Authors: Ana Sofia Monteiro Signorelli*, Carolina da Fonte**, Gustavo Favero Vaughn***
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Corruption is today one of the greatest challenges facing international commerce and has serious detrimental effects on markets, efficiency, and public welfare.[1]
Introduction
Corruption has long been recognized as problematic when present in transactions leading to investor-State arbitration (ISA).[2] It creates jurisdictional challenges, typically raised by State parties, who argue that the alleged corruption associated with investments constitutes gross violations of international public policy.[3] Classic cases illustrating this dynamic include Inceysa Vallisoletana S.L. v. Republic of El Salvador,[4] World Duty Free Co. v. Republic of Kenya,[5] and Metal-TechLtd. v. The Republic of Uzbekistan.[6]
These cases exemplify a recurring theme in which arbitral tribunals often employ the “balance of probabilities” standard of proof to determine jurisdiction in corruption-related cases. This blog post aims to highlight a new paradigm in treaty-based disputes: the necessity of raising the standard of proof, particularly when a leniency program involves the same parties.
How Arbitral Tribunals Address Corruption Allegations
Treaty language plays a crucial role in shaping defensive strategies, as it is the primary source of law in ISAs.[7] When Bilateral Investment Treaties (BITs) contain explicit anti-corruption provisions for specific claims (e.g., Reciprocal Investment Promotion and Protection Agreement Between the Government of the Kingdom of Morocco and the Government of the Federal Republic of Nigeria),[8] determining the impact of corruption claims on proceedings becomes straightforward. However, issues arise when BIT language is ambiguous, often leading States to invoke doctrines like the “clean hands” doctrine[9] to prevent dirty-handed investors from benefiting from the treaty (e.g., Glencore Finance (Bermuda) Limited v. Plurinational State of Bolivia[10]). [11]
Ultimately, whether a case lacks jurisdiction due to corruption allegations hinges on the standard of proof applied by the arbitral tribunal[12]—a discretionary choice.[13] Modern case law reveals that the most frequently applied standard is the “preponderance of evidence,” also known as the “balance of probabilities” or the “inner conviction test,” for civil lawyers. This standard requires a party to demonstrate that its allegations are more likely true than those presented by the opposing party, establishing a genuine dispute where the winner is the one who provides the most compelling evidence.[14]
For instance, in Tokios Tokeles v. Ukraine, the Claimant alleged conspiracy (“nayizd”) that harmed it as a private company.[15] The tribunal applied the “preponderance of evidence” standard, noting it would be illogical to demand proof beyond this threshold in cases of gross misconduct involving high-ranking officials. Furthermore, the tribunal stated that evidentiary requirements should not be elevated merely based on deference or comity.
On similar grounds, the tribunal in Libananco v. Turkey adhered to the preponderance of evidence standard, asserting that while fraud is a serious allegation, it does not necessitate a heightened standard of proof—merely “more persuasive evidence” for inherently improbable claims, thus establishing an objective threshold for jurors or judges to conclude the existence of a fact.[16]
Leniency Programs and the Need for a Higher Standard of Proof
Complications arise when an investor is a company that has successfully participated in a leniency program in the same State that later seeks to invalidate the claim based on a “minimally proven dirty investment.” The stakes are higher in this context.
Leniency programs are designed to encourage entities to admit wrongdoing in exchange for benefits, allowing them to rectify irregularities and restructure their operations.[17] By gaining access to these confessions, the State party to a leniency agreement possesses the evidence necessary to allege corruption issues concerning the lenient company in future ISAs, which ultimately influences the standard of proof required for a corruption-based defense to prevent an investor’s arbitration from proceeding due to a lack of jurisdiction.
Therefore, when an investor has successfully engaged in a prior leniency program and agreed to cooperate with the investment-recipient State, the standard of proof for considering corruption-based defense arguments should be elevated. This necessity arises from (i) the asymmetric access to information between the investor and the State, and (ii) the economic rationale underlying the design of leniency programs.
Using the “balance of probabilities” standard in this scenario would pose significant challenges. The investor would need to produce stronger evidence than what the State presents. Conversely, the State could leverage all available information from the leniency program, dominating the “most likely to be true” narrative, which could enable the tribunal to consistently cite corruption as a basis for jurisdictional dismissal.
