Monthly Archives: December 2016

By Hyun-Soo Lim

In June 2016, the final oral argument[1] for the investment dispute between South Korea (Korea) and Lone Star Funds (LSF) took place. The Texas-based, Belgium-incorporated hedge fund’s ICSID arbitration against Korea began in 2012. Relying on a bilateral investment treaty between Korea and Belgium/Luxembourg, LSF contended that the Korean government failed to comply with its obligations under the investment treaty by refusing to approve the sale of Korea Exchange Bank (KEB) in a timely manner, and imposing capital gains tax on the sales of its investments.

The dispute dates back to 2003 when LSF acquired a controlling stake in KEB from the Korean government for $1.2 billion. A Belgian subsidiary of LSF (KC Holdings S.A.) was used for the acquisition, giving the fund favorable tax benefits and other desirable provisions contained in the investment treaty between Belgium and Korea.[2]

This case is noteworthy for many reasons beyond the substantial $4.6 billion at stake and the potential ramifications for future suits given that LSF is the first foreign investor to bring formal arbitration against Korea. First, the Korean public remains deeply suspicious of the transactions that allowed LSF to enter the banking market in the early 2000s; the Korean government’s near-paranoid protection of confidentiality in the proceedings has only exacerbated allegations of serious corruption. For instance, in April 2015, the Financial Services Commission told an opposition party congressman that he “cannot talk about anything that contains as little as the word ‘Lone’ of ‘Lone Star Funds’ in it.”[3]

Relatedly, the Korea-LSF dispute offers a useful case of discussing modified transparency – compelled disclosure of certain documents – in international investment arbitration. Both the Korean government and LSF have denied the Korean civil society’s allegations of corruption, creating a public interest that is distinct from the parties. Most literature on corruption and international investment arbitration has focused on the dispositive role of alleged corruption in a dispute, but very few scholars have addressed the question of how an arbitral tribunal should handle corruption charges that are not raised by either party.[4] I argue that in cases involving serious allegations of corruption, disclosure of certain documents is necessary to preserve the public interest inherent in any investment dispute.

Thus, I propose a “modified transparency” approach to investment arbitration, through which citizens of the host state may petition for disclosure of certain documents to the public to address suspicions of corruption. In particular, given the reasonable and well-substantiated distrust in prior prosecutorial investigations of corruption in the Korea-LSF dispute, there is a strong argument for transparency in the arbitration proceedings.

Allegations of corruption in LSF’s acquisition of KEB

Misgivings about LSF’s acquisition of KEB arose with the BIS (Bank for International Settlements) Capital Adequacy Ratio, the ratio of a bank’s own capital over its risk-weighted assets. Under Korean financial regulations at the time, a potential controlling shareholder that is not itself a financial institution could only acquire banks with a BIS Ratio of less than 8%. On July 18, 2003, KEB’s BIS Ratio was between 8.24% and 9.14%, but merely one week later, the Ministry of Strategy and Finance evaluated KEB’s BIS Ratio to be dramatically lower, at 6.16%.^[5]

The evaluation raised concerns of fraud upon discovery of unaccountable sums of deposit in personal accounts of then-CEO of KEB, the Director of the Financial Policy Bureau under the Ministry of Strategy and Finance, and his attorney.^[6] Moreover, the person who provided the data for calculations of the BIS Ratio to the Ministry conveniently died on the same day that the report was submitted, stifling further inquiries into the decision.^[7] Public Prosecutor investigations revealed that a secret meeting of high-ranking government officials and bankers had set the BIS Ratio at 6.16% based on the most pessimistic speculations, and gave LSF authorization to acquire KEB based on exceptions in the banking law.^[8] None of the individuals present at the meeting were found guilty, either because the arrest warrants were ejected for lack of preliminary evidence or because the Prosecutor could not find direct proof of bribery.^[9] Nevertheless, the pessimistic BIS Ratio calculation remains unexplained.

Demand for information disclosure

After a series of reports from investigative journalists suggesting that the prosecutorial investigations were incomplete, Minbyun, a Seoul-based plaintiffs’ side law firm, filed an information disclosure request suit in August 2015 at the Seoul Administrative Court against the Korean government. Minbyun demanded disclosure of basic facts giving rise to the investment dispute, including how LSF’s claimed damages of $4.6 billion was calculated. The court dismissed the suit, deeming sufficient the government’s abstract explanation that the amount in controversy is  based on the amount LSF would have received with a timely sale, taxes, and interest. Minbyun contests that “while the exact calculations for the damages is only a small part of the dispute, it can still be a major step towards understanding what really happened.”^[10] According to Minbyun, the government is maintaining strict confidentiality because there is significant information suggesting irresponsible or corrupt behavior by public officials that remained hidden during prosecutorial investigations.^[11]

Normative Justifications for Transparency

Transparency in international adjudications or law-making is vital to forming expectations and developing a notion of an international “rule of law.”[12] There is often tension between the public benefits of a transparent legal order and the government or business tendency to favor secrecy and efficiency. In investor-state dispute settlement, these public benefits can largely be understood as accountability, “right to know,” and legitimacy of international investment law. There is no basis for suggesting that public interest in accountability and transparency in cases involving significant fiscal and policy implications is less important than a private interest in efficiency and protection of privacy.[13] 

Transparency is essential in creating reputations that allow legal systems to build credibility and accountability.[14] Confidentiality leads to doubts over propriety or fairness of proceedings, precisely because of the secrecy. The UNCITRAL Arbitration Rules and the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration embraced this idea by stating:

[T]ransparency in treaty-based Investor-State arbitration would contribute significantly to the establishment of a harmonized legal framework for a fair and efficient settlement of international investment disputes, increase transparency and accountability and promote good governance.[15]

Since investor-state arbitration is also a form of arbitration agreed to by two parties, however, it is difficult to dismiss the parties’ wishes for confidentiality completely, irrespective of whether their motivations are contrary to public interest.[16]

Nonetheless, these reservations may be based on an unqualified conception of who a “party” is. Is the host government a representative of the bureaucracy and the public officials who crafted and implemented the policies and decisions related to the foreign investment? Or should the government be understood as representatives of the people of the host state, who pay for the consequences of investor arbitration both with their finances (tax funds) and implications for their communities (foreign investment)? If the host government is seen as the former, it is the bureaucracy’s interests that are at the center of the dispute, and the public interest is distinct and separate as a “third” interest. However, if the state party is understood as a representative of the country (and its people) as a whole, then any decision by the representative against public will is not an accurate reflection of the party’s wishes.[17] Under this conception of the state party, when it fails to both represent the wishes of its people and respond to calls for accountability, it is no longer a fully representative “party.” Thus, the arbitration tribunal would be justified in heeding the wish of the citizens that the state party is supposed to represent. 

In either scenario, it is undeniable that public interest is deeply implicated. Yet, investment arbitration does not always properly address potential ramifications to citizens in the host state, even when the government is at a high risk of failing to act in the best interests of its people. That tribunals cannot transcend the parties’ wishes to account for public interest in knowing is the clearest indication of this failure to account for public stakes in the arbitration.

Nonetheless, given the difficulty of eroding confidentiality in arbitration proceedings, there must be strong justifications for overriding the parties’ wishes. Therefore, instead of having an uncompromising rule of transparency in every case, an arbitration tribunal should employ a modified approach of allowing for certain documents to be disclosed where the public has a significant interest at stake.[18] One such interest would be the incidence of corruption in the lead-up to the dispute, such that a tribunal’s failure to provide for transparency in the proceedings would exacerbate the lack of accountability and hence promote further corruption.

Proposal for Transparency When Suspicions of Corruption Exist  

I propose that international arbitration proceedings should by default have a petition procedure by which third parties may request disclosure of certain documents on the basis of suspected corruption, creating an avenue of “modified transparency.” In reviewing the petition, the tribunal need not conduct investigations on its own, but simply review the submissions presented with a low threshold of reasonable doubt. If the tribunal finds that the petition is based on reasonable grounds of suspicion, the public should be given access to transcripts of hearings, pleadings and awards, with some redactions allowed for protected information that the tribunal deems to have no relationship to indications of corruption.[19] A simple publication of the award would not be enough, since all of these documents could potentially serve as evidence for the public to hold civil servants accountable.

As critics of confidentiality in the LSF dispute point out, documents presented during arbitration proceedings are likely to contain critical and exclusive information that could serve as evidence of corruption and bribery. Therefore, documents presented during arbitration proceedings are extremely valuable to investigations of corruption, even if the tribunal itself is not empowered to do so. When neither party raises allegations of corruption, arbitration tribunals have neither the capacity nor the authority to properly address these concerns. In this context, enhancing transparency is a meaningful step in the direction of countering corruption in a manner that does not force arbitrators to step out of their usual roles.

