Wising up to the wise guys

Organised crime is using international arbitration to launder money. Can you spot the signs?

International arbitration is booming, that much we know. But how about this – the process for settling cross-border disputes is being hijacked by criminal gangs looking to launder their illicit gains.

Don’t snigger at the back – we’re not making this up. Far-fetched as it may sound, international arbitration is not only popular with legitimate businesses unwilling to venture into far-flung courts, but also with the Mafia and its ilk as a way of cleansing the proceeds of drug deals, people trafficking and extortion.

If you need proof, allow The Law-yer to refer you to a case last year ­involving the Russian Mafia and ­attacks on Moldovan bank Moldova Agroindbank, in which a subsequent arbitration and ad hoc award were both exposed as fakes. The case ­involved Freshfields Bruckhaus ­Deringer, which helped recover the disputed shares after tracking them down through the Seychelles, Cook Islands and Belize.

You could also ask SJ Berwin partner Mark Hoyle about the extent of the problem.

Late last year the Dubai-based lawyer hosted a seminar at SJ Berwin’s London office, one of the firm’s Hot Topics series, flagging up concerns in arbitration circles that fraudulent activity was on the rise.

Fraud focus

“There have been several cases where things have happened that set the alarm bells ringing,” says Hoyle, speaking of the reasons for the seminar. “In one case arbitration proceedings settled suddenly after the parties had been fighting like cat and dog.

That’s odd, especially when it’s a case that one party looks bound to win.”

Hoyle says the response to his presentation was an audience stunned this could be taking place, shortly followed by intense interest in evidence of fraudulent activity and  the warning signs to watch out for.

“A number of people came up to me afterwards and said they’d seen similar things,” adds Hoyle.

The suggestion is clear. As international arbitration increasingly becomes the preferred method of ­settling cross-border disputes, particularly those involving countries in the emerging markets, the risk of the process being subverted by criminals is growing, leaving the lawyers ­involved potentially exposed.

The legal laundry

Clearly, crime happens. Similarly, contracts that have been awarded as a result of bribery and corruption ­occasionally become the subject of arbitrations. That, however, was not what captured the attention of those in the audience at SJ Berwin.

Speaking to The Lawyer, Hoyle says a growing concern for those involved in international arbitration, whether as an arbitrator or as counsel, is that criminal gangs are increasingly picking the dispute resolution mechanism as their preferred means of laundering the proceeds of crime.

“There are certainly rumours in the arbitration industry,” says Hoyle. “There are also rumours that certain lawyers in certain jurisdictions have been in on it. I’ve seen arbitrations that settle out of the blue. Although you never know if there’s anything dodgy going on, you can suspect.”


Suspicious minds

James Clanchy, registrar at the ­London Court of International Arbitration (LCIA), confirms he is aware of the risk that arbitration will be used for money laundering, although he adds he cannot say for certain that he has seen it in the four years he has been at the LCIA.

“There have been some cases where arbitrators have raised concerns and asked for evidence of the kind not normally required in ­arbitrations, such as asking the claimant’s main witness for an affidavit,” Clanchy reveals. “Why do it? Because of money laundering ­concerns, or to check the contract at issue is bona fide. It’s rare but it does happen. The case I’m thinking of was this year.”

White & Case partner Andrew ­McDougall, who rejoined the US firm in Paris in January this year after a spell in his father’s Canadian practice (Perley-Robertson Hill & McDougall) has little doubt that money laundering takes place within the confines of international arbitration. In fact, he wrote an article on the topic while in his previous spell at White & Case several years ago that even today generates business for him.

“I can’t say too much, obviously, but someone read my article and contacted me as a result on the day you called,” says McDougall. “It’s ­actually happened numerous times since that article was published.”

McDougall, an international arbitration specialist with more than 10 years’ experience in a range of industry sectors including construction and oil and gas, believes that occasions when the arbitral process itself is taken advantage of by gangs are less common than cases where an ­apparently legitimate contract that involves money laundering ends up in arbitration.

