Streamlining the Corruption Defense: A Proposed Framework for FCPA-ICSID Interaction
Losco, Michael A., Duke Law Journal
Over the past decade, the number of Foreign Corrupt Practices Act (FCPA) enforcement actions has soared, as has the number of cases before the International Centre for Settlement of Investment Disputes (ICSID). At the same time, events have demonstrated that two problems may arise from the lack of coordination between anticorruption investigations and ICSID arbitration proceedings. First, anticorruption investigations may reveal arbitral decisions to be incorrect due to a lack of evidence regarding corruption in the formation of investment contracts. Second, the "corruption defense"--an emerging affirmative defense that allows host states to invoke corruption in the formation of investment contracts as an absolute bar to liability--creates a perverse incentive that encourages states to expropriate investors' assets, or to renegotiate for burdensome new terms, following FCPA investigations.
This Note explores the characteristics of the corruption defense as applied by ICSID tribunals, including the evidentiary burden placed upon the host state to assert the defense. It then proposes a framework for FCPA-ICSID interaction designed to strengthen the defense and to further the goal of eradicating global corruption. It proposes using tools such as waiver and disgorgement, contract cure, and communication between FCPA enforcement authorities and ICSID tribunals to remedy the problems identified above.
In 1996, Siemens AG (Siemens) won a $1 billion concession for services related to the production of an Argentine national identification card. (1) The contract between Siemens and the Argentine government was governed by a bilateral investment treaty (BIT) between Germany and Argentina. (2) Not three years later, a number of factors--including skyrocketing sovereign debt and the pegging of the Argentine peso to the U.S. dollar--converged to cause the Argentine economy to contract rapidly. (3) In an effort to keep the economy afloat, the legislature passed the "Economic-Financial Emergency Law" allowing the president to renegotiate or terminate any government contracts. (4) The government halted parts of the identification card project and imposed new, nonnegotiable contract terms amidst rapid turnover of government officials. (5) Siemens brought an arbitration claim against Argentina before the International Centre for Settlement of Investment Disputes (ICSID), alleging that the country's actions constituted an expropriation of its investment. (6) The ICSID tribunal found that Argentina's actions over the course of the crisis constituted a "creeping" expropriation and a violation of the state's duties of full protection and fair and equitable treatment of foreign investment. (7) It ordered Argentina to compensate Siemens in the amount of $217 million. (8) The issue of corruption never arose during the proceedings, as there was no evidence to suggest that any such activity had taken place.
Shortly after the tribunal issued its award, however, "German prosecutors discovered Siemens had engaged in rather astonishing acts of systematic bribery around the world." (9) Siemens had procured the Argentine contract after paying $105 million in bribes to Argentine officials over the course of a decade. (10) Siemens pleaded guilty to violating the accounting provisions of the Foreign Corrupt Practices Act (FCPA), (11) and it subsequently waived the $217 million award. (12) Its precise reasons for doing so remain unclear. As a result of its guilty plea, Siemens became the subject of the largest criminal penalty ($450 million) and the largest disgorgement of profits ($350 million) in FCPA history. (13) Even today, its total settlement of $800 million is double the amount of the third largest settlement in FCPA history. (14)
These events demonstrate that investment contracts procured through bribery or fraud may become the subject of an FCPA investigation as well as an ICSID dispute. …