Moreover, the mere existence of a leniency agreement should not suffice for objectively proving corruption. Since the State already possesses comprehensive information to formulate its “dirty handed” case, applying a “balance of probabilities” standard would unjustly lower the evidentiary burden on a party with access to extensive data, investigatory tools, and sovereign power to substantiate its allegations.
Finally, the reason for requiring a higher standard in this sort of case goes back to the economics behind the design of a leniency program. That is, a higher standard is essential in these cases to ensure that the drawbacks of leniency agreements do not outweigh their benefits. If they do, the effectiveness of this critical investigatory tool could be seriously compromised.
In practice, some tribunals have adopted higher standards of proof, even when the parties involved did not participate in a leniency program. In Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, the tribunal stated that because decisions on corruption allegations impact the investor’s ability to claim treaty-based protections, proof must meet a “clear and convincing” standard, akin to “beyond a reasonable doubt.”[18]
In Lao Holdings N.V. v. Lao People’s Democratic Republic, the tribunal suggested that not all aspects of corruption allegations must be proven by “clear and convincing evidence,” but all existing evidence must “clearly point to corruption.”[19] This implies a principle that “the graver the charge, the more confidence there must be in the evidence relied on,”[20] indicating a shift in defining the appropriate standard of proof for corrupt acts.
More recently, in Panamerica Televisión S.A v. The Republic of Peru, while the tribunal refrained from delving into academic discussions on standards of proof, it noted that prima facie evidence of corruption does not automatically shift the burden of proof to the opposing party.[21] Acknowledging the inherent difficulty of establishing corruption, the tribunal emphasized that circumstantial evidence must align with broader principles of the rule of law. This reflects a growing trend where the “balance of probabilities” is increasingly viewed as an inadequate standard in cases of alleged corruption.
Conclusion
While the “balance of probabilities” standard only requires one party to present slightly more convincing evidence than the other, the “beyond a reasonable doubt” standard necessitates “proof coming as close to certainty as is humanly possible.”[22] This discourages baseless corruption allegations and mitigates the risk of unnecessary criminal stigma that could undermine a country’s leniency program—a vital tool in the fight against corruption.
Utilizing ISA as a means of enforcing anti-corruption measures is inherently complex due to the intricate legal frameworks involved. However, by applying a higher standard against defensive strategies that could obstruct investors from seeking remedies due to their prior cooperation during State investigations, a more coherent anti-corruption policy can ultimately be achieved.
*Ana Sofia Monteiro Signorelli graduated cum laude in International Relations and Economics at IBMEC/RJ and in Law at the Federal University of Rio de Janeiro. After graduation, she pursued her MSc in Finance at COPPEAD/UFRJ, her LL.M. in International Business Law at Georgetown and is currently finishing her Ph.D. studies in Commercial Law at the University of São Paulo. As a Fulbrighter, Sofia also had the opportunity to serve as a visiting scholar at the George Washington University. After two years of working as a private lawyer, Sofia joined the Brazilian Competition Authority (Cade), where she served as a General-Coordinator, responsible for analyzing mergers and monopolization cases in service sectors, mainly focused on Health, Education, Retail and Financial sectors. Sofia left Cade for a Clerkship with one of the Justices at the Brazilian Supreme Court, mainly focused on the Economic Analysis of Law, position which she left with the purpose of focusing on her academic career. Currently, she serves as partner at her Law Firm, Buzzi Signorelli Advocacia; consultant at Leme Consultores; and short-term consultant at the World Bank Group.
**Carolina da Fonte has graduated cum laude in Law at the University of Pernambuco (UPE), becoming a lawyer right after she finished her college studies. During her Law Degree, Carolina took part on multiple research projects focused on issues related to gender, presenting her work at multiple conferences in Brazil. She also took part at the PEMUN (Pernambuco Model United Nations) project, simulating, and coordinating mock UN committees, aiming to prepare college students on issues related to Diplomacy and International Relations. In that opportunity, she had been awarded due to her participation as a Representative in an Inter-American Court of Human Rights mock trial. Professionally, she served as a paralegal at the Brazilian Public Defender’s Office in the state of Pernambuco/Brazil, being responsible for assisting the Brazilian Public Defenders in collective matters related to housing and other fundamental rights set out in the Brazilian Constitution. She also served as a public service intern at the Court of Justice of Pernambuco. Currently, Carolina is pursuing a postgraduate degree in White-Collar Crimes at the Pontifical Catholic University of Minas Gerais (PUC Minas). Carolina’s practice is mainly focused on Criminal Law, White-Collar Crimes and Compliance.
