Corruption, Transparency and Foreign Investment: a contribution to the US BIT Model review

This is the note containing a commentary I submitted in the context of the  2004 US BIT Model review. Looking forward to your reactions. Juanita Olaya (c)

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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)


[1] For more information on the relevance of revenue disclosure for investors and host countries see for example the Extractive Industries transparency Initiative ( www.eiti.org), read the 2008 TI Report on Revenue Transparency of Oil and Gas Companies (http://www.transparency.org/policy_research/surveys_indices/promoting_revenue_transparency)  or look at the work Publish What you Pay(www.publishwhatyoupay.org ) and the Revenue Watch Institute  www.revenuewatch.org) are doing in this field. On Stabilization Clauses, confidentiality  and its risks see also the report   of the research undertaken for the UN Special representative for Business and Human Rights and published on a paper authored by Andrea Schemberf, “Stabilization Clauses and Human Rights”, a research project conducted for IFC and the United Nations Special Representative to the Secretary General on Business and Human Rights, March 11, 2008, p 17. Available under http://www.ifc.org/ifcext/enviro.nsf/AttachmentsByTitle/p_StabilizationClausesandHumanRights/$FILE/Stabilization+Paper.pdf

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