3.1 The OECD and Other Guidelines and Principles
The OECD has issued a number of instruments with the aim of recommending tools that states can use when they adopt concrete measures based on considerations of public order and essential security interests. The OECD Codes of Liberalisation of Capital Movements (2019) and Liberalisation of Current Invisible Operations
65 expressly recognise the right of each OECD member state to take measures which it considers necessary for the protection of its essential security interests.
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Adopted on 21 June 1976, revised periodically and last updated in 2011, the OECD Declaration on International Investment and Multinational Enterprises recalls the importance of multinational enterprises in the field of international investment. The OECD Declaration stresses the need for international cooperation between a host state and multinational enterprises. The principles of transparency, national treatment and consultation must be respected in order to minimise or avoid occasions when host states impose conflicting requirements on multinational enterprises.
Adopted on 16 July 1986, the OECD Recommendation on Member Country Measures concerning National Treatment of Foreign-Controlled Enterprises in OECD Member Countries and based on Consideration of Public Order and Essential Security Interests, recommends transparency of such measures when they are notified to the OECD.
67 This OECD recommendation invites adhering countries to limit the use of national treatment measures for foreign-controlled enterprises to areas where public policy and essential security interests are at stake. The Recommendation also invites adhering countries to narrow the scope of these measures by adopting alternative regulations that would allow foreign-controlled enterprises to operate in the host state.
The OECD Recommendation on the National Treatment Instrument also encourages host states to ensure that foreign-controlled enterprises operating in their territory are treated no less favourably than domestic enterprises.
68 Where a host state considers that the foreign investment constitutes a threat to its national security interests, the Recommendation establishes the procedure consisting of (1) a declaration of principle by adhering countries, (2) notification of their exception to the OECD and (3) a monitoring procedure to deal with such an exception within the OECD. Although the National Treatment Instrument is a non-binding voluntary commitment by both adhering and non-adhering countries to the OECD, its purpose is to treat measures taken by a host state in its national interest as an exception. This exception is limited in nature and scope.
In the same vein, the OECD Guidelines for Recipient Country Investment Policies relating to National Security (2009) establish non-binding principles.
69 Their purpose is to set out the exceptional nature of the measure taken in the national interest. The Guidelines also aim to avoid protectionism that may result from the introduction by a state of national policies aimed to safeguard national security interests. The Guidelines, such as the principles of non-discrimination, transparency and predictability, proportionality of measures and accountability of implementing authorities, are intended to guide states in adopting measures in the national interest.
70 The requirement of non-discrimination means that the measures taken must be of “general application” treating “similarly situated investors in a similar fashion” and they must be “taken with respect to individual investments based on specific circumstances of the individual investment which pose a risk to a national security”.
71 The requirements of transparency and predictability imply that the measures taken must be made public by all means, whether in a public register
72 or on the internet, with an assessment of the criteria made available to the public. This includes prior notification to the interested party of proposed changes to investment policies, consultation with the other parties, and, at the procedural level, the establishment of strict time limits for the review of foreign investment screening procedures and the protection of commercially sensitive information of foreign investors. Furthermore, disclosure of investment policy measures should be made through press releases, annual reports and/or reports to parliament, bearing in mind the obligation to protect sensitive and classified information.
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The requirement of regulatory proportionality means that national security measures must link investment restrictions and risks to national security. It also means that particular attention must be paid to how the national interest exception is drafted and interpreted. As noted above, the broad approach to the provision on security interests gives the state greater flexibility in determining what is necessary to protect its national security. The proportionality requirement is therefore useful as it sets limits and provides guidance that a state should take into account.
74 Finally, a state is accountable to its citizens. The state is also required to adopt international accountability mechanisms and grant foreign investors the possibility of a recourse against it.
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In the same vein, the G20 Guiding Principles for Global Investment Policymaking (2016) establish non-binding principles of transparency and coherence, among others, to guide investment policymaking. These instruments recognise the importance for a state to take measures for its national security. As recommendations, they can serve as a guide to states when taking measures to safeguard national security interests in order to limit their impact on investment flows.
Finally, with regard to SWFs, the Santiago Guidelines, also known as Generally Accepted Principles and Practices (GAPP), adopted on 11 October 2008, are a voluntary set of 24 best practice guidelines for SWF operations.
76 Their objective is to maintain (1) a stable global financial system, (2) adequate risk control and (3) a regulatory structure. They are seen as common international standards of transparency, independence and governance that all SWFs can follow.
3.2 Limits Set Out in IIAs
Limits to the state’s national security interests also derive from the limits set out in international investment agreements. The right of a state to adopt security-related measures is likely to be limited by IIAs. This is particularly true in the absence of a provision on “security interests” in the IIA (Sect.
