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Partner Flore Poloni and associates Thibaud Roujou de Boubée and Kimberley Bazelais examine in Global Arbitration Review why the French Court of Cassation’s recent decision in Belokon to affirm the annulment of an investment treaty award because of signs of money laundering is less than satisfactory.

This article was published in Global Arbitration Review, 19 May 2022, here.

In 2017, the Paris Court of Appeal caused shockwaves in the arbitration community by granting Kyrgyzstan’s petition to annul a US$15 million investment treaty award in favour of Latvian businessman Valeri Belokon on the ground that it would violate international public policy by allowing him to benefit from the proceeds of illicit activities.

Traditionally, a judge tasked with verifying that an arbitral award conformed to international public policy was not expected to conduct a review of most factual and legal issues as these fell to the arbitral tribunal to determine. Surprisingly, however, the judge in the Belokon case decided to annul the award even though there had been no conviction yet in pending criminal proceedings for money laundering. Perhaps more surprisingly still, the court ruled that evidence that was not submitted during the arbitration was admissible in the context of the court’s review of the award – subject to due process principles – and that the court was not bound by the arbitral tribunal’s findings.

The Indrago case one year earlier had somewhat paved the way for this, by broadening the scope of the review to be undertaken by the judge, but at least then the judge still applied the well-known Thalès standard that the violation of international public policy must be “manifest, effective and concrete”. Under that standard, only a breach of international public policy so blatant and offensive that it could not be ignored could result in annulment or a refusal to enforce. That level of scrutiny nevertheless did not then imply a detailed review of the facts underlying the allegations, or putting aside the contents of the award to analyse new evidence. The Belokon case seemed to change this.

The Belokon case raised many unsettling questions for the arbitration community. Did the set-aside decision call into question the trust put in arbitration as a dispute resolution mechanism? Would this extensive review by the French courts be limited only to allegations of breach of international public policy? Was the reason behind such change that criminal proceedings were pending in the case at hand? Was this change in methodology specific to certain criminal offences internationally recognised by treaties? And did this new interventionist view of the judge’s role in enforcing and setting aside awards spell the end for Paris as a favourable arbitration seat?

Further decisions by the Paris Court of Appeal confirmed this new approach, with the Alstom, Sorelec, and AD Trade decisions notably developing the “red flags” method. Nevertheless, questions lingered as to what the Court of Cassation’s stance would be; whether the standard had actually changed; and, if a review of the merits was now possible, to what extent.

Five years later, we have some answers. The French Court of Cassation’s March 2022 decision rejecting Belokon’s challenge of the annulment of his award clearly shows the standard of review has indeed changed. However, it also raises a whole new set of questions, leaving the arbitration community still unsatisfied with the current situation.

The new test: a “characterised breach of international public policy”

Belokon brought his investment treaty claim over his interest in a bank that Kyrgyz authorities put into administration amid a financial fraud probe. Kyrgyzstan alleged that the bank had been used to facilitate money laundering and other criminal activities. In its 2014 award, however, a Paris-seated UNCITRAL tribunal ordered Kyrgyzstan to pay compensation after finding the state had failed to substantiate its money laundering allegations.

It is important to note that criminal proceedings had been initiated in Kyrgyzstan against Belokon and although these did not lead to any conviction for lack of a proper prosecution, the Paris Court of Appeal was satisfied the claimant’s “tremendous success, in such a limited amount of time, in such a poor country, could not be explained by orthodox banking practices”.

The Court of Cassation unsurprisingly endorsed the Court of Appeal’s finding that it falls within the judge’s role to look into whether the recognition or enforcement of an award is likely to infringe international public policy standards, by allowing a party to benefit from illicit activities. It confirmed the Court of Appeal’s approach in conducting an extensive review of alleged breaches of international public policy, allowing it to go beyond the evidence submitted before the arbitral tribunal. The Court of Cassation further endorsed the position that it is not necessary for the underlying criminal offence to be established to annul an award, so long as indications of fraudulent activities show a “characterised breach of international public policy”. This standard is therefore broader than the previous Thalès standard, but does not set a clear framework for how it is to be applied.

