Monthly Archives: August 2011

Will Thailand Ever Ratify ICSID? And Why it Should.

ICSID, the acronym for the International Centre of the Settlement of Investment Disputes, is “an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Convention) with over one hundred and forty member States.”  It provides a forum and has rules for arbitrating disputes between foreign investors and countries.  It covers disputes similar to the one we saw between Walter Bau and Thailand recently.

Indeed, the bi-lateral investment treaty (BIT) between Germany and Thailand that Walter Bau employed to commence arbitration proceedings against Thailand provides that if “both” countries become parties to the Convention, investment disputes will be arbitrated under ICSID rules rather than the rules set out in Article 10 (3) of that treaty. This provision might as well have said: “if Thailand (finally) becomes a party to the Convention”, since Germany is already a party to the Convention.

At least 147 countries have ratified ICSID.   China is one of them.  Virtually every developed country (except Canada?) and the vast majority of less developed countries have ratified the Convention.  A few countries, such as Namibia and the Russian Federation, have not.  Thailand signed the Convention on 6 December 1985, but has not yet ratified the Convention?   Why?

To be fair, some commentators claim that ICSID and BITs containing investment protection provisions unfairly override the ability of countries, particularly less developed countries, to exercise their regulatory powers.  To be honest, I have never seen ICSID or a BIT prevent a country from legitimately exercising its regulatory powers.

The irony here is that Thailand is already a party to at least 30 treaties that contain some form of arbitral requirement for investment disputes.  They don’t seem to have deterred Thailand from exercising its regulatory powers.  They have created a hodge-podge of inconsistent obligations on the treatment of foreign investors.

Further, even though the Thai government has been reluctant to agree to arbitration of investor disputes, in some matters it is already obliged to arbitrate investment disputes. (The lesson for investors here is simple: look beyond your contract to possible treaty obligations.)  And because arbitration under a BIT is generally subject to ad hoc rules, that arbitration “is subject to the rules of the arbitration law of the country where the tribunal has its seat.”   The Walter Bau matter arose out of Swiss arbitral proceedings.

As Christoph Schreuer observed in The Dynamic Evolution of the ICSID System:

Compared to ad hoc arbitration, the ICSID Convention offers considerable advantages: it offers a system for dispute resolution that contains not only standard clauses for arbitration and rules of procedure but also institutional support for the conduct of proceedings.

Because of these advantages and, quite frankly, the prestige and integrity of ICSID, arbitral proceedings under ICSID also provides a level of perceived legitimacy that ad hoc arbitration lacks.  When a recognized and well-respected international body such as ICSID administers arbitral proceedings, it’s easier for a government to explain why the award must be paid and fend off misinformed domestic complaints about honoring an unfavorable award.

Those advantages did not exist in the Walter Bau matter.  And, because of what occurred in the Walter Bau matter, I suspect it is even less likely now Thailand will ratify the Convention and join ICSID.  There is further irony here since, if Thailand had adopted ICSID, I suspect that it would have been much easier to pay the award in the first place and thereby avoided the domestic controversy we saw when Walter Bau tried to enforce the award.

The Peculiar Local View of Arbitration

When reporting on disputes subject to arbitration, the Thai press typically says or suggests that the arbitration proceedings are, as a matter of common practice, subject to some form of automatic and independent de novo review by a court.  This is particularly true when the local press is reporting about disputes with the Thai government, but you also see this in reporting about commercial disputes between private parties.

The recent case involving the Boeing 737 in Munich was just an example of this practice in the context of a dispute with the Thai government, made more unusual by the extraordinary claim that a Swiss arbitral award could be directly challenged in a U.S. Court.  More recently, in a description of the dispute between DTAC and CAT, the Bangkok Post reported: “If the arbitrator rules in favour of CAT, DTAC can appeal to the Central Administrative Court.”

Is this how arbitration really works?  Not at all, but reading the Thai press you could be excused for thinking otherwise.  This is not the international practice and it is not even supposed to be the practice in Thailand.

The Thai government does seem to be reluctant to agree to arbitration in the first instance, but once it agrees, it should not object to arbitration and should comply with the arbitral award, absent extraordinary circumstances.  This is basic.

Thailand is one of the original signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, and the New York Convention provides very limited grounds for refusing to enforce an international arbitral award.  Thailand is not alone in agreeing to the New York Convention.