***Gustavo Favero Vaughn is a Partner at Cesar Asfor Rocha Advogados, in Brazil. He has LL.M. degrees from Columbia Law School and the University of São Paulo. Gustavo is an Alumni Advisor at ARIA and currently serves as an Auditor of the Brazilian Superior Court of Sports Justice for Football. After securing his LL.M. degree at Columbia Law School, Gustavo worked for nine months at the New York office of Cleary Gottlieb Steen & Hamilton LLP as an International Lawyer.
[1] Emmanuel Gaillard, The Emergence of Transnational Responses to Corruption in International Arbitration, 35 Arb. Int’l 1, 1 (William W. Park ed., 2019).
[2] Aloysius Llamzon, Chapter 14: Arbitrating Corruption, in Managing ‘Belt and Road’ Business Disputes: A Case Study of Legal Problems and Solutions 285, 288 (Michael J. Moser & Chiann Bao eds., Kluwer Law Int’l 2021). (asserting that “[i]n international arbitration, the term ‘corruption’ is used interchangeably with transnational bribery on a regular basis. Often, however, what is expressed as ‘corruption’ actually pertains not to bribery, but to the kind of ‘background corruption’ that is more properly classified as trading in influence, sometimes called ‘influence peddling.’ This common typological mistake has real implications, as these two offences – the most common forms of corruption in international arbitration – are conceptually similar but remain distinct, with different elements and different consequences under national and international law.”).
[3] Charles N. Brower & Jawad Ahmad, The State’s Corruption Defence, Prosecutorial Efforts, and Anti-Corruption Norms in Investment Treaty Arbitration, in Arbitration Under International Investment Agreements: A Guide to the Key Issues 455, 455 (Katia Yannaca-Small ed., 2d ed., Oxford Univ. Press 2018). (“Respondent states defending against an investment claim have frequently asserted a corruption defence on the ground that the claimant investor bribed a government official in connection with the investment.”).
[4] Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award (Aug. 2, 2006).
[5] World Duty Free Co. v. Republic of Kenya, ICSID Case No. ARB/00/7, Award (Oct. 4, 2006).
[6] Metal-TechLtd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (Oct. 4, 2013).
[7] Caroline Le Moullec, The Clean Hands Doctrine: A Tool for Accountability of Investor Conduct and Inadmissibility of Investment Claims, 84 Arb. Int’l J. Arb. Mediation & Disp. Mgmt. 13, 13 (2018) (arguing that, as “a general rule, investment treaty claims are determined and assessed based mostly on their substantive and procedural merits, with the foreign investor’s conduct and actions only a limited consideration”).
[8] Reciprocal Investment Promotion and Protection Agreement Between the Government of the Kingdom of Morocco and the Government of the Federal Republic of Nigeria, available at https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5409/download.
[9] Aloysius Llamzon & Anthony Charles Sinclair, Investor Wrongdoing in Investment Arbitration: Standards Governing Issues of Corruption, Fraud, Misrepresentation and Other Investor Misconduct, in Albert Jan van den Berg ed., Legitimacy: Myths, Realities, Challenges, ICCA Congress Series No. 18, 451, 508-9 (2015) (“The maxim, ‘He who comes into equity must come with clean hands’, together with its many equivalent variants (usually couched in Latin), is a well-established principle of equity jurisprudence found in many municipal systems of law, the effect of which is to bar a claimant’s claims due to its illegal or improper conduct in relation to those claims. Claims tainted by wrongdoing therefore will not succeed, and the loss will lie where it falls. The principles that underpin the clean hands doctrine are judicial integrity, justice, and the public interest. The doctrine is frequently phrased, ‘He who has done iniquity shall not have equity,’ or, ‘He who desires relief in equity must himself be free from fault.’ But whatever the manner of expression, the doctrine demands that a claimant seeking equitable relief come into court having acted equitably in that matter for which he seeks a remedy.”).
[10] Glencore Finance (Bermuda) Limited v. Plurinational State of Bolivia, PCA Case No. 2016-39, Award (Sep. 8, 2023).
