Assertions of investor misconduct, ranging from allegations of abusive restructuring to outright corruption in procuring an investment, are evolving into an important part of the catalog of state defenses in investment arbitration.  Three recent ICSID arbitration decisions have addressed this "emerging defense." The rise of such defenses underscores the importance of scrupulous business practices and careful consideration of restructuring by investors.

Abusive restructuring of an investment

In the January 9, 2015 award in Renee Rose Levy and Gremcitel S.A. v. Republic of Peru, the tribunal declined to exercise jurisdiction over the dispute even though it concluded that it had the power to do so. Peru asserted that the investment, which was restructured just one day before the alleged violations by the state were announced, constituted an abuse of process.

The tribunal explained that while a "reorganization of a corporate structure designed to obtain investment treaty benefits is not illegitimate per se … a restructuring carried out with the intention to invoke the treaty's protections at a time when the dispute is foreseeable may constitute an abuse of process depending on the circumstances." 

Although the tribunal emphasized that a finding of abuse faces a high threshold and should only be affirmed in "exceptional cases," it nevertheless concluded that the "striking proximity" between the transfer of ownership and the subsequent state action was "not a coincidence." It was "clear," according to the tribunal, that the claimants could foresee the state action they later complained had eviscerated their investment.

Significantly, the tribunal was deeply troubled by what it considered "untrustworthy, if not utterly misleading" documents presented to it by the claimants as part of their efforts to establish jurisdiction. The tribunal noted that the documents, which were found to have been backdated, cast the claimants' actions "in a bad light."  This likely played an important role in persuading the tribunal to find an abuse of process and, in addition to declining jurisdiction, ordering the claimants to reimburse Peru for its portion of the costs of the arbitration in addition to US$1.5 million for Peru's legal fees and other costs.

On December 15, 2014, less than one month before the award in Levy, the tribunal in Cervin Investissements S.A. & Rhone Investissements S.A. v. Republic of Costa Rica addressed similar allegations of an investor's abuse of process by purportedly restructuring the investment for the sole purpose of asserting an ICSID claim. In this case, the investment had been made through Dutch companies, but was later restructured through Swiss companies, all of which were controlled by the same Mexican parent.

Explaining that Costa Rica had the burden of showing that the claimants had restructured their investment for the sole purpose of obtaining an undue procedural advantage, the tribunal rejected the challenge based on the claimants' general statements that the restructuring was done to gain access to better funding sources and establish greater financial order in the company.

The tribunal was particularly persuaded by the fact that the investments would have had access to ICSID under either the Dutch or Swiss investment treaties with Costa Rica. The tribunal emphasized that this assumption was reinforced by the respondent's failure to show that the claimants received any advantage by using one treaty over the other.

Alleged corruption by the investor

In the December 10, 2014 award in Frankfurt AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, the tribunal faced allegations of corruption in procuring investments. In particular, the Philippines argued that the investor's alleged involvement in an elaborate scheme of bribery and money laundering rendered the claims inadmissible. This argument follows the October 2013 award in Metal-Tech v. Uzbekistan, the first time an investment tribunal declined jurisdiction based on corruption by the investor.

In Frankfurt v Philippines, although the tribunal acknowledged that proving corruption by direct evidence is difficult, it emphasized that the "evidence must be clear and convincing so as to reasonably make-believe that the facts, as alleged, have occurred."  After assessing the evidence, the tribunal concluded that the respondent had "failed to provide clear and convincing evidence regarding corruption and fraud."

Conclusions

The law relating to allegations of investor misconduct is developing. Beyond the substantive standards to be applied, tribunals continue to grapple with difficult evidentiary questions, including balancing the parties' burdens and the weight to give to circumstantial evidence. However, given the success of investor misconduct arguments in the Metal-Tech and Levy cases, there is little doubt that states will continue to assert such defenses when available.