CHINA Trends and Developments Contributed by: Jun Gao and Fan Xu, Zhong Lun Law Firm
• Identification – Comprehensively review all facts and circumstances in the case that may indicate the presence of corruption risks. • Verification – Verify the authenticity, accuracy and relevance of these risk indicators one by one. • Assessment – Integrate all verified information and weigh it against counter-evidence to form a com - prehensive judgment. The Report categorises red flags into two main types to help arbitration tribunals conduct more targeted reviews. General red flags are primarily related to environmental factors, including a specific country’s reputation for integrity, inherent corruption risks within an industry, and the current government’s anti-corrup - tion environment. Specific red flags are more direct, primarily involving the counterparty’s background and qualifications, relationships with public officials, and unusual terms and payment arrangements in the transaction itself. Bidirectional evaluation system of red flags and green flags The Report also introduces a two-way assessment system based on red flags and green flags. A single serious red flag indicator – such as a large, undis - closed payment made without a legitimate business justification – may carry significant probative value. Conversely, the accumulation of multiple seemingly minor red flag indicators can also be sufficient to raise reasonable suspicion of corruption. Accordingly, the accused party may refute the allegations by providing a legitimate business explanation (ie, a “green flag”). This is vividly illustrated in the case of Metal - Tech v Uzbekistan , where the arbitral tribunal identified four mutually corroborating red flags: a consultant of ques - tionable credentials; a service fee of USD4 million with little relation to the actual work performed; the close familial relationship between a consultant and the then-prime minister of Uzbekistan; and fund trans - fers conducted through opaque offshore shell com - panies. The claimant failed to present any sufficiently compelling green flags to rebut these suspicions, as it could not produce evidence of the actual consult - ing services rendered or any other reasonable com - mercial justification for the anomalous arrangements. Ultimately, the arbitral tribunal dismissed Metal-Tech’s
claim on the grounds of corruption; however, given that Uzbekistan had also engaged in corrupt prac - tices, it ordered both parties to bear their own costs in accordance with the principle of equity. Practical challenges in applying the red flag methodology Although this methodology offers strong practical guidance, it still faces some significant challenges in real-world application: • the assessment of red flag indicators involves a degree of subjectivity, and there are currently no uniform quantitative standards for determining the weighting of different indicators; • some parties may abuse this mechanism by inten - tionally filing a large number of false red flag allega - tions to delay the arbitration proceedings; and • arbitral tribunals lack the power to compel discov - ery, making it difficult to obtain key evidence held by third parties, and differences in business culture across countries may also lead to misjudgments. Co-ordination of parallel proceedings In international commercial arbitration cases involving corruption, the emergence of parallel proceedings is a common occurrence. A single act of corruption may trigger various types of legal proceedings – such as, criminal investigations, civil lawsuits and regulatory reviews – simultaneously across multiple jurisdictions. Stay of proceedings The primary issue raised by parallel proceedings is whether arbitration proceedings should be stayed pending the outcome of those parallel proceedings. Generally speaking, the threshold for staying arbitra - tion is very high. First and foremost, the tribunal must determine whether there is a mandatory legal obliga - tion to stay the proceedings. In the absence of such mandatory legal obligation, the tribunal will further consider: • the degree of correlation between the core issues of the parallel proceedings and the arbitration dispute; • the current stage and estimated duration of the parallel proceedings;
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