Peru’s Misguided Proposal for Countering Corruption in Arbitrarion

In Peru, as in far too many countries, the judicial system is corrupt and unreliable. For this reason, companies often find arbitration is an attractive alternative for resolving commercial disputes—not just because arbitration can be cheaper and faster than judicial dispute resolution in these cases, but because the arbitrators are (supposedly) less likely to be corrupt than judges. Alas, corruption has found its way into commercial arbitration in Peru as well, as illustrated most prominently by a recent case in which agents of the Brazilian construction firm Odebrecht allegedly paid bribes to arbitrators to secure favorable decisions in pending cases between Odebrecht and the Peruvian government (see hereherehere and here). 

bill was introduced into the Peruvian Congress this past February that, according to its proponents, would address this problem. This bill would amend Peruvian arbitration law to add a requirement that all international arbitrators hearing domestic cases have their qualifications certified by the state education regulator (known by its Spanish acronym SUNEDU) within 30 days. On its face, this requirement doesn’t seem to have much to do with corruption. But the bill’s advocates have been quite explicit that this new rule should be understood as a way to prevent future corruption of arbitration proceedings in Peru. According to the bill’s supporters, corruption in arbitration arises because foreign arbitrators do not understand Peruvian anticorruption laws; therefore, the argument continues, requiring a state agency to validate the credentials of these foreign arbitrators would ensure that they understand the Peruvian system, including the prohibitions on corruption in the arbitral system and the regulation on corruption more generally (see here and here).

If that sounds silly, it’s because it is. This bill not only fails to address the actual sources of corruption in Peruvian arbitration, but might actually make things worse. Arbitral corruption is a genuine problem in Peru, but this is not the right way to address it.

It doesn’t take much in-depth investigation to recognize that the reason that some foreign arbitrators handling cases in Peru have behaved corruptly is not that these arbitrators didn’t know Peruvian law. Indeed, the suggestion that the arbitrators who allegedly took bribes in the Odebrecht case didn’t realize that doing so violated Peruvian law is absurd on its face. (It is doubly absurd because most of the arbitrators who allegedly were corrupted were Peruvian lawyers, not foreign lawyers.) This corruption took place not because the arbitrators didn’t understand what Peruvian rules require, but because they chose to disobey those rules. 

In fact, imposing this additional bureaucratic requirement would not only create more delay (since SUNEDU is a very inefficient institution) and possibly reduce the number of available arbitrators, but it might even introduce new forms of corruption. SUNEDU’s inefficiency means that in many cases it will be impossible for a foreign arbitrator to get his or her credentials validated within 30 days, which creates obvious temptations—by the arbitrators themselves, or by the parties to the cases that are delayed while the credential-review process is ongoing—to speed the process along by bribing officials in SUNEDU. And arbitrators who are willing to pay such bribes are more likely to accept bribes from parties to the proceedings or engage in other forms of unethical behavior. 

This bill, then, is the wrong solution to the problem—but the problem is real, and needs to be tackled. In addition to imposing strict penalties both on arbitrators who take bribes and—perhaps even more importantly—on the parties who pay these bribes, the problem of corruption in arbitration can be addressed in part by promoting greater transparency in the arbitral system.

Peru’s Arbitration Law establishes a default rule of confidentiality in commercial arbitration cases. And while a norm of confidentiality is generally sensible—after all, parties might not want to publicly reveal sensitive commercial information submitted as evidence in arbitration—there are certain aspects of arbitral proceedings that could and should be made public. Perhaps most importantly, information about the arbitrators themselves—including statistics on how each arbitrator has ruled in the past on matters such as damages, evidence production, adverse inferences, and counterclaims, as well as how they conducted the arbitral proceedings more generally–should be made public. In Peru, many arbitrators participate in hundreds of cases (in part because Peruvian law makes arbitration mandatory for various types of disputes), meaning that there would often be enough data to discern when certain arbitrators are behaving anomalously—thus prompting further inquiries. It would also be useful to build on existing initiatives—such as the Transparency Forum established by the Lima Chamber of Commerce and the Arbitrator Intelligence group—to provide more public and easily accessible information about the sanctions that have been imposed on certain arbitrators in the past, with as much specificity as confidentiality laws will allow. Having all this information in an easily accessible database would make it easier for the parties to arbitration proceedings to conduct their own due diligence, and would strengthen arbitrators’ incentives to develop and maintain a reputation for integrity. 

Instead of forcing foreign arbitrators to take part in a bureaucratic system that might lead to more corruption, Peruvian legislators should focus instead on ensuring the strict enforcement of existing anticorruption laws and the promotion of greater transparency in the arbitral system.

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