03 Jul State-to-State Investment Arbitration as a Tool to Recover Misappropriated Assets Abroad
[Danilo Ruggero Di Bella is a lawyer at Bottega Di Bella.]
Upon overthrowing a dictatorship, the swift recovery of stolen assets hidden abroad by a dictator is a key concern for every newly established government. At times, a newly constituted government may rely on the voluntary cooperation of foreign state authorities in which stolen assets are located. In other instances, the newly established government may face difficulties in recovering its assets because of the authorities in such a state, which, more often than not, tends to be a tax-haven country. Failing a cooperation with the country where the assets lie, could the newly established government rely on the mechanism provided by Bilateral Investment Treaties (BITs) to recover its diverted public funds?
A Recurring Problem
Dictatorial regimes are often characterized by diverting public funds to have these fortunes – estimated in the millions and, sometimes, in the billions of dollars – accumulated in foreign tax-haven jurisdictions. Siphoning off public funds abroad deprives entire countries and their citizens of their national wealth. For example, former Nigerian ruler Sani Abacha and his family allegedly stole more $4 billion during his five years in office, and former Philippines’s dictator Ferdinand Marcos reportedly looted $10 billion over his two decades in power. Indeed, upon the destitution of President Ferdinand Marcos in 1986, the newly established Philippines’s government set up a special agency (the Presidential Commission on Good Government) mandated with the task of recovery the ill-gotten wealth amassed by the former dictator, his family, and close associates, whether in the Philippines or abroad.
Bank secrecy and tax-haven court rulings entrusting ill-gotten funds to dictators’ heirs often hinder or considerably slow down the recovery by the legitimate government of its public funds.
Firstly, bank secrecy in force in tax-haven jurisdictions rarely allows for locating promptly the full amount of ill-gotten funds. For instance, the search in Switzerland for Ferdinand Marcos’ funds yielded very limited funds at the beginning, only to later find a staggering US$500 million. Likewise, the search for former Zairean dictator Mobutu Sese Seko’s deposits in Swiss banks turned out to be substantially less fruitful than expected. According to the newly established government of the Democratic Republic of Congo (DRC), former President Mobutu had siphoned approximately US$8 billion to Switzerland. However, after a survey over 406 Swiss banks—asked by the Swiss government at the request of the DRC—only US$3.4 million were found. Obviously, criticisms were advanced as to the completeness and accuracy of the survey, as it was hard to believe that such an astonishingly small amount was found. For instance, the bulk of the US$3.4 million was found in one bank, which at first declared having nearly nothing. Further, Swiss authorities resisted disclosing information about Mobutu’s bank funds.
Secondly, on several occasions, even when a tax-haven jurisdiction has initially cooperated with a government claiming back its national funds by freezing the few assets located, these frozen assets are eventually released to the dictator’s family, instead of the legitimate government.
Finally, even in instances where a decent amount of stolen assets has been located without being released to a dictator’s family members, the process of returning such assets to the legitimate government may prove to be an extremely lengthy process, and span more than a decade. For example, following the deposition of Tunisia’s dictator Ben Ali in the wake of the Arab Spring in January 2011, the Swiss government immediately froze approximately US$61 million held by the ousted Tunisian dictator and his associates in Switzerland. However, since 2011 — after almost one decade – Switzerland has returned only a small fraction of the US$61 million to Tunisia (specifically, just US$250,000 in May 2016, and approximately US$3.5 million in May 2017).
Such delays in returning stolen assets negatively affects the country awaiting fund repatriation, as such financial resources could be deployed for its citizens, or invested to yield substantial profits. In fact, US$ 60 million would have yielded US$ 3 million annually, at a 5% simple annual interest, which, over the course of 10 years, would have translated into US$ 30 million.
Aware of this issue, other countries have been indeed far more diligent and quicker in returning stolen assets. For example, Lebanon took only two years to return approximately US$ 30 million to Tunisia in 2013, also thanks to the cooperation of Dr. Ali Bin Fetais Al-Marri, UN Special Advocate on the Prevention of Corruption.
Potential Investment Claim of a Country Stolen of its National Wealth
A country that is experiencing difficulties in recovering stolen assets from a tax-haven country may avail itself of the remedies in BITs to claim back its public funds every time the latter:
(a) does not investigate or fully disclose relevant bank information,
(b) orders the release of stolen assets to a dictator’s heirs (as opposed to the legitimate government), or
(c) delays considerably the return of located assets.