At least 144 other countries are signatories to the New York Convention, including every major trading partner of Thailand.  The domestic legislation that signatories to the New York Convention enact and the policies they following in recognizing and enforcing international arbitral award may vary somewhat, but this idea that arbitral awards are somehow subject to automatic judicial review is very peculiar.

Parties do go to the court, but in the U.S. a motion to vacate an arbitral award may be heard only in the courts of the country where the arbitration occurred or in the courts of any country whose procedural law was specifically invoked in the contract calling for arbitration of contractual disputes.

When parties do go to court following issuance of an arbitral award, this typically only occurs to have the arbitral award recognized and enforced.  And for obvious practical reasons (cost and inconvenience), this generally only occurs when a party fails to comply with an arbitral award.  Even in China:

…if an Intermediate People’s Court intends to turn down an application for enforcing an award of a PRC foreign related arbitration commission or a foreign arbitration award, it must refer the application to the Higher Court for review before making the decision. If the Higher Court is of the same view as the Intermediate People’s Court, it must further refer the application to the Supreme Court at Beijing and no decision should be made until the view of the Supreme Court is sought. This practice assists to alleviate the concern of some foreign parties that awards may not be enforced in China due to local protectionism, especially if the losing party is a state-owned enterprise.

But what about this notion in Thailand that arbitral awards are subject to automatic review by a court?  There were proposals to change Thai law to prohibit arbitration between private parties and governmental agencies, but those proposals were never enacted.  And there is no general provision of law providing for automatic de novo review of arbitral awards by courts, administrative or otherwise.

Could these be a feature of a contract between a private party and the Thai government?  If so, I have never seen such a provision providing for judicial review following arbitration.

In negotiating contracts with government agencies, I have encountered strong resistance to agreeing to any form of arbitration at all.  And in negotiating contracts on behalf of foreign parties with local commercial parties in Thailand, I have sometimes encountered reluctance to  agree to arbitration outside of Thailand. But I have never seen anyone even suggest a clause providing for automatic judicial review of the arbitration.

In the U.S., the courts do not permit a direct appeal of an arbitration award to an appellate court even when the parties have agreed to such a procedure. Johnson v Well Fargo Mortgages, Inc. An agreement for judicial review on the merits of an arbitral award runs contrary to the very purpose of arbitration. It is well established that:

The number-one benefit of arbitration is that it serves as a forum to resolve disputes outside of the judicial system. Arbitration can be fast, quick and easy, whereas lawsuits can drag on for years and years.

So why does this idea that arbitral awards should and commonly are subject to appeal persist in Thailand?

FCPA Compliance Work Just Got Harder in Thailand

Thai laws are not unique in creating perverse incentives that lead to unintended and unwanted consequences.  On 21 July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. The Dodd-Frank Act primarily introduces major changes in the regulation of the financial services industry, but it also permits “whistleblowers” (click on this link for background on this part of the Frank-Dodd Act) in Foreign Corrupt Practices Act (FCPA) and securities fraud cases to claim a 10% to 30% reward in enforcement actions where the penalties recovered exceed U.S.$1 million.  Was this good policy or not?  I can see arguments on both sides of this issue, but I have major reservations and fear this could be a serious mistake.

We have seen how the Thai Customs Department’s bounty system creates perverse incentives in the enforcement of Thai Customs laws.  Is there something here for U.S. regulators to learn from Thailand?

The bounties from several recent high several high profile FCPA cases would have exceeded 100 million dollars.  As James Tillen, George Clarke, and Kevin Mosley from Miller & Chevalier reported in Corporate Compliance Insights:

If a Siemens whistleblower had been eligible for the 30% reward proposed in the current draft of the legislation, he or she could have received a windfall of $496 million.  In the 2009 case against Kellogg Brown & Root (KBR) and former parent company Halliburton, the DOJ imposed a $402 million fine and the SEC assessed $177 million in disgorgement, for a total of $579 million in penalties.  The windfall for a whistleblower in that case could have totaled $173 million.

By contrast, consider the relatively “meager” incentives the Thai Customs Department offers tipsters.  Consider the results of that incentive system.  Imagine the possibilities here.