Admittedly, it is not the arbitration tribunal’s role to address public interest concerns; any tribunal’s role is to decide on questions presented in a dispute. However, international arbitration as a field of law has always been mindful of public policy considerations. The New York Convention, for instance, allows non-enforcement of an award if the recognition or enforcement of the award would be contrary to public policy.[20] As a matter of public policy, then, the universally-recognized public interest of combatting corruption should be respected in investment arbitration proceedings as well.

One possible reservation in implementing transparency in the Korea-LSF dispute, or other disputes in which neither party raises allegations of corruption, would be that the allegations have already been investigated. After all, the public had enough information to form reasonable grounds of suspicion. There are two responses to this challenge. First, at least in the Korea-LSF dispute, there have been new allegations of corruption that reveal that the investigations were not thorough. As discussed in the previous section, several arrest warrants had been declined on the basis of lack of preliminary evidence; it is likely that there are “hidden” facts in the briefs and witness statements that could change these results.

Second, there is no visible trend or principle in investment arbitration demanding that the claims of corruption be prosecuted in order for them to be considered by the tribunal. For many cases in the last twenty years, the host government’s inability or unwillingness to prosecute the alleged corruption was either a non-issue or dismissed. For example, in EDF (Services) v. Romania, the ICSID tribunal refused to defer to Romania’s investigation on the claimant’s allegation of substantial bribery, and conducted its own fact-finding.[21] In the majority of cases that had claims of corruption, the tribunal hardly paid attention to whether the host state prosecuted any allegedly corrupt officials. Although these cases are distinct in that at least one party made a corruption claim, they do show that the tribunal need not necessarily defer to findings of the state in evaluating similar allegations. Therefore, when neither party raises allegations of corruption, the tribunal can still review the submission from the third party to decide whether there are reasonable grounds of suspicion of corruption, and force disclosure of documents as the proper recourse.

Given the wide recognition of an international public policy and a commonly shared goal of discouraging corruption and misuse of public office, transparency is a necessary value to be preserved in international arbitration. In light of the substantial public interest claim based on reasonable suspicions of corruption in the LSF case, there is a strong case for modified transparency through disclosure of documents and submissions to give the public access to information that will be instrumental to combatting corruption.

[1] Ji-Hun Lee, Lone Star ISD Final Hearing, Delayed to June because of Traffic Accident, Yonhap News (Jan. 9, 2016), http://www.yonhapnews.co.kr/bulletin/2016/01/09/0200000000AKR20160109049100002.HTML?fd5022f0.

[2] Hyun-Jung Lee, Trial of the Century: Three Points in Lone Star ISD, Maeil Kyungjae (May 31, 2016), http://news.mk.co.kr/newsRead.php?no=391210&year=2016.

[3] Id., (citing Ki-Joon Kim, Member of the New Political Alliance for Democracy, the official opposition party in Korea).

[4] The Korean government does argue that the CEO of LSF Korea’s illegal activities prompted the Korean government’s refusal to approve the sale of KEB. However, both parties deny allegations of corruption raised by the civil society in Korea.  

[5] Jin-Young Hwang and Doo-Young Kim, Lone Star Acquisition Justified by Manipulation of BIS Ratio, DongA News (April 21, 2006), http://news.donga.com/3/all/20060421/8298304/1.

[6] Jong-Hak Choi, Hidden Truths Behind the KEB Controversy, 28 Donga Bus. Rev. 82 (2009) (translated source).

[7] Id., at 84.

[8] Tae-Hoon Lee, BIS Ratio Manipulation in the Process of KEB Sale, Korea Economy (Nov. 20, 2006), http://sgsg.hankyung.com/apps.frm/news.view?nkey=2558&c1=01&c2=02.

[9]Hyun-Duk Bang, After Eat and Run Comes $50 Billion Lawsuit, Yonhap News (June 30, 2015), http://www.yonhapnews.co.kr/bulletin/2015/05/31/0200000000AKR20150531070200004.HTML?input=1195m.

[10] Id.

[11] Interview with Song Ki-Ho.

[12] See, e.g., Markus Gehring and Dimitrij Euler, Public Interest in Investment Arbitration, in Transparency in International Law 14-44 (Andrea Bianchi and Anne Peters, eds., 2013); Dimitrij Euler, Markus Gehring and Maxi Scherer, Introduction in Transparency in International Investment Arbitration: A Guide to the UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration 1-4 (Dimitrij Euler, Markus Gehring, and Maxi Scherer, eds., 2015). Sergio Puig, Against International Settlement? The Social Cost of Secrecy in International Adjudication (Laboratory on International Law and Regulation, Working Paper, Paper No. 25, 2016).

[13] Nigel Blackaby, Public Interest and Investment Treaty Arbitration, Investment Treaties and Arbitration, ASA Swiss Arbitration Association, Conference in Zurich (Jan. 25, 2002). See also Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions, 73 Fordham L. Rev. 1521, 1523 (2005). The Future of Investment Arbitration

[14] Martha Finnemore and Stephen J. Toope, Alternatives to “Legalization”: Richer Views of Law and Politics, 55 Int’l Org. 741 (2001).

[15] G.A. Res. 68/109, Preamble (Dec. 16, 2013).

[16] See Leon Trakman, ICSID Under Siege, 45 Cornell Intl. L. J. 605, 653 (2012).

[17] Coleman, Sally, Jeffrey L. Brudney, and J. Edward Kellough, Bureaucracy as a Representative Institution: Toward a Reconciliation of Bureaucratic Government and Democratic Theory, 42.3 Am. J. of Poli. Sci. 717-744 (1998).

[18] The exact parameters of this approach would need to be negotiated between investors, states and arbitration centers.

[19] Arbitration rules under the Trans-Pacific Partnership can serve as guidance on how certain information is protected.

[20] New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, art. V(2), 1958.

[21] In the end, the tribunal concluded on its own evidence that there was insufficient evidence to establish corruption.

By Tracy Nelson

As the Republican-controlled 114th Congress reconvenes for its lame-duck session, expectations for the session’s productivity are low. While issues including military policy, judicial nominations, and various appropriations measures remain pending, it is unlikely that non-essential or divisive measures will move with any great speed. The Trans-Pacific Partnership (TPP), once swirling with lame-duck buzz, also seems unlikely to be ratified during the session, tarnished by a presidential election in which both major party candidates denounced the trade agreement. Senate Majority Leader Mitch McConnell has stated rather firmly that the TPP “certainly will not be brought up this year,” suggesting that consideration of the trade deal will be left to the new Congress, once President-elect Donald Trump has been inaugurated.

While it appears that the present lame-duck session may make little headway overall, this period has historically been one of great productivity in international and foreign relations law. The lame-duck session is often one of the only opportunities for Congress to complete substantial work in the second portion of the calendar year, due to August recess and election recess. As a result, time sensitive issues, such as defense and security measures, are frequently considered during this period. Divisive or executive-led issues are also often considered during lame-duck sessions, as the passage of midterm elections alleviates the pressure of public opinion. Because of these factors, lame-duck sessions present a final opportunity for a Congress or a President to push specific international law agenda items that have gone unaddressed.

The Uruguay Round Agreements Act of 1994 and the New START Treaty of 2010 are two examples of international agreements that were successfully passed during lame-duck sessions, and their passage and significance are detailed below. In both instances, the lame-duck session created time pressures alongside simultaneous relief from public opinion concerns, proving ripe for progress on international law issues. While the current lame-duck session may not result in activity of similar consequence for international law, there are two sanctions bills–one concerning Iran and another concerning Syria–that have already gained some traction in the lame-duck session and deserve attention. This piece concludes with a brief analysis of these bills and their prospects for passage.

Uruguay Round Agreements Act of 1994 and the Impact of Public Opinion

The Uruguay Round Agreements Act of 1994, approved during the lame-duck session of the 103rd Congress, implemented into U.S. law the Marrakesh Agreement of 1994, which transformed the General Agreement on Tariffs and Trade (GATT) of 1947 into the World Trade Organization (WTO). The Uruguay Round Agreements Act recognized the series of trade agreements (“Uruguay Round agreements”) that came out of the Uruguay Round of multilateral trade negotiations, conducted from 1986 through 1994, and formed the basis of the WTO framework. These agreements expanded the industries originally included under the GATT, further reduced tariffs, expanded restrictions on government subsidies, and created an institutionalized dispute settlement system.

A bipartisan majority supported the Uruguay Round agreements but faced opposition from portions of both parties. Opposing Democrats argued that free trade agreements harmed U.S. jobs and drove down the salaries of working-class Americans. GATT-opponent Senator Ernest Hollings (D-SC), Chairman of the Senate Finance Committee, held the legislation in his committee for the maximum permitted forty-five days, forcing the issue to be addressed after the November midterm elections, in the hopes of exposing what he believed to be flawed agreements. Many Democrats supported Sen. Hollings and believed that delaying a vote on the agreements until after the elections would prevent blowback from trade-opposed portions of the electorate. A number of Republicans also objected to the Uruguay Round agreements, due to concerns about the economy, U.S. accountability to the WTO, and the potential impact on the midterm elections. Some Republicans were hesitant to “[give] President Clinton a victory” in the form of accession to the agreements, as they saw the Republican-led negotiations as their own policy win. Therefore, the lame-duck congressional session ultimately allowed both Democrats and Republicans to consider the agreements on their merits rather than considering the political implications of the legislation’s passage in the 1994 midterm elections. Despite prior hesitations, a bipartisan coalition brought the Uruguay Round Agreements Act for a vote and both houses approved by a wide margin.

