A Bit of Anti-Bribery: How a corruption prohibition in FIPAs can bring a minimum standard of conduct for Canadian investors abroad

In September 2015, the United Nations launched the SDGs. SDG 16, “Peace, Justice and Strong Institutions,” includes commitments to fight corruption, increase transparency and tackle illicit financial flows. What’s more, there is broad recognition that without meaningful action to reduce corruption, progress toward the SDGs is likely to be limited.

In that context, my recently published policy brief examines four Canadian legal initiatives against corruption of foreign officials: (1) a spike in enforcement of Canada’s foreign bribery prohibition; (2) the development of firm-level anti-bribery compliance norms; (3) the implementation of mandatory payment transparency for extractive industry investors; and (4) the progressive trade (and investment) agenda. The policy brief argues that simply prohibiting cross-border corruption at domestic criminal law is insufficient and that this diversified approach is promising, if incomplete.[1]

This article focuses on the fourth component of a diversified approach: the necessity of ensuring that Canada’s investment treaties contribute to combating corruption. I first survey Canada’s Foreign Investment Promotion and Protection Agreement (FIPA) program. I then introduce the “Asymmetry Critique” of IIAs and the unsettled legal landscape that has resulted from the lack of guidance in treaties about how tribunals should deal with corruption. In the third section I review recent developments toward a binding anti-corruption norm both in Canada’s treaty practice and in that of other states.

1. Canada’s FIPA program

Canada’s investment treaties include FIPAs as well as FTAs with investment chapters. Canada began negotiating FIPAs in the late 1980s, which resulted in a first generation of six FIPAs that were geographically focused on Eastern Europe. A more systematic approach to FIPAs emerged out of the NAFTA. On the basis of NAFTA Chapter 11, Ottawa developed a first Model FIPA, which was used in negotiations for the remainder of that decade. More than two dozen IIAs were concluded during this second generation. A third generation began in 2004 with the publication of a second Model FIPA.

As of May 2019, the Canadian government lists 38 FIPAs in force.[2] Canada’s Model FIPA has not been formally updated since 2004, but it is understood that changes to the model have been made on an ad hoc, rolling basis. In particular, FIPAs and FTAs signed at the end of the third generation—between 2013 and 2016—include anti-corruption language within a hortatory provision on CSR.[3]

More than 50 investor–state arbitrations are known to have been filed by Canadian investors abroad as of May 2019.[4] Particular sustainable development concerns arise as many of these claims pertain to resource management or environmental protection measures applied to mineral, and oil and gas extraction projects.

Following elections in 2015, Canada’s approach to investment issues is supposed to be guided by a “Progressive Trade Agenda including investment issues.”[5] Between mid August and late October 2018, the Canadian government held online consultations on how to make its FIPAs more progressive and inclusive,[6] with the participation of over 350 Canadians.[7] However, to date there has been no indication from the government about how Canadian FIPAs and FTAs will be “progressive” in anything more than name, as details of the government’s post-consultation intentions remain unavailable.

2. The “Asymmetry Critique” of international investment law

The historical approach to investment agreements is characterized by asymmetry: foreign investors are granted rights unaccompanied by obligations, while host states accept obligations unaccompanied by rights. Yackee provided an illuminating overview of this Asymmetry Critique with a particular focus on corruption.[8] More recently Viñuales provided a response to the Asymmetry Critique arguing for a modified version thereof and reliance on a tribunal-driven, doctrinal “change of mindset.”[9]

Speaking to this need for a mindset shift, Llamzon cogently describes a “moral impetus” stemming from the “the need to hold investors seeking redress accountable for their own wrongdoing.”[10] However, he also acknowledges that existing treaties give “comparatively little guidance to arbitrators about how corruption issues should be treated vis-à-vis the protections provided to investors under these treaties.”[11]

In this context, tribunals draw on a dynamic basket of “implicit obligations”[12] to take account of investor misconduct. World Duty Free v. Kenya provides an example.[13] There the host state alleged at the preliminary stages that the investor had used bribery to secure its investment. The tribunal found that it could not affirm jurisdiction under the relevant investment contract’s arbitration agreements.[14] However, the basic limitation of the International Public Policy (IPP) Approach is that it relies on both the investor and the state being unusually candid about the payment of bribes.

