Corruption and Foreign Investments: Empirical Evidence from Treaties and Arbitration Cases

Abstract

This Article empirically analyses international investment agreements and the practice of investor-state tribunals related to corruption in foreign investments. It introduces a typology of treaty provisions and discusses their limited practical effectiveness and perverse incentives, which they create.

This Article has demonstrated a recent increase in the number of IIAs, which include anti-corruption provisions. However, in practice, IIAs lack teeth and need to be placed into the context of public international and domestic law to have a meaningful impact. Empirical data shows that despite the growing number and acceptance of international anti-corruption frameworks, they receive little attention both in the texts of IIAs and in the practice of investor-state tribunals.

Although anti-corruption provisions in IIAs demonstrate the growing concern of States and intergovernmental organisations, such provisions include no detailed guidance on obligations of investors and states. The “in accordance with host state’s law” provisions found in most treaties refers anti-corruption matters to the domain of domestic law and essentially removes investments tainted by corruption from treaty protection by making only one side, namely the investor, bear the negative consequences of committing corruption offences. Such provisions create perverse incentives for states to engage in corruption activities as an insurance to avoid jurisdiction of investor-state tribunals.

Anti-corruption provisions integrated into IIAs as part of corporate social responsibility requirements for foreign investors help to raise awareness about corruption, but they lack the teeth and the consistency of mandatory norms. Similarly, although including detailed anti-corruption provisions in IIAs and references to international anti-corruption frameworks such as the United NAtions Convention against Corruption (UNCAC) are superfluous because they likely apply to most cases in any event, such provisions at least bring anti-corruption standards to tribunals’ awareness. This Article shows that although the parties (primarily states) made a significant number of corruption allegations in investor-state disputes, only in a handful of cases tribunals found them proven.

The Article also addresses the broader question of how to deal with corruption-related obligations of investors and states in the context of public international law. It presents and analyses new empirical data showing that parties of investor-state disputes increasingly allege corruption, and states are responsible for most of such allegations.

However, in most cases, tribunals either ignore such allegations or decide that they have not been proven. In the small number of cases where tribunals found allegations proven, they declined jurisdiction or declared the investor’s claim inadmissible.

The Article makes proposals on how international investment law can become more effective in tackling the supply and demand side of corruption and discusses the relevant obligations of investment tribunals.

Keywords: corruption, rule of law, isds, arbitration, UNCAC, clean hands, due dilligence, bribery, investor-state arbitration, ICSID,

JEL Classification: F21, K33, K40