Money Laundering Allegations by Kyrgyzstan against Latvian Investor Resurface in Paris Cour d’Appel

In a recent judgment (21 February 2017), the Paris Cour d’Appel annulled the USD 15 million arbitral award in Valery Belokon v The Kyrgyz Republic rendered by the UNCITRAL tribunal against Kyrgyzstan under the 2008 Latvia-Kyrgyzstan BIT.

The arbitral tribunal had previously rejected the allegations by Kyrgyzstan that the Claimant had, through its investment, Manas Bank, engaged in money laundering activities that violated Kyrgyz law. However, the Paris Cour d’Appel found these allegations convincing and annulled the award on the grounds of violation of international public policy.

Background of Money Laundering Allegations by Kyrgyzstan

The dispute between Mr Belokon and the Kyrgyz Republic arose during the 2010 political turmoil and change of presidential regime, when the Kyrgyz National Bank, with a view to ensuring stability in the banking sector, decided to suspend the management of five local banks, including Manas Bank. The National Bank did not subsequently revoke these emergency measures, which resulted in governmental control over Manas Bank for more than four years. After the rendering of the arbitral award, Manas Bank went bankrupt in 2015.

In the arbitration, in which Mr Belokon challenged these measures as amounting to indirect expropriation and violation of the fair and equitable treatment standard of the BIT, Kyrgyzstan justified its actions on the grounds that the Claimant and its investment got involved in money laundering and other criminal activities. The Respondent also alleged that the Claimant had obtained its investment illegally, suggesting at impropriety during the bidding process for its acquisition.

The Findings of The Arbitral Tribunal: The Respondent’s Allegations Not Proven

The Tribunal (presided over by Mr Jan Paulsson, with Prof Kaj Hober and Mr Neils Schiersing as the Claimant’s and Respondent’s nominees) did not find either of these allegations sufficiently proven. The arbitrators stated that the Respondent did not submit sufficient evidence to demonstrate violations of the legal order of the Kyrgyz Republic by the Claimant, noting that the fundamental principles of due process or burden of proof should not be relaxed when dealing with money laundering claims.

Nevertheless, the Tribunal pointed out that, if the Kyrgyz Republic had produced substantial and probative evidence of Manas Bank’s active involvement in money laundering, the investment protection may have been denied.
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The Respondent applied for the annulment of the award based on two separate grounds: improper constitution of the arbitral tribunal and violation of international public policy (Sections (2) and (5) of Article 1520 of the French Civil Procedure Code), the latter being the ultimate reason for setting aside the award.

The Findings of the Paris Cour d’Appel: The Evidence of Criminal Activities Is Convincing

At the outset of its reasoning, the Cour d’Appel highlighted that its duty was not to establish whether the Claimant was indeed liable for money laundering. The duty of the court was to check whether recognition or enforcement of the arbitral award would contradict international public policy. The Court noted that prohibition of money laundering, as an objective of the 2003 UN Convention Against Corruption signed by 140 states (including France and the Kyrgyz Republic), constitutes part of international public policy.

It went further to disagree with the Tribunal’s findings regarding the affiliation between the Claimant and Mr Maxim Bakiev, a son of the former Kyrgyz President, finding it inappropriate, rather than “superficial”, as the Tribunal previously characterised it based on the same facts. In contrast with the Tribunal’s conclusions, the Court found the conditions surrounding the acquisition of the investment suspicious.

As opposed to the Tribunal, the Court examined the relationship between Manas Bank and Baltic International Bank (BIB, also owned by Mr Belokon), based on, among other things, new evidence. The Court took into account the fact that, in 2016, BIB was subject to a EUR 1.
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1 million fine by the Latvian authorities for violations of anti-money laundering legislation.

Finally, unlike the Tribunal, the Court gave weight to the data from the experts’ reports regarding the amount of transactions that Manas Bank operated. The Cour d’Appel noted that it had considerably exceeded the GDP of Kyrgyzstan in 2008, which could not be explained by the ordinary banking practices in a country with such poor economic conditions as in the Kyrgyz Republic. All these findings led to the conclusion that recognition or enforcement of the award that benefits the Claimant from illegal activities would manifestly, effectively and precisely violate international public order, which prompted the annulment of the award.

Enforcement Attempts in Canada: Without Major Success So Far

In the meantime, Mr Belokon has attempted to enforce the arbitral award in Canada by seizing stock indirectly held by the Kyrgyz Republic in mining company Centerra Gold, but, in December 2016, the Ontario Court of Appeal nixed this attempt. It confirmed the ruling of the lower instance court that Mr Belokon, together with two other companies, may not seize these assets to satisfy arbitral awards against Kyrgyzstan, as they were held by a separate legal entity, Kyrgyzaltyn OJSC.

Interestingly, the Kyrgyz Republic raised similar money laundering allegations in the enforcement proceedings in the Ontario courts as well.  However, the Canadian courts struck out its evidence as irrelevant. The Canadian judges concluded that Kyrgyzstan could not rely on any evidence of the investor’s alleged criminal conduct previously rejected by the tribunal, since a recognition and enforcement court cannot review the merits of an arbitral decision. Nevertheless, the judge mentioned that these allegations could become relevant in the annulment proceedings.

Concluding Remarks

The story of this case illustrates differences between the approaches to the review of arbitral awards by national courts of different jurisdictions. It also demonstrates that, when money laundering, corruption and fraud allegations are at stake, the courts can take into consideration new evidence that was not available to the arbitral tribunal.

However, how far the national court can go to reevaluate the same facts and evidence that was previously put in front of the tribunal remains one of the most controversial issues.
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The final word in the annulment proceedings in Belokon v Kyrgyzstan has not yet been said.  Meanwhile there is still an option of recourse to the Cour de Cassation in France.