In a final award issued on 7 December 2016, a Tribunal convened pursuant to the ICSID (The International Centre for Settlement of Investment Disputes) Convention Rules has ruled that claims brought by the UK’s AIM-listed Churchill Mining Plc against Indonesia are inadmissible. This protracted claim for damages, which commenced back in 2012, arose out of the Indonesian government’s decision to revoke Churchill’s licenses to exploit coal reserves in East Kutai, Indonesia. The claims of Churchill’s subsidiary Planet Mining - which had been consolidated before the same Tribunal - suffered the same fate.
The Tribunal was swayed by the weight of evidence indicating that documents submitted to the Indonesian government, which were fundamental in securing the investment opportunity in the first place (and which included licences and letters from various levels of government), had been forged. Whilst there was no evidence explicitly linking Churchill with what the Tribunal found to be forgery, it was determined that in all likelihood the forgery was handled by someone or some entity working for or on behalf of Churchill’s local business partner.
It was ultimately found that Churchill’s due diligence exercises had been insufficient in addressing the risk that a local partner might forge the documents in question. Churchill’s due diligence was criticised for failing to account for the pervasive problem of corruption in the Indonesian mining sector.
To add further insult to injury, Churchill and Planet Mining have been ordered to pay costs and arbitration fees amounting to almost US $9.5 million. Despite this, Churchill has suggested that it may seek annulment of the award.
Ensuring appropriate and proportionate due diligence is carried out prior to investing in a foreign market is a crucial consideration. It should routinely form part of an investor’s risk analysis ahead of making any investment decision or entering into any business relationship, especially in high risk jurisdictions. This is particularly the case where a foreign investor is exposed to potential penalties under the Foreign Corrupt Practices Act of 1977 (FCPA) and/or the UK Bribery Act 2010.
The current climate of increased international enforcement of anti-bribery and corruption laws - as well as increased international scrutiny of energy and infrastructure projects (and a widespread crackdown in Indonesia in particular) - mean that investors should not underestimate the grave importance of carrying out proper due diligence on issues surrounding proposed investments, including on any individuals or entities being considered as local partners. The potential regulatory penalties and/or the loss of investment value (as Churchill and Planet Mining will find to their cost in the event the latest decision stands) where such procedures are found wanting should be sufficient deterrent to ensure that this occurs. Moreover, steps must be taken to monitor and ensure on-going compliance during the life of an investment or relationship. For instance, tailored anti-bribery training, the implementation of financial controls and other operational procedures at the level of any joint venture company, a “whistleblowing” facility and appropriate investigation of concerns raised are just a few examples of the steps that savvy foreign investors take to manage risk in this context.