Introduction

The notion that corruption is no longer a new problem is well established. Figures recently released by Transparency International ("TPI") confirm that corruption remains rampant in international business and has in fact increased over the past three years.1The outcry condemning corruption has never been more pronounced, with a wealth of national laws and international instruments having been implemented to tackle offences such as bribery, money laundering and extortion.2At the same time, the potential for corrupt activities arises at every step of commercial transactions on a daily basis throughout the World. From the initial securing of contracts, to obtaining licences and concessions to the performance of contracts, the temptation or pressure to engage in corrupt activities is ever present. At the same time, and perhaps not surprisingly, the deployment of allegations of corruption by parties to disputes to avoid or subvert contractual and other obligations, is increasing.

In short, corruption is unfortunately not going away and will increasingly form part of the disputes resolution process. With this reality in mind, it seems that there are two critical questions that beg a more definitive view. First, do arbitrators have a right and/or duty to investigate corruption? Second do arbitrators have a right and/or duty to report corruption?

These questions are analyzed and addressed below with the benefit of a wide range of source material including excellent commentary and articles from among others Born, Cremades, Hwang, Lim, Savage, Kreindler and Mourre; case law from England and various Commonwealth jurisdictions; the UK Money Laundering Regulations 2007 No. 2157; and the following EU Directives on preventing the use of the financial system for money laundering and financing terrorism:

• Directive 91/308/EEC

• Directive 2001/97/EC

• Directive 2005/60/EC

One final note - these questions raise a mix of legal and practical considerations. The conclusions reached therefore necessarily involve a reasonable dose of objective opinion.

The duty to investigate corruption sua sponte

It is established that if a party's claim or defence is expressly premised upon a party's corrupt activity, or their joint corrupt object underlying the contract in dispute, a tribunal is obliged to investigate and rule upon the existence and consequences of corruption in order to resolve the dispute in question. Born has concisely pointed out that:

Insofar as arbitrators are requested to make a binding arbitral award through an adjudicative process, either awarding monetary sums or declaratory relief, it is a vital precondition to the fulfillment of this mandate that they consider and decide claims that contractual agreements are invalid, unlawful or otherwise contrary to public policy… inherent in the legally-binding resolution of a dispute and the making of a legally-binding award is the duty to consider and resolve public policy (and other mandatory legal) objection.3[emphasis added]

However, if neither party specifically alleges corruption but the evidence before the tribunal leads it to suspect that corrupt activity may have been involved, there is arguably some uncertainty as to whether a tribunal can or should take a more inquisitorial role to establish the existence of the corrupt activity and rule upon the consequences of it. This uncertainty, or the suggestion that it even exists is controversial. On the one hand, some argue that absent express allegations from one of the parties, a tribunal should not even entertain the notion of a sua sponte investigation as to whether there has been corruption. Others take a firm line in the opposite direction and contend that intimations of corruption cannot be ignored and must be carefully considered regardless of the position of the parties.

Where this debate appears to resolve itself is the perennial question that faces arbitrators - the sanctity of the final award. All arbitrators are acutely aware of the dangers of straying into matters that may be considered ultra vires and thereby exceeding their mandate, with the risk that any subsequent award may be set aside4or permission to enforce it refused.5

It follows that if corrupt activities are relevant to determining issues properly before the tribunal, the arbitrators can and should be able to decide them. The commentary and case law supports this conclusion.

Starting from first principles, while an award can be challenged under Articles 34(2)(a)(iii) and 36(1)(a)(iii) of UNCITRAL Model Law and Article V(1)(c) of the New York Convention on the basis that a tribunal has determined an issue not contemplated by or falling within the terms of the submission to arbitration, these provisions have tended to be construed narrowly by State courts.6The preponderance of opinion is that state courts are loathed to find that a tribunal has exceeded its power unless the position is starkly to the contrary. Indeed, the general proposition that emerges from the case law and commentary is that a tribunal will not be regarded as having exceeded its authority so long as matters determined or the evidence relied upon in its award are relevant to the ultimate resolution of the dispute submitted to it.7

In the English case of Minmetals Germany v Ferco Steel Ltd,8Coleman J dismissed an argument resisting enforcement of an award on the basis that the tribunal had exceeded its mandate by taking into account evidence from separate arbitration proceedings that had not been raised or submitted as evidence. The judge did so on the basis that if such "evidence derived from the tribunal's own investigation went to a central issue in the dispute", a tribunal would not be acting ultra vires by considering it. This pragmatic approach reflects the over-arching attitude of most state courts. For example, in CRW v PT Persero,9a case involving corruption allegations, the Singapore Court of Appeal concluded that the key question was the existence or not of a link between the alleged ultra vires determination and its relevance to the issues submitted by the parties to the tribunal for resolution. As neatly noted in another Singaporean case, PT Asuransi Jasa Indonesia (Persero) v Dexia Bank10where the allegations of corruption are irrelevant to the issues in the case, the tribunal should not consider them.