The New START Treaty and Political and Security Pressures

Ratification of the New START treaty and the United States’ subsequent nuclear posture were influenced by the political dynamics of the 2010 midterm elections and the lame-duck congressional session. The New START Treaty, signed by President Obama and then-Russian President Medvedev in April 2010, replaced the original and recently expired START Treaty. The agreement between the United States and Russia outlined targets for reduced nuclear arsenals and committed both parties to verification mechanisms. Without a valid treaty in place, the U.S. could not verify Russia’s nuclear force size and structure, creating great security uncertainties and additional time pressures for the ratification of the treaty. The treaty met opposition from Republican senators who argued that the agreement conceded too much to the Russians and could potentially foreclose the development of necessary missile defense capabilities. Despite a 58-42 Democratic majority in the Senate, Republican support was essential to clear the constitutionally required two-thirds majority for treaty ratification. Republican victories in the 2010 midterm elections applied additional pressure on the Obama administration to reach a bipartisan compromise in the lame-duck session as greater Republican support would be required in the newly elected Congress. The political and security pressures on timely ratification led to substantial lobbying efforts by the Obama administration as well as to the administration’s commitment to invest $80 billion to nuclear modernization in the subsequent decade. While the New START Treaty was eventually ratified on December 22, 2010, with the support of thirteen Republicans, the lame-duck dynamics present in 2010 led to the Obama administration pursuing a more aggressive nuclear posture than originally intended by the treaty.

Prospects for the Present Lame-Duck Session: The Iran and Syria Sanctions Bills

 Two sanctions bills, one a renewal of the Iran Sanctions Act of 1996 and the other directed at the Syrian government and its supporters, remain pending before the Senate in the current lame-duck session. Passed almost unanimously by the House, the Iran Sanctions Extension Act would renew sanctions set to expire at the end of the year. The bill would preserve “snapback sanctions” that can be invoked should Iran violate its agreements with the U.S., considered essential for the agreements to have any teeth. The renewal has significant support in the Senate and will likely be pushed through during the lame-duck due to the time pressures associated with the impending expiration. Also passed by the House and awaiting Senate consideration is the Caesar Syria Civilian Protection Act of 2016, which would permit sanctioning of the Assad regime and its supporters, including Russia and Iran, for war crimes and atrocities against civilians. This bill runs contrary to potential policy shifts anticipated under President-elect Trump, who has discussed increased cooperation with Russia and a more hands-off approach to the situation in Syria. While passed by a voice vote in the House, the bill lacks vocal champions in the Senate and could be cast aside as continued Republican control of both houses eases political pressure to pass the bill during this Congress.

Conclusion

The lame-duck congressional session presents a unique opportunity for productivity on international law issues. The conclusion of midterm elections eases concern over public opinion often associated with executive-led measures like trade agreements and international treaties. Simultaneous political and security pressures due to the Congressional calendar create an environment conducive for hastened work and increased compromise. Nevertheless, uncertainty surrounding the incoming administration’s policies and a lack of political pressure due to the maintenance of Republican control in Congress will likely stifle meaningful productivity during this lame-duck session, despite the increasingly lengthy queue of international issues to be addressed.

By Leo O’Toole

As international investment arbitration has grown in prominence and as international norms against corruption have strengthened, the number of allegations of corruption brought by parties in investment arbitration proceedings has increased. Eager to enlist investment arbitration in the international anti-corruption campaign, some have welcomed allegations of corruption in investment arbitration and argued that arbitrators should investigate potential corruption sua sponte. In contrast, I argue that while it may be tempting to harness the power of investment arbitration in the international fight against corruption, investment tribunals are ill-suited to hear allegations of corruption. Rather than reducing corruption, the fixed roles of parties in investment arbitration—investors consistently acting as claimants and host-states consistently acting as respondents—and the one-sided consequences of a finding of corruption might actually create new incentives for bribery. Furthermore, investment arbitration is a poor forum for corruption allegations, because tribunals generally do not distinguish between bribes paid to secure a routine government action and bribes paid to violate the law.

Unlike international commercial arbitration, which is a creature of contract between two private parties, international investment arbitration arises out of a treaty between two sovereign entities. Broadly speaking, states sign investment treaties in one of two ways. First, two states can sign bilateral investment treaties allowing country A’s investors to file claims for arbitration against the government of country B for damages made to an investment in country B— and vice versa. Second, states can enter into multilateral treaties – such as the North American Free Trade Agreement or the Energy Charter Treaty – that have investment chapters, which again allow for investors of country A to sue country B for damages made to the investors’ investment in country B, and vice versa. Conceived of during a period of decolonization, investment treaties were originally intended to attract capital to developing countries with protections against the perceived threat of expropriation.

Each investment treaty defines the scope of its protections differently, but no investment treaty gives protection to investments secured through corruption. Defining investments broadly, the Energy Charter Treaty covers “every kind of asset owned or controlled directly or indirectly by an investor.” NAFTA, on the other hand, has a more restrictive definition of investment. Regardless of the scope of investments covered under the treaty, treaties do not extend protection to investment made through corruption. A treaty may have explicit language that it only protects investments made “in accordance with the respective laws and regulations of either Contracting state.” Absent this language, tribunals have nevertheless found that “general principles” of international law prevent the tribunal from hearing a dispute that has been tainted by corruption. To be clear, this outcome hurts investors more than host-states; investors lose the protections of investment treaties and lose a forum for obtaining damages. Because of this asymmetry, investment arbitration might, at first blush, seem like a suitable forum for punishing businesses that bribe overseas. 

World Duty Free v. Kenya illustrates how a finding of corruption affects investment arbitration proceedings. There, an Isle of Man corporation brought claims against the government of Kenya for breaching a contract for “construction, maintenance and operation of duty-free complexes at Nairobi and Mombasa International Airports.” Presumably unaware of the consequences, World Duty Free’s CEO freely admitted the 2 million USD bribe that his company paid to the Kenyan President to secure the contract. As a result of this admission, and without considering the merits of World Duty Free’s claim of breach of contract, the tribunal found it had no jurisdiction to hear this investment dispute as a “matter of ordre public international and public policy under the contract’s applicable laws [the laws of Kenya and England].” Ultimately, a 2 million USD bribe deprived the tribunal of hearing claims of damages around 500 million USD.

World Duty Free v. Kenya, however, is unusual in that the bribe paying party presented evidence of its own wrongdoing; instead, it is typically the host-state who raises allegations of bribery. If statistics on the perception of widespread bribery are to be believed, allegations of bribery in investment disputes are raised much less often than they could be. In the rare instances when allegations of bribery are made, it is much more common for the host-state to make this allegation, knowing that a finding of corruption will effectively immunize it from any liability. Metal-Tech v. Uzbekistan presents an example where Uzbekistan, the host-state, was able to avoid liability by producing evidence of bribery in the formation of a joint-venture agreement between members of the Uzbekistani government and Israeli investors. The tribunal found it had no jurisdiction to hear the dispute, but nevertheless made the parties split the costs of the arbitration, acknowledging Uzbekistan’s complicity in the bribe.

The increasing importance of the international anti-corruption movement likely contributed to the candid discussions of corruption and the ultimate outcomes in the World Duty Free and Metal-Tech awards. Up until the Watergate era, bribery of foreign officials to secure contracts was common among Western corporations. Beginning with the post-Watergate U.S. Foreign Corrupt Practices Act in 1977 and moving through the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997, a steady consensus has developed, such that Chapter 26 of the now-moribund Trans-Pacific Partnership was dedicated to anti-corruption provisions required of signatory states. To deal with the sanctions and fines from the far-reaching U.S. Department of Justice, a global anti-corruption compliance industry has developed with catchphrases like “Will you act now or pay later?” to help companies avoid with the very real prospect of sanctions and fines arising from overseas bribery. This article will not focus on the interaction between domestic anti-bribery enforcement and investment arbitration, but Siemens v. Argentina illustrates how national anti-bribery enforcement affects international investment arbitration. In 2007, Siemens secured a 218 million USD award against Argentina; however, it never enforced the award, because in 2008, a U.S. Department of Justice investigation revealed widespread bribery by Siemens, including in Argentina, making enforcement of the award extremely difficult.

To accomplish the objectives of the international anti-corruption movement and to ensure the integrity of awards rendered under investment arbitration, some have suggested that arbitrators should investigate allegations of corruption on their own initiative rather than allowing each party to provide the proof on which its allegations rest.

