The Reciprocity Dialectic in Transnational Corruption

The Reciprocity Dialectic in Transnational Corruption: The Relative Responsibility of Private and Public Actors Under International Law 

Aloysius Llamzon and Abhik Chakraborty[1]

Introduction

Among the perennial threats to global public order, few can match transnational corruption’s reach and intractability. Characterized by Professor W Michael Reisman as “catastrophic” for developing countries decades ago, the problem of transnational corruption remains undiminished by time: the 2018 World Bank and World Economic Forum estimated, respectively, that $1 trillion is paid in bribes globally every year, costing the world economy at least $2.6 trillion or five percent of the global GDP. Transparency International’s 2023 survey reports that more than forty percent of the top fifty states receiving foreign direct investment have “serious corruption problems.” In spite of the magnitude of the problem, effective national responses have been sporadic. The United States enacted the Foreign Corrupt Practices Act in 1977—a watershed (however imperfect) response to transnational corrupt behavior as Reisman observed at the time.[2] However, other traditionally capital-exporting countries having been slow to follow the United States’s example.

International law has mustered an even more modest response to the problem of transnational corruption: most of the advances in anti-corruption have been in the realm of norm-generation that occurred in the lawmaking peak of the 1990s and early 2000s. Anti-corruption norm-generating instruments include the 1997 OECD Anti-Bribery Convention, various regional anti-corruption treaties, and the 2004 UN Convention Against Corruption (UNCAC).[3] However, these treaties are largely aspirational, having very little coercive bite at the supranational level. In fact, there has been no establishment of a specialized international tribunal or court to enforce anti-corruption norms. Instead, enforcement of these international instruments has, so far, been left to individual states. Yet, state-led enforcement can be problematic where those states are captured by the same corrupt regimes and systems of power that contribute to the problem. Thus, to exert real control over corrupt conduct, these norms must be enforced through external binding mechanisms. Specifically, anti-corruption norms should be enforced through international commercial and investment treaty arbitration, where a small but growing body of cases has begun to examine issues of corruption seriously and punish unlawful conduct, particularly over the last two decades.[4]

Most investment tribunals have consciously refused to accord any protection whatsoever to investments tainted by corruption, effectively punishing only the foreign private investor’s unlawful conduct. In these cases, investors who may have made significant investments into a state nonetheless face the prospect of having those investments fall outside the protection of an investment treaty if it is shown that an act of bribery occurred at the time the investment was made, even if it occurred with the active participation (and in some instances, the solicitation) of high-ranking public officials of that state. [5] In other words: corruption has evolved into a powerful trump card—its presence acts as a complete defense for host states, who only need to prove the bribe in order to be released from unlawful behavior that may have occurred against the investor. The success of the corruption trump is underpinned by the notion that a public official’s corrupt act is incapable of engaging the responsibility of the state, even if they are the head of the state.

In recent years, there has been a noticeable shift: some investment arbitral tribunals have explicitly acknowledged a central tension underlying the fight against corruption. These tribunals have begun asking how they are meant to account for the messy reality that corruption is a fundamentally bilateral and consensual act. If the consequences of bribery fall only on the investor, then instead of being incentivized to prosecute and punish corrupt public officials, states are actually incentivized to engage in corrupt conduct. This is because the taint of corruption in an investment helps negate responsibility for any arbitrary or expropriatory policies that might affect that investment in the future. As a result, when only one party to a reciprocal transaction is held to account, the problem of transnational corruption is greatly exacerbated.

In Part I of this Essay, we elaborate on the bilateral and reciprocal nature of corruption and highlight the inequities resulting from the failure of accounting for this reciprocity in investment arbitral decisions dealing with corruption. In Part II, we show that these investment arbitral decisions are inconsistent with various national and international legal frameworks which militate against an outright dismissal of corruption-tainted contractual claims. In Part III, we discuss the importance of the international law concerning the responsibility of states for the unlawful conduct of public officials in the context of corruption and how critiques of ascribing responsibility for corruption upon states fall short. In Part IV, we propose a framework that urges arbitral tribunals to adopt greater balance when allocating the consequences of a corrupt act between the state and the foreign investor. We suggest that this balance can be best achieved based on principles of state responsibility, proportionality, and good faith. Generating greater accountability for states by holding them responsible for the corrupt conduct of their public officials can better serve the broader public policy goal of combating transnational corruption.

