The idea that a corruption is a “victimless crime” is somehow a cliché. It sounds as if corruption was (only) a matter of morals, an individuals’ decision. If that was the case, there would be no reason to treat corruption as a crime. The confusion may well have “historical” grounds as corruption, when criminalized, is taken as a crime of conduct and therefore no actual material damage is required to be eligible for punishment.  A different matter is that the damage caused by corruption is both material (human and financial loss for example) but also immaterial (lost in trust and credibility for example); it can also affect at the same time individuals (bidders who lost in a procurement process tainted by corruption), identifiable groups of people (children of a specific school) and also members of a community (like the citizens of a country).

The last financial crisis is yet another demonstration of how tangible trust is, and how equally important are collective rights in comparison to individual rights. Modern times and the ideas about good governance have also brought about an enhanced sense of the relevance and priority of public interest and of collective rights that have also changed the perspective; a view with the eyes of good governance treats nation-states as responsible (right-bearing and obligation-bearing) entities, as part of (and not despite) their sovereignty; good governance also sees societies, legal entities and individuals all as bearers of both rights and responsibilities, and the primacy of the public interest over the individual one. The rule of law in good governance times brings about a renewed sense of collective, where the individual also counts and the state has responsibilities.[1]

But the focus of the international and national anti-corruption frameworks on the perpetrators may also have to do with the focus on the causes of corruption that has occupied many scholars and activists during the initial times of the awareness raising stage of the anti-corruption campaign at the beginning of the nineties. The concern was legitimate, if anything, to understand and to support preventive efforts, another concept that at that time was innovative.

Nowadays, as more clarity and awareness exists on the problems, costs and consequences associated with corruption, and as prosecution cases increase, the victims take a more salient role. Preventing corruption was a novel concept some years ago, and is a necessary attitude; but preventing corruption alone has not worked and will not work. Corruption is to some extent inevitable, and enforcement is also necessary. In this scheme of things, it is even more important to address the consequences of corruption and to take a closer look at its victims. It is possible and necessary to repair social damage originated in cases of corruption.

I have done research and looked into this issue in partnership with Transparency International-Americas and wrote a paper on social damage coming out of corruption cases and how it can be repaired. The paper, written with the research support of my colleagues Kodjo Attisso and Anja Roth,  explores this concept and the opportunities and challenges faced when seeking reparation of social damage. For that purpose we look at the Alcatel Case in Costa Rica, one of the instances were this concept has been used under legal proceedings. You can download the paper here under this link:Repairing social damage out of corruption cases: opportunities and challenges as illustrated in the Alcatel Case in Costa Rica

I would be very interested in reading your comments and reactions to the paper.

In denying his blessing, the Judge questions who wins with this arrangement: if shareholders of the Bank where robbed once with the lie, they would be robbed twice with the agreement with the S.E.C: why should they pay for their manager’s (or lawyers thereof) wrongdoing? The math is also clear: the executives’ bonuses were worth $5.8 billion of shareholders’ money which adds to the agreed sanction that totalled an additional $33million of their money. It’s like adding insult to injury. The judgment suggests first, that the correct thing to do would be to go against whomever orchestrated the “lie”, and second, the S.E.C should not settle agreements that would cover the fact they simply reacted late and did poorly on their own regulatory and oversight functions. Judge Rakoff puts it squarely: “…the parties’ submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C with the façade of enforcement and the management and the management of the Bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders.”[2] Appearances or not, the point is, is the damage repaired or further wrong doing prevented by this agreed sanction?