What this means in practical terms is that arbitrators must, absent allegations from the parties, carefully consider whether the potential existence of corruption is relevant to the ultimate determination of the issues before them. If this enquiry leads to the conclusion that a finding of corruption will have no bearing on the outcome, then it is an issue that should be left alone. On the other hand, if such a finding would impact the outcome of the dispute, it is not something that the tribunal should duck. At the heart of this enquiry is the legal impact of a finding of corruption. For example, if the corrupt activity goes to the very sanctity of the contract that underlies the parties' relationship, it has the potential to be very significant. If, however, the corruption arises with respect to say the performance of a minor aspect of a broad range of obligations and is therefore unlikely to impact on the determination of the parties' rights then the relevance link probably does not exist and the arbitrators ought to avoid exercising their curiosity.

A further issue arises in the event that arbitrators regard corruption as an issue that they ought to explore - due process and the right to be heard. The parties must be informed of the background, the nature of the concerns, invited to respond and given the opportunity to make submissions and file evidence. Under no circumstances should the sua sponte investigation be undertaken in a vacuum.

Assuming that the dynamic is clear as to whether a tribunal can carry out a sua sponte investigation, there is a further question: should a tribunal do so? The public policy considerations obviously and rightly favour a tribunal's self-inquiry into corrupt activity that is relevant to the outcome of a dispute before it. Some argue that tribunals must remain vigilant and alert to the possibility of corrupt dealings being hidden by one or both parties, otherwise they may become unwitting accessories to illegal acts. Others take a more general view and suggest that the process of international arbitration as a dispute resolution mechanism would be harmed by the notion that tribunals could effectively turn a blind eye to corrupt activities in the name of party autonomy.

These views are counterbalanced by the pragmatic outlook that not every suspicious element in the formation, execution and performance of a contract should instigate an inquisitorial exercise on the part of a tribunal, as this could stymie the entire process. Proponents of this pragmatic approach argue that while a laissez faire attitude to corruption is undesirable, an overzealous approach risks turning arbitrators into quasipolicemen and by consequence undermines the primary aim - efficient and focused dispute resolution.

In reality, this dilemma cannot be solved by a rigid test or formula. Each case and each circumstance has to be considered carefully and with thought to the principles discussed above. It is unlikely to be an easy task when it arises. Not only will the allegations inevitably involve contentious points of evidence, they will only occur in circumstances where the parties for whatever reasons have chosen not to raise the issue themselves. Judicious thought will therefore be required as to a host of issues, including the likelihood of the suspicions being borne out by further investigation, the impact of them if established on the issues before the tribunal and how the investigation should be conducted if it is indeed to be undertaken.

The duty to report corruption

The debate that surrounds whether a duty to report corrupt practices exists emanates from two conflicting views on the role and status of arbitrators.

Many argue that obliging arbitrators to report corrupt practices to national authorities would be totally incompatible with the inherently private nature of their mission, and that their role should be limited to the analysis of the contractual rights and obligations of the parties, as is strictly within their mandate. Further, that in contrast to the role of state judges, the primary role of an arbitrator is to enforce the contract and not to defend public policy.

The contrary view is that arbitrators owe duties not only to the parties, but also the international community and that with their adjudicatory function comes a responsibility for the administration of justice that obliges them to expose corruption, or at the very least not let it go unreported.

It is clear therefore that with increasing public condemnation of corruption, the need for a consensus on the merit of imposing a duty to report corrupt practices of which arbitrators become aware during the course of arbitral proceedings, is more pressing than ever. At the same time, formal and precise guidance as to whether a duty exists is scarce.