3.2.1), where the security related provision is narrowly drafted (Sect.
3.2.2) or where state parties exclude certain areas from the provision on “security interests” (Sect.
3.2.3).
3.2.1 The Absence of a Provision on “Security Interests” in IIAs
According to a 2009 UNCTAD study, only a few BITs include a national security interests’ exception.
77 The absence of any provision on “security interests” in BITs limits the right of a state to take security-related measures. Accordingly, the impact of the state measure taken for reasons of public interest will be assessed by an arbitral tribunal in the light of the investor protection provisions of the applicable BIT. In other words, the absence of a provision on “security interests” in BITs or free trade agreements (FTAs) with an investment chapter allows the investor to be better protected against state action related to essential security interests.
3.2.2 The Restrictive Wording of the Provision on “Security Interests”
A state’s right to adopt security measures is also limited when the security-related exception is drafted in a restrictive manner, such as in the case of the previously-discussed Canadian Model BIT, which limits what may constitute a security interest to trafficking in arms, munitions and war material, and the non-proliferation of nuclear weapons.
78 If a related claim is brought before an arbitral tribunal, the latter will then assess the state measure in light of the wording of the provision of the BIT. Any security-related state measure that is outside the scope of the provision on “essential security interests” will be assessed in light of the standards of protection in IIAs and is likely to lead to state responsibility.
3.2.3 The Limited Application of “Essential Security Interests” to Specific Provisions
A state’s right to take security-related measures is ultimately limited by the scope of the treaty’s exceptions. For instance, this will be the case when only “expropriation or nationalization or similar measures” are covered by the scope of the treaty’s exceptions, provided that other conditions specified in the clause are met.
79 For example, the China-Philippines BIT states:
1. Either Contracting Party may for reasons of national security and public interest, expropriate, nationalize or take similar measures (hereinafter referred to as “expropriation”) against investments of investors of the other Contracting party, but the following conditions shall be met:
(1)
under domestic procedure;
(3)
upon payment of fair and reasonable compensation.
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Where the state undertakes, in a BIT or FTA, to limit its right to adopt security-related measures to a specific provision, such as that relating to expropriation, it can no longer adopt measures outside the scope of the specific clause without incurring liability.
3.3 Customary International Law
Limitations on a state’s adoption of security-related measures also arise under customary international law. Customary international law may play an important role in assessing a state’s security-related measures, even in the presence of an essential security interests exception. We will consider the example of the World Trade Organization (WTO) panel report in
Russia – Measures concerning traffic in transit of 5 April 2019 in the context of a dispute between Russia and Ukraine.
81 The questions dealt with allow for an analogy with the subject of our chapter. The WTO Panel addressed the interpretation of Article XXI(b)(iii) of the 1994 General Agreement on Tariffs and Trade (GATT) on “Security Exceptions”,
82 the measures at issue and their existence,
83 whether the measures were “taken in time of war or other emergency in international relations”, and whether the conditions of the introductory part
84 of Article XXI(b) of the GATT were satisfied.
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With regard to the facts and very briefly, in its dispute with Ukraine, the Russian Federation invoked the national security exception in Article XXI of the GATT concerning restrictions on road and rail transit traffic through the territory of the Russian Federation.
86 The Russian Federation justified the national security exception as being necessary for the protection of its essential security interests. The Panel analysed Article XXI of the GATT in light of the principle of good faith as codified in the Vienna Convention on the Law of Treaties.
87 In the Panel’s view, Article XXI of the GATT provides for “essential security interests” in a strict sense, understood as being limited to the “quintessential functions of the state”.
88 The Panel further recognises the right of “every member to define what it considers to be its essential security interests”.
89 However, the state is not free to raise any concerns as “essential security interests”. This right is limited by the principle of good faith
90 which applies, on the one hand, to the interpretation of what constitutes an essential security interest and, on the other hand, to the assessment of the link between the measure and the conditions set out in the provision.
91 Therefore, the obligation of good faith requires that WTO members should not use the exceptions in Article XXI of the GATT as a means of circumventing their obligations.
92 In addition, “the Member invoking the Exception should articulate the essential security interest said […] sufficiently enough to demonstrate their veracity”.
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As the Panel’s analysis shows, the self-judging security exception is assessed according to the principle of good faith. This implies that the right of a state to invoke the exception can only be admitted in exceptional circumstances. The state must ensure there is a link between the measure taken and the conditions set out in the exception. The principle of good faith plays an important role in limiting the manner in which the state may invoke the national security interests exception. As in WTO law, so in investment law, good faith could pave the way for an arbitral tribunal to assess the manner in which a self-judging essential security interests provision is implemented by a state.