For two chief reasons, I argue that investment arbitration is ill-suited to handle allegations of corruption. First, the structural mechanics of investment arbitration undermine the justification behind the common law principle that in a case of equal fault, the defendant’s case prevails [in pari delicto potior est conditio defendentis]. Second, the current system does not consider factors surrounding the bribe, such as whether the bribe was paid to secure routine government action or whether it was paid to violate the law. Without question, corruption seriously impairs development and harms the well-being of hundreds of millions across the globe. Businesses that bribe should be prosecuted by the national authorities who have jurisdiction over those cases. In cases where clear evidence of bribery is brought before a tribunal, tribunals should find they have no jurisdiction to hear investment disputes. That said, tribunals should not seek out evidence of corruption sua sponte because investment arbitration is a poor forum for punishing businesses accused of bribery.

First, the justification for the in pari delicto doctrine makes sense in ordinary litigation but not in investment arbitration. Similar to the clean hands doctrine, the in pari delicto doctrine states that in the case of equal fault—for example, both litigants being party to a corrupt contract—the court will not grant relief. Accordingly, the plaintiff’s suit is dismissed and the defendant gets off largely scot-free. In a case of breach of contract outside of investment arbitration, the default rule—in the case of equal fault the defendant’s case prevails—does not systematically benefit either party; neither party to a corrupt contract knows ex ante whether, in the case of litigation, they will be the plaintiff or the defendant. Investment arbitration, however, is different, because private investors will almost always be claimants and states will always be respondents. Extending the in pari delicto doctrine to investment arbitration gives the host-state an advantage, because the host-state will benefit from its almost certain position as respondent/defendant. The default rule is transformed from ‘in equal fault, the defendant’s case prevails’ to ‘in equal fault, the host-state’s case prevails.’ This default rule in investment arbitration actually creates an incentive for host-states to solicit bribes for investments. Once paid, these bribes will defeat the protections of investment treaties and immunize host-states from liability under the treaty. Rather than suppressing bribery, an investment tribunal system eager to hear and rule on allegations of bribery may actually encourage bribery.

Second, investment arbitration does not consider the function of the bribe. For example, under the FCPA, an investor is not liable for facilitating payments made to secure routine government action. There is a meaningful difference between a payment that secures something that the investor is lawfully entitled—say, securing a permit in accordance with the law—and a payment that allows the investor to break the law with impunity—paying a government official to ignore the dumping of hazardous waste. Proponents of investment arbitration are quick to stress its function in maintaining and promoting the rule of law; however, insofar, as investment arbitration is insensitive to the difference between a bribe paid to vindicate the law and a bribe paid to corrupt the law, investment arbitration is a poor forum for airing allegations of corruption.

While it may be tempting to harness the power of investment arbitration in the international fight against corruption, investment tribunals are ill-suited to hear allegations of corruption. The in pari delicto rule may encourage rather than discourage bribery, and investment arbitration tribunals fail to take into account the purpose of bribes. Undoubtedly, the international anti-corruption campaign should continue through other domestic and international means, but investment arbitration is a poor forum for the airing of allegations of corruption.

By Quentin Johnson

Tension continues to build in Kuala Lumpur, Malaysia this month. The corruption investigation into the Malaysian sovereign wealth fund, 1Malaysia Development Fund (1MDB), captured headlines over the summer when U.S. Attorney General Loretta Lynch announced the Justice Department’s entry into the controversy. Attorney General Lynch announced that the Justice Department would seek forfeiture of $1 billion in assets tied to an international conspiracy linked to luxury real estate, Leonardo DiCaprio, and the film The Wolf of Wall Street (which is, ironically, in part about the damage caused by unchecked greed).

The DOJ’s investigation into 1MDB is not alone. It is just one of many investigations either conducted or pending, into the fund. Public protests in Malaysia over the scandal began in the summer of 2015. But the announcement that DOJ’s Kleptocracy Asset Recovery Unit would be pursuing legal action, rekindled the controversy and prompted action by the Malaysian government. Nearly five months after the announcement of the action, the public debate concerning 1MDB and the possible involvement of Malaysian Prime Minister Najib Razak continues to grow.

Nearly three weeks ago, a Singaporean banker was convicted of forgery and failure to disclose information in connection with his assistance in the 1MDB scandal. The conviction tied the banker to Jho Low, a Malaysian investor turned celebrity high-roller and partier, who is implicated in the DOJ’s case. In the days following this conviction, an opposition member of Malaysia’s Parliament, Rafizi Ramli, was sentenced to 18 months in prison for publicly disclosing classified information from an official audit into 1MDB. Critics of the Prime Minister claimed that the prosecution was only because of Mr. Rafizi’s opposition to the government. Police raided the offices of the Bersih 2.0 opposition movement and arrested two of the movement’s leaders prior to a large protest on November 19th.

The escalation of the public debate in Malaysia prompts renewed focus on the DOJ’s case concerning 1MDB. The complaint was groundbreaking in size and scope for DOJ’s Kleptocracy Asset Recovery Unit. DOJ claims that over $3.5 billion in assets were misappropriated from the fund and the agency is seeking over $1 billion of those assets in the form of property in the United States and abroad. The DOJ needed to unwind a complex series of relationships in building its complaint. Below is an overview of the factual and legal issues involved in the case and a discussion of the cases current status in the U.S. District Court for the Central District of California.

What is 1MDB?

1Malaysia Development Berhad is an investment and development entity that is owned by the government of Malaysia. The fund was developed in 2009 after it assumed the debts of a smaller, state investment fund. Leadership of 1MDB is comprises a Board of Directors, a Board of Advisors, and a Senior Management Team. Prime Minister Najib served as head of the Board of Advisors. According to the complaint, this provided Mr. Najib with the authority to approve all appointments and removals from the Board of Directors and the Senior Management Team. The Wall Street Journal reported that Mr. Najib’s involvement in 1MDB also included authorizing several investments and arranging financial services with Goldman Sachs.

What are DOJ’s factual allegations?

The narrative of DOJ’s complaint is that from 2009 through at least 2013, Malaysian public officials and their associates fraudulently diverted billions of dollars from 1MDB to personal ends rather than investment for the benefit of the Malaysian people. The complaint divides these activities into three phases of conduct:

1. The “Good Star” Phase: the DOJ alleges that funds from 1MDB were diverted to Good Star Limited, a company owned by Jho Low, a Malaysian who is connected to the founding of 1MDB and a friend of the Prime Minister’s stepson. DOJ claims that Low laundered more than $400 million of 1MDB funds through Good Star into the United States.
2. The “Aabar-BVI” Phase: the complaint alleges that 1MDB funds raised through two bond offerings were fraudulently transferred to the Singaporean bank account of Eric Tan, who used the funds to pay officials at 1MDB among others.
3. The “Tanore” Phase: In 2013, a third bond offering was issued and the proceeds were diverted to Tan and used for the personal benefit of Low, his associates, and officials at 1MDB.

The assets purchased include rare artwork, jewelry, and luxury real estate. The funds were also used to hire personal airplanes, pay gambling expenses, and hire musicians and celebrities to attend parties.

The complaint describes formal and informal networks of individuals who facilitated the transfers of money. The DOJ names Jho Low, “Eric” Tan Kim Loong, and Riza Shahriz Bin Abdul Aziz (known as Riza Aziz) as individuals outside of the government who illicitly received substantial sums of money from 1MDB. Riza Aziz is chairman of Red Granite Pictures, which produced The Wolf of Wall Street, and stepson of Prime Minister Najib. The complaint alleges a variety of unnamed Malaysian officials and bankers facilitated these transfers. While the individuals are anonymous in the complaint, several news sources have purported to accurately identify the individuals based upon the circumstances of the allegations provided in the complaint.

What legal action did DOJ take?

 The DOJ is pursuing a civil action for forfeiture in rem. The DOJ argues that the property and assets at issue in the case were involved in one or more money laundering offenses in violation of the Money Laundering Control Act (18 U.S.C. §§ 1956, 1957). The United States brought the complaint for forfeiture pursuant to the civil forfeiture laws (18 U.S.C. § 981). It is not pursuing criminal charges against any of the parties at this time.

What is the current status of the case?

In early August, attorneys from Boies, Schiller & Flexner LLP entered their appearance on behalf of Red Granite Pictures. In September, Red Granite Pictures and its related entities submitted claims for the assets stemming from The Wolf of Wall Street. Red Granite and DOJ agreed to extend the deadline to file claims and statements of interest by other third parties. In October, the Directors Guild of America, Screen Actors Guild – American Federation of Television and Radio Artists, and other associations representing workers in the film industry filed a claim on behalf of residuals payments that they would receive for distribution of the film. At the end of October, Judge Dale Fischer granted an extension of the time to answer the initial complaint for the film industry association and Red Granite claimants until November 28, 2016.

