Transcript Fraud in international arbitration

FRAUD IN INTERNATIONAL ARBITRATION
ROBERT HUNTER, HERBERT SMITH FREEHILLS LLP – LONDON
& YACINE FRANCIS, ALLEN & OVERY LLP - DUBAI
CONTENTS
1. Separability of arbitration clauses
2. Arbitrability of fraud claims
3. Tactics in arbitrations concerning fraud
4. Arbitration as instrument of fraud
5. Arbitration award secured by fraud
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SEPARABILITY OF ARBITRATION CLAUSES?
Does the tribunal have jurisdiction to deal with fraud cases?
• Arbitration agreement is treated as a distinct agreement
• Invalidity or non-existence of main agreement does not necessarily mean
arbitration agreement is invalid or non-existent
• Fiona Trust v Privalov [2007] UKHL 40
• Section 7 UK Arbitration Act 1996
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ARBITRABILITY OF FRAUD CLAIMS
Does the tribunal have jurisdiction to deal with fraud cases?
Arbitration is based on contract between the parties -
• Tribunal only has jurisdiction:
– to determine disputes within the scope of the arbitration clause
– over the parties to the arbitration agreement
• Principle that tribunal rules on own jurisdiction – widely recognised in
international arbitration practice
• Arbitrators can deal with fraud allegations
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TACTICS IN ARBITRATIONS CONCERNING FRAUD
The arbitration as an instrument of fraud
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THE ARBITRATION AS AN INSTRUMENT OF FRAUD
• Sham arbitrations - use of international arbitration process to launder money
• May be more attractive than litigation as documents not put on the public record
and hearings are private
• “Claimant” and “Respondent” settle and request a consent award, which
legitimises settlement payment
• No ICC scrutiny of consent awards
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HOW CAN MONEY LAUNDERING AFFECT
INTERNATIONAL ARBITRATIONS?
Allegation of corruption tainting the contract
• A party to the arbitration alleges corruption – may be tactical
• The underlying contract is void/voidable/unenforceable
Arbitrator suspects corruption in relation to the contract
• No allegation of corruption has been made by the parties
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THE ARBITRATION AS AN INSTRUMENT OF FRAUD
Money laundering issues – UK Proceeds of Crime Act 2002 (“POCA”) and
Money Laundering Regulations (“MLRs”)
• POCA, s.328: an offence if a person "enters into or becomes concerned in an
arrangement which he knows or suspects facilitates (by whatever means) the
acquisition, retention, use or control or criminal property by or on behalf of
another person”
• POCA, ss.330 - 332: obligation to notify suspicions of money laundering
• MLRs: client identification requirements
• Bowman v Fels [2005] EWCA Civ 226 – did not specifically address arbitration
but view that Court’s principles and policy considerations also apply to
arbitration and to arbitrators
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THE ARBITRATION AS AN INSTRUMENT OF FRAUD
Money laundering issues
Law Society guidance:
• Arbitration, like litigation, is not covered by the MLRs 2007 and as such the
collection of client due diligence information is not required by law
• Following the decision of Bowman v Fels, genuine litigation and genuine
arbitration will not amount to an arrangement for the purposes of s 328 POCA
• Sham arbitration will still be money laundering and a lawyer or even the
arbitrator will need to consider money laundering offences
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THE ARBITRATION AWARD SECURED BY FRAUD
Duty to investigate suspected fraud/corruption?
• Arbitrators cannot determine matters outside those submitted by parties (can
result in refusal to recognise and enforce award)
• May have positive duty to investigate suspicions of illegality as failure to do so
may facilitate illegality
• Failure to address possible illegality may expose award to enforcement
challenges contrary to duty to render binding, final and enforceable award
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THE ARBITRATION AWARD SECURED BY FRAUD
Illegality of underlying contract
• Is the underlying contract illegal or contrary to public policy?
• Depends on governing law of the contract but also consider law and public
policy of:
– place of performance
– seat of arbitration
• Also consider international public policy
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THE ARBITRATION AWARD SECURED BY FRAUD
Enforcement issues
• Enforcement of arbitral awards can be refused on grounds that confirming,
recognising or enforcing the award is contrary to public policy in country in which
enforcement sought
• However, enforcing courts are likely to consider public interest in respecting
finality of arbitral awards and upholding New York Convention
• UK Arbitration Act 1996 section 68 - Award may be challenged on grounds that
obtained by fraud was procured in way that is contrary to public policy – requires
evidence of actual fraud eg Elektrim v Vivendi [2007] 2 All ER (Comm) 365
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Also consider UK Bribery Act: accepting a bribe to induce a favourable award;
offering a favourable award in return for re-appointment
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CORRUPTION AFFECTING THE UNDERLYING
CONTRACT
How should an arbitrator deal with a claim where he suspects that the
contract is tainted by corruption?
• Refuse jurisdiction?
• Find the contract void, voidable or unenforceable by applying:
– The law of the contract
– Public policy of another jurisdiction
– Mandatory rules of another jurisdiction
• The law of the place of performance
• The national laws of the parties
• The law of the seat
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