In a recent New York Times article, Sean McKessy, chief of the new S.E.C.’s whistle-blower office, said: “The program “will strengthen our ability to carry our mission and it will save us much time and resources in the process.”  Mr. McKessy is quoted in this same article as saying the small agency: “has already received an uptick in quality tips, including lengthy letters laying our elaborate schemes.”  The agency has a new website here with easy to follow instructions on how to submit tips.

If you don’t want to complete the form or if you are concerned about the repercussions of submitting a tip directly, simple Google “FCPA whistleblower” and I am sure you will have no problems finding one of several U.S. firms that will happily help in submitting a tip.  The rewards are great.  I ran this same search several times here in Thailand and each time I found several such firms on the front page of my Google search results.

The United States Chamber of Commerce is not happy about this (please do not confuse AMCHAM Thailand with the U.S. Chamber of Commerce, although I personally sympathize with their concerns on this issue).  According to the New York Times, David Hirschmann, president and chief executive of the Chamber’s Center for Capital Markets Competitiveness says:

In approving this new whistle-blower rule, the S.E.C. has chosen to put trial lawyer profits ahead of effective compliance and corporate governance…This rule will make it harder and slower to detect and stop corporate fraud.

The dig at “trial lawyer profits” is a cheap dig, but he has a point.  It’s early days, but having been involved in several internal FCPA investigations here, having seen how the Thai Customs incentives work in practice and now seeing the early signs of how the whistleblower program is being promoted on the internet, I think its a strong point.  There are other troubling signs.

A whistleblower doesn’t need to report violations internally in order to obtain a reward.  The FCPA Blog comments:

Whistleblowers will run to the SEC whenever there’s a whiff of overseas bribery. They won’t talk about it with their bosses inside the company first. Why should they? That would be like giving away a lottery ticket. And why expose themselves to retaliation? If they go straight to the SEC, they’re immune from corporate discipline. So they’ll go to the feds, taking with them as many internal emails, audit documents, and bank records as they can carry.

I hope I am proven wrong, but my hunch is that this new development will make FCPA compliance work harder, much harder, here in Thailand.  I have seen how things tend to work here and the incredible challenges that foreign companies already face in places such as Thailand.  Stifling the supply side is important, but we really need to see more action curbing the demand side.

Diageo – Victim or Perpetrator?

The Thai press has reported  extensively on the settlement reached between the major multinational alcoholic beverages company, Diageo plc, and the U.S. Securities and Exchange Commission (SEC) after Diageo self-reported violations of the U.S. Foreign Corruption Practices Act (FCPA). Most of the coverage seems to consist of speculation – or perhaps “hints” is the better word – about the identity of the “Thai government official and foreign political official” retained by Diage to provide “lobbying services…in connection with several important tax and customs disputes that were pending between Diageo and the Thai government”.  This is understandable.  The SEC’s Order (in particular, pages 5 and 6) instituting the claim, imposing a cease and desist order and civil penalties provides plenty of hints.  Fingering the ‘bad guy’ makes for simple and exciting press.

But there is another, more fundamental, issue here: why is it that some Thai agencies seem to attract more than their fair share of corruption cases?  “Bribery is particularly concentrated in a few governmental sectors in charge of large financial transactions: the Land Department, Tax and Customs Department, the Transport Department, and the Police Department”, according to the Business Anti-Corruption Portal’s report on Thailand. The Diageo matter involved the Customs Department, and that is not surprising.

The Bangkok Post reports that: “Numerous business surveys have placed the Customs Department at the top of the list of government agencies with serious corruption and transparency problems.”  A large part of the problem at Thai Customs is the incentive system for rewarding tipsters and Customs officials who uncover alleged violations of Thai customs laws.  The Bangkok Post reports:

Previously, officials would get cash rewards of 25% while outsiders would get 30%. However, there were no ceilings. There were cases involving billion-baht shipments where the rewards would be staggering. This led to officials spending too much time trying to find fault with shipments.

Reform in the form of reducing numbers has been the approach, but many question if reducing ‘the take’ rather than changing the underlying policy is really effective. Many also ask why such a system was allowed in the first place; the Bangkok Post reports: “Pornsil Patchrintanakul, the deputy secretary-general of the Board of Trade says the cash rewards should have never existed.”

