Compliance and International Arbitration: Once Separate, Now Becoming Inextricably Linked

Often studied and practiced separately, the worlds of anti-corruption compliance and international dispute resolution are now intersecting. This is particularly true in international arbitration, where tribunals are now routinely presented with allegations that the conduct of one or both of the parties is tainted by corruption.

The stakes are high, as claims or counterclaims based on corruption allegations can have dramatic consequences for the outcome of a dispute. Consider that a successful corruption-based argument can:

• Lead to a denial of jurisdiction over the underlying dispute or a rejection of the basis of a claim
• Dispose of the claim on the merits by a finding that the contract is void or unenforceable
• Lead to a wanted or unwanted settlement
• Cause an award to be set aside
• Allow a party to resist award enforcement
• Waive rights to an award

As such, it is becoming increasingly important to develop a framework for understanding and responding to the ways anti-corruption compliance can impact international arbitration.

Three forces are at play

Three forces underpin the rising prevalence of corruption allegations in international arbitration.

First, as business becomes increasingly complex and global, companies and regulators alike are paying closer attention to compliance through heightened due diligence, audits, and internal and external investigations. However, when business relationships sour or when these compliance efforts uncover potentially improper conduct, compliance considerations often resurface as outright corruption allegations before arbitration tribunals.

Second, the fight against corruption is crystallizing into a globally recognized public policy objective. Today, international dispute mechanisms — be it courts, mediators or arbitrators — are increasingly prone to recognizing concerns of this nature. This can lead to civil consequences from tainted obligations, thus further encouraging parties to allege corruption.

Third, raising corruption allegations in arbitration entices national courts to entertain such claims. Even at the conclusion of arbitrations, national courts have come to play an important role, as they are increasingly being asked by the winning or losing parties to review corruption-related issues.

Note also that while arbitral tribunals are generally reluctant to void contracts over corruption claims, national courts are increasingly willing to do so. Ultimately, courts decide whether enforcing the allegedly tainted contracts at issue would violate the public policy of their country. As such, parties may strategically choose to present corruption claims during arbitration in the hopes that such claims might be successful upon review by lower courts.

Three key issues

Recognizing this phenomenon, our team took a deep dive (see chapter six of our FCPA and Anti-Bribery 2022 Alert) into recent cases to identify and illustrate the evolution in how tribunals and courts are treating corruption claims within arbitration. Looking at examples from the U.S., France, England and the Netherlands, key themes we’ve identified include:

Certain types of cases are the most likely to attract claims of corruption

Corruption allegations are increasingly common in both commercial and investment arbitration. These claims are raised in a variety of contexts, most often defensively, either as a respondent’s defense to a contractual or treaty-based claim or as the basis for a respondent’s counterclaim. The main situations where corruption is increasingly alleged include:

• Contracts for services that involve potentially corrupt activities
• Contracts with intermediaries
• Commercial or state contracts potentially procured through corruption
• States actions (solicitations, rescissions, investigations into corruption)

Of course, the strategy adopted will largely depend on the facts of the dispute, national laws and standards available to the parties in the context of a specific arbitration. Parties will likely use any and all strategies at their disposal to weaponize corruption allegations most effectively within a contract dispute.

Those introducing corruption into proceedings often rely on ‘red flags,’ albeit with mixed results

While corruption claims in arbitration proceedings are brought in a variety of contexts and stages of a dispute, they all present parties and arbitrators with both methodological and substantive questions. Perhaps the most significant issue is the extent to which a party can rely on various “red flags” as a tool to advance corruption claims in international arbitration.

Along with the standard and burden of proof, the function of red flags in international arbitration is hotly debated. At the heart of this debate, tribunals and lower courts continue to disagree over: (a) the value of red flags as evidence of corruption and (b) the use of red flags to meet (or not meet) a party’s burden of proof.

In one recent arbitration, the respondent cited various red flags as a basis for withholding payment to the claimant. The respondent went so far as to argue that the claimant should bear the burden of proving that it had not acted in a corrupt manner. Ultimately, it was concluded that red flags alone were not sufficient to reverse the burden of proof nor were they conclusive evidence of the claimant’s corruption.

Another observation is that national-level lower courts tend to view a respondent’s corruption-based arguments more favorably than might an arbitral tribunal. Not only does this trend run counter to the generally deferential standard adopted by lower courts towards tribunal decisions, but it also suggests that lower courts are more likely than arbitral tribunals to interpret red flags as evidence of corruption. In turn, this further encourages the overall trend of including corruption allegations as an intrinsic part of a party’s dispute resolution strategy.