I. The Bilateral Nature of Corruption in International Trade and Investment

In the paradigmatic form of corruption in international investment and trade, the foreign investor pays a bribe to a public official in exchange for the exercise of public power in that investor’s favor. Often, the private investor pays the bribe either to secure the contract itself or to maintain the ability to continue operating an investment already made in the state. Without the meeting of minds between these private and public actors, the quid pro quo characteristic of bribery cannot occur. The investor-payor is often called the supply side, or the “briber,” while the public official is the demand side, or the “bribee.” The relationship between briber and bribee forms a spectrum. On one end of the spectrum, the bribe is not truly voluntary and is either supplied or received out of compulsion rather than condonation. Solicitation (where a public official demands a bribe in exchange for awarding the contract to the briber) or extortion (where a public official threatens to cancel a license or an investment contract on failure to pay a bribe by the briber) by the public official are characteristic examples of this form of bribery, which is often seen in case law. The terms briber and bribee hold less meaning in such instances as the public official bribee is not a passive actor—they are forcing the corrupt act.[6]

At the other end of the spectrum is a voluntary meeting of the minds between the two sides. In this situation, the investor offers the bribe to gain an economic advantage over its competitors prior to the bidding for the contract, and that bribe is taken by a public official who did not coerce the briber and was not coerced to exercise discretion and make public decisions to the briber’s advantage. Here, despite a lack of coercion by either the briber or the bribee, the investor is still awarded the contract. Such situations are where the most characteristic quid pro quo found in the statutory definition of bribery occurs: the consummation of bribery results in a reciprocal transaction between the two sides where the investor and the public official have exchanged benefits. The definition of bribery in UNCAC codifies this reciprocity: “the promise, offering or giving to a public official . . . an undue advantage . . . in order that the official act or refrain from acting in the exercise of his or her official duties.”

The reciprocal nature of bribery brings moral valence to every aspect of the issue. While there is widespread consensus that bribery should be proscribed under both national and international legal frameworks, the proscription itself that “corruption is unlawful” does not take a decisionmaker very far. Faced with the fact that consent to pay and receive the bribe on the part of the private and public actors are necessary to constitute the offense, judges and arbitrators are tasked with the real-world complexity of having to assign the consequences of corruption upon either—or both—sides of the transaction.

Most national anti-corruption legislation criminalizes both the demand side (promise, offering, or giving) as well as the supply side (solicitation or acceptance) of corruption. These laws ascribe specific penalties for each offense consistent with national criminal law which are aggravated or mitigated according to familiar criminal law principles. However, less certainty exists on how the civil consequences of corruption should be split between the two sides, particularly in international investment arbitration. As noted above, in the last twenty years, most investment tribunals have used the corruption trump to dismiss an investor’s corruption-tainted claim as a threshold matter, essentially allocating its consequences solely on the private foreign investor.

The use of corruption as a trump card has some roots in international commercial arbitration dating back to the 1960s. Its modern incarnation in international investment arbitration can be traced to two cases, one arising from a contract (World Duty Free v. Kenya) and the other from a treaty (Metal-Tech v. Uzbekistan), both dealing with allegations of consummated bribery at the time of procuring the contract/investment. In World Duty Free, the investor’s officer admittedly donated $2 million to the President of Kenya while procuring the contract for the construction and maintenance of duty-free complexes in airports. Despite a finding that the bribe was solicited by the head of state, the tribunal decided to punish only the investor. The claims were entirely dismissed on the ground that bribery was prohibited as a matter of transnational public policy as well as English and Kenyan law. In Metal-Tech, the tribunal found that the investor had entered into sham consultancy agreements—one of them with the brother of the Prie Minister of Uzbekistan—while setting up the joint venture (the investment vehicle). The tribunal based the dismissal of the claims on the wording of the so-called “legality clause” in the treaty, which required investments to made in accordance with the host state’s laws. The tribunal ruled that the investment violated the state’s domestic anti-corruption laws. Because the Metal-Tech tribunal considered compliance with the legality clause as a condition precedent to Uzbekistan’s consent to arbitration under the investment treaty, the violation of anti-corruption law amounted to an absence of consent to arbitrate, in the tribunal’s view. These two cases became the bedrock of the jurisprudence that has developed in the last twenty years in the sphere of corruption (and all its related forms such as fraud or serious illegality) and investor-state arbitration.

