The ever-increasing volume of transnational commercial activity has generated the demand for a system of dispute resolution capable of rendering enforceable judgments, which is also certain, cost-effective, fast, and unbiased.[1] In the absence of an international authority with universal jurisdiction over the resolution of international commercial disputes, the only recourse is reliance upon state-based jurisdiction, i.e., litigation, or arbitration.[2] Given the limitations of national courts in addressing the needs of global commerce – [3] e.g., inadequate or even corrupt legal frameworks in less developed jurisdiction, foreign parties’ lack of familiarity and knowledge of the laws, enforcement of foreign awards – arbitration has long become the preferred method of resolving disputes originating from international commercial dealings.[4] Arbitration of commercial disputes has been utilized since the dawn of commerce,[5] but as international trade relationships have grown tremendously since the turn of the 19th century, the contemporary systems of arbitration were developed to eliminate the limitations posed by global commercial litigation: costs and speed, assertion of jurisdiction by national courts, choice of law, choice of forum, unfamiliarity with foreign jurisdictions and enforcement of non-domestic judgments.[6]
Arbitration is a non-judicial mechanism for public and private dispute resolution that parties agree to as an alternative to litigating their disputes in national courts.[7] As such, arbitration arises from a contract.[8] Although a voluntary submission of disputes to a neutral third-party is by no means a recent phenomenon,[9] the modern incarnation of arbitration has numerous distinguishing characteristics that have contributed to its rapid growth.[10] Most notably, unlike adjudication, arbitration affords parties with the desired flexibility in shaping the system under which their disputes are to be resolved.[11] Given the growth of arbitration in all areas of civil dispute resolution, however,[12] it is difficult to attribute its attractiveness to a single factor. As compared to its judicial counterpart, arbitration proceedings are consensual and customizable, possibly confidential, likely speedier, more efficient, and more cost-effective.[13] Furthermore, arbitration awards are final and enforceable.[14]
As a method of civil dispute resolution, arbitration may seem worlds apart from the sphere of criminal law. After all, an arbitrator is not a judge, and jurisdiction over criminal sanctions remains wholly in the hands of national courts. But as arbitration rises in popularity, especially in international commerce, arbitrators are increasingly faced with civil disputes tainted with financial crimes such as tax evasion, theft, corruption blackmailing and money laundering. The interaction of financial crimes and arbitration gives rise to a host of complex legal questions, e.g., the burden of proof, evidentiary requirements, applicable criminal laws, enforcement, and judicial review. [15] Contracts tainted by financial crimes place arbitrators in a difficult predicament. On the one hand, arbitrators have certain duties to parties and the process; on the other hand, arbitrators have certain responsibilities as arbitrators, members of the legal community and individuals. So, what are arbitrators’ legal and ethical obligations when faced with criminality? Put another way, should arbitrators be guided by enforcement of the public policy against fraudulent transactions or the public policy in favor of sustaining arbitration agreements?[16]
Money laundering is one of the crimes that arbitrators face in deciding international commercial disputes. It has become the subject of increased international scrutiny and criminalization in recent years[17] and it is considered a crime in most jurisdictions for its universally recognized destructive impact on commerce and society at large.[18] Despite the implementation of many national and international instruments for its prevention, it is still widely practiced.[19] The definition and scope of money laundering is contingent upon the national laws or the international conventions under which it is considered to be a crime. Actions that constitute money laundering are carefully defined in national laws and multilateral directives.[20] The United Nations’ definition is found in the Vienna Convention.[21] Although it is not easy to find a universal definition for money laundering,[22] the common attribute of all money-laundering schemes is the objective of concealing the sources of revenue derived from criminal activities.[23]
There are different scenarios in which money laundering is presented to an arbitral tribunal. First, and more frequent, it is when a party raises a money laundering defense against the enforcement of a contract.[24] In such a scenario, the party alleging money laundering refuses to fulfill his contractual obligations for the other party’s alleged criminal conduct in relation to the contract. A second possibility is when the dispute itself is carried out as part of a broader money laundering scheme. That is, there is no real dispute between the parties, and the arbitral tribunal is used as a tool to conceal and legitimize criminal sources of assets.[25] In these situations, depending on the role of the arbitrator, two different scenarios may emerge. First, the arbitrator is being used, despite her knowledge, to render an arbitral award and thereby legalize a criminal activity. It may also be the case that the arbitrator is acting as an accomplice.[26] Sham disputes in which parties are trying to dupe the arbitrator involve the following steps: the offenders of the “predicate” offense, typically establish two separate companies. The companies then engage in a commercial venture, which involves the transfer of some other goods or performance of services often for unreasonably high/low prices (as compared with the market value for similar products or services). The underlying contract contains an arbitration clause, which serves to preclude the judicial system from deciding a potential dispute arising from the contract. Next, they generate a fake dispute and often act diligently to prepare the necessary documents in support of their positions. As stated earlier, such agreements are entirely sham and often specify excessively unreasonable prices.[27] Once the arbitrator issues an enforceable award, the process is completed. The defendant will then proceed to transfer funds with illicit origins to the bank account of the claimant, and thereby legalizing the criminal activity. [28]
