Call for Modified Transparency in the Korea-Lone Star Funds Arbitration

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),

[2] Hyun-Jung Lee, Trial of the Century: Three Points in Lone Star ISD, Maeil Kyungjae (May 31, 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),

[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),

[9]Hyun-Duk Bang, After Eat and Run Comes $50 Billion Lawsuit, Yonhap News (June 30, 2015),

[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.

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