Making Corruption Count: Red Flags and Proof Standards in Arbitration

Shefali Usha is a fourth-year B.A., LL.B. (Hons.) student at Jindal Global Law School

Keywords: Inner Conviction, Red Flags, Standard of Proof

Dealing with corruption in international arbitration is complex. It happens secretly, and there is no clear rulebook for tribunals. . This paper suggests a more practical and flexible way to handle such cases. The first part examines the international standard of proof, and the second analyzes the approach of Indian courts. It argues that tribunals should use the “inner conviction” approach from European law, which lets them look at the overall picture and allows flexibility instead of demanding strict proof. Thus, the standard of proof used will depend on the specific facts of the case.. It also recommends using red flags as a structured tool to assess indirect or circumstantial evidence.

1. Introduction

Instruments like the UNCAC and OECD Anti-Bribery Convention illustrate corruption through various offenses, rather than giving a definition. In practice, "corruption" acts as an umbrella term, often used interchangeably with bribery, despite encompassing a wider range of covert misconduct. In contract-based arbitration, if the arbitration agreement itself was obtained through corruption, tribunals may deny jurisdiction. But if only the contract is tainted, that issue usually goes to the merits. In treaty-based cases, corruption can lead to dismissal for lack of jurisdiction if the investment violates local law.

Corruption is inherently secretive. Bribes are rarely paid openly or leave clear audit trails. In World Duty Free (para 121), the arbitral tribunal faced an anomaly. This ultimately led to landmark decisions that “bribery is contrary to the international public policy of most, if not all, States” (para 157). This recognition of corruption as a matter of public policy both at the international and transnational levels has necessitated arbitral tribunals to engage with questions of jurisdiction, admissibility, evidentiary standards, and the legal consequences of corrupt conduct. 

On this note, Lucinda Low has elaborated on key obstacles that are apparent in cases of corruption. First, there’s no universally accepted definition of corruption, tribunals must interpret the specific misconduct alleged through applicable laws and treaties.  Second, proving corruption requires tribunals to rely on circumstantial evidence and “red flags,” though these indicators alone do not constitute proof. Tribunals must navigate the burden and standard of proof, balancing calls for flexibility with the need for probative evidence. . Arbitrators are bound by party consent and the arbitration rules, and unlike state authorities, they can’t compel evidence or conduct raids. In practice, tribunals may stay proceedings if criminal investigations are ongoing or use tools like adverse inference if a party withholds key evidence. Lastly, the consequences of a corruption finding are still evolving and debated - whether to dismiss a claim outright, apply a proportional remedy, or consider a state's or company’s compliance effort. For the purposes of this paper, the focus will be on the standard of proof.

2. Standard of Proof (Part I)

2.1 International Position

The burden of proof usually lies with the party making the allegation. Yet, some scholars argue that once initial evidence of corruption appears, the burden should shift to the accused. This shift is justified since corruption is difficult to prove, and an innocent party should be able to rebut the claim with evidence. The jurisprudence on the standard of proof has developed from two systems: common law (adversarial) and civil law (inquisitorial).

(i)             Higher standard of proof

Some tribunals have applied a higher standard of proof, sometimes even approaching close the one used in criminal matters. This is usually in very serious cases of corruption or fraud.An ICC survey showed a 'high' standard was applied in 14 of 25 cases. . In the EDF v Romania, the tribunal categorically noted that corruption is “notoriously difficult to prove” and yet still demanded a “clear and convincing evidence.” Partasides argues that the standard of proof for corruption shouldn’t be lowered but it also shouldn’t be raised because doing so would unfairly burden the party alleging corruption, especially given how difficult such misconduct is to prove due to its secretive nature. Moreover, in commercial arbitration, there is no justification for applying criminal law standards as no criminal liability is at stake.

(ii)           Balance of probabilities

Relying on a lower standard of proof would enable tribunals to 'draw more heavily on circumstantial evidence in their factual findings and play a more significant role in resolving disputes concerning corruption. The Westinghouse v. Philippines is an apt example where a US District Court overruled an arbitral decision for using a standard stricter than the preponderance of evidence for finding corruption. A similar approach was adopted in the Uzbekistan gas case, where the tribunal accepted corruption was established on a balance of probabilities based on red flags and circumstantial evidence.

While applying the standard of proof, it is important to note how questions of corruption usually come up in international arbitration. In most arbitration proceedings, corruption is raised as a ‘shield’ to defeat the claimant’s case. In investor-state arbitration, the respondent state may argue that allegations of corruption deprive the tribunal of jurisdiction. In commercial arbitration, the respondent may seek to invalidate a contract on the grounds that it was procured through corrupt means. In certain cases, allegations of corruption can also be used as a ‘sword’. If the proof standard is too low, states could benefit from a deal and later use corruption as an excuse to back out. But if the standard is too high, proving corruption becomes nearly impossible because arbitration is private and tribunals lack strong enforcement powers.

3. Standard of Proof (Part II)

3.1  Indian position

In Ayyaswamy,[1] the Court distinguished between “fraud simpliciter” and serious fraud affecting the public domain, viewing the latter as cases involving complex facts and extensive evidence, rather than based on the nature of the legal rights affected. Thus, it created an inherently discretionary standard prone to inconsistent application. The lack of a uniform method leads to unpredictability. The Antrix-Devas case shows the same problem, just at a later stage. After Antrix cancelled the 2005 Devas‑Antrix satellite‑services contract in 2011, Devas’s foreign investors-initiated ICC arbitration. In September 2015, the tribunal awarded Devas US $562.5 million plus interest, finding that Antrix had unlawfully terminated the agreement. India never raised corruption or fraud as a defense during those proceedings, only doing so later in domestic winding‑up petitions. In 2021, the Supreme Court agreed with the finding of “prima facie fraud” by NCLT without explaining how much or what kind of evidence was enough to prove it. Supreme Court concluded that despite the Tribunals' use of the term "prima facie," their findings were sufficiently detailed to meet a higher standard.^[2]  This dismissive approach leaves the standard of proof vague and contentious, confusing both arbitrators and courts about what evidence is required.

