Regulatory activity around the world has been broadening in the pursuit to uncover, sanction, and where possible undo the effects of corrupt activity. In parallel, and perhaps partly because of this, corruption has become a hot topic in international arbitration in recent years, especially in investor-state arbitrations. By way of example, it was deployed as a means to request the dismissal of a claim before arbitral tribunals and to obtain the annulment of an arbitral award before national courts.
The term corruption is a broad one, encompassing a wide variety of dishonest practices, including bribery, money laundering, embezzlement, bribery, misappropriation or other diversion of property, and false accounting and auditing. Tribunals have adopted various standards of proof for corruption allegations – “robust”, “clear and convincing” or “beyond reasonable doubt” to name a few – but most arbitral tribunal and national courts in annulment proceedings have relied on transactional red flags, i.e., circumstantial indicators of corruption, to guide their decision making. Examples of red flags include:
- Unusual payment modalities (e.g., cash, gifts or other indirect payments)
- Use of third-party intermediaries (TPIs) with little experience or who carry reputational risk (e.g. TPI investigated or fined by national or foreign regulators or authorities)
- Use of offshore or shell companies
- Circumvention of due diligence processes in selecting vendors
- Lack of details around and evidence of services rendered and billed
- High/unusual amounts of payment not benchmarked to activity levels or market prices
- Non-compliance with local tendering rules (e.g. unusual speed of bidding process)
- The absence of a well-designed and active compliance program.
Often these indicia should be considered together, as a pattern of behaviour, and not only as single occurrences.
Ultimately the legal characterisation of indicia of alleged corruption, the standards of proof applied to them, or their legal and procedural impacts are matters of law for the tribunal or court to decide upon. However, from a factual perspective, we share in this article our thoughts on practical approaches to identify relevant facts and explain how they may or may not constitute red flags in the context of a specific business transaction. We discuss various approaches available to support or rebut corruption allegations, and share case study examples where approaches were combined to evidence simple and more complex corruption schemes within a global business.
The Forensic Tools
Unfortunately for dispute parties and their legal counsel, identifying glaringly clear evidence of corruption, such as a cash-stuffed Louis Vuitton bag, is fairly rare these days. International business transactions have become increasingly sophisticated, and so have the behaviours used to conceal corruption. For instance, in many cases, illicit payments to a third-party intermediary will not be a straightforward wire transfer to the intermediary’s bank account. Rather, the payment may go through a sophisticated scheme involving a network of global related parties and indirect payments. An example is included in the case studies that follow.
In the absence of an obvious “smoking gun”, identifying compelling red flags ideally requires the combination of accounting and financial data (structured data) analysis and document (unstructured data) review, with, to the extent appropriate, searches of public records and, if appropriate, supportive witness statements.
We discuss in this article three case studies of arrangements suggesting corruption, together with a description of how the analysis of data highlighted red flags.
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