France: Proving Corruption In Investment Arbitration – Lao Holdings v. The Lao People's Democratic Republic

Defenses based on alleged corruption-related activities by investors have become popular by States in investment arbitration. Given the seriousness of such accusations, one of the most important tasks for arbitral tribunals is undoubtedly to sort out legitimate defenses based on well-established facts of corruption from unfounded insinuations. Therefore, the approach undertaken by arbitral tribunals regarding the standard of proof is of paramount importance.

Recently, the standard of proof to apply was analyzed in an award rendered in the Lao Holdings v. Laos¹ case by an arbitral tribunal composed of Ian Binnie (Chair), Bernard Hanotiau (appointed by the Claimant) and Brigitte Stern (appointed by the Respondent).

A parallel PCA arbitration had been initiated by Sanum Investments Limited under the UNCITRAL Rules and the China-Laos BIT.² That case was ruled upon by an arbitral tribunal composed of Andrés Rigo Sureda (Chair), Bernard Hanotiau (appointed by the Claimant) and Professor Brigitte Stern (appointed by the Respondent). Although the tribunals reached similar decisions, the proceedings were subjected to joint hearings and the tribunals refer to the Claimants in the plural since the cases were factually intermingled, albeit not consolidated.³

The findings in the Lao Holdings v. Laos award will be discussed in the following paragraphs.

Factual Background of Lao Holdings v. Laos

The arbitration concerned an investment made in the gaming sector in Laos, namely the Savan Vegas Hotel, Casino Complex in Savannakhet Province, and three slot machine clubs. It was created by two U.S. nationals, John Baldwin and Shawn Scott, and channeled through two companies incorporated respectively in the Netherlands Antilles (Lao Holdings N.V.) and in Macau (Sanum Investments Limited).

Business activities were carried out in collaboration with a local entity named ST Holdings. Accusing local politicians of interfering with its relationship with the local partner, which had considerably deteriorated over time, in an attempt to drive Lao Holdings out of the country, the Claimant initiated ICSID arbitral proceedings against Laos under the Netherlands-Laos BIT.

Corruption Defense Raised by Laos and the Parties' Positions Regarding the Standard of Proof

One of Laos' main defenses consisted of the argument that the tribunal should "dismiss all claims because of the illegal activities in which the Claimants allegedly engaged, including bribery, embezzlement and money laundering"⁴ in the course of the investment's creation and its performance.

Regarding the burden of proof, the Parties were in agreement that it laid with the Respondent.

However, they strongly disagreed on the standard of such proof, "i.e., whether a balance of probabilities is sufficient or whether corruption must be established to the more demanding standard of 'clear and convincing evidence' of corruption."⁵

According to the Respondent, as corruption is generally difficult to establish since "the parties to such transactions are generally careful to leave no paper or other direct or documentary evidence",⁶ the standard of proof should rest on circumstantial evidence, i.e., so-called "red flags", requiring "the alleged perpetrators to provide an exculpatory explanation of otherwise suspicious conduct."⁷ The Respondent based its position on the Metal-Tech v. Uzbekistan award whereby the arbitral tribunal considered a number of red flags when assessing allegations of corruption:

"(1) an Adviser has a lack of experience in the sector; (2) non-residence of an Adviser in the country where the customer or the project is located; (3) no significant business presence of the Adviser within the country; (4) an Adviser requests 'urgent' payments or unusually high commissions; (5) an Adviser requests payments be paid in cash, use of a corporate vehicle such as equity, or be paid in a third country, to a numbered bank account, or to some other person or entity; (6) an Adviser has a close personal/professional relationship to the government or customers that could improperly influence the customer's decision."⁸

The Claimant, on the other hand, considered that the standard of proof in relation to corruption should be one of 'clear and convincing evidence', requiring the establishment of "substantial facts, not mere inferences."⁹ It referred, inter alia, to the findings of the arbitral tribunal in the Siag v. Egypt case, "The Tribunal accepts that the applicable standard of proof is greater than the balance of probabilities but less than beyond reasonable doubt. The term favoured by Claimants is 'clear and convincing evidence'. The Tribunal agrees with that test."¹⁰

The Arbitral Tribunal's Analysis

In assessing the relevant standard of proof in the context of alleged corruption, the arbitral tribunal took a rather pragmatic approach reflecting "the proposition that the graver the charge, the more confidence there must be in the evidence relied on."¹¹

It held that there is no need of "clear and convincing evidence of every element of every allegation of corruption, but such clear and convincing evidence as exists must point clearly to corruption. An assessment must therefore be made of which elements of the alleged act of corruption have been established by clear and convincing evidence, and which elements are left to reasonable inference, and on the whole whether the alleged act of corruption is established to a standard higher than the balance of probabilities but less than the criminal standard of beyond reasonable doubt, although of course proof beyond a reasonable doubt would be conclusive."

Ultimately, the tribunal ruled that such clear and convincing evidence was lacking in the present case. In addition, the tribunal found it "disturbing" that no prosecution, let alone investigation, had been initiated in Laos against the persons who had allegedly participated in activities tainted by corruption.

However, the arbitral tribunal went even further in its analysis with respect to one particular allegation – a number of loans of considerable amounts allocated by Mr. Baldwin to one of the witnesses. Although the tribunal rejected the corruption-related defense that the money paid to the witness would serve as a bribe to Government officials as non-proven under the clear and convincing evidence test, it considered that under the lower standard of balance of probabilities, illegal conduct was established,¹² given, inter alia, the timing between the allocation of the loans and the Claimant's "urgent need for Government intervention on its behalf at critical junctures of its business".¹³

It also held that the payment to the witness was done in an attempt to "secure her loyalty and to avoid her testifying on behalf of the Government, thereby obstructing justice."¹⁴ These findings were subsequently utilized in the tribunal's assessment of the alleged breach by the Respondent of the fair and equitable principle, and namely "the Claimant's good faith and the legitimacy of the Claimant's alleged legitimate expectations".¹⁵

Finally, the tribunal made an interesting statement regarding the principle of good faith. It held that "the Claimants' bad faith initiation of some investments and bad faith performance of other investment agreements (as detailed above) and the attempt of Mr. Baldwin to compromise the integrity of this arbitration through an inducement to Madam Sengkeo not to testify provide added reasons to deny the Claimant LHNV the benefit of Treaty protection."¹⁶

This statement was made after the tribunal had dismissed all claims on the basis of the lack of factual evidence. The tribunal itself introduces its position stating that "the Tribunal has already rejected the Claimants' allegations".¹⁷ However, it is not clear from the tribunal's position whether, had the claims been established factually, the Claimant's bad faith throughout the life of its investments and during the arbitral proceedings could deny it the benefits of treaty protection. Further clarification from the arbitral tribunal would certainly have been appreciated.

Footnotes

1 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019.

2 Sanum Investments Limited v. The Government of the Lao People's Democratic Republic, PCA Case No. 2013-13, 6 August 2019.

3 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 68; Sanum Investments Limited v. The Government of the Lao People's Democratic Republic, PCA Case No. 2013-13, 6 August 2019, para. 66.

4 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 88.

5 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 96.

6 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 107.

7 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 107.

7 Metal-Tech Ltd. v. The Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 293.

8 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 108.

10 Waguih Elie George Siag and Corinda Vecchi v. The Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009, para. 326.

11 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 110.

12 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 162.

13 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 158.

14 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 157.

15 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 162.

16 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 280.

17 Lao Holdings N.V. v. The Lao People's Democratic Republic, ICSID Case No. ARB(AF)/12/6, Award, 6 August 2019, para. 280.

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