This article was written by Meg Utterback, International Partner at King & Wood Mallesons, Monique Carroll, Special Counsel at King & Wood Mallesons and Emily Rich, Graduate at King & Wood Mallesons.
Bribery and corruption is increasingly an issue of concern for multinational companies, especially when seeking to invest in “high risk” jurisdictions. Historically, the primary concern in this area has been exposure to civil and criminal penalties for contravention of anti-bribery and corruption legislation. However, recent years have seen a growing trend towards governmental expropriation of investments alleged to have been obtained by bribery and corruption. This poses a significant additional risk to foreign investors. Investors who are found to have engaged in corrupt practices will have difficulty defending against expropriation or seeking compensation for expropriation that might otherwise have been obtainable under either domestic or public international law. Unfortunately, in some cases, foreign officials may take retaliatory action against an investor for failing to pay a bribe. Organisations doing business abroad must remain vigilant about anti-bribery and corruption compliance. They must also consider what protections may be available under investment treaties for unfair or arbitrary state conduct that equates to an expropriation or another breach of applicable international standards.
This article considers the following:
- The risks that allegations of bribery present to foreign investors
- How to protect against the adverse consequences of bribery and corruption
- The importance of seeking investment treaty protection when doing business in high risk jurisdictions
- The need for “clean hands” when seeking to enforce your rights
Bribery: the ins and outs
While there may be a perception in some jurisdictions that a bribe or “facilitation payment” is a customary and necessary part of doing business, such payments can place the investor at the whim of the host government.
In addition to the legal sanctions imposed by anti-bribery legislation in a range of jurisdictions (including Australia, the United Kingdom and the United States), an investment agreement or a transaction procured or implemented through corruption may be rendered null and void. Upon establishing that the agreement or right was obtained by ‘illegal’ or improper means, the agreement or right can be cancelled under local law without payment of compensation. International law is also likely to decline to assist an investor who has paid bribes to obtain the investment. Both public policy and the doctrine of unclean hands often forecloses any remedy to the errant investor.
A government regime which tacitly expects bribes in exchange for investment opportunities may be considered less likely to raise bribery as a reason for cancelling the agreement or rights granted. However, investors who have indulged in local practices of bribery may be exposed to heightened risk if the political or social climate turns against such practices.
The following are examples of lost investments resulting from corruption or due to social unrest:
- In 2013, a Chinese hydropower company operating in Myanmar was asked to close operations owing to fighting between the national army and Kachin rebels. The company was asked to leave despite having initially invested with the approval of the Government.
- In 2014, the Guinean government cancelled a licence granted to BSG Resources over the Simandou region in Guinea after allegations that BSG Resources paid more than US$200 million in bribes to secure the mining concession.
- In August 2013, the new Kenyan government launched a taskforce to review all mining licences issued between 2003 and 2012 by the prior government. Forty-seven licences were revoked as a result of the review, including a niobium licence held by Cortec Mining Kenya. Cortec (which is owned by TSX-listed Pacific Wildcat Resources) alleged that senior government officials asked for bribes of Ksh 80 million (approximately US$1 million) to prevent cancellation of its licence. It has since filed proceedings in the High Court of Kenya to quash the purported licence revocation.
- In 2014, the New South Wales government cancelled licences for tenements at Doyles Creek and Glendon Brook without compensation after an inquiry found the licences were tainted by corruption. One investor valued its licences at more than AU$500 million.
What should you do?
Avoidance is by far the best method of protection against the adverse consequences of bribery and corruption. Of course, bribes or facilitation payments should not be used as a means to acquire investments. Similarly, targeted due diligence should be undertaken to assess specific investment environments. Anti-bribery and corruption compliance measures should be implemented to minimize any attendant risk.
Investment treaty protection should also be obtained to ensure some limits are imposed on the permissible actions of the host state. Without investment treaty protection, you take the risk of investing in a foreign country with no protections beyond those offered by that country’s domestic legal system. This can be a real concern in countries without a stable political environment and sophisticated legal system.
Investment treaty protection
Investment treaties can provide protection against 'political risk events' by giving foreign investors the right to seek compensation from a foreign state for harm unfairly caused to foreign investments or suffered by foreign investors. Each investment treaty defines the investors and investments which will be protected, the protections provided and the means by which investors may seek redress for breach of these protections. Investors need to ensure that their investments are structured so as to meet the legal definition of 'investment' and that they have standing as an 'investor'. These definitions can exclude certain investment structures from treaty protection and often require that the investment initially be made 'in accordance with local laws'.
There are more than 3,000 bilateral investment treaties worldwide as well as some significant regional and sector-specific multilateral treaties. Common protections provided by investment treaties include:
- Obligation by state to encourage foreign investment. Investment treaties can require host states to encourage investors to make investments in its territory in accordance with its laws.
- Full Protection and Security (“FPS”). This requires the host state to exercise due diligence in ensuring a basic level of protection to foreign investments. It might be breached if, for example, the host state did not take adequate steps to protect protestors or the state's armed forces from causing physical damage to investments.
- Fair and Equitable Treatment (“FET”). This concept is very broad and generally provides protection from court, tribunal or administrative decisions which do not afford the investor due process or are tainted with bias, fraud, dishonesty, or lack of impartiality. It also protects investors against arbitrary or capricious treatment and failure to maintain a transparent and stable investment environment (for instance, by changing the legal and business environment in which they have invested so as to prejudice the value of the investment). FET provisions may be relied upon by a foreign investor if a host state revoked the investor’s business license or undermined the investor’s expectation that its investment would be supported by the state.