Why the solution remains unsatisfactory

The Court of Cassation’s confirmation that evidence submitted to show a breach of international public policy is admissible in court even when it has not been adduced in the arbitration, and that the judge will – at the enforcement or annulment stage – perform a new and independent review from the one conducted by the arbitral tribunal might appear to be a virtuous solution to fight violations of international public policy. It is not, however, necessarily the most effective way of doing so.

First, it blurs the distinction between a full de novo review, and extensive control of the award.

While the Court of Cassation insisted that the Court of Appeal did not undertake a de novo review of the underlying facts, many commentators consider that this decision shows appellate judges are indeed  authorized to cross into this previously forbidden territory.

With the court confirming that it is neither limited to the evidence submitted during the arbitration proceedings, nor bound by the factual findings and legal conclusions of the arbitral tribunal, it is difficult to argue that annulment proceedings have not become an arena for a whole new litigation on the merits of the dispute – at least as far as the allegations of violation of international public policy are concerned. Now the question is whether this will be the case for all kinds of breaches or only for those defined as a priority by internationally recognised standards such as the fight against corruption (at present, money laundering is the only allegation for which we have any certainty).

Second, although the Court of Cassation provided a new standard to apply concerning international public policy violations, there is still as much uncertainty regarding how it will be applied in practice. For example, what constitutes a “characterised” violation? Although it seems clear that this standard is broader than the Thalès criterion, the framework remains unsettled as far as the evidence that is required. Courts have used and will continue to use the “red flags” test, as for instance in the Airbus Helicopters decision). The difficulty with this approach is that it gives nearly unlimited discretion to the judge, who may give weight to different elements from one allegation to another (although the fact that applications to annul international arbitration awards are heard by a single chamber at the Paris Court of Appeal should reduce this difficulty). It is also a bit disconcerting that while the Court of Cassation and the Paris Court of Appeal cited the 2003 Merida Convention Against Corruption as a reflection of an international consensus on the prohibition of money laundering, they did not actually apply the standards put forward in the Convention and specifically designate the offences as a criminal judge would be required to do.

Third, as a more insidious consequence, there is a substantial risk that parties, and in particular state parties, will use allegations of corruption as a loophole to escape the consequences of an award, a safety net in the event the state loses the arbitration.

In this regard, states are likely to have much easier access to evidence in cases of corruption, as they may hold all documentation of bribes or kickbacks, may have access to criminal or regulatory investigations, and may potentially control the testimony of certain officials.

As the French courts markedly place much importance on due process guarantees – both Belokon decisions taking great care to state that the judge’s extensive liberty in examining evidence is only limited by the adversarial principle and equality of arms – it seems odd to choose not to set any safeguard against a lopsided and inequitable use of the courts’ position.

If one is to find some comfort in the recent decisions, it will be the deference nevertheless shown towards the arbitral tribunal in the most recent Court of Appeal decisions. This is essential, since the amount of time that French judges can dedicate to cases before them is relatively low, and arbitral tribunals are arguably better equipped than annulment or enforcement judges to review the merits of a case.

The Court of Cassation already hinted at this in its Alstom decision, by insisting upon the importance of the arbitral hearing transcripts, which had been overlooked by the Court of Appeal.

Additionally, the Paris Court of Appeal in its Santullo decision of 5 April, which annulled an award on grounds of corruption using the new standard set by the Court of Cassation, took good care to note that although the arbitral tribunal had rightly applied the “red flags test”, further elements had been uncovered since the award, such as Swiss criminal proceedings confirming the allegations of corruption, which the arbitral tribunal could not have been aware of. The court thus took care to differentiate its findings from that of the tribunal for objective reasons.

In line with this observation, a solution that has been repeatedly offered is that if new facts arise, the tribunal should revise the award instead of the national judge. However, this avenue seems not to have been considered by the French courts yet.

Don’t expect more annulments

While the Court of Cassation’s decision seemingly broadens the criteria for annulment, awards being set aside (even post-Belokon) should remain the exception. Nevertheless, certain parties will be tempted to trigger further investigations at the annulment stage, thus expanding the volume of evidence analysed. Accordingly, while this may now result in a greater review of the facts by the French courts than was previously the case, such evidence will nevertheless be carefully reviewed, and so this does not mean that there should be a greater number of annulments as shown by recent cases where the court refused to find a breach of international public policy on grounds of corruption (Paris Court of Appeal, 7 September 2021, 28 September 2021).