Written by: Damien Laracy (HK), and Reema Shour (UK) – Hill Dickinson
Fraud in arbitration – recent UK developments Â
In October 2023, in Federal Republic of Nigeria -v- Process and Industrial Developments Ltd, the English High Court set aside an US$11 billion arbitration award on the basis that the party that had procured the award had done so through fraud and in a manner contrary to public policy.
Among the numerous concerns that this case raised was the issue of whether and to what extent an arbitral tribunal should intervene if there is any failing by a party’s legal team or experts that results in a compromised presentation of the party’s case. An arbitral tribunal is not expected to, nor should it, argue a party’s case for it. However, the tribunal also has to try and ensure a level playing ground between the parties. The case also heightened concerns relating to the transparency of the arbitral process.
In February 2024, supplementary written evidence put to the UK Parliament from anti-corruption charity, Spotlight on Corruption, in relation to the English Arbitration Bill (likely to become law in 2025) included recommendations that an arbitrator should have a duty to raise suspicions of corruption with the parties and engage in a “red flag†analysis where appropriate, combined with a power to disclose any suspicions of corruption to an appropriate law enforcement authority, with an immunity from any liability for breaching confidentiality.
These recommendations do not appear in the Arbitration Bill, which is currently making its way through the legislative process. Interestingly, however, when it was debated in the House of Lords, one proposed amendment was to include in the tribunal’s duty under s.33 Arbitration Act 1996 to act fairly and impartially a duty to safeguard against bribery and corruption. However, this proposed amendment was subsequently deleted.
Nonetheless, corrupt practices in international arbitration continue to attract considerable concern from the arbitral community. Among others, an ICC Task Force has been addressing the issue.
ICC
In December 2024, the ICC Commission on International Arbitration and ADR published a document addressing red flags and other indicators of corruption in international arbitration. The Red Flags Document is part of the ongoing work of the ICC Task Force on Corruption in International Arbitration and will form part of the Task Force’s final report on the issue.
The Red Flags Document provides for detailed guidance on the identification and assessment of corruption in international arbitration proceedings and aims to promote understanding of what red flags or other indicators are, their use and their limits as a tool in establishing a corrupt practice.
Such guidance has often been requested by the arbitration community, including arbitral tribunals, arbitration practitioners, anti-corruption compliance officers and anti-corruption organisations.
The Red Flags Document is 43 pages long and it is not possible within the remit of this article to discuss the guidance offered in detail. In essence, however, the Document endeavours to identify what is meant by a red flag and sets out a three-step methodology for evaluating potential or asserted red flags.
This is intended to assist arbitral tribunals, arbitral institutions and supervisory courts when they are alerted by red flags of corruption in the facts of an arbitration or when an arbitral tribunal develops concerns of its own about possible corruption.
What is a red flag?
A red flag is defined as any fact or circumstance that indicates a potential risk of corruption, for example bribery involving a public official. The Red Flags Document highlights the importance of considering the red flags in the context of the specific legal elements of the corrupt practice in question.
Two categories of red flags are identified:
- General red flags. These relate to specific characteristics of the country, geography or government administration in question, as well as the relevant business sector.
- Specific red flags. These relate to facts or circumstances related to the counterparty or to the transaction in question or a payment to a third party.
Importantly, red flags do not of their own lead to a finding of corruption. Rather, they must be considered and evaluated in the context of all the circumstances, the evidence and with regard to the legal elements of the relevant corrupt practice. In other words, red flags do not automatically lead to a conclusion that corrupt practices are in play or that it has been sufficiently demonstrated that a law has been broken.
Three-step methodology
- Identifying the red flagsThis involves determining which facts, factors or circumstances are relevant to the alleged or apparent corrupt practice in question.
- Confirming or negating the red flagsThis requires determining whether the alleged red flags are factually supported. It also involves assessing the strength of the red flags taking into account all the facts and evidence, contrary indicators as well as mitigating measures.
- Assessing red flags from the perspective of the law on evidenceThis involves an evaluation of whether the red flags have led only to circumstantial evidence or whether there is in fact direct evidence of corrupt practice. Procedural issues will arise, for example admissibility of allegations of corruption, admissibility of new evidence, the shifting of the burden of proof and the application of the proper standard of proof.
Arbitrators’ duties
The Red Flags Document also considers red flags from the perspective of arbitrators’ legal duties. The duties of arbitrators faced with allegations or suspicions of corruption based on asserted red flags have been intensely debated in recent years.
This is a complex topic and raises issues as to what an arbitrator is legally required to do as well as what he or she should (morally) do. Arbitrators are under a duty to act ethically but what this involves may not always be clear-cut. At which point could an arbitrator be held liable for what may be perceived as inaction in the face of a potential red flag? And irrespective of legal liability, what are the reputational and professional consequences? And what is the ultimate impact on international arbitration as a preferred method of resolving disputes?
The Red Flags Documents highlights various relevant considerations but does not endeavour to answer all the questions that may arise. Instead, it makes a number of recommendations, including that in cases involving red flags of corruption, arbitrators should do their best to ensure that any award they publish is enforceable (reflective of the aims and objectives of the New York Convention). Further, that they should fulfil their duties to the parties by not diverting resources to unnecessary investigations that may overly burden the parties or violate due process.
Ultimately, arbitrators must maintain impartiality in decision-making and avoid becoming biased in favour of one party, despite the existence of corruption.
Comment
There is a lot of food for thought in the Red Flags Document for all those involved in the arbitral process, whether as service providers or as users. It will be interesting to read the final report once that has been published.
In the meantime, the Red Flags Document concludes on a very topical note: the use of AI to identify red flags. As the use of technology in this context is still in its early days, it remains to be seen whether AI will make the process more accurate or whether it will muddy the waters by producing too many false positives and negatives.
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