The result of reliance on implicit obligations is described by one practitioner as “[a] lack of clarity with respect to the emerging implicit obligation for investments to accord with the law [that] may leave investors, states, and tribunals with an uncertain understanding as to when the substantive protections of an investment treaty should be denied to an investor.”[15]

The tribunal in Metal-Tech v. Uzbekistan also had to confront the issue of investor bribery. It relied on an “in accordance with the law” clause in the underlying investment treaty finding that circumstantial evidence—such as “red flags”—was sufficient to establish that bribes had been used to secure the investment.[16] (In both World Duty Free and Metal-Tech the international tribunals concluded on the facts that there was corrupt behaviour and therefore did not rely on a prior penal outcome in either the host state or the home state.)

It should be noted, however, that many investment treaties do not contain an “in accordance with the law” clause. And, in any case, even if the treaty does contain such a provision, its effectiveness in excluding investments made through corruption is contingent on the law of the host state. The more fundamental point is that, considering that Canadian law prohibits bribery of foreign officials,[17] Canadian FIPAs should also exclude corrupted investments from their ambit of protection regardless of the legal particularities of the host state.

3. Improved treaty language: necessary if incremental progress

Canada has made limited progress in clarifying the unsettled legal landscape discussed above. This section introduces that development alongside other treaty negotiation initiatives.

In the CETA investments made through corruption have been explicitly excluded from dispute settlement. CETA Art. 8.18(3) states:[18]

For greater certainty, an investor may not submit a claim under this Section if the investment has been made through fraudulent misrepresentation, concealment, corruption, or conduct amounting to an abuse of process.

This should be cautiously viewed as a step in the right direction. (The language in CETA is yet to be interpreted by an arbitral tribunal.)

However, the Canada–Moldova FIPA and Canada—Kosovo FIPA, signed after CETA was concluded on October 30, 2016, do not include the CETA Art. 8.18(3) language.[19] Although this may at first be surprising, it likely reflects the fact that Canadian negotiators have continued to operate under the prior negotiating template and will continue to do so until the Model FIPA is updated.[20]

In the two FIPAs concluded after CETA, the most significant development is outside the treaty text, in the form of a joint declaration,[21] substantially identical in both cases and silent on the issue of corruption. In the document, the governments “commit to work together to help make international trade and investment policies more progressive and inclusive, to empower all members of society – particularly women, to have a positive impact on economic growth, and help reduce inequality and poverty.” They also reaffirm the right to regulate to achieve legitimate policy objectives and recognize the need to address certain ISDS-related issues.

It is unclear whether and when a new Model FIPA will be published and begin to inform Canada’s negotiations. Also unclear is whether the CETA Art. 8.18(3) language will be brought into a new Model FIPA, or whether the Canadian government—now operating under the banner of a Progressive Trade Agenda—might go even further in using FIPAs to combat corruption.

The Canadian government must ensure that FIPAs begin to establish a minimum standard of investor conduct applicable to Canadian corporations abroad. In this regard the 2012 South African Development Community (SADC) model investment agreement, the 2016 Morocco–Nigeria BIT and the 2018 model BIT of the Netherlands are all noteworthy.

The SADC model formulates a shared obligation regarding corruption that applies to investors, host states and home states. The main obligation thereunder is derived from the United Nations Convention against Corruption (UNCAC) and the OECD Convention’s prohibition approach on bribery. Enforcement of the prohibition is intended to be carried out by domestic authorities, and a breach of the prohibition is intended to have the effect of vitiating any investment tribunal’s jurisdiction.[22] The SADC model’s linkage between home state enforcement (that is, retention of sovereign prosecutorial authority over criminal law matters) and exclusion of investment tribunal jurisdiction certainly merits consideration.

The Morocco–Nigeria BIT introduced a series of obligations on investors, including compliance with a rigorous environmental assessment screening and a social impact assessment.[23] What’s more, Article 17 (Anti-Corruption) sets out comprehensive rules for prohibiting corrupt payments to an official or an intermediary of an official in the host state.[24]

Finally, the recently finalized model BIT of the Netherlands[25] contains a series of changes aimed at controlling the scope of investment protection and introducing greater guidance as regards investor conduct. In particular, the model follows CETA Art. 8.18(3) and states: “The Tribunal shall decline jurisdiction if the investment has been made through fraudulent misrepresentation, concealment, corruption, or similar bad faith conduct amounting to an abuse of process.”[26]

Conclusion

In the context of the SDGs, Canada’s gradual adoption of a diversified approach to combatting cross-border corruption is encouraging. To date, however, there has been only minimal recognition that investments made through corruption or otherwise tainted by corruption must be excluded from the ambit of protection afforded by FIPAs.