Just a band aid

An interesting anecdote is that precisely because of this contract Siemens had initiated in 2005 an international arbitration at the International Centre for Settlement of Investment Disputes -ICSID[3] against Argentina alleging they had not fulfilled its commitments and had treated them unfairly all in violation of the German-Argentina Bilateral Investment Treaty. During the arbitral proceedings the corruption issue was not raised and not dealt with by the Tribunal ( despite huge red flags) who ordered in 2007 that Argentina should pay some US $217 Million dollars in compensation, and about US $219 Million on unpaid bills plus the US$20 Million performance bond[4] of what actually was a corrupt contract.  Argentine sought to halt the award’s enforcement and to have that award annulled. Later, in November 2008 as Siemens’ confession emerged, the annulment procedure was stopped[5] and  in September 2009 it was announced that Siemens and Argentina had reached an agreement whereby Siemens waived its rights to enforce this 2007 award ( note this is different from accepting its annulment), and it is reported that as part of the agreement both waived their rights to  “pursue further legal actions arising out of the earlier contract dispute” and that “each side will bear its own legal costs and fees associated with the long-running saga at ICSID”.[6] The truth of the matter is that corruption alone should have been enough to finish the arbitration proceedings earlier than 2007, and that in such case it is most likely that the enforcement of the corrupt contract would not have been the expected Tribunal’s decision. At this point let’s do the math here not for Siemens’ shareholders but for Argentina’s shareholders (a.k.a citizens and tax payers): because of a corrupt contract the Argentinean’s lost 1) What their government paid Siemens already for the identity card contract; 2) What their government had to pay in lawyers and arbitrators fees for the ICSID tribunal; 3) What their government didn’t do while focused on the identity card project and its defence afterwards; all of this, at a minimum.  The trouble is that to top the current of costs from spiralling, Argentina had to agree to stop any other further claim so…only judging from this public information, it looks like there is little hope for Argentinean shareholders to get some justice at this end.

On September 2009 Siemens announced a plea bargain with its former managers and Board members involved in the bribery scandal that came out in 2008[7]. The deal entails they each pay the company €500 thousand for their wrong doing and in exchange they are left in peace…in their new jobs. Let’s ask who wins with this arrangement: the company recovers some money; the former managers lose some money and the Argentineans still have a problem with their identity cards.  Is the damage repaired by this action? For Siemens shareholders: partially; in addition they are lucky enough to own a company that had an insurance that may cover it against the corrupt acts of its managers.[8] For Argentinean shareholders: by no means, at least not that I know of; besides, I am almost sure the Argentineans are not insured against the corrupt acts of their politicians.

The truth is that the international prosecution system, if it is feasible to give this name to the current patchwork of prosecution cases outside of the counties that were the scene of the crime, is perhaps one of the few ways to prosecute economic crime effectively. This is good. The problem is such “system” is as far from the victims of corruption as it could be.  Where is the Judge Rakoff of international corruption crimes? Is criminal responsibility of legal persons really working if companies can be insured for acts of bribery of their managers? What happens to the victims of corruption? Are they also lost in the enforcement system? Is it really enough to prosecute if sanctioning stops short of recovering damage for victims? Can damage coming out of corruption be repaired at all? Or should we all sit and feel contempt with self pity?

[2] Ibid p 8.

[3] Siemens A.G. v. Argentine Republic (ICSID Case No. ARB/02/8). Information on status under http://icsid.worldbank.org. The award is not available.

[4] See Investment Arbitration Reporter. http://www.iareporter.com/Archive/IAR-07-28-08.pdf

[5] http://www.investmenttreatynews.org/cms/news/archive/2008/12/23/argentina-takes-the-offensive-as-siemens-pleads-guilty-to-corruption-charges.aspx

[6] Investment Arbitration Reporter September 2, 2009 (Vol. 2, No. 14) – available under http://www.iareporter.com

[7] See note on Reuters of September 23 2009 under http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSLN52337520090923

[8] See Süddeutscheszeitung’s  article of September 6 2009 http://www.sueddeutsche.de/wirtschaft/208/486621/text/ and also in Businessweek on September 23, 2009 http://www.businessweek.com/ap/financialnews/D9AT05OG0.htm

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COMMENTS ON GOOD GOVERNANCE ASPECTS UNDER THE US MODEL BIT

Juanita Olaya

Independent Researcher and Consultant

I welcome the opportunity to submit comments within the review process of the 2004 US BIT Model. As an academic, expert and consultant, I have worked for several years in the area of good governance, accountability and corruption prevention. I also recently finished writing my doctoral dissertation on the topic of “Good governance and International Investment Law: the challenges of lack of transparency, corruption and legal instability” and in this context I want to share some of its findings as they are relevant to the review of the 2004 US Model BIT. My input is also restricted to a few points akin to this topic, hoping it is useful to you. While the opinion I share in this document comes out from this experience, it is entirely a personal opinion that doesn’t commit any of the organizations I have worked with or I am currently engaged with.