The World Duty Free and Metal-Tech approach does not fully account for the reality that corruption is an inherently reciprocal act: only one side was punished even though both sides necessarily participated. A moral hazard underlies this result: as Professor Reisman noted, exoneration incentivizes public officials to indulge in more corrupt acts.[7] Similarly, ICJ Judge Joan Donoghue observed that “impos[ing] the costs of corruption entirely on the investor” would do little to “dissuade [public officials] from taking bribes.”

Indeed, the moral hazard of upholding the corruption trump card has not escaped the attention of investment tribunals. Investment tribunals, traditionally, justify the allocation of responsibility to the investor alone by viewing the public official’s taking of a bribe as a distinct act and not the act of the state. In World Duty Free, for example, the tribunal was sympathetic to the “unfairness of the legal case now [sic] advanced by Kenya” and observed that “[i]t remains 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” and that “no attempt ha[d] been made by Kenya to prosecute him for corruption or to recover the bribe in civil proceedings.” Nevertheless, the tribunal dismissed the claims, noting 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 tribunal also refused to attribute knowledge of corrupt conduct upon Kenya: “Moreover, there can be no affirmation or waiver in this case based on the knowledge of the Kenyan President attributable to Kenya. The President, here, was acting corruptly, to the detriment of Kenya and in violation of Kenyan law (including the 1956 Act). There is no warrant at English or Kenyan law for attributing knowledge to the state (as the otherwise innocent principal) of a state officer engaged as its agent in bribery.” Effectively, the World Duty Free tribunal refused (albeit more as a matter of English law than international law) to attribute the illicit conduct of the President—highest public official of Kenya—to the state itself.

Years after World Duty Free, subsequent tribunals seem to take the moral hazard issue more seriously. A more nuanced approach to corruption is found in Spentex v. Uzbekistan, for example, where the tribunal acknowledged that the corruption defense leads to punishing the investor only “while corrupt host States are left off the hook,” which would “reinforce perverse incentives” as it would “grant . . . impunity to a respondent State both in respect of the alleged corruption and the claimant’s investment claims.” Nonetheless, the Spentex tribunal held that it was “helpless” to sanction the state for its role in the corruption—similar to the Metal-Tech case noted above, the tribunal found that the investor’s failure to comply with the state’s anti-corruption norms breached the legality clause leading to vitiating the state’s consent to arbitration.

Cases like Spentex signal a belated but welcome recognition of the imbalanced outcome of the corruption trump. These cases recognize that leaving the investor to bear the entirety of the consequences of corruption (without any other effective remedy, whether in arbitration or outside it) has the effect of incentivizing (or at least allowing) the state to act with impunity toward that investment and investor in circumstances where both sides were involved in the underlying illegality. Despite this recognition, tribunals have largely been reluctant to take meaningful measures to restore balance to the equation. This resistance stems from the sense that irrespective of the state’s role in the corrupt act, claimants deserve no relief whatsoever in such cases, in view of norms such as the transnational public policy prohibiting corruption (as relied upon by the World Duty Free tribunal), the legality clause (as relied upon by the Metal-Tech and Spentex tribunals), or the clean hands doctrine (which requires the claimant to have done equity when seeking equitable relief). As we discuss below, this rigid approach (i) is not in sync with the existing national and international legal mechanisms dealing with corruption-infected contracts and (ii) lacks firm legal footing insofar as it does not apply principles of state responsibility in the corruption context.

II. Accountability for Public Official Corruption: International Instruments and the “Odious Debt” Doctrine

To address the moral hazard for public official corruption from the standpoint of international law, one must start with the law as it currently exists. Among the various treaties that deal with corruption, only one binding international instrument provides actionable guidance on its civil aspects.[8] In 2003, the Council of Europe’s Civil Law Convention on Corruption came into force, requiring member states to enact laws (i) declaring contracts “providing for corruption” to be null and void; and (ii) allowing persons whose consent to the contract was “undermined by an act of corruption” to apply to the court for the contract to be declared void. This provision is aligned with both civil law and common law systems, which provide that contracts for corruption are null and void, while contracts procured through corruption are voidable.[9] As regards the former, a contract whose sole purpose is to bribe public officials, however masked by artifice, would historically have resulted in two consequences. First, the contract would be considered void ab initio (i.e., from the outset). Second, claims arising from that contract would be considered inadmissible, resulting in no form of contractual or quasi-contractual relief being available for such contracts.[10]