This is slowly starting to change, however. In concert with the Asymmetry Critique, there is broader recognition that FIPAs can no longer be devoted only to protection of foreign investors. Following the 2018 consultation on FIPAs, the Canadian government must at a bare minimum publish a new Model FIPA, with binding treaty language excluding protection to investments tainted by foreign bribery and addressing other issues raised by Canadians, and use it to guide the negotiation of “fourth generation” FIPAs. Canada should also seek to renegotiate outdated older-generation FIPAs.

When it comes to bribery of foreign officials, anything less than a continuation of the practice in CETA would be a move in the wrong direction. It would be a betrayal of not only the government’s Progressive Trade Agenda rhetoric but also the simple legal fact that Canadian corporations are prohibited by law from paying bribes to officials of foreign countries. In this way, Canada can take a small but concrete step toward balancing the minimum standard of treatment of investors it demands of host states against a minimum standard of investor conduct on the part of Canadian corporations abroad.

Author

Matthew A. J. Levine is a Canadian lawyer (Barrister & Solicitor, Law Society of Ontario). In addition to domestic business law matters, his practice includes design and implementation of anti-corruption anti-bribery (ABAC) compliance programs under the United States Foreign Corrupt Practices Act (FCPA) and Canadian Corruption of Foreign Public Officials Act (CFPOA).

Notes

[1] Levine, M. A. J. (2019, June). Canadian initiatives against bribery by foreign investors. IISD: Winnipeg. Retrieved from https://iisd.org/library/canadian-initiatives-against-bribery-foreign-investors

[2] See https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/index.aspx?lang=eng

[3] Brower, C. N., & Ahmad, J. (2019). The state’s corruption defence, prosecutorial efforts, and anti-corruption norms in investment treaty arbitration. In K. Yannaca-Small (Ed.). (2019). Arbitration under international investment agreements: A guide to the key issues. Oxford: Oxford University Press. Canada–Burkina Faso FIPA, Article 16; Canada–Guinea FIPA, Article 16; Benin–Canada FIPA, Article 16; Canada–Honduras FTA, Article 10.16; Canada–Republic of Korea FTA, Article 8.16; Canada–Cote d’Ivoire FIPA, Article 15(2); Canada–Serbia FIPA, Article 16; Canada–Nigeria FIPA, Article 16; Canada–Mali FIPA, Article 15(3); Canada–Mongolia FIPA, Article 14; Canada–Senegal FIPA, Article 16; Canada—Kosovo FIPA, Article 16. All agreements are available at https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/index.aspx?lang=eng

[4] Mertins-Kirkwood, H, & Smith, B. (2019). Digging for dividends: The use and abuse of investor–state dispute settlement by Canadian investors abroad. Ottawa: Canadian Centre for Policy Alternatives. Retrieved from https://www.policyalternatives.ca/digging-for-dividends. The work indicates that at least 43 cases have been brought by Canadian investors under treaties other than NAFTA. Meanwhile, according to UNCTAD, 15 arbitrations have been initiated by Canadian investors against the United States alone under NAFTA Chapter 11. See https://investmentpolicy.unctad.org

[5] This terminology has been advanced by diplomats and politicians during the renegotiations of NAFTA (leading to the USMCA or CUSMA), negotiation of CPTPP and, to a certain extent, the inclusion of an MIC in the final text of the CETA.

[6] See https://www.international.gc.ca/trade-commerce/consultations/fipa-apie/index.aspx?lang=eng

[7] See https://www.placespeak.com/en/topic/5788-public-consultation-canadas-international-investment-agreements-fipas/#/overview. IISD played a leadership role in gathering stakeholders to identify ways in which a new Model FIPA could contribute to investment for sustainable development. See IISD. (2018, July). Developing a progressive agenda for reform of international investment law: Canadian perspectives. Retrieved from https://www.iisd.org/library/developing-progressive-agenda-reform-international-investment-law-canadian-perspectives; IISD. (2018, November). Commentary: Reply to public consultation on Canada’s international investment agreements (FIPAs). Retrieved from https://iisd.org/library/reply-public-consultation-canadas-international-investment-agreements-fipas

[8] Yackee, J. W. (2011). Investment treaties and investor corruption: An emerging defense for host states. Virginia Journal International Law, 52, 723.