Many so-called tax-havens have indeed ratified a long list of BITs, so chances are that a BIT is in force between a country whose public funds were diverted and the tax-haven country hosting such funds.
Nearly all BITs contain provisions according fair and equitable treatment (FET), compensation for expropriation, and the free transfer of funds, obliging host-States to permit the inward transfers, conversion and repatriation of funds with regard to investments. Most BITs also provide for a State-to-State arbitration concerning their interpretation or execution of the BIT itself, often preceded by diplomatic consultations.
A country – whose former dictator diverted millions or billions of dollars to a tax-haven – may argue that its former president did so in his official capacity, or could do so only because of his official capacity as head of State, acting de facto as the director of a sui generis sovereign wealth fund, which manages the national savings for the purposes of investment. Therefore, bank deposits in a tax-haven jurisdiction could effectively constitute an investment in that country for the former dictatorial State on behalf of its citizens. Such type of investment would receive legal protection under most BITs, which usually define the term “investments” also as contributions in cash or in kind made by nationals of one of the Contracting-Parties in the territory of the other. This way, a newly established government may threaten to resort to a State-to-State investment arbitration against an uncooperative tax-haven country to reclaim its public funds located in the latter as a form of a qualified investment, thus internationally protected by virtue of the applicable BIT.
The failure of a tax-haven country to conduct a thorough and transparent investigation over a foreign former dictator’s bank accounts upon the request of the newly established government (viz. the home-State, i.e. the Claimant-State for the purpose of the investment arbitration), and the failure to share the findings of such investigations with the new government may constitute a breach of the FET standard. Under this standard, the host-country (i.e. the tax-haven country) may be required to conduct an accurate investigation over such bank accounts. Likewise, the home-State may expect full cooperation from the authorities of the host-country to get back its governmental funds that were previously invested there. In this sense, the lack of full cooperation may violate the FET standard.
Similarly, a court ruling that orders the release of governmental funds to a dictator’s heirs, instead of the legitimate, newly constituted government, may breach the obligation to repatriate such funds, which qualify as the foreign government’s protected investments. According to a well-established principle of law, the payment to the falsus creditor frees the debtor of its obligations only if the debtor was in good faith on the basis of univocal circumstances. Circumstances cannot be univocal, nor the host-country can be in good faith – meaning unaware of the circumstances – every time the newly established government has claimed the ownership of such funds before the courts and authorities of the host-country. Further, the action of the tax-haven’s courts violating the obligation to repatriate such funds would be directly attributable to the State under Article 4 of the Articles on State Responsibility, thus triggering its international responsibility.
Additionally, depending the relevant circumstances of a case, the millions or billions accumulated by a former dictator in tax-haven’s banks may hint at alleged ill-gotten wealth of public officers based on the size of their accounts alone. As such, by not cooperating fully with the disclosure of relevant bank information to find the large reminder of such wealth, by illegitimately giving a portion of this wealth to the dictator’s family members, or by postponing the restitution of stolen funds, the tax-haven country may perpetuate the embezzlement of the home-State’s governmental funds. Such acts – both individually and collectively – may be regarded as an unlawful expropriation if the funds are not returned promptly, at the expense of the newly established government and its citizens, thus prompting for a full compensation under an applicable BIT.
In the case of an alleged violation of any of these BIT-based standard obligations, a State stolen of its public funds may threaten to resort to an investment arbitration against the tax-haven country where those funds are kept.
Countries who have been victims of dictatorial and corrupt regimes that have diverted public funds abroad, may recover these conspicuous sums from tax-haven countries, where these fortunes are often stashed to either mysteriously disappear or be egregiously downsized upon the deposition or death of a dictator, much to the detriment of the newly established government. In the event that settlement with a tax-haven country to repatriate these funds fails, a country who was stolen of its sovereign wealth may avail itself of BIT protection to claim the return of its national funds. In this manner, the claimant country may overcome the lack of cooperation of a recalcitrant tax-haven by means of the tools and guarantees provided by international arbitration, chiefly, a thorough discovery and impartial assessment of evidence.
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