Corruption Evidence in Arbitration - The Role of Red Flags

As featured in ThoughtLeaders4 Disputes Magazine

Introduction

There is a growing recognition of the need for arbitrators to be vigilant and proactive in addressing signs of corruption.

While corruption is a term without a universal definition, we can broadly refer to it as a wide variety of dishonest practices, including among others, bribery, money laundering, embezzlement and false accounting.

^{"Proving corruption during arbitration proceedings is even more difficult than defining it."}

Not only do counsel and experts have the challenging task of identifying and presenting evidence of corruption before a tribunal, but tribunals have also adopted different standards of proof for corruption allegations, requiring varying degrees of evidence.

However, an approach that most arbitral tribunals and national courts (in annulment proceedings) appear to agree on involves relying on the identification of red flags to pinpoint and describe potentially suspicious business activities or transactions. For instance, in a recent ruling in England during October 2023,^[1] the High Court of Justice overturned arbitration awards of US$11 billion (including interest). The court noted that the awards were tainted by fraud and violated public policy, even highlighting several red flags marked the transactions at the core of the dispute.

What Do Red Flags Look Like?

The concept of red flags covers a broad spectrum of indicators that may suggest unethical or illicit behaviour aimed at gaining an undue advantage. These indicators can reveal potential misconduct in various forms, including attempts to improperly obtain or retain business through a transfer of value or the promise of transfer of value. Red flags can largely be considered as transactional or contextual, and experts should consider both types in tandem as this is often helpful in guiding their methodology and in identifying potential risks or irregularities.

^{"Transactional red flags are identified based on the details and characteristics of specific transactions. They focus on the who, the what, and the why: largely the nature, value, timing, frequency, and parties involved in the transaction."}

Transactional red flags are often uncovered in detailed accounting data and supporting documentation, including invoices, purchase orders, contracts, and payment documentation. Forensic accountants typically identify them through detailed review of potentially relevant transactions, looking at discrepancies, anomalies, and patterns that may indicate irregularities or potential misconduct. Examples of typical red flags, depending on the context of the matter, may include:

• purchase orders dated after the invoice date which may indicate overriding internal controls;
• non-compliance with local tendering rules such as fast tracking public tenders;
• unnecessarily complex transaction structures that obscure the true nature or purpose of the transaction;
• the use of unusually high transaction prices in comparison to market benchmarks; or
• lack of details and/or evidence of services rendered and billed that may put into question the legitimacy of the transaction.

Contextual red flags relate to potential issues or irregularities surrounding the broader context in which a transaction occurs. They consider the environment, background, and patterns associated with the entities and individuals involved. Contextual red flags are generally identified in publicly available information such as company records, adverse regulatory filings, jurisdiction and risk indicators, or even compliance program assessments. They emerge from analysing patterns and risk factors associated with the entities and environments involved, rather than the specifics of individual transactions. For example, potential red flags may include:

• entities operating in a country with historically high corruption risk;
• absence of internet presence or credentials in the relevant industry that may indicate lack of legitimacy of an entity;
• a company historically in a low-risk industry suddenly shifting to a high-risk environment;
• payments to third-party intermediaries with poor reputation or a history of regulatory issues; or
• the absence of a well-designed and active compliance programme.

How Are Red Flags Best Presented To Arbitral Tribunals?

When reporting the results of their work, experts should keep in mind that the facts will be critically examined and interpreted based on the judgement of the tribunal. Therefore, they must carefully analyse and contextualise any findings to assist the tribunal in making an informed judgement. A compelling expert report should build on a clear representation of the expert’s instructions, relevant context and circumstances (including region and industry), the assumptions on which experts relied, the methodology adopted to assess indicators of corruption, and the type of evidence they obtained and how they obtained it.

When describing red flags, experts should lay out how they were identified, any patterns, and why they represent a risk within the matter. It is important to note that one single red flag, despite indicating potential risk, is unlikely to constitute evidence of corruption.

For instance, a transaction involving a commission payment to an agent may not be indicative of corruption on its own. However, when assessed jointly with other red flags, such as the payment being routed through an entity registered in a tax haven or the agent having little to no internet presence/industry credentials, this transaction may carry a higher risk of corruption and be of relevance to a case.

Very rarely will experts find a smoking gun that undoubtedly proves corruption. Ultimately, it is up to the experts and counsel to present their findings in a way that highlights the consistency of the evidence with corruption to a point where tribunals cannot reasonably ignore it.

Contributions kindly added by Senior Associates Dinara Afaunova & Isabelle Vinter.