“There are a few things happening,” says McDougall. “There’s more cross-border trade, the world’s ­getting smaller and borders are ­disappearing. That means there’s been a growth in international ­contracts, a growth in the number of contracts with arbitration clauses and a growth in cross-border disputes. Inevitably, some of that will ­involve fraud.”

In his article, McDougall cites one example of fraud he saw personally – a contractual dispute following the acquisition of a business.

“The client discovered contracts the former management [had entered into] that had been siphoning off ­assets of the company,” recalls McDougall. “They were illegal contracts and the new management ended them, but they had arbitration clauses in them so the former management decided to arbitrate. Their line was that these were valid contracts and  they’d been unlawfully terminated, so they went to law. The result? They were illegal contracts and we were able to demonstrate this.”

McDougall says he is also aware of “a handful of cases” where the ­identity of the senior management can be hard to nail down.

“There’ll be multiple corporations and multiple locations, often in places like the Channel Islands, the Mediterranean countries, the Caribbean and so on,” he adds. “In one case there were four Channel ­Islands companies and [the paper trail] was completely circular. It was impossible to tell who owned what.”

Challenging convention

Several of the reasons for the recent boom in international arbitration make it attractive to criminals, adds McDougall.

Let’s say, two entities from two countries – for example, a Texas oil company working in Nigeria – have a dispute. Neither will want to resolve it in the other’s home court so, by ­default, they pick arbitration. The attraction to criminal gangs enters the equation along with enforceability.

“No international treaty in the world allows for the enforcement of court judgments,” says McDougall. “In contrast, the New York Convention [the 1958 Convention on the Recognition and Enforcement of ­Foreign Arbitral Awards] allows for the enforceability of awards in more than 140 countries that are signatories. That’s what makes it so attractive and as global trade grows and ­arbitration clauses are included in cross-border contracts, so international arbitration grows.”

When it comes to fraud, one of the attractions of arbitration is its private nature.

“I say ‘privacy’ rather than confidentiality because there are regional differences,” McDougall says. “In England and Wales the rules are strict – there’s an implied duty of confidentiality. In Australia and Sweden, ­however, there’s no implied duty of confidentiality and there have been court decisions about this. But ­privacy does exist. You can’t go into a hearing unless the parties agree. It’s a private process.”

That provides a level of comfort for legitimate commercial entities as well as those that are less savoury.

Who knew?

Despite McDougall’s awareness of the risk of being exposed to money laundering activities during arbitral proceedings, interviews The Lawyer conducted for this article suggest that the majority of the market remains firmly in the camp of the audience at Hoyle’s seminar – in blissful ignorance. But dig a little deeper and the signs are there.

Freshfields international arbitration partner Sylvia Noury notes that the Moldova Agroindbank case certainly started ringing alarm bells.

“We – and I think all the major firms – have strict ‘know your customer’ rules and guidelines as well as money laundering regulations,” says Noury. “There are huge hoops to jump through whether you’re taking on a client for international arbitration or a piece of major M&A. That said, one of my partners currently has a case against someone he’s pretty certain is Mafia.”

For any law-abiding reader that is an astonishing revelation, although of course, not everybody is law-­abiding and even criminals need lawyers. Among the many questions this ­scenario raises is, as Noury says, that of whether smaller firms or ­barristers are taking on clients they should not be.

She cites a case she was working on in which Freshfields was representing a sovereign government against a special purpose vehicle incorporated in the British Virgin Islands (BVI) that had a claim against the government.

“In this case they weren’t trying to get money via the arbitration process but via damages under the contract,” says Noury. “If they succeeded it wouldn’t be money laundering but getting money via a contract that had [allegedly] been corruptly procured. We see much more of that – where fraud was involved in the inititial ­investment, most often in emerging markets.

“Sometimes, when clients show up with counsel representing them on a matter where there’s a strong allegation of fraud I think ‘there’s a story there’. The thing about international arbitration is that it’s so international. People can retain counsel in another country and anyone is qualified – you don’t have to be a solicitor or lawyer in that jurisdiction.”

