are divided into two categories:

• General red flags related to the circumstances of the particular country, government administration or business sector – for instance, lists of red flags have been developed for the natural resources sector which is seen as being particularly susceptible to corrupt practices.
• Specific red flags related to the facts or circumstances relating to the counterparty, or their relationship, or specific to the transaction at issue such as unexplained, large payments to third parties. 

The Task Force sets out examples of each type of red flag and the sources from which they can be identified. However, without further analysis, red flags are not themselves probative of corrupt conduct, they are merely facts that strike “…the chords of the legal elements of the relevant corrupt practice, thereby commanding further delving into the facts through the rules of evidence, to ascertain based on the evidence ultimately adduced whether corruption in the specific form it is alleged or suspected to have taken place has occurred” (pg. 43). 

Step 2: Validate    

Once red flags have been identified, each red flag should be critically examined or validated based on contemporaneous evidence. Validation will fail, for instance, where the source lacks credibility or the particular action can be justified in the relevant factual and temporal context.

The Task Force illustrates the lines of inquiry and considerations that should inform the validation process. For example, when a third-party intermediary apparently lacks the required qualifications to undertake the relevant work, consideration should be given to how specific those qualification requirements are, the pool of available personnel in the relevant country to undertake that task, or whether the third party has been hired mainly for their influence with government.

Once a red flag has been validated, it becomes an indicator of a likely corrupt practice absent contravening facts or circumstances. The relevant corrupt practice is probable but, importantly, red flags still lack “probative force.”

Step 3: Assess

At this final step, a ‘big picture’ analysis must be undertaken to ascertain the collective import of validated red flags in evidentiary terms. Red flags must be assessed by being weighed up against each other in addition to being considered concurrently. Even if validated, red flags are not all of equal significance. 

The existence of specific red flags would generally carry greater weight (inferring a higher likelihood of the alleged conduct) as opposed to the existence of general red flags. Possible mitigating circumstances, such as the presence of a robust corporate compliance policy (green flags), neutral facts (black flags) as well as alternative scenarios must also be considered at this stage, together with any gaps or inconsistencies. This may lead to factual findings and, ultimately, a legal determination on whether a specific corrupt practice has occurred.

The Task Force usefully identifies several tools that the tribunal can use in making its factual assessment, including: 

• Drawing adverse inferences
• Using expert opinion on the meaning of certain red flags, reasonable compliance expectations and other relevant issues
• Pursuing lines of inquiry with the parties, using their inherent authority over the proceedings, even where corruption issues are not raised by the parties
• Relying on publicly available findings of regulatory authorities and other tribunals
• Invoking the principles of estoppel and waiver to influence factual findings, or using admissions of peripheral facts to establish corruption 
• Ptentially leveraging the data mapping and predictive functions of artificial intelligence in the assessment of red flags.

Broader issues

The Red Flags Document goes on to discuss the following broader issues:

• The procedural effects of red flags in the arbitration and in set-aside and enforcement proceedings, such as admissibility of new corruption allegations and evidence, where the burden of proof should lie and the proper standard of proof.
• The role and responsibilities of the tribunal in relation to red flags.
• New and emerging issues, such as the growing role of corporate compliance measures and the role of artificial intelligence.

A detailed examination of these issues is beyond the scope of this article but the Red Flags Document provides a synthesis of material and offers valuable guidance to arbitrators.

Conclusion

The Red Flags Document meaningfully responds to growing concerns around corruption in international arbitration, offering a methodological framework approach for tribunals. The Task Force’s forthcoming comprehensive report on corruption in international arbitration will include guidance on other related matters such as burden of proof and parallel proceedings.