Red Flags of Corruption in International Arbitration

The International Chamber of Commerce (“ICC”) arbitration is one of the most used alternative dispute resolution methods for commercial disputes. For instance, in October 2024, the ICC registered its 29,000th case under the ICC Arbitration Rules, with a total of 1,789 cases pending at the end of the year. These figures underline confidence in the ICC’s arbitration and ADR mechanisms.

The participation of international parties requires increasing consideration, both by arbitrators and by the parties involved in the proceedings, of potential issues that may arise during the arbitration. According to the ICC Commission on Arbitration and ADR (“Commission”), one of the major risks in arbitration proceedings is the presence of signs of corruption. In recent years, allegations of corruption have arisen with increasing frequency in arbitral proceedings, both commercial and investor-state. Those allegations often arise as part of an affirmative claim or as a defense to jurisdiction or admissibility of a claim, and sometimes in other contexts.

The “Red Flags Or Other Indicators Of Corruption In International Arbitration”

The ICC recently published the document titled “Red Flags or Other Indicators of Corruption in International Arbitration” (“Document”)^[1] with the scope of providing a methodology for identifying and assessing corruption in international arbitration proceedings. The Document mainly assists arbitral tribunals, judges, and arbitration institutions in understanding red flags, or indicators of potential corruption, in particular when they are alerted by red flags of corruption in the facts of an arbitration, i.e. when allegations of corruption are raised, either affirmatively or as a defense by parties to a dispute that has been submitted to arbitration, or when the arbitral tribunal itself develops concerns about possible corruption.  Clearly, knowing these guidelines will help also the parties, making them aware of the arbitrator’s standard and optimal approach to these events.

A red flag refers to any factor that suggests a potential risk of corruption, particularly in cases involving public officials. Broadly speaking, these indicators fall into two categories: the general red flags and the specific red flags.

General red flags are tied to inherent aspects such as:

• Reputation for corruption of a country (or a region, subregion or relevant geography) or of a government administration
• An industry with a track record of corruption or with characteristics (such as high-value transactions and need for speed) that make it vulnerable to corruption.

Specific red flags, stem from the characteristics of:

• The counterparty, such as its background or reputation, close relationships with public officials, a lack of experience required for the activity to be performed, or a high requirement of secrecy;
• The transaction itself, like excessive compensation, a request for payments in cash or to a beneficiary other than the contractual counterparty, excessively high success fees, or a general lack of transparency.

The specific red flags are generally considered to constitute stronger indicators of corruption risk than general red flags; conversely, they are more susceptible to risk mitigation measures than general red flags.

Sources Of Red Flags And Practical Tips

The warning signs can originate from various sources: publicly available data, such as Transparency International’s Corruption Perceptions Index or the Rule of Law Index by the World Justice Project, provide valuable insights. Due diligence reports, which track legal and financial histories of business partners, often reveal past misconduct. Internal corporate mechanisms – ranging from financial audits to compliance reviews and anonymous internal reports – also play a key role in identifying red flags. Additionally, journalistic investigations and whistleblowers can shed light on suspicious behaviors, while artificial intelligence tools help detect anomalies within payment structures, corporate networks, or economic transactions.

Consequences of Red Flags for the arbitration proceeding

The importance of identifying red flags is not just a theoretical matter but has significant implications for the parties involved in arbitration proceedings. If corruption indicators surface, arbitrators may take measures such as allowing previously undisclosed allegations, broadening document discovery requests, or reassessing the burden of proof. In some cases, the evidentiary threshold required to demonstrate corruption may be adjusted, from a simple “balance of probabilities” standard to the more stringent “clear and convincing evidence” criterion. Moreover, disregarding serious red flags may jeopardize the enforceability of an arbitral award, potentially leading to its annulment or refusal of enforcement for violating international public policy.^[2]

In particular, the Document identifies some consequences that corruption allegations may have:

• As for the effects of red flags on the admissibility of evidence, allegations of this nature may call for the admissibility of new evidence. If this occurs, no admissibility issues should arise unless a party requests extensive document production or seeks to admit new evidence based on red flags as part of a late allegation of corruption.
• Another consequences is the shift of the burden of proof, which may be established by the arbitrator in specific circumstances, such as a red flag that points to an aberrant situation relating to facts that should be known to a party, or if a red flag has to do with lack of specific actions taken that are within the knowledge or control of the other party.
• An award that enforces a contract tainted by corruption risks being denied recognition and enforcement on public policy grounds.

Furthermore, although the consequences and effects of corruption on contracts are regulated differently in various jurisdictions, so that it will be essential to analyze the law applicable to the contract submitted to the arbitrators, it is worth noting that allegations of corruption, if well-founded, can void the entire contract and affect its validity. The 1999 Civil Law Convention on Corruption of the Council of Europe specifically stipulates that signatories to the Convention must provide in their internal law that “any contract or clause of a contract providing for corruption shall be null and void”. Likewise, European countries adhering to the Civil Law Convention on Corruption shall ensure that their internal law offers “the possibility for all parties to a contract whose consent has been undermined by an act of corruption to be able to apply to the court for the contract to be declared void, notwithstanding their right to claim for damages”.

How to mitigate the risks

From a different perspective, what measures can be taken to prevent red flags from emerging? The Document outlines several “green flags”-indicators that help mitigate the corruption risk. These green flags may include the following scenarios:

• the company has performed due diligence on a third party;
• the contract with a third party contains anti-corruption safeguards;
• there is documented evidence of anti-corruption controls (e.g. through audits);
• the company has trained its personnel on anti-corruption policies or procedures; and
• the company participates in collective action initiatives to offset risks.

Separately, artificial intelligence can be considered a green flag as it is increasingly recognized as a valuable tool in detecting and analyzing red flags related to corruption and fraud. While effective compliance programs rely on systematic data collection and analysis, the sheer volume of information makes AI particularly useful in this domain. Regulatory guidance from organizations such as the U.S. Department of Justice and the OECD underscores the importance of leveraging all available data for compliance management, though it does not mandate AI adoption.

[1] Available at: https://iccwbo.org/wp-content/uploads/sites/3/2024/12/2024-ICC-Red-Flags-or-Other-Indicators-of-Corruption_ICC-DRS-Bulletin.pdf

[2] An award that enforces a contract tainted by corruption risks being denied recognition and enforcement on public policy grounds, as in the Soleimany v. Soleimany case [1998] 3 WLR 811. Likewise, in the case Kyrgyzstan v. Belokon, an UNCITRAL award was annulled for violating the international public order for referring to a contract used for money laundering, Cour d’appel Paris, 21 Feb. 2017.