Given the role BITs and particularly US BITs play in the protection and promotion of foreign investment and in the development of international investment law instruments for that matter, the direction the review takes has an impact at many levels inside and outside the US. In reviewing the 2004 US BIT Model it is therefore of most importance to bear in mind that good governance and investor protection do not need to be contradicting objectives and that investor protection is in fact more effective through increased (better) governance.

In the paragraphs that follow I provide some background and justification for the recommendations to be considered in the 2004 US Model BIT review that I include hereafter.

Background: good governance and investment protection

Corruption, legal instability and lack of transparency hurt investors and hurt good governance and the investment climate. Improvements in these areas benefit all, investors and citizens alike: the former by enabling profitable business and the latter by facilitating the advantages and benefits of international economic exchanges to spread. It benefits both also by creating a climate were quality of life and business is better. In sum what is good for the investor should also be good for the host country and vice versa: investors are being protected when good governance standards are being required and enforced.

The aim of investment and investor protection places BITs in a crucial role to contribute toward global and national governance. It requires understanding that the purpose of providing protection to the foreign investor not only does not contradict this role, but that it is actually performed more effectively if understood within the overarching governance system. The problem is that it is  commonly thought that protecting the investor means only the acceptance by the host government of certain obligations, in the hope they will fulfill them. This is unfortunately not the way phenomena like corruption occur, and ignores the role governments and investors have in the good governance of their own business environment. It is therefore necessary to look at BITs and their protective function of investors and investment, not in regards to how many duties do they require from host governments, but how best they can serve the purpose of investment protection.  This entails looking at the system (and not just the parts) and the responsibility of all actors: host and home governments and investors; and it also requires a degree of consistency with good governance goals.

The effectiveness of BITs as investor protection mechanisms in the context of good governance is determined quite closely by its own fulfillment of a consistency requirement in four areas: credibility, legitimacy, effectiveness and impact in terms of corruption restraint.

Credibility. The requirement of credibility compels BITs and international investment law to set transparent and accountable international institutions, rules and regulations. Enhanced transparency requirements of investment arbitration rules for cases of State arbitration are imperative and so is the persuasion of all relevant international arbitration institutions to facilitate easy access at a minimum, to the awards. In this sense the US has set an important example in its 2004 Model BIT with best practice standards for transparency requirements in arbitration procedures. However, the confidentiality of many transnational concession contracts and their stabilization clauses is still a source of concern. Also, those countries around the world that have enacted high domestic access to information standards need to be encouraged to implement them, and not required to lower them in international jurisdictions. International mechanisms that privilege confidentiality push countries in the wrong direction. BITs can agree on minimum standards for transparency but are even better if they either encourage a higher standard or encourage the host country standard when it is higher as it may occur in some cases.

Legitimacy. The requirement of legitimacy aims also at enhancing public trust at the global level. This calls for BITs and international investment law to encourage and provide the space for all appropriate stakeholders to participate in relevant decision making processes and to have their share of rights and responsibilities. It also requires the implementation of mechanisms that can help the “system” to sort out conflicting interests in the international arena. In this sense the inclusion in the US 2004 Model BIT  of the possibility of allowing consultations with investors on regulatory matters that concern them is positive, and so is the move towards accepting third party contributions in arbitration, provided they bear a legitimate interest and bring value added to the proceedings.

The requirement of legitimacy also calls for increased international responsibilities of home governments and companies.  Until now the investment protection mechanisms have been more focused on protecting the investor from the host country’s possible wrongdoing, but have been less attentive to protecting the host country from possible investor’s wrongdoing and thus to protecting the investor form itself (otherwise called regulation). Indeed, the investor protection standards included in them assume for the most part that the investor or the home government neither have any responsibility nor are capable of damage. This is not consistent with the fact that corruption is often pursued and promoted by companies operating outside their home countries, or that often home regulations are more effective in controlling company behavior than host countries can be, and not the least, that company disclosure may be necessary.  In addition, the emphasis investment agreements and particularly BITs place on the host government creates a real and perceived imbalance of power. Third world countries still encounter with skepticism the requests for good governance from the “North” when the behavior of northern companies and the leniency of their governments is also affecting their own “weak” governance situation. A current trend to include some good governance related obligations for the investors in investment agreements could also be incorporated into possible US BIT Model reviews.

