Corruption and Illegality in Asian Investment Arbitration

Corruption is considered a major issue globally, particularly for developing countries, as it takes away important resources resulting in huge costs to the economy. This is especially true in the case of attracting foreign direct investment (FDI) in the host country. However, the theoretical literature contains counter-arguments, with some scholars agreeing with the above argument while others suggest that, in some cases, corrupt practices facilitate business transactions, thus helping to attract FDI. This chapter further explores this literature. It first provides a review of the theoretical and empirical literature on corruption–growth and corruption–investment relationships. This is followed by some interesting details on the cost of corruption. Subsequently, some econometric analysis is performed to verify the ‘grabbing hand’ and ‘helping hand’ views on the impact of corruption. The empirical findings of this chapter support a grabbing hand view for the top 20 (least corrupt) countries while the evidence suggests a helping hand view for the bottom 20 (most corrupt) countries. The author also finds evidence supporting a non-linear corruption–growth and corruption–investment relationship for the sample of the 20 most corrupt countries. He believes that these are interesting findings and could have important policy implications.

This chapter looks at the effect of corruption on foreign direct investment (FDI) at the world and regional levels, with a focus on East, South and Southeast Asia. The academic literature is inconclusive because the nature of corruption can be different from one country to another and because various other factors can decide whether a foreign company will invest in a country or region despite a relatively high level of corruption. To shed light on the effect of corruption, the authors proceed to a panel econometrics investigation that assesses the relationship between the stock of FDI and the ‘control of corruption’, published by the World Bank, for a sample of 180 countries over the period 2002–2019. The ‘control of corruption’ index combines 23 different assessments and surveys capturing perceptions of the extent to which public power is exercised for private gains. A low score means that the authorities do not fight corruption or are not effective in fighting it, and therefore corruption is high; and vice versa. The authors include two control variables (real GDP and secondary school enrolment) to better estimate the specific role of corruption. Their results show that at the world level, the control of corruption is low and has a positive effect on FDI, which means that corruption is a stimulus to FDI, in line with Egger and Winner's findings. However, in East Asia, Southeast Asia, Australia and New Zealand, corruption has a ‘grabbing hand’ effect. In the European Union, corruption is a helping hand. The authors’ results confirm the importance of a regional approach to the analysis of the effect of corruption on FDI.

There are multiple international agreements that require states to criminalise corruption. This chapter deals with the effects of such international anti-corruption agreements in the field of investment treaty arbitration. Focus will be placed on Asia. This Asian perspective is pertinent given the continued prevalence of corruption in many Asian jurisdictions, despite their growing economic importance. International agreements on corruption and their implementation in domestic law can have an unintended consequence in the field of investment treaty arbitration. This is because anti-corruption laws can provide states with an effective defence against an arbitral tribunal’s jurisdiction. This chapter concludes with a proposal on how this consequence can be tempered by applying to international investment law the more nuanced approach to illegality established in recent common law jurisprudence. The article will be divided into four sections. Section 4.2 will survey multilateral and bilateral international agreements on corruption. Section 4.3 will discuss how international agreements on corruption have been implemented in the domestic laws of various Asian jurisdictions. It will consider differences in anti-corruption laws of Asian states and comment on whether such differences give rise to uncertainty as to the scope of corruption crimes. Section 4.4 will look into how host states can use anti-corruption laws as a means of evading the scrutiny by arbitral tribunals of confiscatory conduct. Section 4.5 will argue that the ‘all or nothing’ approach to investments tainted with corruption should be replaced with a balancing approach to illegality.

Effective international cooperation is essential for combating the pervasive and far-reaching problem of transnational corruption. This chapter focuses on the anti-corruption commitments and cooperation among Asian countries in the context of international investment. It firstly examines the legal framework against corruption in Asia at both the international and regional levels, encompassing both ‘hard law’ and ‘soft law’ instruments. In addition, the chapter presents a comprehensive analysis of the anti-corruption provisions in international investment agreements concluded by Asian countries. The review of these agreements reveals that provisions of direct anti-corruption obligations imposed on investors are still elusive among Asian investment agreements, whereas provisions that demonstrate states’ general commitments to combatting corruption are more common. The chapter highlights the importance of more nuanced treaty-making practices in addressing corruption, as well as the need to align commitments made under investment agreements with those of other international instruments aimed at tackling corruption.

Corruption takes on several forms, including bribery, trading in influence and facilitation payments, with some forms facing universal condemnation but not others. The topic of corruption and its many forms is gaining increasing importance in the field of investor–state dispute settlement, where three broad categories of issues are relevant: evidentiary issues, attribution of responsibility and legal consequences. As corruption is notoriously difficult to prove, many unique legal issues arise with regard to the evidence required to prove the relevant allegations. Even where there is evidence of the alleged corruption at hand, there is the added complexity of the need to establish whether the relevant act is attributable to the party alleged to have committed it—particularly host states. Once corruption has been proven and properly attributed, the legal consequences of that finding of fact must be determined, which may differ depending on various factors, including the extent to which the parties were complicit in the corruption and the nature of the corruption.

