Investor corruption

Introduction

When Metal-Tech lost its rights under a bilateral investment treaty against a sovereign because it had secured its investment through corruption, it became part of an apparent growing trend in which bribery is playing a critical role in international investment arbitration.

In a recent award, an International Centre for Settlement of Investment Disputes (ICSID) tribunal unanimously rejected an investor’s claim against the Republic of Uzbekistan. This was on the ground that an illegally-obtained investment contract based on corrupt payments by the investor to ‘consultants’ linked to high ranking officials was in breach of the requirement for legal investments under the Israel–Uzbekistan bilateral investment treaty. This award highlights the growing relevance of corruption both in the context of national anti-bribery legislation and international investment frameworks – to the extent that, where bribery exists, relief may no longer be available under the investment treaty.

While it may be premature to consider this proceeding as part of a growing trend in corruption-centred investment arbitration awards, Metal-Tech highlights the increasing importance of bribery considerations in international investment ventures and reminds the business community, as well as legal practitioners, that bribery can no longer be treated as a peripheral issue but is increasingly becoming a centre-piece of legal disputes.

The Israeli metals company filing the claim, Metal-Tech Ltd, alleged wrongdoing on the part of the Republic of Uzbekistan for the latter’s withdrawal of exclusive purchasing rights which underpinned their investment in a joint venture with two Uzbek state-owned companies. Metal-Tech argued that their contribution to the joint venture, Uzmetal, was expropriated following actions taken by the Uzbek government that helped result in its 2008 liquidation.

A request for arbitration was filed with ICSID in 2010. During the oral testimony of the Metal-Tech chairman and CEO in January 2012, evidence of corrupt payments came to light which proved to be decisive to the tribunal’s findings. Prior to the Israeli company securing the investment contract from the Uzbek authorities, it paid approximately $4 million to ‘consultants’ connected to key public officials. The payments were made for ‘lobbyist activity’ rather than what was originally understood by the tribunal as operational and logistical product support. The consultants, who included the brother of the then prime minister as well as a formal public official, were said to have provided ‘immense assistance’ and were a ‘substantial part of putting the deal together’.

In uncovering the facts relating to the consultants, numerous corruption indicators were present: lack of professional qualifications or technical expertise, large commission fees paid – approximately 20 per cent of the project value – for vague services rendered, payments unrelated in timing to the services provided, financial transfers made to offshore accounts in Switzerland and the British Virgin Islands, as well an overall lack of transparency in their dealings with Metal-Tech. Also, the payments notably ceased when the prime minister left office in 2006.

The tribunal unanimously held that Metal-Tech had failed to substantiate its rebuttal of the bribery findings. The award was made in favour of the Republic of Uzbekistan on October 4, 2013 (not released publicly until November); because the investment was obtained unlawfully, no protection was available under the bilateral investment treaty. Notably, despite this outcome, the costs of the proceedings were to be borne by each party due to the state’s implicit participation in the underlying corruption. The tribunal made clear that although the law of illegality in the context of bilateral investment treaties is clear, it ‘does not mean… the State has not participated in creating the situation that leads to the dismissal of the claims’ and, as a result of ‘this participation, which is implicit in the very nature of corruption, it appears fair that the Parties share in the costs’.

In making the substantive decision, the tribunal determined that evidence of bribery would be established based on a standard of reasonable certainty and, given the particular difficulty in proving corruption, circumstantial evidence would suffice. It also found that, in conformity with international law standards, the burden of proof fell on the parties proving the facts upon which it relied.

This ICSID award illustrates the growing relevance of corruption as a factor in investment arbitration disputes. There are other notable instances (given below).

World Duty Free v Kenya

The ICSID case of World Duty Free Co Ltd v Republic of Kenya, where international public policy was found to have been violated as a result of the investor’s illicit payments to the then Kenyan head of state – though the findings were rooted in contract rather than the law of bilateral investment treaties.

Siemens v Argentina

The out-of-court settlement between Siemens and the Republic of Argentina following the latter’s request to ICSID to ‘revise’ a 2007 ICSID award as a result of the contemporaneous Siemens corruption scandal, which led to a costly settlement for the German multinational.

Hamester v Ghana

The ICSID award in Hamester GmbH v Republic of Ghana, which stated that an ‘investment will not be protected if it has been created in violation of national or international principles of good faith; by way of corruption, fraud, or deceitful conduct; or if its creation itself constitutes a misuse of the system of international investment protection under the ICSID Convention.

What remains to be seen is how evidence of bribery and corruption will be handled by tribunals in the future: whether it will still be treated as a jurisdictional issue that allows states to raise a de facto defence to their obligations under bilateral investment treaties or, more intriguingly, on its merits, where liability can be apportioned to each party in proportion to their participation – whether tacit or active – in the corrupt activities.

The trend exemplified by this arbitral award is that corruption is no longer confined to national regulatory enforcement actions such as those led by the US Department of Justice. Instead, it is increasingly appearing in a range of wider international fora – not as a peripheral point of law but as the central focus upon which legal disputes are decided. This rise in the prominence and relevance of corruption in the law is one to watch, as its developments will be felt far beyond the realm of foreign investment.

This article was first published in Fraud Intelligence.