Tackling corruption in international arbitration: Examining the ICC’s “red flags” approach

Allegations of corruption may arise in international arbitration proceedings and related litigation. Left unaddressed they threaten the integrity of arbitration as a trusted method of dispute resolution. That threat is not, however, being ignored by the arbitration community. The ICC Commission of Arbitration and ADR’s 2024 report, Red Flags or Other Indicators of Corruption in International Arbitration (the ICC Report), provides a practical framework for identifying, assessing, and responding to corruption risks in arbitration, and forms part of the wider work of an ICC task force examining this issue.

This article examines the approach set out in the ICC Report. Key takeaways for client parties to arbitral proceedings include:

• Identifying and assessing red flags: The ICC Report categorises red flags into general and specific types, acting as indicators of potential corruption rather than definitive proof.

• Structured three-step approach: The ICC Report outlines a clear process for handling indications of corruption: (1) identifying red flags; (2) validating them through evidence; and (3) assessing their significance. This ensures a balanced and evidence-based approach.

• Impact on arbitration and enforcement: Allegations of corruption can potentially influence tribunal actions, procedural decisions, and post-award recognition and enforcement. High-profile cases like Nigeria v P&ID highlight the importance of early scrutiny to prevent corruption from undermining arbitration outcomes.

 

Understanding red flags

Red flags are indicators of potential corruption, though they do not serve as definitive proof. They act as warning signs that demand further scrutiny. The ICC categorises these red flags into two main types:

• General red flags: Contextual risks such as a country’s corruption reputation, industry susceptibility to bribery, or the involvement of politically exposed persons.
• Specific red flags: Direct warning signs within a transaction, including unusual payment structures, lack of transparency in business dealings, or excessive fees without justification.

Recognising red flags is the first step in tackling corruption, but arbitration practitioners must also validate and assess these indicators to determine their relevance and evidentiary weight.

 

A three-step approach to red flags

The ICC Report outlines a structured approach to handling red flags in arbitration:

Step 1: Identification

The first step is recognising red flags that suggest potential misconduct. These can emerge in various ways, such as:

• Suspicious backgrounds of parties involved in a contract.
• Unusually high commissions or payments that lack clear justification.
• Unusual payment terms.
• Lack of due diligence in selecting intermediaries.

Red flags may be raised by a party or identified by the arbitral tribunal itself. Early detection allows for more effective examination and response.

Step 2: Validation

Once identified, red flags must be assessed for credibility. Some indicators may be misleading or based on incorrect assumptions. The validation process involves:

• Evaluating whether the red flag is supported by evidence.
• Considering mitigating factors, such as compliance measures or “green flags” that suggest integrity.
• Utilising tools like audits, due diligence reports, and forensic analysis to substantiate or disprove allegations.

Not all red flags indicate corruption. For example, a party might have legitimate reasons for unusual payments, such as regulatory requirements or specific industry practices. A thorough validation process helps avoid baseless allegations that could unnecessarily prolong proceedings.

Step 3: Assessment

Validated red flags must be analysed holistically in the broader context of the case to determine their evidentiary significance. This assessment can involve:

• Evaluating red flags against legal standards for proving corruption.
• Assessing whether the identified red flags meet evidentiary standards to substantiate allegations of corruption.
• The evidentiary weight and significance of the identified red flags.

Tribunals should not rely solely on the number of red flags but must also evaluate their probative value. A case may feature multiple red flags and still be legitimate, or conversely, a corrupt act may occur without any obvious red flags. The assessment phase ensures balanced decision-making based on the totality of the circumstances.

 

Evidentiary considerations

While red flags require scrutiny, they do not automatically equate to corruption. Instead, they serve as signals that require further evidentiary assessment. The ICC Report highlights key procedural considerations:

Burden of proof

The burden of proof generally falls on the party alleging corruption, who must present their evidence and convince the tribunal of their claim.

There are instances where tribunals decide to shift the burden of proof on a particular issue to the accused party. Generally, this is justified when a red flag points to an unusual situation involving facts that can only be known to the accused party.

Standard of proof

Arbitral practice usually applies a civil standard of proof (ie proof on a balance of probabilities), rather than a criminal one (ie proof beyond a reasonable doubt). However, the ICC Report suggests that the abundance and specificity of validated red flags can influence the level of proof required.

Admissibility of evidence

Red flags can influence procedural decisions, including document production requests and the admission of new evidence. When sufficiently strong, they may warrant expanded document requests and even justify reopening a case, even in the final stages where an award is imminent.

Raising red flags without a clear allegation of corruption is unlikely to be persuasive. However, when red flags are accompanied by a substantiated claim of corrupt practices and connected to specific legal elements, they stand a stronger chance of being considered, even if introduced at a later stage in the proceedings.

 

Impact on arbitration outcomes

Arbitrators have a duty to resolve the disputes as presented to them by the parties. This duty means they should not divert the process and resources to unnecessary investigations. Similarly, even if corruption is found, arbitrators must remain impartial and not show bias against any party. Ultimately, they must strive to ensure that the award they issue is enforceable.

Allegations of corruption can influence arbitration proceedings and enforcement in significant ways:

Tribunal actions

Arbitrators may take several measures when corruption concerns arise, including:

• Ordering additional fact-finding or expert analysis.
• Suspending proceedings if a parallel investigation is underway.
• Reporting validated corruption findings to state authorities (where required by law).

Although arbitration is typically confidential, public policy considerations, such as anti-money laundering regulations, may necessitate the disclosure of certain information by tribunals.

Post-award challenges

Red flags can emerge after an arbitration award, impacting enforcement, as seen in the case of Nigeria v Process and Industrial Developments Ltd (2023).

Case Study: Nigeria v Process and Industrial Developments Ltd [2023] EWHC 2638 (Comm)

In this high-profile case, Nigeria challenged an arbitration award of USD6.6 billion before the English courts, alleging that the underlying contract was secured through bribery. The court found that:

• The respondent’s legal team had improperly obtained and retained Nigeria’s privileged documents that it had received during the arbitration;
• The respondent relied on material evidence which they knew to be false; and
• The respondent had bribed a Nigerian official to buy her silence in the arbitration proceedings.

As a result, the court set aside the award.

While the decision of the English Commercial Court ultimately exposed and penalised the underlying corruption in this case, the dispute underscores the importance of scrutinising red flags early to prevent corrupt practices from undermining arbitral outcomes.

Following the decision in Nigeria v P&ID, the UK government consulted with various arbitration institutions and bodies about the prospect of addressing corruption as part of the reforms to the Arbitration Act 1996. After considering feedback from the ICC, LCIA, Ciarb, and others, the government confirmed that the Arbitration Bill would not be amended to address corruption issues, and a suggestion during debates that a duty on arbitrators to safeguard against fraud and corruption was not taken up. The UK government took the view, among other matters, that there are mechanisms already in place to combat corruption, as demonstrated by the court’s decision in the Nigeria v P&ID case.

For additional coverage of this decision, see: Nigeria v PI&D: Nigeria’s USD11 billion fraudulent arbitration awards.

 

Conclusion

The ICC’s Report provides a structured and practical method for identifying, validating, and assessing corruption risks in arbitration. By following this framework, tribunals can uphold the integrity of arbitration while ensuring fairness and procedural soundness. Addressing red flags early not only strengthens arbitration proceedings but also enhances the enforceability of awards, reducing the risk of post-award disputes.

We will monitor further developments in this area, including the work of the ICC Task Force Addressing Issues of Corruption in International Arbitration. If you have any questions, please contact the authors of this article or your usual DLA Piper contact.

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