However, recent cases from the UK have signaled an important shift from the more severe approach of the 2003 Civil Law Convention on Corruption in relation to contracts providing for corruption. In 2016, the UK Supreme Court in Patel v. Mirza overturned two centuries of precedent, including the 1775 case of Holman v. Johnson case cited explicitly by the World Duty Free tribunal as its basis for allowing the consequences of the bribe to fall solely upon the investor due to the contract’s unenforceability. The Patel court held that claims arising from an illegal contract (which is void ab initio) would not automatically be considered inadmissible. Instead, the court sought to strike a balance between the public policy underpinning the relevant legal provision purportedly breached (which results in the illegality of the contract) and the nature and seriousness of the claimant’s wrongdoing, to determine the extent of restitution. This decision demonstrates a landmark shift in English law from the former position favoring an outright dismissal of a claim arising from an illegal contract to a new position which entertains the possibility of restitution on illegality tainted claims based on facts and circumstances surrounding both parties’ conduct. This shift in the legal position was subsequently confirmed by the UK Supreme Court in 2020 in Stoffel & Co. v. Grondona.

As regards contracts procured by corruption, the consequences are even more nuanced. Such contracts do not lead to an inadmissibility (much less a lack of jurisdiction) outcome. Consistent with the Civil Law Convention on Corruption, most national jurisdictions deem these contracts to be voidable at the option of the “innocent” party. If the “innocent” party has knowledge of the corrupt acts but continues with the performance and enforcement of the contract, it may lose the option to rescind it subsequently. Ascertaining the “innocence” of a party turns on the degree to which knowledge of the corrupt conduct by the public official is attributable to the state. A tribunal would need to investigate whether the party claiming to be innocent (i) was in fact (or in law) considered to be complicit in the corruption; or (ii) if not complicit, had knowledge of the corruption but chose to ignore it as the contract was being performed. When considering the first question from the standpoint of international law, the issue of state responsibility for corruption, discussed in Part III, arises. In any case, this rule on voidability arising from a contract tainted by corruption does not favor an automatic dismissal of claims; a more nuanced assessment of the factual circumstances surrounding the corrupt act focused on the degree to which the “innocent” counterparty either participated in or knew of the corrupt act but ratified the contract through conduct is required.

Another international institution that has spoken to the issue of civil consequences of corruption is the International Institute for the Unification of Private Law (UNIDROIT), through its 2016 UNIDROIT Principles of International Commercial Contracts. Article 3.3.2 of the UNIDROIT Principles provides that restitution may be granted to the party which has performed the contract if it is reasonable in the circumstances, even if the parties had infringed a national or international “mandatory” rule. Corruption is one such mandatory rule, given its public policy implications and treatment as a crime. Indeed, this provision was drafted in the context of corruption-infected contracts. The Official Comments to the UNIDROIT Principles notes, in the context of a construction contract tainted by corruption between a foreign investor and a state, that

under the circumstances it would not be fair to let the [new government] have the almost completed power plant for half the agreed price. [The contractor] may be granted an allowance in money for the work done corresponding to the value that the almost completed power plant has for [the government] and [the government] may be granted restitution of any payment it has made exceeding this amount.

To assess reasonableness, Article 3.3.2 lists several factors, including the “purpose of the infringed rule,” “the seriousness of the infringement,” “the parties’ reasonable expectations,” and “whether one or both parties knew about the infringement.” Thus, the UNIDROIT Principles preclude a blanket ban on all claims arising from contracts tainted by corruption. As with the voidability rule under the Civil Law Convention on Corruption, the UNIDROIT Principles leave the door open for restitution depending on the circumstances of the case.

An illustrative case that considers the consequences of proven corruption tainting the underlying contract is the Netherlands-seated Wells v. Bariven arbitration and its related Dutch court proceedings. In Wells, an international commercial tribunal rendered an award in March 2018 directing Bariven (a subsidiary of Venezuela’s national oil and gas company PDVSA) to pay $11.7 million (plus interest and costs) to Wells (a U.S. company) for failing to pay for oil drilling equipment which Bariven had acquired from Wells pursuant to a 2012 contract. Bariven had alleged in the arbitration that the contract should not be given effect because Wells had procured it through bribery. While the tribunal was not convinced that Bariven had met the high standard of proof required to establish Wells’s corruption, it also observed that even if bribery had been proven, Dutch Law (which governed the contract) would have required Bariven to either return the drilling equipment or pay compensation to Wells. In subsequent setting-aside proceedings, the Dutch Supreme Court overturned the Hague Court of Appeal’s decision (which had set aside the award on finding strong indications of corruption), on the ground that Bariven had not challenged the arbitral tribunal’s obiter dictum regarding the need to pay for the equipment even if the sales contracts were proven to have been procured through the payment of bribes.^[11] Wells is thus a vivid illustration that national laws do not generally consider corruption a rule of jurisdiction or admissibility of claims. Indeed, it is an example of national law favoring the granting of restitution even for corruption-tainted contracts, rather than leaving the claimant without any contractual remedy.