[9] Viñuales, J. E. (2017). Investor diligence in investment arbitration: Sources and arguments. ICSID Review-Foreign Investment Law Journal, 32(2), 346–370, p. 368.

[10] Llamzon, A. (2015). Yukos Universal Limited (Isle of Man) v The Russian Federation: The state of the ‘unclean hands’ doctrine in international investment law: Yukos as both omega and alpha. ICSID Review-Foreign Investment Law Journal, 30(2), 315–325, p. 316.

[11] Llamzon, A. P. (2014). Corruption in International Investment Arbitration (pp. 238-281). Oxford University Press, para. 4.66.

[12] Llamzon (2015), supra note 10. Llamzon refers to implicit obligations for limitations that are thought to exist outside the four corners of the treaty text.

[13] See Johnson, L. (2011). World Duty Free v. Kenya. In N. Bernasconi-Osterwalder & L. Johnson (Eds.). International investment law and sustainable development: Key cases from 2000–2010. Geneva: IISD. Retrieved from https://www.iisd.org/ITN/2018/10/18/world-duty-free-v-kenya

[14] This IPP Approach has a long history in international commercial arbitration: Yackee (2011), supra note 8, traces the origin of this doctrine against the use of arbitration to enforce a contract secured corruptly, to Judge Gunnar Lagergren’s 1963 Award in ICC Case No. 1110.

[15] Moloo, R., & Khachaturian, A. (2010). The compliance with the law requirement in international investment law. Fordham International Law Journal, 34, 1473, p. 1475.

[16] See Schacherer, S. (2018, October). Metal-Tech v. Uzbekistan. In Bernasconi-Osterwalder, N. & Brauch, M. D. (Eds.). International investment law and sustainable development: Key cases from the 2010s. Geneva: IISD. Retrieved from https://www.iisd.org/itn/2018/10/18/metal-tech-v-uzbekistan

[17] Levine (2019), supra note 1, Section 5.0.

[18] CETA, Chapter 8 (Investment), October 30, 2016. Art. 8.18(3). Retrieved from http://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/ceta-AECG/text-texte/toc-tdm.aspx?lang=eng

[19] Canada–Moldova FIPA, June 12, 2018 (not in force). Retrieved from https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/moldova/fipa-apie/text-texte.aspx?lang=eng; Canada–Kosovo FIPA, March 6, 2018, in force as of December 19, 2018. Retrieved from https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/kosovo/fipa-apie/text-texte.aspx?lang=eng

[20] On May 25, 2018, Canada and the United Arab Emirates concluded negotiations toward a FIPA. The FIPA text is not currently available. See https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/united_arab_emirates-emirats_arabes_unis/fipa-apie/background-contexte.aspx?lang=eng

[21] Joint declaration by the Government of Canada and the Government of the Republic of Moldova regarding progressive and inclusive trade and investment, June 12, 2018. Retrieved from https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/moldova/fipa-apie/declaration.aspx?lang=eng; Joint declaration by the Government of Canada and the Government of the Republic of Kosovo, March 6, 2018. Retrieved from https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/kosovo/fipa-apie/declaration.aspx?lang=eng

[22] SADC. (2012, July). SADC model bilateral investment treaty template with commentary. Gaborone: SADC, Arts. 10.1–10.3 and commentary on p. 32. Retrieved from http://www.iisd.org/itn/wp-content/uploads/2012/10/SADC-Model-BIT-Template-Final.pdf

[23] Morocco–Nigeria BIT, December 3, 2016, Arts. 14(1) and 14(2). Retrieved from https://investmentpolicy.unctad.org

[24] Id., Art. 17.

[25] For a comprehensive review of the draft text, see Verbeek, B.-J. & Knottnerus, R. (2018, July). The 2018 Draft Dutch Model BIT: A critical assessment. Investment Treaty News, 9(2), 3–6. Retrieved from https://www.iisd.org/itn/en/2018/07/30/the-2018-draft-dutch-model-bit-a-critical-assessment-bart-jaap-verbeek-and-roeline-knottnerus. The Dutch government adopted the model BIT on October 19, 2018.

[26] Netherlands Model Investment Agreement, October 19, 2018, Art. 16(2). Retrieved from https://www.rijksoverheid.nl/binaries/rijksoverheid/documenten/publicaties/2018/10/26/modeltekst-voor-bilaterale-investeringsakkoorden/modeltekst-voor-bilaterale-investeringsakkoorden.pdf