The case is still early in its development. It is notable, however, that the only claimants relating to the assets at issue are Red Granite, the film industry associations, and 1169 Hillcrest Road LLC, which owns property in Beverly Hills.

It is also notable that other law enforcement agencies continue to investigate 1MDB and the scandal’s connection to their jurisdictions. There are law enforcement probes on going in Luxembourg, Switzerland, the United Kingdom, Australia, and Singapore. The Singaporean government, in particular, already seized $177 million of assets linked to 1MDB and continues the investigation into Jho Low.

The case is as notable for the amount of funds at issue as it is for the alleged dramatic and flashy style in which those funds were spent. The actions of law enforcement also will serve as a test case to see how regulators will be able to unwind the complex fact pattern and work across borders with their counterparts in order to deter these financially sophisticated schemes. The 1MDB scandal promises to be a focus of Malaysian politics, international corruption regulators, and financial asset managers for years to come.

By Erin Biel and Mattie Wheeler

On October 30, 2016, the European Union (EU) and Canada signed the Comprehensive Economic and Trade Agreement (CETA), following seven years of trade talks[1] and ongoing resistance from regional parliaments in Belgium. Amidst a flurry of last-minute negotiations,[2] the Belgian federal government reached a four-page compromise deal, deemed an “addendum,” addressing many of the concerns raised by Belgium’s French-speaking region of Wallonia and other regional governments. The addendum requires, inter alia, that the Belgian government request an Opinion from the European Court of Justice (ECJ) on whether CETA’s Investment Court System (ICS) is compatible with the EU Treaties,[3] which give exclusive jurisdiction to EU Member State courts and, above all, the ECJ to decide challenges that concern EU law.[4] The ICS, a permanent and institutionalized double-instance tribunal, was meant to replace the traditional ad hoc investor-state dispute settlement (ISDS) model[5] that has received criticism for allegedly being too deferential to corporate interests. However, in the addendum, Wallonia, Brussels, and other aggrieved local governments aver that they will still not ratify the trade agreement if the ICS remains in its present form under Chapter 8 of CETA, the relevant investment chapter. While the addendum does not appear to have any legal effect, CETA has been put forward as a “mixed” agreement, meaning that the trade agreement will fully enter into force only after the European Council issues a decision with the consent of the European Parliament and once all 28 EU Member States ratify the agreement through their relevant national ratification procedures. While only the European Parliament’s approval is necessary for CETA to be provisionally applied, which would immediately eliminate most of the 99% of customs duties that the agreement removes overall, the ICS is not part of the provisional application of CETA.[6] Therefore, the fate of the investment chapter remains uncertain.

The Belgian compromise is only the latest chapter in a multi-year dispute between certain Belgian regional parliaments and the federal government over the merits of CETA. Earlier this year, the regional parliament of Wallonia adopted a resolution identifying its main grievances with the trade deal. Its very first demand was that the government “seek the opinion of the European Court of Justice (ECJ) on the compatibility of the agreement with the European Treaties on the basis of Article 218 (11) TFEU . . . .”[7] and not to ratify unless if the ECJ finds the agreement to be in accordance with the EU Treaties. Nor has Wallonia been the only pronounced skeptic of ISDS during CETA’s negotiations. Back in June 2011, the European Parliament issued a resolution on EU-Canada trade relations, stating that “given the highly developed legal systems of Canada and the EU, a state-to-state dispute settlement mechanism and the use of local judicial remedies are the most appropriate tools to address investment disputes.”[8] Then, in September 2015, the Commission presented a plan for a new Investment Court System to replace the traditional ISDS model “in all ongoing and future EU investment negotiations.” The EU quickly went on to present the United States with a proposal for such an investment court in the Transatlantic Trade and Investment Partnership (TTIP),[9] incorporated a similar model into its free trade agreement with Vietnam, and shortly thereafter announced that Canada had also agreed to “a clear break from the old [ISDS] approach,” demonstrating “the shared determination . . . to replace the current ISDS system with a new dispute settlement mechanism and move towards establishing a permanent multilateral investment court.”[10] On the same day that the Commission announced its agreement with Canada, it released the “legally scrubbed” CETA text, including the new provisions on the ICS.

Relevant CETA Provisions on the ICS

While CETA has now been signed (but not ratified) and the EU appears intent upon introducing the ICS into other trade agreements, a negative Opinion from the ECJ on the ICS’s legality could send the European Commission back to the drawing board. Most relevant for the ECJ’s evaluation will likely be Article 8.31 of CETA, which concerns the “Applicable Law and Interpretation” of the ICS. An ICS tribunal is to “apply [the] Agreement as interpreted in accordance with the Vienna Convention on the Law of Treaties, and other rules and principles of international law applicable between the Parties.” The text then explicitly states: “The Tribunal shall not have jurisdiction to determine the legality of a measure, alleged to constitute a breach of this Agreement, under the domestic law of the disputing Party.” Doubling down on an attempt at clarity, the text explains:

For greater certainty, in determining the consistency of a measure with this Agreement, the Tribunal may consider, as appropriate, the domestic law of the disputing Party as a matter of fact. In doing so, the Tribunal shall follow the prevailing interpretation given to the domestic law by the courts or authorities of that Party and any meaning given to domestic law by the Tribunal shall not be binding upon the courts or the authorities of that Party (emphasis added).[11]

CETA’s treatment of domestic law as fact is reiterated in Article 8.28 (2), which grants the Appellate Tribunal power to review an award based on, inter alia, “errors in the application or interpretation of applicable law” and “manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law.”

Moreover, according to Article 8.39, Tribunal awards cannot result in the repeal of a measure in the EU, a Member State, or Canada; rather, only monetary damages are allowed, and they cannot be punitive. CETA’s investment chapter also prohibits parallel proceedings, with the consequence that investors pursuing a case before the ICS cannot at the same time seek remedies in domestic courts (Article 8.22) or other international tribunals (Article 8.24).

If Belgium requests an opinion from the ECJ, the ICS’s treatment of domestic law and its interaction with other jurisdictions will factor importantly into a decision on its compatibility with the EU Treaties. The following section explores the relevant EU law and precedent that may factor into the ECJ’s evaluation of the ICS’s legality.

Potential Legality of the ICS under EU Law

Under EU law, any international agreement into which the EU enters must be compatible with the EU constitutional framework: the Treaty on the European Union (TEU), the Treaty on the Functioning of the European Union (TFEU), and the Charter of Fundamental Rights.[12] Article 218 (11) TFEU provides a mechanism by which Member States may seek an opinion from the ECJ as to whether an envisaged international agreement would be compatible with EU law prior to its entry into force in order to avoid future complications.[13] In the past, the ECJ has clarified that “an international agreement providing for the creation of a court responsible for the interpretation of its provisions and whose decisions are binding on the institutions, including the Court of Justice, is not, in principle, incompatible with EU law.”[14] Indeed, the EU is a party to the WTO dispute settlement system, and the ECJ found the Court of Justice of the European Free Trade Association States (EFTA Court) to be compatible with EU law.[15] However, these judicial bodies differ crucially from the ICS. The WTO is a vehicle for state-to-state dispute settlement between the EU and third-party states; the EFTA Court hears individual claims, but operates outside the EU legal framework. Neither body has jurisdiction to rule on claims by individuals concerning the law of the EU and Member States.

The ECJ has previously found other international courts to be incompatible with the EU Treaties when those courts would have heard claims by individuals involving EU law.[16] The ECJ has focused on two areas of its exclusive jurisdiction upon which parallel judicial bodies may not infringe: the jurisdiction to definitively interpret EU law, and the jurisdiction to determine the division of competences between the EU and Member States. The Court notably emphasized these areas of exclusive jurisdiction in two important opinions sought via the Article 218 (11) process. The ECJ’s reasoning in both opinions raises significant concerns about the compatibility of ISDS—and in particular, CETA’s Investment Court System—with EU law.[17]

In Opinion 2/13, the ECJ held that the draft agreement providing for the accession of the EU to the European Convention on Human Rights (ECHR) was incompatible with the EU Treaties.  The Court determined that the European Court of Human Rights (ECtHR)—a court that hears claims by individuals and would be able to declare an EU measure in conflict with the ECHR—would unacceptably interfere with the ECJ’s exclusive jurisdiction to definitively interpret EU law.[18] The Opinion clarified, importantly, that the Court’s exclusive final jurisdiction applies not only to the determination of the validity of EU law but also to the interpretation of EU law.[19] The Court explained,  “If the Court of Justice were not allowed to provide the definitive interpretation of secondary law, and if the ECtHR, in considering whether that law is consistent with the ECHR, had itself to provide a particular interpretation from among the plausible options, there would most certainly be a breach of the principle that the Court of Justice has exclusive jurisdiction over the definitive interpretation of EU law.”[20] At present, the Treaty of Lisbon requires the EU to accede to the ECHR, but no final agreement on accession has yet been approved by the ECJ.