Despite the global success of arbitration, there is not a universally recognized set of ethical standards governing arbitrator conduct,[29] perhaps due to the private and autonomous nature of arbitration.. But there are standards of ethical conduct that are imposed on arbitrators by arbitration institutions, national legislations and courts,[30] e.g., the duty of privacy, the duty to disclose conflicts of interest,[31] the duty to act with competence and diligence[32], and the duty of impartiality and fairness.[33] These duties can be in reference to parties, their contract, arbitration institutions, courts or the governing national or international public policy. Ethical and legal duties arise from different sources, e.g., legislations, conventions or institutional rules. It is also possible that a single duty has both legal and ethical roots. Since there is not a universally binding body of criminal law, the problem of what an arbitrator should do when faced with instances of money laundering in international commercial disputes is borne out of a conflict between the arbitrator’s legal and ethical duties to parties under the arbitration agreement, and other duties originating from public policy concerns in countering criminal activities both as an individual and as a member of the legal profession.[34]
The topic of public policy is a muddy and complex issue posing several challenging legal questions. What public policy means can be vastly different across jurisdictions or even the way various international instruments conceptualize it. Nevertheless, the practice of money laundering is considered against transnational public policies in nearly all jurisdictions. Since these transnational standards of public policy are fundamentally drawn from national standards and international treaties and conventions, they reflect principles that are most commonly adopted by jurisdictions across the world.[35] The common practice of arbitral tribunals is that a standard of “transnational public policy” is the applicable standard to cases of corruption,[36] and that it is a standard drawn from widely accepted national standards of public policy.[37] Although arbitrators are precluded from imposing criminal sanctions, injunctions or fines on parties, in deciding a case tainted by financial crimes, the “transnational standards of public policy” are relevant in determining the civil consequences of contracts tainted by money laundering.[38] Not only is transnational public policy directly applicable in international arbitration, but international arbitral tribunals also have the authority to determine the content of the transnational public policy.[39]
When confronted with money laundering, two fundamental questions arise before an arbitrator tribunal. First, it must decide whether or not it has jurisdiction, i.e., whether there is sufficient relationship between the contract and the alleged criminal conduct. Second, if jurisdiction is found, it must determine what the effect of international public policy consideration on the underlying contract are. If money laundering, as raised by one of the parties or manifested to the arbitrator in the dispute as a sham dispute, is proven to the satisfaction of the tribunal, the validity of the contract will depend upon the applicable national law.[40] As stated earlier, transnational standards of public policy (derived from national standards of public policy as reflected in national criminal laws) are directly applicable, and arbitral tribunals determine their contents on a case by case basis.[41] But failure to do so does not potentially expose arbitrators to criminal liability, as failure to uphold transnational standards is not a crime. It is the parties’ responsibility to raise a violation of transnational public policy as a defense in arbitration or before courts for an arbitral award to be set aside.[42]
Unlike credit and financial institutions that are required to report “suspicious transactions” pursuant to various international and domestic regulations since the 1970s, there are no such reporting obligations imposed on arbitrators. Doing so would likely diminish the function of arbitration. In October 2016, the Federal Penal Code of the United Arab Emirates was amended to sanction punishment on judges and arbitrators who “knowingly issue a decision or express an opinion or submits a report or presents a cause or establishes a fact in favor of a person or against him, contrary to the duties and integrity and impartiality, shall be punished by temporary imprisonment.”[43] Although this example concerns the principle of impartiality, a determinantal effect on arbitration can be expected if the privacy principle of arbitration is undermined. The legislative intent of the UAE code was to enhance the arbitration process, but the actual effect of it was that it was perceived as a threat by arbitrators, and adversely affected the UAE arbitration system and fear of prosecution by arbitration practitioners.[44] If the confidentiality of the proceedings is violated, many parties may no longer wish to recourse to arbitration. It would also deter arbitrators from accepting cases, as it could expose arbitrators to criminal liability.
In order to be able to preserve both the integrity of the process and fulfill contractual and ethical obligations to parties, arbitrators need to balance the obligations imposed on them from various sources. Arbitrators may be tasked with balancing their obligations arising from the contract between the parties, their legal and ethical duties, and transnational public policy considerations. In the case of money laundering, unless the dispute is entirely sham, an arbitrator does not have to refuse jurisdiction. Not only doing so curtails the effectiveness of arbitration, as parties can use the defense of financial crimes to avoid arbitration, but it is also not required for arbitrators in order to do so to fulfill their ethical, legal, and contractual duties effectively.
[1] Saul Perloff, The Ties That Bind: The Limits of Autonomy and Uniformity in International Commercial Arbitration, 13 U. Pa. J. Int’l Bus. L. 323, 324 (1993).
[2] See id. at 324.
[3] See id. at 325.
[4] See Yves Dezalay & Bryant G. Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order 6 (1996); see generally Emmanuel Gaillard & John Savage, Fouchard GAllard Goldman on International Commercial Arbitration (1999); Thomas E. Carbonneau, Arbitral Adjudication: A Comparative Assessment of Its Remedial and Substantive Status in Transnational Commerce, 19 Tex. Int’l L. J. 33, 34 (1984) (“With the growth of international trade, arbitration has emerged as the preferred remedy for disputes in private international commerce.”).