3.2 Towards a Practical Standard of Proof: A Middle Path

In this light, adopting a more flexible and realistic approach like the “inner conviction” or “conviction intime” standard as developed under the European Continental legal tradition would benefit practice and lead to more just outcomes. This principle is centered on a straightforward question: whether the evidence presented is enough to convince the judge or arbitrator in favor. This approach allows decision-makers to evaluate how the facts fit together as a whole. It offers a balanced path - more flexible than strict criminal standards like “beyond a reasonable doubt,” but more rigorous than the lower civil threshold. It is a more context-sensitive, intuitive evaluation that focuses on what persuades, not just what is proven on paper. The basis for a judgment isn't just the evidence placed before the tribunal by the parties but it also includes the judge or arbitrator’s own wisdom, experience, and understanding.

The Metal-Tech case serves as a strong example of how arbitral tribunals can manage corruption claims. This case essentially pushes for two-step framework: (1) Burden-Shifting i.e., where prima facie indicia of corruption are present, the burden of proof shifts to the accused party; and (2) Adjusting the Standard i.e., if the accused fails to disprove the allegations, the tribunal may apply a suitable standard of proof to determine whether corruption occurred.  Another great example is Westacre v. Yugoimport (para 6), where Lord Justice Waller made it clear that if a claim is to be dismissed on the grounds of bribery, the tribunal must actually be convinced that bribery took place. A mere suspicion would not do. There needs a firm and reasoned belief based on what’s been properly presented and tested during the proceedings.

However, the flexible inner conviction standard risks being criticized as a highly subjective approach, allowing general red flags like country reputation to unfairly prejudice the accused party and jeopardize due process. Furthermore, the emphasis on inquisitorial sua sponte investigation can lead to tribunals exceeding their mandate and violating the essential principles of party autonomy in arbitration. Despite these drawbacks, the framework enables a more accurate understanding of how corruption operates; furthermore, its dangers can be curbed through guidance on how arbitrators may approach such issues, thereby providing much-needed clarity.

3.3 Role of Red Flags in Supporting the Standard of Proof

​            The ICC document, "Red Flags or Other Indicators of Corruption”, serves as an excellent entry point for those unfamiliar with the complexities of bribery and corruption in arbitration. The ICC Report introduces a three-step framework: (1) identification of red flags categorized into general indicators, such as a country's corruption reputation or involvement of politically exposed persons, and specific indicators, like unusual payment structures or lack of transparency; (2) validation of these red flags through evidence, considering mitigating factors and utilizing tools like audits and due diligence reports; and (3) assessment of the validated red flags within the broader context of the case to determine their evidentiary significance.  Red flags, as identified by the ICC, are warning signs that may point to corruption or fraud. They must be viewed collectively and connected through a demonstrable causal link to disputed conduct rather than in isolation. This complements the flexible “inner conviction” approach, as it allows tribunals to assess indirect evidence in a structured and fair way.  A similar approach in the Antrix-Davas Sagas, might have worked in India’s favour, despite its failure to raise timely corruption concerns.

In the Antrix-Devas case, several indicators aligned with these red flags. For instance, Devas was incorporated shortly before securing a substantial contract with Antrix, despite lacking the necessary experience and infrastructure. Additionally, the agreement was signed without a competitive bidding process, and there were subsequent allegations of funds being siphoned off to foreign entities. W hile it is crucial for India to raise corruption or fraud claims in time, a red-flag approach could still have streamlined the arbitration, even if no corruption was alleged, particularly when the tribunal itself developed concerns about possible corruption. Unfortunately, in the Antrix-Devas case, the Indian Supreme Court missed an opportunity to bring this more balanced and functional standard into Indian legal practice.

Spentex v. Uzbekistan  is a good example of the red flags approach. The tribunal here addressed corruption allegations by looking at indicators of corruption. These included unusually high commissions, concealment of contracts, and lack of legitimate services for payments. Despite no direct evidence of payments to Uzbek officials being found, the tribunal concluded that the most compelling explanation for the events that surrounded the tender process was that it involved corrupt activities by intermediaries. This case is notable for being one of the first where bribery was successfully proven based on an accumulation of "red flags," with the tribunal's methodology of "connecting the dots" going beyond just red flag analysis to form a plausible conclusion from the totality of evidence.

To conclude, using a flexible standard of proof like inner conviction, along with the ICC’s red flag guidelines, can make it easier to deal with corruption in arbitration. This approach fits with Article V(2)(b) of the New York Convention, ensuring enforcement isn’t refused on public policy grounds. A detailed corruption finding using the 'inner conviction' standard provides national courts (as the final enforcement bodies) a strong basis to either enforce a 'clean' award, or to justly refuse enforcement of a 'tainted' one under the NYC's public policy exception. Therefore, it’s important for arbitrators to use tools like inner conviction and red flags to deal with corruption properly and make sure the final award can actually be enforced. Together, they give tribunals a clear and fair way to approach such cases.

[1] A. Ayyasamy v A. Paramasivam, (2016) 10 SCC 386.

[2] Devas Multimedia Private Ltd v Antrix Corporation Ltd. and Ors MANU/SC/0046/2022MANU/SC/0046/2022, paras 12-13.