In its Opinion 1/09, the ECJ similarly found a draft agreement to establish an EU-wide patent court incompatible with the EU Treaties. The proposed agreement would have bestowed exclusive jurisdiction upon a new EU-wide patent court to hear individual claims over European patents and future EU patents.[21]  The ECJ found that the proposed patent court would have to interpret and apply EU patent law and other EU law concerning intellectual property, the internal market, and competition law without the involvement of the ECJ.[22]

Consistent with Opinions 2/13 and 1/09, the ECJ may find that CETA’s ICS unacceptably infringes upon its exclusive jurisdiction to interpret EU law. As a general matter, ISDS confers upon individual investors the ability to challenge EU or Member State actions as a breach of investment protections guaranteed by a treaty, and the situation would be no different under the ICS. If the EU or Member State took such actions on the basis of EU measures, an ICS tribunal might be required to interpret and thus give meaning to EU law. Indeed, a number of arbitral tribunals have found jurisdiction to apply and interpret EU law when it is relevant to the arbitration.[23] The ICS also does not envision any mechanism to refer questions of interpretation of EU law to the ECJ for a definitive interpretation. Of course, such a referral requirement would defeat one perceived advantage of ISDS: the efficiency gained by resolving disputes outside of domestic courts. Furthermore, any requirement for referral to the ECJ would, as a matter of reciprocity, implicate the domestic courts of the counterparty to the treaty, again frustrating the purpose of ISDS.

As described above, CETA’s text does attempt to remedy this concern by clarifying that the Tribunal may not issue any independent binding interpretation of EU or domestic law, may only consider domestic law as a matter of fact, and shall follow the prevailing interpretation given to the domestic law by courts or authorities of the disputing Party. The EU’s press release on CETA ostensibly reasserted this: “The revised CETA text confirms that the Tribunal shall only apply the agreement, in accordance with the principles of international law, when adjudicating upon claims submitted by investors. It cannot decide on matters of EU or Member State law.” In other words, the Tribunal may interpret only the text of CETA itself. While the Tribunal may determine whether or not domestic or EU laws conflict with CETA, it cannot render an independent interpretation of those laws. This limitation is consistent with Opinion 1/09, in which the European Court clarified that the European Free Trade Association Court was compatible with EU treaties because it was designed “to resolve disputes on the interpretation or application of the actual provisions of the international agreement[] concerned.”[24] CETA Article 30.6 (1) provides further assurance on this front, stating that CETA may not be directly invoked in the domestic legal systems of the Parties.

These efforts at clarity nevertheless raise further questions: While the Tribunal is to follow the prevailing interpretation established domestically, what happens if an investor questions the interpretation of a host state’s courts or authorities?[25] Alternatively, what happens if there is no prevailing domestic interpretation off of which to base a decision, or if existing interpretations are ambiguous or conflicting? CETA does not speak directly to such a situation.  Would the Tribunal then be creating an interpretation and overstepping its bounds?

Although Article 8.31 states that any meaning given by the Tribunal shall not be binding, the Tribunal’s interpretation could become de facto binding in some cases because of certain features of ISDS that would seemingly continue under the ICS.  Final awards are binding upon the parties, often entail significant financial consequences, and are likely to serve as persuasive precedent for future claims involving interpretation of the same or similar laws.  If the Tribunal finds that a Member State’s compliance with EU legislation violates an investment guarantee, such as fair and equitable treatment, will Member States face significant financial pressure not to comply in order to avoid future claims?

Separately, the ECJ might find that the Tribunal’s responsibility to determine the proper respondent to a claim—a choice between a Member State or the EU—displaces the ECJ’s exclusive jurisdiction to determine the division of competences between the EU and Member States.  In Opinion 2/13, the ECJ raised the fact that the ECtHR would have to determine whether the EU or a Member State would be responsible under international law for a particular violation of the Convention. The ECJ equated this determination with the determination of whether the EU or a Member State had competence to take a specific measure, thereby “allowing [the ECtHR] to take the place of the Court of Justice in order to settle a question that falls within the latter’s exclusive jurisdiction.”[26] Similarly, under CETA a claim may be brought against either the EU or a Member State. Article 8.21 (3) of CETA provides that the European Union shall make a determination regarding who will be the respondent.  However, if the EU does not make the determination and notify the claimant within 50 days, then the Tribunal must make a determination of the respondent. CETA provides broad rules to guide the Tribunal in its determination. In sum, the Tribunal must decide whether the measures identified in the notice are “exclusively measures of a Member State” or include measures of the European Union. If the ECJ finds that CETA requires the Tribunal to “assess the rules of EU law governing the division of powers”[27] in order to make that determination of the respondent, the Court will likely find the agreement incompatible, consistent with Opinion 2/13.

If the Court does find ICS incompatible with the EU Treaties, it should provide clear guidance on how future international agreements that include an investment dispute mechanism—such as the EU-Singapore Free Trade Agreement—could be made compatible.[28] Ultimately, the ECJ has recognized that the EU’s “competence in the field of international relations and its capacity to conclude international agreements necessarily entails the power to submit to the decisions of a court which is created or designated by such agreements as regards the interpretation and application of its provisions.”[29] The ECJ’s decision on CETA should provide clarity and allow the EU to negotiate with greater certainty over future trade and investment agreements.

[1] The trade negotiations officially concluded in August 2014.

[2] The signing ceremony, which had originally been scheduled for October 27, was cancelled after Wallonia and other Belgian regional governments refused to acquiesce to the trade deal, preventing the Belgian federal government, which had always backed the deal, from giving its consent.

[3] The addendum particularly references the ECJ’s Opinion 1/94, which concerned the division of competences between the then-European Community (EC) and EC Members to conclude international agreements, namely the World Trade Organization (WTO) Agreement.

[4] Treaty on the Functioning of the European Union (TFEU) Article 267 provides:

The Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:

(a) the interpretation of the Treaties;

(b) the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union;

Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a ruling thereon.

Where any such question is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under national law, that court or tribunal shall bring the matter before the Court. . . .

See Consolidated Version of the Treaty on the Functioning of the European Union art. 267, May 9, 2008, 2008 O.J. (C 115) 164.

[5] Only one EU-wide agreement containing ISDS is currently in force: the Energy Charter Treaty.

However, CETA will also replace eight existing bilateral investment treaties between individual EU Member States and Canada.

[6] Since the ICS “is a new issue in trade agreements and the public debate on it is not finished in many countries,” it will only be implemented after all Member States ratify the agreement. See the Council of the European Union’s “Decision on the provisional application of the Comprehensive Economic and Trade Agreement (CETA) between Canada, of the one part, and the European Union and its Member States, of the other part” at http://data.consilium.europa.eu/doc/document/ST-10974-2016-INIT/en/pdf.

[7] Article 218 (11) of the TFEU provides: “A Member State, the European Parliament, the Council or the Commission may obtain the opinion of the Court of Justice as to whether an agreement envisaged is compatible with the Treaties. Where the opinion of the Court is adverse, the agreement envisaged may not enter into force unless it is amended or the Treaties are revised.”

[8] The European Commission later carried out an online public consultation regarding investment protection and ISDS. The consultation, which was intended for the purposes of the Transatlantic Trade and Investment Partnership (TTIP) negotiations, used the CETA draft text as a reference. Out of approximately 150,000 responses, “[a]lmost a half of the replies contain[ed] various negative statements also against CETA . . . or calls to exclude ISDS from it.” See Commission Staff Working Document Report: Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), Eur. Comm’n 133 (Jan. 13, 2015), http://trade.ec.europa.eu/doclib/docs/2015/january/tradoc_153044.pdf.

[9] The United States has given no indication that it intends to accept this proposal.

[10] The EU and Canada have expressed greater aspirations for the ICS model. As elucidated in CETA’s Joint Interpretive Instrument:

[The ICS] lays the basis for a multilateral effort to develop further this new approach to investment dispute resolution into a Multilateral Investment Court. The EU and Canada will work expeditiously towards the creation of the Multilateral Investment Court. It should be set up once a minimum critical mass of participants is established, and immediately replace bilateral systems such as the one in CETA, and be fully open to accession by any country that subscribes to the principles underlying the Court.

Article 8.29 of CETA’s investment chapter also reflects these aspirations.

[11] This language is nearly identical to language contained in the EU-Vietnam Free Trade Agreement (section 3, article 16(2)) and the proposed TTIP text (section 3, article 13(4)).

[12] Treaty on the Functioning of the European Union, art. 218 (11).

[13] Treaty on the Functioning of the European Union, art. 218 (11).

[14] Opinion 2/13 of the Court, 18 Dec. 2014, at ¶ 182 [hereinafter Opinion 2/13]; see also Opinion 1/91 ¶¶ 40, 70.

[15] Opinion 1/92 of the Court, 10 Apr. 1992.