[5] See Michael John Mustill, Arbitration: History and Background, 6 J. Int’l Arb. 4, (1989).
[6] Thomas E. Carbonneau & Henry Allen Blaire, Arbitration Law and Practice 3 (8th ed., 2005).
[7] Note, Classwide Arbitration: Efficient Adjudication or Procedural Quagmire? 67 Va. L. Rev. 778, 784 (1981).
[8] Carbonneau & Blaire, supra note 6, at 2.
[9] Barry E. Carter & Phillip R. Trimble, International Law 43 (Little, Brown & Co., 2d ed., 1995); see also L. B. Sohn, International Arbitration in Historical Perspective: Past and Present, in International Arbitration Past and Prospects 9-11 (A. H. A. Soons, ed., Martinus Nijhoff Publ.1990).
[10] Robert Donald Fischer & Roger S. Haydock, International Commercial Disputes Drafting an Enforceable Arbitration Agreement, 21 Wm. Mitchell L. Rev. 948, 952(1996).
[11] Alan Redfern & Martin Hunter, Law And Practice Of International Commercial Arbitration 23 (1986).
[12] Joseph H. Helm, Jr., Daniel A. Noonan & Robert Horowitz, ADR: An Alternative for Settling Civil Disputes, 63 Wis. Law. 14, 15 (1990).
[13] Fischer & Haydock, supra note 10, at 948.
[14] Houston Putnam Lowry, Critical Sourcebook Annotated: International Commercial Law and Arbitration xix (Little, Brown & Co. 1991).
[15] Klara Drlickova, Money Laundering in International Commercial Arbitration, 31 Econ. & Soc. Dev. 227, 230 (2018).
[16] Westacre Investments Inc. v. Jugoimport-SPDR Holding Co. Ltd., 2 Lloyd’s Rep. 111, 114 (Q.B. 1998).
[17] Marc S. Palay & Ricardo E. Ugarte, Money Laundering as a Defense in International Commercial Arbitration: a Practitioner’s Perspective, The International Comparative Legal Guide to: International Arbitration, 24 (2007).
[18] See generally Christoffer Coello Hedberg, International Commercial Arbitration and Money Laundering, 30 E.C.T.S. 1 (2016).
[19] See UNODC, Estimating Illicit Financial Flows Resulting From Drug Trafficking and Other Transnational Organized Crimes – Research Report, 7 (2011) (concluding that money laundering accounts for 2 % to 5% of global GDP. These estimates have been concurred with in later studies).
[20] See for example, Article 305bis of the Swiss Penal Code, and the Third EU Money Laundering Directive, Chapter 1, Article 1.2 (2005).
[21] The Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988:
- The conversion or transfer of property, knowing that such property is derived from any of the drugs offenses established by the Convention, or from an act of participation in such offenses, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offense to evade the legal consequences of his actions;
- The concealment or disguise of the true nature, source, location, disposition movement, rights with respect to, or ownership of property, knowing that such property is derived from an offence or offences established in accordance with subparagraph a) of this paragraph or from an act of participation in such an offence or offences.
[22] Hedberg, supra note 18, at 8.
[23] See Peter W. Schroth, Bank Confidentiality and the War on Money Laundering in the United States, 42 AM. J. Comp. L. 369, 375 (1994).
[24] Drlickova, supra note 15, at 229.
[25] A. J Belohlavek, Ordre Public a Trestniprdvo: Komentf: I, Dil. Praha: C. H. 680 (2008).
[26] Drlickova, supra note 24, at 229.
[27] Id.
[28] Belohlavek, supra note 26, at 929.
[29] See, e.g., Maureen A. Weston, Reexamining Arbitral Immunity in an Age of Mandatory and Professional Arbitration, 88 Minn. L. Rev. 449, 468 (2004) (stating that notwithstanding “[v]oluntary and aspirational”codes of conduct, “arbitrators and provider institutions are not subject to specific regulatory standards or public oversight.”).
[30] Id. at 206.
[31] 9 U.S.C. §§ 1-14.
[32] See, e.g., Carrie Menkel-Meadow, Ethics Issues in Arbitration and Related Dispute Resolution Processes: What’s Happening and What’s Not, 56 U. Miami L. Rev. 949, 962 (2002).
[33] See id. at 959.
[34] Hedberg, supra note 18, at 8.
[35] Id. at 64.
[36] Id.
[37] Later in the Comment the specific types of duties that arise from public policy considerations will be discussed.
[38] T. Alexander Brabant & Maxime Desplats, Arbitration and Company Law in France, 12 Eur. Comp. L. 144, 147 (2015).
[39] Lew, supra note 37, at 43.
[40] Hedberg, supra note 18, at 17.
[41] Id. at 64.
[42] Lew, supra note 37, at 43.
[43] UAE arbitration law No. 6/2018.
[44] Mohamed Sweify, Criminal Sanctions Targeting Arbitrators: An Egyptian Perspective, 11 Int’l J. Arab Arb., 70, 75 (2019).