The above examples of national and international legal frameworks support the view that contractual claims tainted by corruption do not deserve an in limine dismissal. Rather, these frameworks entertain the possibility of restitution or unjust enrichment on such claims based on examination of several factors such as the extent of wrongdoing committed by either side. The examination of these factors safeguards against the inequities arising from letting the consequences of a bilateral act of corruption slide to only one side of the equation.

III. Reciprocity and Relative Responsibility in International Law and Investment Treaty Arbitration

The search arbitral tribunals have recently undertaken to establish greater accountability for public actors who participated in an act of corruption has deep roots in international law that bear examination. One putative principle of public international law that emerged from the post-colonial and post-imperial age of the last century—the so-called odious debt doctrine that sought to punish foreign lenders who knowingly or negligently allowed corrupt public officials to capture the benefits of loans made to developing states—never took hold precisely because of its corrosive effects on state accountability.

Between 1917 and 1919, a Costa Rican dictator, F. Tinoco, took state loans for odious purposes (i.e., for personal use but cloaked as a state loan) from the Royal Bank of Canada, which was aware of the illicit end-use of the loans. The government that replaced the Tinoco dictatorship refused to honor the state’s debt obligations for that odious loan. In the ensuing arbitration in 1923, the tribunal observed that a change of government has no impact on a state’s international obligations. Nevertheless, the tribunal allowed Costa Rica to repudiate the loan obligation mainly because the Royal Bank of Canada was aware of the corrupt purposes of that loan. In 1927, the Russian scholar Alexander Sack gave a new name to the principle underlying the Tinoco arbitration: the odious debt doctrine. He described odious debt as having three elements. First, the state’s people did not consent to the debt. Second, the debt was taken by a despotic regime for its own personal benefit. Third, the creditors were aware of the first two conditions at the time they extended the debt to the state. According to this doctrine, if these elements are met in a particular state debt transaction, then a non-complicit successor government should be entitled to repudiate the debt. The principle has since evolved further to bring within its fold loans taken for lavish and uneconomic “white elephant” projects used as a front for pillaging of state resources by authoritarians such as Ferdinand Marcos in the Philippines or Saddam Hussain in Iraq.

Regardless of its salutary intent, however, the principle of odious debt never achieved the status of customary international law. Private creditors and states alike have continued to insist that a change of government has no impact on the state’s debt obligations; successor governments remain liable for the debts of predecessors. From one standpoint, states effectively argued that knowledge of corrupt conduct perpetrated by public officials is attributable to the state itself, such that the state remains bound by its debt obligation even if the successor government’s public officials had no knowledge of and were not involved in that corrupt conduct. Arguments such as those found in World Duty Free—where knowledge of corrupt conduct was found not to be attributable to the state—would have no currency in international law if viewed from an odious debt framework. International law’s rejection of the odious debt doctrine lends further credence to the view that the consequences of corrupt conduct need to flow to both investors and states alike. Indeed, states seem to have the clear advantage of the corruption trump under international law only in the limited area of investment treaties.

Investment arbitral tribunals are not “helpless” as lamented in Spentex v Uzbekistan in demanding accountability from both sides as part of an overall effort to deter corruption. Principles of state responsibility, along with a more holistic understanding of international anti-corruption law, can be directed towards a more balanced approach. A two-pronged approach is necessary. First, there should be no doubt that a public official’s instigation of or participation in bribery can be attributed to the state following Article 7 of the International Law Commission (ILC) Articles. Second, states have a positive obligation under international law to prevent bribery on the part of their public officials and to prosecute those officials. These principles and their implications for anti-corruption decision-making within the context of investment arbitration has been discussed at length by one of the authors.