- Protection from unreasonable or discriminatory measures can ensure the unfettered management, maintenance, use, enjoyment and disposal of investments. This protection might be engaged if a host Government introduced regulations which severely restricted the management and operation of the foreign investment.
- Compensation for Expropriation or Nationalisation of investments may apply where there has been a partial or total loss of the investment without adequate compensation. Such provisions may also protect against acts or state measures which, over time, have the effect of nationalising or destroying the value of your investment.
- Compensation for Damage and Loss may give investors a right to compensation equal to that provided to local investors or investors based in another state, when their investment suffers damage or loss as a result of war, a state of national emergency, insurrection, riot or other similar events.
- Repatriation of Investments and Returns guarantees the ability of foreign investors to transfer out returns from their investment including profits, dividends, interest and other legitimate income, proceeds obtained from the total or partial sale or liquidation of the investment, and royalties in relation to intellectual property rights.
The importance of ‘clean hands’
Investment treaties can offer effective protection to an investor with 'clean hands'. As already mentioned, an agreement or right obtained by bribery or corruption may be legally voidable. If the bribe is paid in connection with an investment, and the investor subsequently complains that the host state has expropriated its investment without compensation for reasons unrelated to the bribery, this claim could be rejected for two reasons.
First, if an investment treaty requires that an investment be made 'in accordance with law', the investment is unlikely to satisfy this requirement if it is tainted by bribery. Second, the prohibition against bribery and corruption is now firmly entrenched as a principle of international public policy. There is an established body of case law in which tribunals have declined an investor’s claim under international law as contrary to public policy. Such cases even arise where the host state has systemic corruption and bribery issues. The general principle is that by partaking in bribery or corruption, the investor has ‘forfeited any right to ask for assistance of the machinery of justice.’
For example, in the case of World Duty Free Company v The Republic of Kenya the investor paid a bribe of US$2 million (claimed to be a legitimate payment as part of the “Harambee culture”) to the then prime minister of Kenya to obtain the right to build and operate duty free stores at Kenyan airports. A contract was entered into and the investor spent approximately US$27 million building the duty free stores. The investor was subsequently alleged to have been involved in an election funding scandal, which prompted a newly instituted government to take over control of the investor’s shares and assets. The tribunal held that even though the bribe was paid to the head of state, it was paid covertly and not in the performance of his official duties. The Kenyan state had not therefore condoned the bribery. The investment agreement secured through bribery was rendered illegal and the investor was left with no recourse under international law (and therefore no recourse under the applicable bilateral investment treaty).
A similar finding was made in Metal-Tech Pty Ltd v Uzbekistan in 2013. Metal-Tech, an Israeli company, formed a joint venture with state-owned companies in Uzbekistan. When the Uzbekistan government took action which led to bankruptcy proceedings being commenced against the joint venture, Metal-Tech commenced arbitration under the Israel-Uzbekistan investment treaty. The Tribunal found that Metal-Tech’s investment structure involved the payment of bribes. This was contrary to the law of Uzbekistan and Metal-Tech did not have protection under the treaty. The treaty provided that protected investments must be made ‘in accordance with law’.
To obtain the assistance of international law under an investment agreement or treaty where bribery is established, the current trend is to require an investor to prove that the state was complicit in the bribery, and that it was not merely the covert acts of individual officials. This is despite the established general principle that states are accountable for unlawful acts of their officials. Tribunals have distinguished between bribes as covert acts, which by definition cannot be recognised as legitimate, and sanctioned acts of officials carried out in the course of their public duties, for which the state party is responsible.
Investment treaties are more likely to provide a means of redress where the investor is not implicated in the bribery. For example, where a government official seeks to extract bribes or 'facilitation payments' from an investor in exchange for permission to make the initial investment or to continue to operate in the host country, and the investor refuses to pay the bribe. This scenario may give rise to an investment treaty claim because the investment cannot be made or the government refuses to allow the investor to continue to operate by denying other business concessions or by taking other retaliatory means. The investor could claim compensation under an investment treaty that requires the host state to encourage investment in accordance with their national laws or to provide fair and equitable treatment to investments.
The case of EDF (Services) v Romania provides an example of the application of this protection. In that case, an investor alleged corruption on the part of the host state, claiming that the then prime minister of Romania solicited a $2.5 million bribe at the time of the investment. Further, it alleged that Romania took retaliatory action against it in the form of an adverse finding in respect of the renewal of its business license because it refused to pay the bribe. The tribunal recognised that the conduct complained of could constitute a breach of the fair and equitable treatment standard. However, in the end, it found that the investor had failed to submit sufficient clear and convincing evidence in support of its claims. The Tribunal unanimously dismissed all of the investor’s claims.
To date, investment treaty claims have arisen in response to affirmative measures taken by governments that result in devaluation of the investment. In some countries with systemic corruption, political agendas targeting corruption can also result in the bureaucracy reaching a standstill. Delayed project approvals, delayed licences, refusals to approve or register investment agreements, reluctance to review and sign off on collateral investment requirements are increasingly resulting in a loss of investment value for foreign investors in these countries. These circumstances may also give rise to claims under investment treaties.
The prevalence of bribery and corruption is a significant risk for foreign investors. Not only can it can give rise to criminal and civil penalties, it can lead to confiscation of the investment and a rejection of all claims that a host state has taken illegal and damaging actions in respect of the investment. Conducting thorough due diligence, obtaining investment treaty protection and maintaining “clean hands” when making foreign investments are essential steps in protecting investors and investments alike against these risks.