And why allow any form of pernicious incentive system like this to continue even if the incentives are more modest? Another Bangkok Post article reports: “Even capping the ceiling of each case at 5 million baht might not solve the problem.  For shipments of larger value, officials could simply break them down into smaller cases that meet the 5-million-baht limit.”   The prior Bangkok Post article provides part of the answer about why real reform is so difficult:  “A senior Finance Ministry official said there once was a proposal to abandon the reward system but there was serious opposition from the Customs Department.”

But another, less reported, legal ruling highlights the flaws in Thailand customs law regime: the WTO Ruling and WTO Appellate Body ruling in the Philipp Morris case.  The WTO case concerned the valuation of imported cigarettes, but the fact that the imported products in this particular WTO case were cigarettes should not divert attention to its more important findings.  The rulings by the WTO panel and a WTO Appellate Panel are far more important for what they say about the rule of law in Thailand.

The WTO not only found that Thailand failed to comply with its international obligations in setting values for these imported products for tax purposes, but also that: “Thailand…fail[ed] to publish laws and regulations pertaining to the determination of a VAT for cigarettes and the release of a guarantee imposed in the customs valuation process.”  It is may be hard to garner sympathy for a cigarette producer, but this case was not about protecting the Thai public from cigarettes.  How is any company importing goods into Thailand supposed to do business when its imports are subject to unpublished laws and regulations?

If the subject matter of the dispute, cigarettes, is still a concern, consider this from the WTO: “Philippines challenged the Thai government system under which certain government officials simultaneously served on the board of TTM, a state-owned domestic cigarette manufacturer.”  This wasn’t a public health issue.  It was a trade issue pure and simple.

But even more troubling, according to the WTO’s summary of the case: “[t]he Panel also found that Thailand acted inconsistently …by failing to maintain or institute independent review tribunals or process for the prompt review of guarantee decisions.”  No independent review of decisions made by officials with strong financial incentives to find violations?

This is not about cigarettes or even about the alcoholic beverages that Diageo produces and imports.  It’s about the rule of law.  And the inevitable friction between: (a) legal regimes that permit officials to exercise unfettered discretion when identifying violations pursuant to unclear – or here – unpublished regulations; and (b) and increased enforcement of foreign anti-corruption laws.  Clashes are inevitable.

The U.S.’s FCPA prohibits the payment of bribes to gain a business advantage.  In US vs Kay the fifth circuit held that prohibited payments (illegal bribes) not only include payments to obtain, say, government concessions or contracts, but also include payments made to reduce import duties and reduce taxes if they are made to obtain an unfair business advantage.  But what if they are simply necessary to even do business at all in a particular country?

This feature of the FCPA and other foreign anti-corruption laws puts businesses, particularly foreign businesses, in a very awkward position when they have to deal with less than transparent foreign government agencies.  It often places companies doing business in those jurisdictions with few, if any, legitimate options.  And it is not limited to only the Thai Customs Department.

What might be characterized in the U.S. as payment made to obtain an “unfair” business advantage is often seen as a necessary payment so as even to be able to do business.  It doesn’t provide the business with an unfair business advantage.  It is often simply seen as an unsavory requirement for doing any business at all in some jurisdictions.

This is not a justification for such payments and I am not involved in or familiar enough with Diageo’s situation to say if that is what happened here, but this clearly does happen in practice in Thailand.  More developed countries are more aggressively enforcing their own anti-foreign corruption laws, and this is a positive development.  But the increased enforcement on the supply of the corruption problem must be matched by increased reform on the demand side.

Laws that provide unfettered discretion to officials and provide for little or no independent review on how such discretion is exercised are big part of the problem on the demand side.  As long as local vested interests can use such laws to tilt the playing field in their favor, they will do so.  And in doing so, they undermine local economies, create business environments conducive to corruption and – this is often missed – generate friction with the increasingly robust anti-foreign corruption regimes of more developed economies.  And because these uneven playing fields place foreign companies subject to regulation in countries with robust foreign anti-corruption laws in impossible situations, these same foreign companies will, naturally enough, often press harder for serious enforcement of international conventions and obligations that are designed to level the playing fields.

Aggressive efforts to enforce rights and obligations under the WTO, the UN Convention, the New York Convention and other international treaties and conventions will play an increasingly important role in efforts to level the playing field going forward.   We are now only seeing the early signs of this.