That said, even lawyers such as McDougall say they are satisfied the  safeguards in place to prevent money laundering are sufficient.

“There seems to be an acceptance that the arbitral process is well-equipped to deal with the increase in international arbitration and any commensurate increase in fraud,” says McDougall. “I’d agree. There’s a unique feature of the ICC [International Chamber of Commerce] – the scrutiny process of every arbitration decision. They’re all reviewed by the ICC court and the secretary of the court. That’s a safeguard and it is valuable.”

The ICC did not wish to provide a spokesperson on this issue but did provide a statement: “The ICC believes it would be extraordinarily ­difficult, if not impossible, for money laundering to happen in ICC arbitration because of the in-built protections of the ICC system and the role of the ICC court.”

Tony Marks, director of legal ­services at the Chartered Institute of Arbitrators, agrees that the likelihood of a criminal gang using one of the ­institutional arbitration bodies to launder money is unlikely, but says that does not mean it is not ­happening.

“Most international arbitration is done through one of the main global institutions, such as the ICC, but there’s also ad hoc arbitration,” Marks says. “It would be very difficult to set up an arbitration through one of these institutions because of the checks and balances; but with ad hoc arbitration you simply engage an ­arbitrator and it’s not under the ­auspices of the institutions. It’s very flexible.

“In those circumstances you’d ­certainly need to be very vigilant that the process wasn’t being used for a sham arbitration.”

Lorraine Brennan, the London-based managing director at US-­headquartered mediation and ­arbitration provider JAMS International, is not so sure that even the ICC and its ilk are completely immune from rougue arbitrations. She was among those in the audience at Hoyle’s SJ Berwin seminar and ­admits to being stunned by his ­presentation.

“I’d never heard of this [scam] ­before,” she admits. “I’d heard of corruption of course, but the idea that people would use the arbitration ­system to launder money was new to me. But I think the point about the ICC’s in-built scrutiny process eliminating the chances of this happening is heading down the wrong path. What these criminal gangs are ­seeking – if this is happening – is a ‘consent award’.

“The parties file the arbitration and go through the motions so to the arbitrator it looks as if everything is perfectly normal and it’s a genuine arbitration. Then the parties say ‘we’re settling – we just need an award’. In those circumstances the ICC scrutiny doesn’t happen because the parties have agreed to settle by consent. There isn’t the same level of scrutiny.”


Following the money

For the lawyers, barristers, firms and former judges – indeed, anyone ­involved in international arbitration – the key is to be vigilant. Indeed, given the boom in the practice area in the past few years – a trend reflected by the high demand globally in disputes practices at the world’s leading law firms – the need has never been greater.

“Now everyone is trying to get into it because arbitration activity follows  capital flows around the world,” says Gerry Lagerberg, a partner in ­forensic services at PricewaterhouseCoopers who regularly advises in ­relation to international arbitration. “The big growth is obviously in the emerging markets and the Bric countries, which have less sophisticated legal systems and are therefore ­potentially more open to abuse.”

Occasionally during proceedings there are allegations of fraud, often centred on how the contract was ­procured or awarded, says Lagerberg.

“Our role is to find the fraud,” he adds. “Often, the way we find it is ­because they account for it wrongly – ie they put it down as flowers, ­marketing expenses and so on.”

Call it the Al Capone syndrome – the Chicago gangster and killer was finally caught and imprisoned for tax evasion.

“The money laundering element is not something I’ve ever come across directly,” admits Lagerberg. “But there’s no doubt this model could work, although it’s a complex way of laundering money.”

The change in the flow of arbitration Lagerberg refers to has seen the traditional dominance of the centres of work challenged and eroded by emerging centres such as Dubai and Singapore (see graph, above).