While it is true that arbitrators owe their primary duty to the parties, it is also true that they have a functional role in a larger systemic context:

The modern international arbitrator is not simply an instrumentality of the parties' collective will expressed through the arbitration agreement but instead an integral part of a larger system that depends, in part, on them performing their role as responsible custodians of the system.11

A tribunal's obligation to render enforceable awards encourages it to take public policy into account to facilitate enforcement12and article (V)(b) of the New York Convention provides that an award can be refused recognition and enforcement if to do so would be contrary to public policy. Therefore it is conceivable that public policy and the prospect of non-enforcement could justify imposing a duty to report corrupt practices on arbitrators.

Proponents of the opposite view often raise the fear that imposing a duty to report corrupt practices on arbitrators could threaten the confidentiality of arbitral proceedings. One of the classic features of arbitration is that the proceedings are private and the substance confidential.13But how far does confidentiality go and can it be overridden on public policy grounds? Should, "[t]he privacy and confidentiality of the process… have to yield to the great interest of combating corruption"?14The answer to is plainly "yes", given the established exceptions to confidentiality in both institutional rules and national law of complying with legal obligations.

Leaving aside the philosophical debate, what are the most obvious sources of a duty to report? After all if there is a duty, it must come from statute, following a debate, no matter how detailed and scholarly it may be.

Institutional rules do not provide direct guidance on the issue. There are excellent commentaries on the question15but they remain a view of the skilled authors and not dispositive. There are no known published awards directly addressing the point. The most obvious source for such a duty is the wide array of money laundering conventions, statutes and regulations that work hand in hand with anti-corruption legislation.16In simple terms, these instruments aim to attack not so much the criminals but those who assist them including lawyers, accountants and financial institutions. They do so by imposing, among other things, a duty to report activities that may involve the proceeds of a crime. The classic example is a bank noting the payment of a large sum of money to a government official by an off-shore entity with no apparent or obvious explanation. Most money-laundering regimes would require the reporting of this activity by the bank in question.

These same money-laundering instruments could impose a duty on arbitrators. This may seem like a far-fetched concept, but is surprisingly close to home for an arbitrator. Imagine the impact of an award that upholds the payment of a contract price in an agreement with a state that is tainted by corruption in that a portion of the consideration is to end up with a corrupt government official. The corrupt portion of the payment would be a proceed of crime and thus the whole transaction would be subject to a report on the face of most money laundering regimes. For example the Proceed of Crime Act (2002) ("POCA") an English statute, provides in section.328 that:

A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property of another person

In Bowman v Fels,17the Court of Appeal held that legal proceedings could not fall within the concept of "becoming concerned in an arrangement" for the purposes of s.328 of POCA and therefore that the regulations did not encompass the activities of litigation lawyers in the course of a dispute. Unlike lawyers acting in a transactional field who are subject to this provision, the court found that Parliament could not have intended that steps taken by lawyers in order to determine or secure legal rights and remedies for their clients, should involve them becoming involved in an "arrangement".

In reaching this decision, the Court cited both access to justice through legal proceedings and access to legal advice on a private and confidential basis as principles that should not be interfered with lightly.

And while this could be seen as applying equally to arbitration (having regard to the corresponding confidentiality provisions in Article. 30 of the LCIA Arbitration Rules), the Court did not specifically address the position of arbitrators and other dispute resolvers under s.328 of POCA.

In fact, the court surmised that if it were wrong on its conclusion of the central issue, the question would remain whether on its true construction, section 328 would have the effect of overriding legal professional privilege. In confirming its view that it would not, the court at paragraph 89 of its judgment stated that it was:

of the firm opinion that it would require much clearer language than is contained in section 328 before a parliamentary intention could be gleaned to the effect that party's solicitor is obliged, in breach of this implied duty to the court, and in breach of the duty of confidence he owns to his own client as his litigation solicitor" to disclose evidence of matters referred to in section 328.18

The position at European level corresponds, in that recital 17 of EU Directive 2001 97/EC and recital 20 of EU Directive 2005 60/EC both state that where members of professions providing legal advice, such as lawyers, are ascertaining the legal position of a client or representing a client in legal proceedings, it would not be appropriate to put them under an obligation to report suspicions of money laundering. Thus, legal advice remains subject to the obligation of professional secrecy unless that profession is taking part in money laundering activities, the legal advice is provided for money laundering purposes or the lawyer knows that the client is seeking legal advice for money laundering purposes.