[16] See Opinion 2/13; Opinion 1/09 of the Court, Mar. 8, 2011 [hereinafter Opinion 1/09].

[17] Given the uncertain precedent set by Opinions 2/13 and 1/09, a number of European law professors, judges, and interest groups have pressed for a definitive ECJ ruling on the general compatibility of ISDS with EU law.

[18] Opinion 2/13 at ¶¶ 194, 197.

[19] Opinion 2/13 at ¶ 247.

[20] Opinion 2/13 at ¶ 246.

[21] Opinion 1/09 at ¶¶ 3-8.

[22] Opinion 1/09 at ¶ 78.

[23] Euram v. Slovak Republic, UNCITRAL, PCA Case No. 2010-17, Award on Jurisdiction, (Oct. 22, 2012) at ¶¶ 248-253; Achmea B.V. v. Slovak Republic, UNCITRAL, PCA Case No. 2008-13, Award on Jurisdiction, Arbitrability and Suspension (Oct. 26, 2010) at ¶¶ 278-283; Maffezini v. Kingdom of Spain, ICSID Case. No. ARB/97/7, Award (Nov. 13, 2000) at ¶ 69. EU authorities have already raised pointed concerns about ISDS in intra-EU Member State bilateral investment treaties (BITs). European Commission President Jean-Claude Juncker, for example, has stated in his political guidelines that he will not allow “special regimes that limit parties’ access to national courts or that allow secret courts to have the final say in disputes between investors and states” to limit the jurisdiction of EU courts. The European Commission has also made several amicus submissions to arbitral tribunals, arguing against ISDS convened under existing intra-EU BITs. For example, in Achmea v. Slovak Republic, the EU Commission urged the Tribunal to decline jurisdiction because “an investor-State arbitral mechanism […] conflict[s] with EU law on the exclusive competence of the EU court for claims which involve EU law, even for claims where EU law would only partially be affected.” Achmea B.V. v. Slovak Republic, UNCITRAL, PCA Case No. 2008-13, Award on Jurisdiction, Arbitrability and Suspension (Oct. 26, 2010), at ¶ 193 (quoting the European Commission Observations submitted to the Tribunal). Similarly, in EURAM v. Slovak Republic, the Commission argued that “[t]he arbitral tribunal is not a court or tribunal of an EU Member State but a parallel dispute settlement mechanism entirely outside the institutional and judicial framework of the European Union. Such mechanism deprives courts of the Member States of their powers in relation to the interpretation and application of EU rules imposing obligations on EU Member States.” European American Investment Bank AG (EURAM) v. Slovak Republic, UNCITRAL, PCA Case No. 2010-17, Letter to the Tribunal from Luis Romero Requena, Director General, European Commission Legal Service (Oct. 13, 2011).

[24] Opinion 1/09 at ¶ 77.

[25] See Jarrod Hepburn, CETA’s New Domestic Law Clause, EJIL: Talk! (Mar. 17, 2016), http://www.ejiltalk.org/cetas-new-domestic-law-clause/ (“However, situations may exceptionally arise in which the investor might allege that the courts or authorities of the host state are not to be trusted.”).

[26] Opinion 2/13 at ¶ 234.

[27] Opinion 2/13 at ¶ 224.

[28] The Commission has requested an opinion from the CJEU to clarify the competence to sign and ratify the EU-Singapore Free Trade Agreement. However, at that time, the Commission did not seek an opinion on the compatibility of the standard ISDS provisions codified in the EU-Singapore agreement.

[29] Opinion 1/91 at ¶ 40.

By Iulia E. Padeanu 

Introduction

The Joint Comprehensive Plan of Action (“JCPOA”)—also often referred to as the Iran Deal or the Iran Agreement—marked a significant shift in the relationship between the United States and Europe, and the Islamic Republic of Iran. Under this Agreement, Iran agreed to eliminate its stockpile of medium-enriched uranium, cut its existing stockpiles of low-enriched uranium, and reduce the number of its centrifuges in exchange for the lifting of a number of sanctions imposed by the United States, the European Union, and the United Nations Security Council. Iran also agreed to restrict the amount of nuclear fuel it will keep over the next fifteen years.

The Deal, signed in Vienna on July 14, 2015, ended decades of animosity between the United States—and the West more broadly—and Iran. After years of tough sanctions from the US and Europe, Iran agreed to come to the negotiating table. The JCPOA, which has brought together six different world powers (China, France, Russia, United Kingdom, United States, Germany) and the EU, will significantly stall Iran’s nuclear development program.

But can the Iran Deal withstand challenge from the next US administration? Can the next president legally and unilaterally dismantle the Agreement?  In 2015, during his campaign, Donald Trump called the Iran Deal a “disaster” and “the worst deal ever negotiated.” It is not unlikely that, despite loud calls from all sides not to undo it, the new Administration will look for ways to quickly withdraw from or dismantle the Agreement. But can President Trump legally dismantle the Agreement, or is he bound to abide by its terms? This post suggests that, although President Trump has the power to legally dismantle the Agreement (as both an international and domestic matter), it would be extremely unwise to do so.

Over the past year and a half, a lot of work has already been done to set up a meaningful relationship between Iran and the United States and its partners. This has included the lifting of sanctions, the monitoring of Iranian nuclear activity, and engaging in economic partnerships—all of which will make it very difficult to undo the Deal unilaterally. However, nothing in the JCPOA, or in the domestic legislation supporting it, formally binds the United States to the Agreement. While international expectations that the United States will abide by the Agreement will serve as a strong incentive not to withdraw, the structures of the Deal also don’t formally prevent the United States from walking away. And yet, although the legal option to withdraw from the Agreement exists, it would be extremely imprudent for the Trump Administration do so. Remaining a party to the JCPOA would serve the United States’ interests, protect the United States and its allies, and contribute to a stronger and more cooperative international order.

What is the Iran Deal?

Whether the Trump Administration can withdraw or dismantle the JCPOA rests in part on what the Agreement actually is.

What type of agreement is it domestically?

Traditionally, there have been three kinds of agreements concluded under U.S. law: 1) Article II treaties (signed by the president with the advice and consent of the Senate); 2) sole executive agreements (concluded by the president acting solely and within his independent constitutional authority and without any input from Congress); and 3) congressional-executive agreements (which involve a Congressional statute, passed either before or after an agreement has been made, which grants the President authority to conclude the). On occasion, the executive has also entered into non-binding political agreements.[1]

Although the Deal may have begun as a series of talks, the Iran Nuclear Agreement Review Act of 2015 (“Review Act”) re-framed what type of agreement the Iran Deal is. What was originally intended to be a way to curb the President’s power may have actually been the very thing that transformed “what would have been a constitutionally dubious exercise of unilateral executive authority (a ‘sole executive agreement’) into a constitutionally unimpeachable exercise of joint legislative and executive power (a ‘congressional-executive agreement’).” It was ultimately this Review Act that gave President Obama the authority to conclude a “legally binding nuclear agreement, [and] not just an informal political pact.” Along with the “constitutional text, democratic principles, and entrenched practice,” the Review Act adopted in May 2015 supports the binding character of the Agreement and “grants the Administration authority to negotiate and implement binding legal commitments with Iran.”

What type of agreement is it internationally?

Internationally, the Iran Deal is a treaty. The distinction that exists under domestic U.S. law regarding the type of agreement the Iran Deal may or may not be isn’t replicated on the international level. The Vienna Convention established the definition of a treaty without prejudice to differing uses of the term ‘‘treaty’’ in the domestic laws of various states. Article 2, Section 1(a) of the Vienna Convention defines a treaty as “an international agreement concluded between states in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation.” Treaties have been used consistently throughout the twentieth century, to establish durable relationships and aid in international governance. They consistently serve “as an intrinsic part of our global order and have been considered legally binding.”[2] International agreements are transformed from a piece of paper, or most likely a sum of papers, meetings, phone calls, and other communications, into a binding law is the formal agreement made by countries through an act of consent.[3] The Iran Deal has all the characteristics of an international treaty: written document, buy-in from a number of states, and firm commitments. As such, under international law, the Agreement is presumptively legally binding.

Can the Trump Administration Dismantle the Iran Deal?

President Trump can dismantle the deal in two ways: 1) he can either re-impose sanctions against Iran, reneging on its own promises and likely encouraging Iran to withdraw and thus undo the Agreement, or 2) he can formally withdraw the United States from the Agreement.

Can the Trump Administration Legally Dismantle the Deal under U.S. Law?