“Historically, most of the work flowed to London or Paris – or, if it stemmed from the old Eastern Bloc countries, Stockholm,” adds Lagerberg. “Now there’s increasing ­demand from DIAC [the Dubai International Arbitration Centre] and SIAC [the Singapore International ­Arbitration Centre], which have grown rapidly off the back of the rise of India and China.”

That shift is presenting new ­challenges that the suggestion of money laundering makes it even more acute.

“The locations may be different but the people and the firms doing the arbitrations are often the same,” says Lagerberg. “The arbitration world is small and clubbable, and the regional centres all want the A-list. There aren’t many of these, which  means there’s a demand for younger – and not necessarily Anglo-Saxon – arbitrators. There’s a push from the international community.”

New faces

This new blood could be just what is required, says David Saunders of Navigant Consulting, which also ­advises on arbitration.

“It’s a good thing that there are younger people coming through,” says Saunders.

“There’s definitely a group of lawyers in the upper echelon of international arbitration, but you’re starting to see more people in their 30s and 40s getting appointed as well as the elder statesmen.”

The flipside of this new blood is that younger lawyers will, by definition, be less experienced than the old hands, in which case the key for the new breed of arbitrators and counsel is to learn to recognise the warning signs that fraud may be ­involved in a contract or, increasingly, that the ­arbitral process itself is being used to launder the proceeds of crime.

“You have to be vigilant,” says ­McDougall. “There can be all kinds of things going on behind the scenes, and if you suspect fraud is involved, get out while you can.”

For Brennan, whose organisation has been steadily expanding its office network alongside international ­arbitration itself, the idea of the Mafia using the arbitral process to launder its blood money remains an eye-opener.

Thoroughly modern scam“It’s true that it had never occurred to me that someone would take such elaborate measures to launder money, but think of the present ­context,” she comments. “A lot of the world’s authorities have been cracking down on the more obvious schemes, so ­perhaps this is why ­criminal gangs are increasingly using this one.

“It gives them the imprimatur of respectability and of having been blessed by an arbitral authority. My suspicion is that this will grow as more and more countries use the ­arbitration system.”

As Brennan admits, it is something difficult for an individual to police.

“You need experienced arbitrators in the front line who’ll spot that something’s not right. People who’ve been around the block,” she says. “The problem is that, as arbitration grows in popularity, there are proportionately fewer experienced people.”

Just remember, if there is no ­evidence of fraud, it could just mean it is a particularly good scam.

‘Everyone talks about it, but there’s no proof’

John Dickie is a professor of Italian Studies at University College London and an internationally recognised specialist on many aspects of Italian history, including crime. Dickie, the author of several books on the Mafia and organised crime (including Cosa Nostra. A History of the Sicilian Mafia (2004), Darkest Italy: The Nation and Stereotypes of the Mezzogiorno, 1860-1900 (1999) and his most recent, Mafia Brotherhoods: Camorra, mafia, ’ndrangheta: The Rise of the Honoured Societies) has a better sense than most as to the extent of which criminal gangs have infiltrated business – and the likelihood that international arbitration is being used by gangs to launder money.

“Basing it on my experience of Italy it’s by no means implausible,” says Dickie. “The Italian criminal justice system has been infiltrated since the 1870s and there’s been a long fight to free itself from mafia infiltration. The ’ndrangheta – the Calabrian Mafia based in the ‘toe’ of the Italian boot – have, since the 1960s, had their children trained

as lawyers and financial experts because [the organisation] was smart enough to have people on the inside.”

As far as industry sectors go, construction remains the number one suspect.

“The mafia are territorial organisations – they tend to like stuff that gets built,” says Dickie. “But there was also a case of money laundering through a telecoms company in Italy.” (The €2bn [£1.7bn] alleged fraud involving Telecom Italia Sparkle and Fastweb, which had allegedly been led by members of the Calabrian Mafia.)

“Once you’ve made your money through drugs or whatever you can set up any company you like to launder it,” adds Dickie. “The rule is that everyone talks about

it and says it’s going on, but there’s no proof.”

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