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Official warnings of a potential increase in fraud and corruption during the COVID-19 crisis raise the question of how to address allegations of illegality in international arbitration.
Heightened risk of fraud and corruption during the COVID-19 crisis: The public health and economic impacts of the COVID-19 pandemic are spreading rapidly across the globe and, as in any crisis, unfortunately include a heightened risk of fraud and corruption.
As our White & Case colleagues explain in Mitigating Risk of Fraud During the COVID-19 Crisis, any crisis increases the risk of fraud. In particular, the 2008 financial crisis led to a surge in prosecutions for accounting and financial statement fraud, insider trading, loan fraud and other financial crimes.1 Anticorruption watchdog Transparency International reports that "corruption often thrives during times of crisis, particularly when institutions and oversight are weak, and public trust is low."2
Official warnings and commitments to prosecute: In view of these heightened risks, the US Department of Justice and the US Securities and Exchange Commission have committed to investigate and punish illegalities related to the COVID-19 crisis to the maximum extent provided by law.3 These agencies have warned that they already have received reports of attempts to profit from the crisis through fraudulent activities such as selling fake cures online and using malware and phishing emails to prey on potential victims.4
Fraud and corruption already were rampant before the crisis: The potential for a new wave of fraud and corruption is troubling as recent reports indicate that fraud and corruption were already rampant before the onset of COVID-19. According to Corruption Perceptions Index 2019, released in January 2020 by Transparency International, two-thirds of countries scored below 50 on a scale from zero ("highly corrupt") to 100 ("very clean").5 The Index revealed that the average score for all countries was 43, indicating that most countries are perceived as more corrupt than not, and that "a staggering number of countries are showing little to no improvement in tackling corruption."6
What does this mean for international arbitration? Allegations of fraud and corruption have become increasingly common in international commercial and investment disputes. That trend is likely to continue in view of the heightened risk of fraud and corruption during the COVID-19 pandemic.
Key issues to consider in fraud and corruption cases: As detailed in Addressing Corruption Allegations in International Arbitration (Brill),7 we provide a comprehensive overview of the key issues that arise in arbitrations involving allegations of fraud and corruption:
- First, the party alleging fraud or corruption bears the burden of proving it, whether the issue is raised by the claimant as part of its claims or by the respondent as a defense.8
- Second, the standard of proof for allegations of fraud, corruption and other serious illegality is generally higher than it is for ordinary allegations and often is described as requiring "clear and convincing evidence."9
- Third, "red flags" are not conclusive evidence of fraud or corruption, although they are warning signs that must be taken seriously and investigated and may be relevant to assessing disputed facts relating to alleged fraud and corruption.10
- Fourth, the consequences of fraud and corruption, if proven, are severe. Retaliating against an investor for refusing to pay a bribe would violate a state's obligation to accord fair and equitable treatment, should such protections apply under the applicable investment treaty, law or contract. Conversely, claims arising out of a contract or an investment made through fraud or corruption will be dismissed in their entirety.11
- Fifth, there is an important exception for fraud, corruption or other illegality occurring after the investment was made. Such post-investment illegality generally will not give rise to a jurisdictional or admissibility defense, although it may have consequences for the merits of the claims or the amount of compensation awarded.12
- Finally, a state's failure to prosecute generally will not preclude the state from raising a fraud or corruption defense in the arbitration, but it may be taken into account by the tribunal in assessing the evidence and in awarding costs.13
Guidance for COVID-19 crisis: As the COVID-19 crisis develops, it is imperative to follow established controls and procedures, including with respect to red flags of fraud and corruption. According to resource guides developed by the DOJ/SEC,14 the ICC,15 and other authorities,16 common red flags include using a consultant or intermediary who:
- has a close relationship with a key government decision-maker or their relative;
- lacks experience in the relevant sector;
- does not reside or have a significant business presence in the country;
- appears shortly before a particular government action is to be taken;
- claims to know the "right" people in government;
- provides unspecified services;
- requests payment in cash or through a third entity; and/or
- requests urgent payments or unusually high commissions.
Any transaction involving one or more of these red flags should be thoroughly investigated. Deliberately ignoring facts indicative of fraud or corruption will not prevent potential criminal or civil liability17 and could have serious consequences in a commercial or investment dispute.18
For more information on the key issues in these cases, click here to purchase Addressing Corruption Allegations in International Arbitration (Brill).
1 Scott Hershman, Doug Jensen, Tai Park, James Robinson, Virginia Romano, and Tami Stark, "Mitigating Risk of Fraud During the COVID-19 Crisis" (Apr. 1, 2020), https://www.whitecase.com/publications/alert/mitigating-risk-fraud-during-covid-19-crisis.
2 Transparency International, "Corruption and the Coronavirus" (Mar. 18, 2020), https://www.transparency.org/news/feature/corruption_and_the_coronavirus.
3 US Department of Justice, Office of the Attorney General, Memorandum for All US Attorneys on COVID-19 – Department of Justice Priorities (Mar. 16, 2020) at 2, https://www.justice.gov/ag/page/file/1258676/download; US Securities and Exchange Commission, Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC's Division of Enforcement, Regarding Market Integrity (Mar. 23, 2020), https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.
4 US Department of Justice, Office of the Attorney General, Memorandum for All US Attorneys on COVID-19 – Department of Justice Priorities (Mar. 16, 2020) at 2, https://www.justice.gov/ag/page/file/1258676/download.
5 Transparency International, "Corruption Perceptions Index 2019" (Jan. 2020) at 4, https://www.transparency.org/cpi2019.
7 Brody K. Greenwald and Jennifer A. Ivers, Addressing Corruption Allegations in International Arbitration (June 2019), https://brill.com/view/title/38274?language=en.
8 Id. at 15-20.
9 Id. at 24-31.
10 Id. at 42-43.
11 Id. at 50-72.
12 Id. at 72-74.
13 Id. at 77-83.
14 A Resource Guide to the US Foreign Corrupt Practices Act by the Criminal Division of the US Department of Justice and the Enforcement Division of the US Securities and Exchange Commission (2012) at 2-3, https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2015/01/16/guide.pdf.
15 ICC Commission on Corporate Responsibility and Anti-Corruption, ICC Guidelines on Agents, Intermediaries and Other Third Parties (2010) at 5-6, https://iccwbo.org/content/uploads/sites/3/2017/02/ICC-Guidelines-on-Agents-and-Third-paries-ENGLISH-2010.pdf. See also ICC International Corporate Integrity Handbook: Fighting Corruption (2008) at 61-62.
16 See, e.g., Woolf Committee, "Business Ethics, Global Companies and the Defence Industry" (May 2008) at 26.
17 A Resource Guide to the US Foreign Corrupt Practices Act by the Criminal Division of the US Department of Justice and the Enforcement Division of the US Securities and Exchange Commission (2012) at 22, https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2015/01/16/guide.pdf.
18 See, e.g., Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (Oct. 4, 2013) at fn. 340 (noting that red flags reflect "factors which any adjudicator with good common sense would consider when assessing facts in relation with a corruption issue," and that this approach also was used in ICC cases). See also Brody K. Greenwald and Jennifer A. Ivers, Addressing Corruption Allegations in International Arbitration (June 2019) at 42-43, https://brill.com/view/title/38274?language=en.