In essence, resistance to ascribing responsibility to states for corrupt conduct lies in the argument that a lex specialis concerning corruption exists that sets it apart from the ordinary rules on state responsibility (i.e., a “primary rule” exists in international law that precludes responsibility for states from the corrupt acts of its public officials). This “primary rule” is said to be grounded on a number of principles, including the legality clause, transnational public policy, and the unclean hands doctrine and its Latin cognates. However, when properly considered, serious doubts can be raised on the supposed trumping effect that each of these principles brings.

Legality Clause

Several bilateral investment treaties prescribe that an investment must be made “in accordance with” the host state’s laws. This is commonly referred to as the legality clause, which arbitral tribunals tend to treat as a jurisdictional condition operating as a limit on the host state’s consent to arbitration should there exist any illegality such as corruption in the making of the investment. As set out in Part I above, the Metal-Tech tribunal was the first case in which the jurisdiction was denied on the ground that lack of compliance with anti-corruption laws of the host state violated the legality clause.

There exists, however, considerable opposition to the way the legality clause has been interpreted in the corruption context. Professor Zachary Douglas, for example, is of the view that legality clause should be limited to examination of the question as to whether the investment, (i.e., the acquisition of the assets) complies with the formal conditions of the host state’s laws, rather than being a question of jurisdiction or admissibility of the claim. Additionally, as discussed further below, tribunals have started to depart from this rigid all-or-nothing interpretation of the legality clause, most explicitly in Kim v. Uzbekistan.

Transnational Public Policy

As set out in Part II, anti-corruption norms exist across jurisdictions: the existence of a transnational public policy proscribing corruption is uncontroversial. Investment arbitral tribunals such as the World Duty Free tribunal have reasoned that there cannot be any relief given on a claim tainted with corruption on account of this transnational public policy. The fundamental problem with this approach is a failure to recognize that whilst the transnational rules prohibit corruption, they, as we saw in Part II, do not promote an automatic dismissal of corruption-tainted claims on jurisdictional or admissibility grounds. In fact, the global consensus appears to favor hearing the case on the merits, and apportioning responsibility of corruption in light of facts and circumstances, rather than treating it as a jurisdictional matter.

Clean Hands Doctrine

The clean hands doctrine is a principle in equity which arises from the Latin expression in pari delicto melio est conditio possidentis. It translates to “he who has done inequity shall not have equity.” Put differently, the doctrine requires the claimant to approach the court with clean hands in respect of the matter for which it seeks relief. Some investment arbitration tribunals have applied the clean hands doctrine to outrightly dismiss claims which are infested with illegality such as corruption, and let the loss lie where it falls.

However, the binding status of the clean hands doctrine itself is at best uncertain under international law. The Yukos tribunal, for instance, concluded that the clean hands doctrine has failed to attain the status of a principle of international law, while the Niko v. Bangladesh tribunal observed that its status under international law “remains controversial and its precise content is ill defined.” In any case, the clean hands doctrine is an equitable doctrine that should be responsive to the particular context of a case, not an inflexible rule that disregards relative participation in the corrupt act.

Bringing basic principles of state responsibility to bear in anti-corruption decision-making is only the beginning of the analysis, however. In a world where the act of seeking or taking a bribe by the public official is imputable to the state, decisionmakers must also be careful not to move too far on the other side. It would also defeat the purpose of greater accountability if states were entirely unable to raise corruption issues as a defense before a tribunal.

IV. Restoring the Reciprocity Balance in Investment Treaty Arbitrations

It is important not to go too far in placing all of the responsibility for corruption on states. One of the pitfalls of a stringent application of the ILC Articles, for example, lies in the tension between attribution of knowledge and attribution of conduct of the public official to the State. As Reed and Zamour correctly observe, it would be inconsistent to attribute only the conduct (or act) of the public official to the state, but not the knowledge of the bribe to the state. As set out in Part II, under national and international frameworks, a respondent is prevented from raising the corruption defense if it is established that it knowingly ignored the corrupt acts during the performance of the contract. Therefore, if, on application of the ILC articles, knowledge of corruption is automatically attributed to the state from the moment the bribe is consummated, there is a risk that the state loses its “innocent” status from that point onwards, precluding it from rescinding contracts tainted by corruption outright. This would create a total restriction on the state’s ability to raise the corruption defense even in situations where the corrupt regime is being prosecuted by a new successor regime which had no role in the prior administration.