Consider the following case. An investor is building an apartment complex. Halfway into developing this multi-million-ducat investment, a government department starts demanding bribes, which is business as usual for it. The investor initially resists, but eventually caves in. Years later, the host state seeks to use the investor’s participation in this corruption against it in an investment-treaty arbitration. The applicable investment treaty stipulates that only lawfully made investments are protected, with the result that the investor must fail. Any arbitral tribunal would be uncomfortable with this outcome. The degree of wrongfulness of the investor’s conduct pales in comparison to the host state's, noting that the host state has let many of its governmental departments become dens of corruption. But the arbitral tribunal’s hands are apparently tied. The terms of the applicable investment treaty are clear: the investor's claim must be denied, with an asymmetric outcome that effectively benefits the state. This chapter unties arbitral tribunals’ hands. It lays down another path for these tribunals to follow in such cases, one which avoids this outcome, yet remains honest to the tenets of international investment law.

This chapter focuses on the interaction of domestic regulation of corruption in China and Hong Kong and the increasing number of international arbitration cases brought by and against China. In conjunction with the enormous growth in foreign investment in China since it opened up at the end of the 1970s, China has developed a comprehensive network of international investment agreements (IIAs). Hong Kong is also a party to about 30 IIAs in its own name. Government and business corruption and bribery have been a problem in both jurisdictions. China and Hong Kong have taken active steps to criminalize, and to investigate and prosecute, corruption and to participate in major international initiatives relating to corruption. While corruption has, so far, made a limited appearance in the small number of investor–state dispute settlement (ISDS) cases brought by investors against China and cases brought against other states by Chinese and Hong Kong investors, based on existing material, a number of tentative conclusions and recommendations can be made. China should move towards a higher level of transparency, both in relation to ISDS cases and to its domestic criminal law system; both China and Hong Kong should play a more active role in prosecuting bribery by enterprises outside China, including by joining the OECD Convention on Combating Bribery of Foreign Officials; and, finally, China should consider including provisions relating to corruption in its future IIAs in order to demonstrate its commitment to the international war on corruption in business.

There has been a stupendous expansion of investor–state dispute settlement (ISDS) cases involving foreign investors challenging sovereign state action as breaches of the investment treaty. This expansion has resulted in a wide range of non-investment concerns being brought before ISDS tribunals. One such non-investment concern is corruption. ISDS tribunals are increasingly required to deal with the allegation that the foreign investor was involved in corrupt activities in the host state while making or working on the investment. Against this global backdrop, this chapter looks at this issue in the Indian context. The chapter studies India’s new investment treaty practice, which has developed in the last few years as a response to a large number of ISDS claims brought against India. India’s new investment treaty practice has provisions aimed at dealing with foreign investors’ corrupt practices, which is a step forward considering that India’s old investment treaties didn’t deal with corruption. However, there’s a need to strengthen these provisions in a manner that would allow the host state to bring counter-claims against foreign investors. The chapter also discusses the case of Devas v. India, where India (mis)handled the issue of the alleged involvement of the investor in corruption.

Indonesia is notorious for high levels of corruption. This has remained the case in spite of significant reforms made since the collapse of the Soeharto government in 1998. This chapter briefly introduces some of the key law reforms which have sought to address corruption in Indonesia as well as ongoing concerns regarding high levels of corruption in the judicial system, which is one of the factors leading investors in Indonesia to prefer arbitration for resolving disputes. The chapter then considers the legal framework for international commercial arbitration in Indonesia, particularly relating to enforcement of arbitration awards and recent changes to Indonesia's policy relating to investment treaties and investor–state dispute resolution. The chapter includes consideration of two investor–state arbitrations involving Indonesia which featured allegations of corruption.

Japan emerged from the 1980s as a leading net exporter of foreign direct investment, with very little corruption. Since 2001, it has accelerated ratifications of standalone bilateral investment treaties as well as investment chapters in free trade agreements. Almost all allow foreign investors from the home state to directly initiate investor–state dispute settlement (ISDS) arbitration against host states to get relief from violations of substantive treaty commitments. Japan’s investment treaty practice on corruption and illegality is intriguing. First, from around 2007, its treaties have often urged host states to take measures against corruption. This should help Japan’s outbound investors. Second, Japan’s treaties have been less consistent in expressly limiting their protections to foreign investments made in accordance with host state laws. This can again benefit Japanese outbound investors as claimants, as the absence of a legality provision renders more difficult defences from host states, which typically have more corruption than in Japan. Japan may adopt more and clearer legality provisions if subjected to more inbound ISDS arbitration claims and/or if claims by Japanese outbound investors are mostly against well-governed host states with little scope for corruption. Yet both types of claims remain few. The shift may therefore come more from other counterparty states pushing for such legality provisions and Japan agreeing in its future treaties to demonstrate its overall commitment to combatting corruption, and to preserve the legitimacy of the ISDS arbitration system.