This is also essential for the purposes of restraining corruption. Corruption in transnational business transactions requires coordinated action, effective home based deterrents and host based anti-corruption efforts, and needs the recognition that home governments do have a role to play in restraining corruption taking place in host countries. In this sense the US is well placed for its track record with anti-corruption legislation (FCPA 1977). The requirement that investors protected by the agreement subject themselves to a no-bribes no-corruption obligation would thus be consistent with US law, where the FCPA constitutes one of the longest standing anti-corruption statutes in the world. It would also level the playing field for national and foreign investors and fosters credibility of US investors abroad, which are nevertheless bound to the FCPA.

Effectiveness. More legitimacy and credibility engender also more effectiveness of instruments like BITs. In addition, when it comes to governance issues, consistency between national and international instruments is necessary in order to strengthen the governance mechanisms and above all to prevent them from backfiring. In a world were transparency and accountability are increasing but still deficient, rent-seekers will use any opportunity to avoid the light, yielding these problems more and more difficult to tackle. It is therefore imperative for BITs to ensure they are not used for the wrong purposes. It is not a matter of turning BITs into anti-corruption tools, but ensuring that corrupt deals escape their protection. It is also important that arguments of legal instability are not used lightly, impeding countries’ necessary legal change and governance.

Nowadays, there is more clarity within international law on the strength of the good faith and public order legal principles that sustain principles and practices of transparency, corruption restraint and legal stability. The challenge of effectiveness now, therefore, is not to clarify the existence of such principles but to harmonize their application and device mechanisms to solve possible contradictions and sanction violations.  Transparency seems to be an optimal informal mechanism to facilitate this task.

Transparency is essential to good governance as it supports its other attributes: enables accountability, fosters legitimacy and credibility and sustains effectiveness. Transparency has three dimensions: 1) availability of information (access); 2) the quality, timeliness and contents of that information and 3) the possibility of involvement of relevant stake-holders in reaction to that information (for example through participation, the possibility of recourse etc.), when appropriate.  With regard to foreign direct investment, it is commonly thought that the publication of laws and regulations relevant to foreign investment are the most important, if not the only, element of transparency. I consider this to be a restricted view and propose the government-business interface as the way to identify a number of areas relevant for transparency in foreign investment as follows:

• General transparency in State behavior  ( including Executive, Legislative, Judiciary and Control and oversight entities)
• Regulatory processes and regulations
• Contracts, concessions, privatizations and licensing processes
• Registers and Permits
• Revenue flows, contributions and subsidies
• Public finance related issues
• Law enforcement, dispute resolution, contract enforcement and particularly arbitration procedures
• Corporate sustainability and corporate governance.

These other areas often escape the usual definition of “administrative regulations” included in BITs and are nevertheless relevant for both foreign and national investors. It may be worthwhile considering raising the standard of transparency by including some of these areas explicitly. This includes not only those instances were the government proactively publishes information without being requested to do so, but also instances were it may be possible to request access to information that can be made available, access which should be easy, granted quickly and  at low cost .

Another important issue is who bears the responsibility of transparency, of making information available. The host government is the main entity responsible for the adequate openness and disclosure of its own activities. However, in matters relevant to foreign investment there may also be aspects that lie within the responsibility of the home governments regulation and the companies own disclosure like issues of corporate social responsibility and corporate governance, revenue payments and subsidies when paid by companies to the governments, stability clauses as well as taxation, environmental and labor implications of concession contracts just as well. Including relevant corporate disclosure duties levels the playing field for investors, supports and encourages host government disclosure and facilitates compliance with home and host regulations also necessary for the protection of investors. Transparency is indeed a good mechanism to counteract extortion and bribery to which investors may be exposed.