[11] Domitille Baizeau & Tessa Hayes, The Arbitral Tribunal’s Duty and Power to Address Corruption Sua Sponte, in International Arbitration and the Rule of Law: Contribution and Conformity, ICCA Congress Series, Volume 19, 225, 249 (Andrea Menaker ed., Kluwer Law Int’l 2017). (stating that “[t]ypical situations which may raise suspicions of corruption in international arbitration are: […] An investment-treaty dispute between a foreign investor and a host state, where the investment at issue is suspected of having been made or obtained through corruption. [and] An investment-treaty dispute between a foreign investor and a host state, where the investor alleges illegal treatment as a result of refusing to pay bribes.”).
[12] Olivier Caprasse & Maxime Tecqmenne, The Evidence of Corruption in Investment Arbitration, 39 J. Int’l Arb. 519, 528 (Maxi Scherer ed., 2022). (explaining that, “[a]s to the rules on the prevailing standard of proof, they define the level or degree of confidence required to conclude that the fact of corruption is demonstrated. As such, these rules determine whether the evidence adduced by each party is sufficient to support a finding of corruption. The identification of the laws and regulations applicable to the burden and standard of proof may therefore have a bearing on the outcome of allegations of corruption.”).
[13] Carolyn B. Lamm, Hansel T. Pham et al., Fraud and Corruption in International Arbitration, in Liber Amicorum Bernardo Cremades 699, 702 (Miguel Ángel Fernández-Ballesteros & David Arias Lozano eds., Wolters Kluwer España 2010). (“Regardless of the applicable burden and standard of proof, as determined by the tribunal under the applicable law, a tribunal is free to determine the weight and credibility to be accorded to the evidence presented. This authority granted to a tribunal becomes particularly important because direct evidence is rarely available to prove fraud and corruption.”). See also Aloysius Llamzon, Proving Corruption, in Corruption in International Investment Arbitration 225, 236 (Oxford Int’l Arb. Series, Oxford Univ. Press 2014). (“Thus, the current state of evidentiary principles on corruption seems to be at the beginning of a move away from the uniformity and rigidity of high standards of proof, with tribunals refusing to be pinned down a priori either by particular standards or by formal rules on burden-shifting or presumptions. Given the inability of the prevailing doctrine to generate positive findings of corruption despite its anecdotal frequency and repeated invocation, this is surely a positive development. Without such room for the exercise of discretion, corruption would likely continue to reside in the margins of arbitral decision-making, and would have no practical impact on the outcomes of a vast majority of cases. That unsatisfactory status quo—where not a single investment arbitration case has resulted in a finding of corruption on the basis of contested evidence—would expose international arbitration to further criticism for being a ‘soft touch’ on corruption.”).
[14] Frédéric G. Sourgens, Kabir Duggal et al., Evidence in International Investment Arbitration 76, 78 (Oxford Univ. Press 2018). (clarifying that “[t]his standard requires an evaluation of all the evidence produced by both parties on a particular issue and this evaluation would ultimately result in the tribunal determining which party’s evidence was more likely than not to be true.”).
[15] Tokios Tokeles v. Ukraine, ICSID Case No. ARB/02/18, Award (Jul. 26, 2007).
[16] Libananco v. Turkey, ICSID Case No. ARB/06/8, Award (Sep. 2, 2011).
[17] See Cesar Pereira, Contractual Impacts of Corruption in International Commercial Arbitration, available at https://justen.com.br/wp-content/uploads/2024/02/IE-204-Cesar-CONTRACTUAL-IMPACTS-OF-CORRUPTION-IN-INTERNATIONAL-COMMERCIAL-ARBITRATION.pdf.
[18] Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award (Aug. 16, 2007).
[19] Lao Holdings N.V. v. Lao People’s Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award (Aug. 6, 2019).
[20] Ibid.
[21] Panamerica Televisión S.A v. The Republic of Peru, PCA Case No. 2019-26, Award (date unavailable).
[22] Andrea Menaker & Brody Greenwald, Proving Corruption in International Arbitration: Who Has the Burden and How Can It Be Met?, in Addressing Issues of Corruption in Commercial and Investment Arbitration 7 (Dossier of the ICC Inst. of World Bus. Law, 2015).