June 08, 2009
There has been a lively debate in compliance circles for some time about how best to address potentially overlapping areas of risk: corruption, money-laundering, sanctions, export violations, data privacy. This can be particularly problematic when different people within large companies are responsible for each. Dr. Mohamed Abdel Wahab of TRACE’s partner firm in Egypt prepared this summary about a small, but growing area of concern: the abuse of the arbitral process to launder money. As he describes it, it seems a new and clever way for the payer and recipient of a bribe to collude to disguise the transfer of funds.
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“Amongst the general sacred principles of international commercial arbitration is the principle of finality of arbitral awards. Awards in the context of international commercial arbitration are not usually subject to subsequent judicial review on the merits.
This pro-arbitration approach may be abused by some legal entities and money-laundering is one example of potential abusive behaviour.
This is how it works. Two or more companies or legal entities enter into a sham dispute involving monetary claims and counterclaims. These entities then turn to arbitration and commence proceedings before an arbitral tribunal where their claims and counterclaims are submitted and argued deceptively. At some stage of the proceedings, prior to the tribunal’s arbitral award, the disputants settle amicably and request the tribunal to record their settlement and render an arbitral award by consent.
The award by consent involves monetary payments as agreed by the disputants. The disputants then either enforce the award voluntarily or seek an exequatur (order for enforcement) from the competent national courts. These are generally granted without review of the merits or the facts. Thus, money is laundered and transferred through legal channels by abuse of process.
What role should the arbitrators play if they believe that the proceedings are a sham? Should they refrain from rendering an award by consent, or should they honor the proceedings?
This is a question worth answering because the potential for abuse is not exclusive to arbitration. It applies to mediation settlements as well, especially if national laws provide for direct enforcement of such settlements without scrutiny.”