Investigations — past, present or ongoing — are another key means of alleging corruption

This means any documents elicited during an internal or external investigation can be presented in support of a party’s corruption counterclaims or defenses. Moreover, in a trend concerning compliance professionals and companies alike, parties have attempted to introduce pleas, disclosures and settlement agreements as evidence of corruption or misconduct. In other words, companies that have, in good faith, reached resolutions with authorities risk those resolutions being used against them in the context of an international arbitration.

A respondent might argue that any investigation into corruption is a red flag or even actual evidence of corruption. For example, in Wells Ultimate Service v. Bariven, Alexander Brothers v. Alstom and Rutas de Lima v. Metropolitan Municipality of Lima, respondents all pointed to the existence of investigations and/or indictments as corruption red flags. The implication across these cases is that if a company is under any type of investigation, for allegations relating to the present dispute or otherwise, then the company likely had unclean hands when it entered into the contract under dispute.

Tribunals do not seem responsive to this line of argument. In all three cases, the tribunals found that the mere fact of an investigation, indictment or conviction did not constitute evidence of corruption in contract procurement. The tribunals ultimately concluded that the link between the investigations and the procurement of the contracts was too attenuated and unclear, without the provision of underlying facts and evidence that might link the issues under investigation to the contracting process at issue.

Furthermore, recent cases indicate that respondents are also attempting to introduce instances of government resolutions as evidence of corruption or as corruption red flags. For example, in Vantage v. Petrobras, the tribunal allowed the respondent to introduce a copy of the claimant’s recent 10-Q shareholder filing, which contained information on the claimant’s in-principle settlement with the SEC relating to the claimant’s alleged FCPA violations.

The respondent argued that this constituted an admission of guilt in relation to corruption allegations. The tribunal ruled that it could not give evidentiary weight to this filing and rejected the respondent’s attempt to conflate a settlement offer with an admission of guilt. The tribunal stressed the importance of promoting voluntary cooperation and voluntary dispute resolution, as a public policy.

How should compliance professionals respond?

Given the increasing use of corruption claims in the arbitration context, compliance professionals should assume that their work may appear at the center of litigation, including international arbitration proceedings. While strategies for introducing compliance materials relating to potential corruption will vary depending on which side of the dispute a company might find itself, certain recommendations are broadly applicable:

• Be prepared with robust documentation. While compliance professionals should be maintaining robust documentation regardless, the rising risks within arbitration make this exercise even more critical. This includes reviewing, documenting, and cataloguing any materials relating to past, ongoing, or future corruption-related investigations (either internal or external) and due diligence reviews. Compliance professionals must also anticipate that even unrelated investigations, or investigations of adjacent employees or parties, might be dragged into the fray of arbitration.
• Be prepared to assist. When issues arise, compliance professionals should liaise closely with their company’s litigation department to assess which arbitration cases may present compliance and/or corruption-related issues. Increased cooperation between compliance professionals and litigators will allow for better preparation of potential claims, counterclaims, and defenses.
• Develop pre-litigation risk assessments. This is a chance to assess risks and educate the litigators handling the dispute about existing compliance issues that may be raised within the arbitration process.

Based on this risk assessment, compliance professionals and litigators should discuss and map out the consequences such claims could have in the various jurisdictions that may come into play throughout the dispute. The pre-litigation compliance risk assessment could inform discussions about where the tribunal should be seated, if it is an issue for discussion, whom to appoint or where to seek enforcement of the award.

A pre-litigation compliance risk assessment also allows litigators, with the support of compliance professionals, to develop an argument strategy and to anticipate the opposing party’s strategy. For example, how can litigators representing the respondent in an arbitration most effectively weaponize a corruption allegation: as a shield (defense), or as a sword (counterclaim)? By contrast, how can litigators representing the claimant preempt these allegations or use the respondent’s participation in the alleged corruption to undermine the respondent’s position?

Be in it for the long haul. A case isn’t over until it’s over — and may cycle on for years on end. It may also begin in arbitration then shift to lower national courts or take any number of twists and turns. Recognize also that there will be varying treatment contingent on the venue. As a result, be prepared for continuing collaboration between compliance professionals, arbitration litigators and general litigators throughout the lifecycle of the case.