Recommendations

In light of the previous arguments and with the goal of improving investor protection in a way that is aligned with good governance principles, the following are some of the suggestions to consider in the context of the 2004 US Model BIT review:

• Continue the use and enforce the application of the transparency requirements for arbitral proceedings as included in the 2004 US Model BIT (Article 29), including the possibility of participation of amicus curiae (Article 28).  These standards and their application bring legitimacy and credibility to the arbitration procedure. As a corollary, the resort to UNCITRAL arbitration rules should be conditioned upon the incorporation of similar transparency standards within them for instances of investor-state arbitration.

• Introduce an anti-corruption chapter along the lines already being used in FTAs signed or drafted by the US, with some clarifications. In addition, this could include an explicit statement that investment undertaken or maintained through corrupt deals benefit from the protection of the treaty. Consider the inclusion of investor obligations not to engage in corrupt deals in the context of their investment, and the requirement that investors possess adequate codes of conduct and compliance mechanisms. All this could be introduced along the lines of obligations regarding the environment and labor rights which should also be acknowledged.

• Keep the regulatory transparency requirements included in Article 11, adding the option that should the host country implement higher standards of disclosure and access to information, those would be applied instead.

• Include investor disclosure requirements on relevant areas that would be supportive of host government disclosure such as and would discourage host governments and foreign investors from using confidentiality clauses. This is particularly relevant in cases such as revenue disclosure in the extractive industries and off-budget payments, stabilization clauses among the most salient.[1]

Juanita Olaya (c)

Se trata de una estrategia empresarial simple: se llama transparencia. Se basa en el principio de responder por lo que uno realmente es, hace y piensa, y consiste en poner a disponibilidad de a quien le interese (inversionistas, clientes, contratistas o el público en general) información relevante sobre las características, planes  y operaciones de la empresa.

¿Por qué tiene sentido una estrategia de transparencia corporativa?

Antes se pensaba que un eje fundamental del desarrollo empresarial se fundaba en la confidencialidad y el secreto.  Esta premisa, en parte se basada en la mistificación de los desarrollos obtenidos alrededor de la Revolución Industrial, y por otra parte se basada en el hecho cierto que la propiedad industrial e intelectual se puede robar. Pero hoy en día la globalización de los mercados, la redefinición del papel del Estado, el enfoque de gobernabilidad pública y privada, el inmenso flujo de información y el creciente papel de la reputación empresarial han cambiado un poco esta premisa. Hoy en día el desarrollo económico y social es entendido como el resultado de la acción común del gobierno, las empresas y los ciudadanos.

Resulta que si el secreto de la receta para el extraordinario sabor de un producto es un ingrediente venenoso (como en el caso reciente de la leche proveniente de la China), este es un dato que le interesa saber tanto alas autoridades de sanidad, como a los inversionistas y a los padres de los niños que usualmente la consumen. Lo cierto es que hoy, quien dice “mejor no preguntes” tiene algo que esconder como lo probó con desafortunada elocuencia Madoff; y quien ofrece ganancias fantásticas pero no puede explicar de donde provienen, como DMG lo que tiene es fantásticas debilidades. Siemens sufrió las consecuencias de sus propias prácticas, que germinaron en medio del silencio por parte de empleados y directivos que hoy comienzan a responder ante la justicia.

En un mundo donde fluye tanta información, ser su propia fuente resulta importante. Es un mecanismo de protección y a la vez de promoción. Un sector económico que es transparente compite en términos de calidad y no de  astucia, reservando ésta última para hacer valiosos avances tecnológicos, desarrollos creativos y el mejoramiento de productos. Todos ganan.

¿Transparencia de qué?

A veces escucho comentarios de empresarios neófitos en este tema que se refieren a la transparencia con escepticismo, por entenderla como el equivalente a publicarlo todo. Esta percepción es errónea;  la información legalmente protegida como confidencial o privilegiada debe continuar siéndolo. Realmente, se trata de publicar información que no es confidencial pero es relevante sobre la compañía. Por ejemplo: sobre su estructura de propiedad, su gobernabilidad corporativa (conformación de Junta Directiva y Consejo Asesor y sus posibles conflictos de interés), su estructura funcional, su Código de Ética junto con la manera como se implementa, así como la información financiera relevante para analistas, inversionistas y clientes y de manera muy importante, las donaciones, regalos,  y las contribuciones a la financiación de lo partidos políticos. De todo lo anterior, hacen parte también además los asuntos objeto de reportes de Sostenibilidad Corporativa (sobre políticas y prácticas ambientales, de derechos humanos, de responsabilidad social y de recurso humano entre otros) que ya comienzan a ser práctica generalizada en muchas empresas.