This post argues that the JCPOA is a congressional-executive agreement, and as such, it would ordinarily be challenging for any future administration to dismantle or withdraw from it. When an administration inherits a congressional-executive agreement, it may not unilaterally and without cause withdraw from such agreement.[4] Although this area of the law remains fraught with debate and controversy, as Oona Hathaway argues, congressional oversight over withdrawal from a congressional-executive treaty may be even stronger than control over treaty withdrawal.[5]

In this case, the congressional act that gave the Executive the power to make the Agreement, also gave the Executive discretion to walk away from it. The Review Act specifically grants the ability to re-impose sanctions—in effect sanctioning an executive decision to renege on its commitments and signal the end of the Deal. Section (C) of Review Act states:

(2) In general–Notwithstanding any other provision of law, action involving any measure of statutory sanctions relief by the United States pursuant to an agreement subject to subsection (a) of the Joint Plan of Action—

(A) may be taken, consistent with existing statutory requirements for such action, if, during the period for review provided in subsection (b), there is enacted a joint resolution stating in substance that the Congress does favor the agreement;

(B) may not be taken if, during the period for review provided in subsection (b), there is enacted a joint resolution stating in substance that the Congress does not favor the agreement; or

(C) may be taken, consistent with existing statutory requirements for such action, if, following the period for review provided in subsection (b), there is not enacted any such joint resolution.

This provision suggests two things. Firstly, sanction relief may be granted if Congress either enacts a resolution favoring the agreement, or fails to enact a resolution not favoring the agreement. Congress was unable to muster enough votes to enact a resolution stating it did not favor the Iran Deal (at least not enough votes to withstand a presidential veto, which Obama was ready to use). As such, sanction relief was possible. The second important thing the statute provides is that the relief is discretionary—that an action may be taken suggests the same action may also not be taken. Thus, sanction relief enacted by President Obama may be withdrawn, consistent with the Review Act, by President Trump. And re-imposing sanctions will, in effect, be the death knell of the Deal. Iran would likely refuse to continue to abide by the terms of the Agreement if the United States re-imposes sanctions, and has already suggested it is unhappy about the contributions the United States and its allies have made.

It is worth noting that, the JCPOA lifted only some of the US sanctions against Iran. Since the last 1970s the US has leveled a number of sanctions against Iran, “ranging from weapons proliferation to human rights abuses within Iran to state sponsorship of terrorism and fomenting instability abroad.” Under the JCPOA, the United States promised to lift mostly nuclear-related, “secondary sanctions.” These sanctions had not been leveled directly at Iran; rather they were directed towards third party, non-US persons doing business in Iran. After the Deal came into effect, the US also removed hundreds of individuals from the Office of Foreign Asset Control’s (“OFAC”) list of blocked persons. As a result, individuals and businesses conducting transactions with these listed individuals would no longer be sanctioned. Most of the primary sanctions (those leveled directly at Iran) continue to apply.

President Obama enacted sanction relief both through executive order and congressional statute (see also a discussion of this here). Come January 2017, President Trump will be able to easily re-impose those sanctions lifted by executive order, and will likely also dispose of those waivers enacted through statue. The President has the ability to waive statute-based sanctions, but the current waivers rely in large part on a determination by John Kerry, in his capacity as Secretary of State, that it is “vital to the national security of the United States” to waive certain sanctions—that determination can, and most likely will be, withdrawn by the next Secretary of State serving under a Trump Administration. Additionally, such waivers only last a short period time, which will elapse early in Trump’s administration, even if President Obama was to extend them at the end of his term.

Domestically, it seems, President Trump will have an easy, if not seamless path to re-imposing sanctions and effectively dismantling the agreement.

 Can the Trump Administration Legally Withdraw from the Deal under International Law?

 As an international treaty, the Iran Deal is governed by the paramount principle of international law pacta sunt servanda—the notion that that treaties must be kept. As such, without cause or justification, the United States would be in breach of international law if it simply walks away from the Agreement. However, as laid out in the United National Security Council Resolution blessing the deal, the Agreement provides the parties with a possibility to withdraw from the agreement through a “snapback” mechanism. This allows any of the six parties to the Agreement to flag significant non-compliance and, if concerns remain unresolved, snap back all sanctions previously leveled against Iran. Nowhere in the Agreement is “significant non-compliance” defined, leaving the definition and scope up to each individual member.

Lifting of UN and EU sanctions, along with some of those imposed by the United States, was a central component to the Iran Deal. The “snapback” mechanism would re-impose the status-quo as it existed before the Agreement—in effect forcing the United Nations and the European Union to re-impose all the sanctions it has lifted over the past year. Before the mechanism is triggered, the United States would have to abide by several procedures, including referring the issue to the Joint Commission (a body consisting of members from all parties established to monitor the implementation of the deal), and further to Ministers of Foreign Affairs, if the Joint Commission is unable to resolve the issue. If the United States continues to have concerns over Iran’s compliance at the end of this process, it can force the re-imposition of sanctions within 30 days.

Lawful but Awful

As laid out above, both domestically and internationally, President Trump has a legal and legitimate way to withdraw from the Agreement. This blog post joins a chorus of voices calling on President Trump to consider the awful implications of tearing up this Agreement, and argues it would be much more prudent for the Trump Administration to continue to abide by the Agreement and waive sanctions in return for international monitoring, limiting nuclear development, and cooperation with Iran.

For those who worry Iran has gotten the better side of the deal and that the Agreement was not enough to deter Iran from developing nuclear weapons, it is worth noting where Iran was before the deal was struck. In 2013, at the start of negotiations, Iran’s breakout time— the time it would take Iran to create enough material for one nuclear bomb—was about two months. As a result of the Agreement, Iran will be forced to slow down its enrichment and development program for the next fifteen years, giving the international world at least that much time to prepare for a possible nuclear Iran. Many U.S. allies joined President Obama’s call for sanctions in 2009, in part because they were convinced absent a diplomatic path, “the result could be war, with major disruptions to the global economy, and even greater instability in the Middle East.” Sanctions, thus, were the tool employed by the U.S. and its allies to force Iran to engage in a diplomatic solution.

Additionally, what previously made sanctions effective was the unified approach of the United States, the European Union, and the EU members and the multilateral sanctions leveled against Iran. Without support from our allies, the United States will either have to employ drastic and wide-ranging sanctions that will significantly impact the Iranian economy, which would be very unlikely and extremely difficult, or the United States will have to implement a plan that will force European nations to join it (i.e. enact sanctions against Europe to force members to bring back their own sanctions). Recently, the EU reaffirmed their commitment to continue the deal, and other powerful states like China and Russia seem unlikely to agree to re-impose sanctions. Even if the United States is successful in imposing the snapback mechanism described above, there is nothing that would force them to do so. 

Even if President Trump is able to impose sufficiently harsh unilateral sanctions on Iran or gain support from European allies and re-instate the concerted effort in place before, sanctions alone are not enough. Even with the support of our allies, concerted sanctions proved unable to deter Iran from slowing down its production of uranium. In fact, over the past few years, Iran increased its production—despite sanctions and pressure from the US “Iran’s nuclear program advanced steadily through the 1990s” and by the time President Obama took office, “Iran had installed several thousand centrifuges, and showed no inclination to slow — much less halt — its program.”

More broadly, reneging on an agreement the US has championed, would weaken the United States’ position as a negotiator and steady partner in world affairs. As President Obama argued, “America’s credibility is the anchor of the international system.” The United States will face much tougher negotiations in the future, if its international partners worry that changes in the administration can lead to significant and unforeseen shifts in US policy. President Trump should capitalize on the United States’ power and influence to make international agreements and not jeopardize the US’ credibility and leadership.

Conclusion

In such a politically divisive and internationally important question, the legal analysis is inevitably interlinked with the political considerations. Although most likely a congressional-executive agreement, which ordinarily would make it much more difficult to withdraw from, by the terms of the Review Act, the next administration may legally re-impose sanctions against Iran, effectively dismantling the Agreement. Internationally, nothing in the JCPOA binds the signatories to the agreement, and the United States is free to walk away if Iran fails to meet any of the obligations laid out—which could re-impose multilateral sanctions. However, reneging on the Iran Deal would be politically awful both domestically and internationally. The United States would be left on very precarious ground, damaging our international reputation for upholding our promises, weakening our future negotiating positions, and driving a wedge between America, the rest of our partners, and Iran. Instead, the United States should continue to act as a leader in international collaboration and pursue vigorously a path that stalls Iran’s nuclear plans.

[1] This is what some have considered the Iran Deal to be. Critics have a justifiable basis for arguing this. In March of 2015, before the Agreement was final, Sectary of State John Kerry was adamant that the Administration was not negotiating a “legally binding plan.”

[2] Louis Henkin, Foreign Affairs and the United States Constitution 230 (2nd ed. 1996).

[3] Oona A. Hathaway, Treaties’ End: The Past, Present, and Future of International Lawmaking in the United States, 117 Yale L. J. 1236, 1239 (2008).

[4] See Hathaway, supra note 4 (discussing the difficulty future administrations face when attempting to withdraw from congressional-executive agreements). 

[5] The complex discussion surrounding the power of withdraw from such a treaty is beyond the scope of this post, and for the purposes of assessing whether President Trump needs Congressional authorization to withdraw, the debate need not be fully settled.