Is it possible that current investor-state arbitration rules actually encourage states to tolerate corruption? A terrific 2012 note by Zachary Torres-Fowler in the Virginia Journal of International Law raises that question. Here’s the gist of his argument: According to the widely discussed arbitral decision in World Duty Free v. Kenya, states in investment treaty arbitration can escape liability by proving that the aggrieved investor engaged in corrupt activities in connection with the investment under dispute–even if senior state officials were full participants in the corrupt transaction. That being the case, states that receive inbound foreign investment have a perverse incentive to tolerate corruption in the officials who deal with foreign investors, because that corruption may help shield states from legal liability should the state subsequently renege on its agreement with the investor. This is a great insight, and one which I think could actually be expanded a bit further.
Although cases like World Duty Free v. Kenya suggest that corruption may provide a defense for states in arbitral proceedings, other arbitral decisions have suggested that corruption within a state’s bureaucracy can also be grounds for an investor’s claim against a state. In the leading case, EDF v. Romania, the tribunal indicated that a state official’s attempt to solicit a bribe from the claimant might violate the guarantee of “fair and equitable treatment” under the relevant bilateral investment treaty (BIT). The logic of EDF, in tandem with the cases like World Duty Free, has some strange implications for investment treaty arbitration. The participation of state officials in corruption, though perhaps a violation of the state’s obligations under a BIT, does not prevent states from using such corruption to establish a complete bar to sovereign liability for other violations of the BIT. Applying that principle to the reverse situation – where the investor is the party alleging corruption – would mean that an investor could potentially allege a treaty violation if its own employees and state officials engaged in corruption! (It’s certainly debatable whether the no-contributory-liability principle should apply symmetrically in the investor-state arbitration context, but I’ll accept that that argument is at least tenable). And it’s also worth noting that in the World Duty Free context, the actions of state officials (including the President!) are not attributed to the state (on the logic that the officials are acting in their personal capacity when soliciting bribes), but in the EDF context, the corrupt acts of the state’s officials are grounds for finding the state itself in violation of the BIT.
At the risk of too much speculation, this kind of system probably leads to even more complex and potentially perverse incentives than Torres-Fowler recognized. When deciding how strictly to enforce anticorruption norms, investors and states must consider both the possibility that corruption will harm their case in a future arbitration, and the possibility that it will strengthen their legal position. Ultimately, the problem seems to be that arbitral tribunals haven’t established a comprehensive framework for regulating corruption – and haven’t decided whether to prioritize penalizing supply-side or demand-side violations. But if arbitral tribunals were to begin thinking about the two issues together, that alone would be a significant step forward.