In recent years, corruption has become prevalent in investment arbitration. This chapter closely examines the issue of corruption in the Lao People’s Democratic Republic through the lens of two key investment-treaty arbitration decisions: Lao Holdings N.V. v. Lao People’s Democratic Republic and Sanum Investments Limited v. Lao People’s Democratic Republic. The decisions place a spotlight on how tribunals address allegations of fraud and corruption, and also the larger systemic issues which plague the Republic. The chapter thoroughly analyses the two decisions and discusses their implications on the conduct of arbitral proceedings. It is envisaged that these observations will provide a guide for practitioners navigating allegations of corruption in investment-treaty arbitration proceedings while contextualising the socio-political environment within which such grafting is perpetuated.

Corruption is deeply rooted in Philippine culture. Much legislation was passed to strengthen the country’s legal frameworks to prosecute corruption cases. However, the abundant local anti-corruption laws have yet to produce the desired results. For most of the latter half of the twentieth century, the Philippines relied on protectionist policies conducive to corruption to shelter its domestic economy from the burgeoning highly competitive international markets. The succeeding adoption of trade liberalization policies enabled the country to attract foreign investments to bolster its economy. Unfortunately, it also exposed investors to the pitfalls of local corruption. The country’s first major investment dispute involving its main international airport was not a pleasant experience. The Philippines is no longer in a bubble. As an active member of the international community, it must adjust its law enforcement efforts, legal systems, treaty practice and business culture to match global anti-corruption standards.

This chapter provides an overview of Korea’s investment treaty regime and its provisions and practice concerning corruption and illegality. It further analyzes how these issues have featured in cases related to Korea and Korean investors. Korea has become a leading exporter and significant importer of foreign direct investment. To protect and promote inbound and outbound investment, Korea has established one of the most wide-ranging and extensive regimes of international investment agreements in the world, primarily through an array of bilateral investment treaties and free trade agreements with investment chapters. However, their provisions related to corruption and illegality are generally not developed. For instance, most of Korea’s treaties do not include an explicit requirement for the host states to take measures against corruption. Korean treaties also vary in terms of how they require foreign investments to be made in accordance with host state laws. Korea’s passivity regarding such provisions seems unaffected by foreign investors increasingly commencing arbitrations against the country recently and Korean investors also becoming more active in bringing outbound claims. While the extent that corruption or illegality features in cases brought by Korean investors remain largely unknown, some of the cases against Korea have corruption and illegality related elements. There is no indication that Korea may become more proactive in terms of corruption provisions, but there are some signs it is pursuing more and clearer legality provisions. Nevertheless, it is foreseeable that Korea might become more proactive in promoting both types of provisions in future treaties as part of its commitment to transparency.

Thailand’s economy has developed strongly by consistently attracting foreign investment especially since the 1980s, despite political upheavals and persistent corruption amidst ongoing challenges. It has also expanded the numbers and scope of its investment treaties, including more options for investor–state dispute settlement arbitrations to enforce substantive commitments to foreign investors, resulting in a few treaty-based arbitrations as well as some contract-based arbitrations involving foreign investors. A few, and possibly the Kingsgate v. Thailand claim under the Thailand–Australia Free Trade Agreement since 2017, have involved allegations and investigations concerning corruption and other serious illegal behaviour. As reiterated in the conclusion, corruption investigations and court proceedings are necessarily very lengthy, sometimes more so than the time taken to generate and enforce final awards in large (especially treaty-based) investment arbitrations. To reduce the consequent risk of enforcing an award that later proves to be based on seriously corrupt conduct, one solution may be for investment treaty arbitrators to apply the same higher standard of proof that corruption investigators and criminal courts need to apply, although this will mean more delays and perhaps costs in arbitration. Secondly, more transparency could be added to Thailand-related investment arbitration proceedings, so that the public at least knows that corruption is being alleged.

In parallel with their strong economic growth, Asian jurisdictions have scaled up campaigns against bribery and other illegal misconduct by foreign investors by adopting international anti-corruption frameworks. Nonetheless, corruption remains common in many places and there is also still a lack of consensus on the influence of corruption and illegality over foreign direct investment (FDI), as well as in investor–state arbitration cases. There is also a paucity of literature considering how Asian countries have dealt with such serious misconduct by foreign investors. The foregoing chapters have started to fill the gaps, finding that there are some ‘Asian approaches’ to corruption and bribery in investment arbitrations: some individual jurisdictions have started to address the issues of corruption and illegality through treaty (re)drafting and/or investment disputes. However, a uniform Asian approach towards corruption and illegality in investment arbitration has not yet been established. Thus, this chapter proposes a roadmap for a more harmonised regional approach to corruption and illegality in Asian investment arbitration. It recommends that Asia should (1) establish a forum for all jurisdictions to discuss corruption and other serious misconduct involved in FDI, (2) develop more unified rules on corruption and illegality specifically in Asian investment arbitration and (3) consider creating an independent institution or permanent court to better handle Asian investment disputes—not necessarily limited to allegations of corruption and illegality.