Do Investment Arbitration Treaty Rules Encourage Corruption?

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.

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