Rather than a strict application that automatically attributes knowledge to the state (from the moment the illegality occurred), the more balanced approach would be, for example, to defer to the good faith obligations of the state to prosecute the corrupt individuals prior to the arbitration. In Copper Mesa v. Ecuador, one of the jurisdictional objections was based on “grave allegations against the Claimant for violations of international law” under the unclean hands doctrine. The tribunal did not favor an “outright dismissal of the claims” in circumstances where the alleged conduct took place “openly and in view of the Respondent’s governmental authorities.” However, no complaint was raised prior to the arbitration as regards “international law, international public policy and human rights.” The tribunal, referring to the state’s good faith obligations under the treaty, decided that it “was far too late” to raise these objections by way of a jurisdictional matter. This approach diverges from those of the Spentex and World Duty Free tribunals, who, as noted in Part I above, lamented the state’s unwillingness to take any domestic action against the corrupt conduct, but nonetheless dismissed those claims.

The Copper Mesa approach ensures that arbitral tribunals remain empowered to investigate corruption fully to apportion the consequences of the corrupt act as circumstances warrant. As such, this approach prevents the moral hazard of states being able to use their own officials’ corruption as a complete defense while also holding investors accountable because they cannot claim the state’s imputed knowledge of the corrupt act automatically. Ultimately, the goal should be to strike the right dialectic between doing too much and too little.

With this goal in mind, the principles of proportionality are the optimal way to reach a more sophisticated fact-based decision which allocates the consequences of the corruption between the investor and the state. These considerations have found their way in some recent arbitral decisions. In Kim v. Uzbekistan, the tribunal, while dealing with corruption allegations and the legality clause, favored a proportionality analysis centered on the “particulars of the investor’s violation” rather than only on the “gravity of the law.” The tribunal recognized the need to balance the object of “providing a stable investment framework with the harsh consequence of denying the application of the BIT in total when the investment is not made in compliance with legislation.” The Kim tribunal’s decision to view the legality clauses from a proportionality lens has been endorsed by at least two subsequent investment arbitral tribunals. Other tribunals should follow in Kim’s footsteps and continue developing jurisprudence based on principles of proportionality in the corruption context.

Following the adoption of principles such as proportionality and good faith to reject a threshold dismissal of the claim, the arbitral tribunal would then be able to embark on a more thorough investigation of the various facts at the merits stage before deciding on the allocation of blame. Some of these factual considerations may include (i) whether the purpose of the investment contract is legal; (ii) the nature of the corrupt payment made (whether the investor sought a better-than-market economic advantage through the bribe or whether the investor was paying in order to obtain legitimate services or otherwise be treated fairly); (iii) the role of the state in allowing an environment that facilitated the public official’s corrupt act; (iv) whether the officer of the investor engaged in corruption unilaterally or whether higher management was involved; (v) whether the investor had an internal anti-corruption policy; (vi) what steps the state and the investor took in remedying the situation after discovering the illegal act (including prosecution of the public officials said to be corrupt); (vii) at what stage of the contract the corruption took place; (viii) whether systemic corruption occurs in the state; and (ix) the extent to which the investment project contributed (or not) to the economic development of the state.

Once the tribunal has ascertained the extent of fault of each party, it could then decide the extent to which the investor’s claim of restitution should be reduced if the investor prevails on merits of the claim. In Copper Mesa, the tribunal took account of allegations of the claimant’s illegality related to the investment as part of its merits review “under analogous doctrines of causation and contributory fault”: the relevant damages were reduced by 30%. Analogously, there are numerous instances where the tribunals have reduced the investor’s damages after finding that it had contributed to its own injury. For example, in MTD v Chile, the investor’s failure to properly assess the domestic laws prior to the investment led the tribunal to reduce the damages. Another example is Yukos v Russian Federation, where the tribunal held that due to the claimant’s misconduct, the apportionment of liability between the claimant and the state would be 25% and 75%, respectively.

Similarly, the SIREXM tribunal—despite finding that fraud had vitiated the contract (in relation to gold mining)—ruled that restitution should be awarded against the more guilty party as an outright dismissal of the claim would incentivize the wrongdoer to continue engaging in the conduct. The tribunal allowed the claimant to be reimbursed for its contributions to the capital of the joint venture which carried out the development of the sites, but no restitution was granted for any future profits as, in the tribunal’s words, there should be no “bonuses for fraud.” Just like the national and international legal frameworks set out in Part II, the SIREXM approach advocates for granting restitution to the claimant depending on the extent of its wrongdoings. Indeed, even the World Duty Free tribunal—which seems to have dismissed the investor’s claims on grounds of inadmissibility—left the door to restitution open for corruption-tainted contracts. It did so by referring to the “legal consequences following the avoidance of the Agreement”—with the qualifier that the bribe cannot be returned. However, the question of restitution was left unexplored by the Tribunal as the investor did not plead it. 