En materia de operaciones, la información relevante puede ser diferente de sector en sector. Por ejemplo, en el sector petrolero y minero, es importante saber cuanto pagan las empresas a los gobiernos de los países donde operan en forma de regalías y otros pagos, sus reservas, producción y costos. Esta información les permite a los inversionistas saber si son compañías rentables y el riesgo a que están expuestas; le permite a las empresas disminuir los riesgos de extorsión y recibir reconocimiento por sus contribuciones a la comunidad; le permite a la sociedad civil saber cuanto esta recibiendo su gobierno de ingresos y hacerlo responsable por que los ejecute eficientemente y en beneficio de la comunidad; le permite a las autoridades de control verificar si se están pagando los impuestos adecuadamente y si la contabilidad corresponde a la realidad. En el sector de construcción e infraestructura resulta relevante por ejemplo conocer cuales son los contratistas, subcontratistas y socios estratégicos. Eso disminuye las oportunidades de colusión, le permite a las empresas beneficiarse de la buena reputación de sus contratistas y clientes, y le permite al Estado hacer un mejor seguimiento de sus contratos públicos.

En últimas, la transparencia es un tema de responsabilidad y gobernabilidad corporativa, pero también es un tema de estrategia empresarial: es un hecho que la transparencia paga. No basta con ser bueno hay que parecerlo. Por esto sorprenden los resultados de la “Primera encuesta nacional sobre prácticas contra el soborno en empresas colombianas”  realizada por Transparencia por Colombia junto con la Universidad Externado en Julio del 2008¹ ,  los cuales muestran que de las empresas encuestadas, el 57% dice tener  una “posición de rechazo frente al pago de comisiones indebidas par agilizar trámites” pero sólo el 36% dice darla conocer a sus empleados y terceros. En el mismo sentido sorprende que a pesar de que 65% de las empresas encuestadas manifiestan tener “cómo política nunca hacer contribuciones políticas” pero solo el 20% manifiestan dar a conocer a sus empleados y a terceros esta posición. Uno se pregunta: si no comunican sus políticas, ¿Cuál es la utilidad de tenerlas?

¿Pero si paga?

La rentabilidad y la valoración del mercado de las empresas dependen de una gran variedad de factores. Sería ingenuo sino desacertado pensar que la sola transparencia genera valor; pero es un hecho cierto que contribuye.  Por ejemplo, en Mayo del 2008 Transparencia Internacional publicó un estudio cuya realización lideré y escribí con un importante grupo de expertos sobre la transparencia de 42 compañías petroleras y sus operaciones en 21 países² ; varios analistas han coincidido en afirmar que las empresas que en nuestro estudio resultan entre el grupo de las mas transparentes tienden a mostrar mejores valoraciones de mercado que las que son menos transparentes. También es cierto que la corrupción, el abuso, la extorsión y el fraude son más difíciles cuando hay transparencia; entre otras por que el costo de vigilar disminuye. Si no, pregúntenle a los accionistas de Siemens. En la transparencia hay una gran oportunidad.

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* Este artículo lo escribí para Transparencia por Colombia –Sección de Opinión online. El link original se puede consultar aquí: http://www.transparenciacolombia.org.co/OPINION/tabid/64/ctl/Details/mid/774/ItemID/121/Default.aspx.

1.  La encuesta se puede consultar en http://www.transparenciacolombia.org.co/Portals/0/descargas/publicaciones/Cuaderno15%20web.pdf
2. El estudio titulado “Informe 2008 sobre la Transparencia en los Ingresos Provenientes de las Compañías de Petróleo y Gas”  puede consultarse en http://www.transparency.org/policy_research/surveys_indices/promoting_revenue_transparency