Many would argue with some force that the decision in Bowman v Fels naturally applies to arbitration given the parallels with State court litigation. However, an aggressive regulator could well take a more sinister view assuming the hypothetical described above of the corrupted contract price award. The points against the application of Bowman v Fels would include the following:

1. The access to justice argument does not work for arbitration as it is a contractual arrangement between two parties and does not invoke the same kind of public policy considerations. It could not be said that the right to arbitrate (as opposed to seek justice from a State court) is a fundamental human right under the European Court of Human Rights ("ECHR"). Moreover, the arbitration agreement, could be said to be an instrument, like the tainted contract itself, implicated in the crime in that it was deliberately used to providecredenceandvaliditytothetransactionaswellasamethodforupholdingit;

2. The notion of private and confidential legal advice likewise does not arise given that arbitrators, unlike the counsel that appear before them, are not giving advice to the parties. Instead, they are like a judge deciding issues. As discussed above, the arbitral confidentially considerations cannot be invoked in this context and it is well established that complying with a legal or regulatory obligation is an accepted and necessary exception.

What this means is that the two main planks for reasoning in Bowman v Fels can arguably be said not to arise in the context of an arbitrator deciding a case along the lines of the hypothetical described above. That leaves the question of the plain language of s.328 of POCA. Again, there are arguments that the approach in Bowman v Fels should not apply. The Court's reasoning (set forth above) was focused on the point that strong language would be needed in a statute to override important and well established existing duties of a lawyer (e.g. the duty of confidence to his/ her client). Again, such considerations do not arise where an arbitrator owes no such duty of confidence. Further, when considered by reference to its plain language, it is not a quantum leap to suggest that upholding a tainted contract that will result in the payment of a corrupt payment amounts to being "concerned in an arrangement" as contemplated by s. 328 of POCA.

Conclusion

Whether a duty to investigate exists will largely be down to the relevance of the issue to the determination of the dispute. Arbitrators will be required to take an important and somewhat difficult decision as to whether to embark on an independent investigation, but the broad considerations that need to be factored in are well established.

There is no obvious duty to report by reference to institutional rules, published awards or State court case law. However, an analysis of the relevant money laundering legislation and regulations suggests that such a duty could arise in certain rare but not inconceivable circumstances. The available case law is helpful but leaves a lacuna as to the potential application of the money laundering regimes to arbitrators. It would be ideal for the arbitration community to have this issue clarified sooner rather than later.

1
The Global Corruption Barometer.

2
US Foreign Corrupt Practices Act 1977; UN Convention against Corruption 2003, UK Bribery Act 2010; ICC Rules of Conduct and Recommendations to Combat Extortion and Bribery 2005.

3
Gary B. Born, International Commercial Arbitration (Wolters Kluwer Law & Business, 2009) at pg. 2183.

4
Article 34(2)(a)(iii) UNCITRAL Model Law.

5
Article 36(1)(a)(iii) UNCITRAL Model Law; Article V(1)(c) New York Convention.

6
Elite Inc v Texaco Panama Inc (1991); Banco de Seguros del Estado v Mut. Marine Office, Inc (2003).

7
Hwang and Lim, Corruption in Arbitration - Law and Reality, 2011.

8
[1999] All England Law Reports 315.

9
[2011] SGCA 33.

10
SA [2007] 1 SLR 597.

11
Catherine A. Rogers, The Vocation of the International Arbitrators, 20 Am. U. Int'l Law Review 957, pg. 963.

12
LCIA Rule 33.1, SCC Rule 47, ICC Rule 35, ICA Rule 34.

13
Rule 6 of the ICSID Arbitration Rules.

14
Arthur Marriott, "Corruption in Arbitration and Mediation Compared, 72(3) Arbitration 231 (2006) pg. 234.

15
S. Nadeau-Séguin, Commercial Arbitration and Corrupt Practices: Should arbitrators be bound by a duty to report corrupt practices? Transnational Dispute Management, Vol 10, Issue 3, May 2013. Also, Hwang and Lim, Corruption in Arbitration - Law and Reality, 2011, p 48.

16
For example Directive 2005/60/EC of the EU Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, which was implemented in the UK by the Money Laundering Regulations 2007 No 2157.

17
CA [2005] 1 WLR.

18
Id., at para. 89.