Conclusion

International law as it relates to transnational corruption is in a curious state. While the law seeks to penalize both the private supplier of the bribe and the public official taking the bribe, the reality is often different when actual cases are decided. Currently, states whose public officials participated in bribery can often rely on corruption as a complete defense against claims made by investors in investor-state arbitration. In these cases, the peremptory nature of the corruption defense precludes an analysis of the cause of the corruption or the degree of complicity of both the state and the investor, with serious implications on public accountability and moral hazard. The result is that the investor is left without an arbitral remedy, while the state may end up with disproportionate gains from having expropriated the investment. So long as all its consequences are absorbed by the private party, states are incentivized to engage in corruption or at least insulated from being asked to account for their role in facilitating the corrupt act or prosecuting the corrupt official. This self-defeating result recalls Professor Reisman’s insight that periodic attempts to expand the scope of anti-corrupt conduct often take the form of “crusades” that possess little more than symbolic meaning.

Lessons can be learned from the way national legal frameworks treat corruption. Such frameworks allow a far more equitable way of determining what the consequences of corruption should be for each side of a corrupt transaction. A mechanism for application in the investment arbitration context grounded on principles of state responsibility and proportionality can help restore the balance between the demand and supply side of the corruption. This would better contribute to world public order in the long term.

[1]  Aloysius Llamzon, Partner, International Arbitration Group, King and Spalding LLP (Washington, D.C.); Professorial Lecturer, Ateneo de Manila University School of Law. Abhik Chakraborty, Juriste (Associate), International Arbitration Group, Clifford Chance (Paris). The views expressed in this Essay are the authors’ alone, and do not represent the views of their firms or of any of their clients.

[2]  W. Michael Reisman, Folded Lies: Bribery, Crusades and Reforms (1979).

[3]  Aloysius P Llamzon, International Efforts to Combat Corruption in Foreign Investment, in Corruption in International Investment Arbitration 43 (2014).

[4]  See Aloysius Llamzon & Anthony Sinclair, Investor Wrongdoing in Investment Arbitration: Standards Governing Issues of Corruption, Fraud, Misrepresentation, and Other Investor Misconduct, in Legitimacy: Myths, Realities, Challenges 451, 468 (Albert Jan Van den Berg ed., 2015).

[5]  In World Duty Free Company Limited v. Republic of Kenya, for example, the tribunal noted that then-President of Kenya Daniel arap Moi apparently had solicited the bribe payment from the foreign investor.

[6]  Llamzon, supra note 2, ¶ 4.86.

[7]  W. Michael Reisman, Foreword in Llamzon, supra note 3, at xi-xii.

[8]  By contrast, the UN Convention Against Corruption gives states autonomy to determine the consequences of a finding of corruption, while also conveying that its presence is only a “relevant factor” in annulling contracts with or rescinding concessions given to private parties. Under Article 34 (Consequences of Acts of Corruption”), “[w]ith due regard to the rights of third parties acquired in good faith, each State Party shall take measures, in accordance with the fundamental principles of its domestic law, to address consequences of corruption. In this context, States Parties may consider corruption a relevant factor in legal proceedings to annul or rescind a contract, withdraw a concession or other similar instrument or take any other remedial action.”

[9]  See Emmanuel Gaillard, The Emergence of Transnational Responses to Corruption in International Arbitration, 35 Arb. Int’l 1 (2019).

[10]  The ICC award rendered by Judge Lagergren—the first reported corruption related arbitration award—is arguably an example of a case where the claims were dismissed as the underlying contract had an illegal purpose: a commission/consultancy agreement for the purpose of bribing government officials.

[11]  Bariven had sought to set aside the award on the ground that the tribunal had incorrectly ignored the strong evidence of corruption but had failed to challenge the tribunal’s obiter dictum that Bariven was liable to pay even if corruption was proven. According to the Supreme Court, it did not matter that the tribunal had described that finding as “obiter dicturm;” it was nevertheless clear that it formed a standalone basis to support the dispositive ruling of the tribunal and therefore needed to be expressly challenged.