TagTime with Vladimir Khvalei – Corruption in international arbitration: red flags, burden and standard of proof*

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Author: Natália Rincon**


Vladimir Khvalei,† a partner in Baker & McKenzie’s Moscow office, discussed the issue of corruption in international arbitration with Dr. Kabir Duggal and Amanda Lee in the episode titled “Corruption in international arbitration: red flags, burden and standard of proof” of the TagTime webinar series ran by Delos Dispute.[1]

Mr. Khvalei begins his presentation by stating that understanding a criminal’s mind and how he conducts his business helps to identify red flags in an arbitral proceeding. On this note, he analyzes corruption from the criminals’ perspective and presents a path they would generally follow. First, they would conduct their businesses in a highly corrupted country, where people are more susceptible to bribery. Second, they would avoid the private sector and instead target states, state-owned or publicly listed companies where control mechanisms tend to be less efficient. Third, they would look for an industry that receives many public funds, such as defense, public health, telecom, or construction.

Further, Mr. Khvalei suggests that these arrangements would be disguised as seemingly legal contracts, normally with an intangible subject matter that could be an agency or brokerage agreement. As for the payment, the parties would come up with an unusual structure. For example, the agency fees would be payable in percentages in an amount unreasonably high compared to the agent’s work and payable only after the main contract is awarded. Another common trait of this kind of arrangement would be the absence of an office for the agent to perform his obligations under the agency contract or insufficient personnel capable of carrying out work. Also, there would typically be a lack of substantial records confirming the performance under such a contract. These circumstances should prompt the arbitrator to look deeper into the case for possible corruption.

Mr. Khvalei moves on to confront the issue of whether international arbitration is a safe harbor for corruption. He believes that, unfortunately, this is still often the case. Parties with malicious intentions are still resorting to arbitration to give effect to agreements that conceal corruption. The speaker believes that some factors may contribute to this reality. Often, arbitrators do not consider they must investigate corruption ex officio. Arbitral tribunals also lack investigative apparatus due to their private nature, preventing them from issuing coercive investigative measures. Further, it is common for arbitrators to place the burden of proof on the party alleging corruption and impose a high standard of proof.

The speaker provides examples of cases in which the tribunal imposed a high standard of proof and refrained from making findings on corruption despite the red flags. For instance, in ICC Case No. 13384, the tribunal concluded there was “no conclusive evidence of corruption”, even in the face of a shortage of written evidence, no indication of bank accounts for payments, consultant’s lack of experience, and ill-defined purpose of the agreement. Likewise, in ICC Case No. 7047, the tribunal considered a brokerage agreement through which the parties agreed to a high commission fee and whereby the agent was not required to prove its actual services would amount to a “mere suspicion”, which was insufficient to make findings on corruption. Mr. Khvalei sustains that this classic approach to the standard of proof is ineffective in cases involving corruption. First, the opposing party often does not have evidence of corruption as those involved in criminal activities do not leave footprints. Second, the lack of coercive measures makes it even harder to obtain evidence. Finally, sometimes neither party makes allegations of corruption, which would prevent the arbitrators from analyzing the matter.

By contrast, Mr. Khvalei highlights a new trend that might be arising in international arbitration that requires tribunals to raise the issue of corruption sua sponte. He thinks that a tribunal that overlooks corruption might face several consequences such as violation of national and international public policy, the invalidity of the award, and the risk of lending credibility to illegal conduct. In some cases, it might even mean that arbitrators are aiding and abetting a crime by facilitating the payment of bribes, which could result in the criminal liability of the arbitrators themselves. To avoid such consequences, Mr. Khvalei proposes measures the tribunal should take when faced with a case that presents red flags, such as inviting the parties to provide evidence on the agreement’s legitimacy and shifting the burden of proof. The speaker provides examples of awards in which the tribunal proceeded accordingly. For instance, in ICC Case No. 12990, the tribunal made findings based on indicators of corruption and stated that “after examining typical indicators of corruption (lack of evidence, brevity negotiations, unusual payments arrangements, disproportionately high remuneration, corruption endemic in-country concerned, secrecy, incrimination of persons involved), the tribunal found evidence of corruption, held that the agreement as void and dismissed Claimant’s claim.”

Mr. Khvalei also addresses the treatment national courts are giving to such cases and gives an example of a well-known case where the award was set aside due to the tribunal’s failure to assess corruption properly. In ICC Case No. 21754/FR, the tribunal ruled that there was no direct evidence that the respondent obtained the agreement through bribery and that no findings of corruption should be based on alleged indications of corruption. In the set-aside proceedings filed in the Netherlands, the national court found that the arbitral tribunal imposed a too strict standard in requiring direct proof. The court concluded that the case provided “strong indications” that the agreement was obtained through corruption and the award was ultimately annulled. The speaker considers that this approach taken by national courts sends a strong message to arbitral tribunals that they should not close their eyes to corruption.

As a closing remark, Mr. Khvalei shares the “Toolkit for Arbitrators” produced by the University of Basel’s Competence Center Arbitration and Crime, which contains guidelines for arbitrators to deal with corruption. On the same note, he shares the work of the “ICC Task Force: Addressing issues of corruption in international Arbitration”, on which he is co-chair, which intends to summarizes best practices in various countries. Both initiatives provide guidance on how to proper address corruption in arbitration.

[1] Vladimir Khvalei, Corruption in international arbitration: red flags, burden and standard of proof, TagTime (July 8, 2020), available at https://member-delosdr.org/video-tagtime-vladimir-khvalei-on-corruption-in-international-arbitration-red-flags-burden-and-standard-of-proof/.

* This post is part of a series summarising Delos Disputes Resolution’s TagTime webinars. A list of past TagTime webinars is available at https://delosdr.org/index.php/past-webinars/.
** Natália Rincon is a Brazilian lawyer and a current LL.M candidate at Columbia Law School (’21).
† Vladimir Khvalei is a partner in the Moscow office of Baker & McKenzie and heads the firm’s CIS Dispute Resolution Practice Group. Mr. Khvalei is former Vice-President of the ICC International Court of Arbitration (July 2009 – July 2018) and a member of the London Court of International Arbitration (LCIA).