Investment Arbitration, Corruption and Illegality: South Korea

Abstract

This chapter provides an overview of Korea’s investment treaty regime and its provisions and practice concerning corruption and illegality. It further analyzes how these issues have featured in cases related to Korea and Korean investors. Korea has become a leading exporter and significant importer of foreign direct investment. To protect and promote inbound and outbound investment, Korea has established one of the most wide-ranging and extensive regimes of international investment agreements in the world, primarily through an array of bilateral investment treaties and free trade agreements with investment chapters. However, their provisions related to corruption and illegality are generally not developed. For instance, most of Korea’s treaties do not include an explicit requirement for the host states to take measures against corruption. Korean treaties also vary in terms of how they require foreign investments to be made in accordance with host state laws. Korea’s passivity regarding such provisions seems unaffected by foreign investors increasingly commencing arbitrations against the country recently and Korean investors also becoming more active in bringing outbound claims. While the extent that corruption or illegality features in cases brought by Korean investors remain largely unknown, some of the cases against Korea have corruption and illegality related elements. There is no indication that Korea may become more proactive in terms of corruption provisions, but there are some signs it is pursuing more and clearer legality provisions. Nevertheless, it is foreseeable that Korea might become more proactive in promoting both types of provisions in future treaties as part of its commitment to transparency.

Special thanks to Hyewon Yoon for her research assistance. All references to Korea refer to the Republic of Korea. The Korean Won is shown converted at the rate of one US dollar to 1,300 Won for convenience.

1 Introduction

This chapter provides an overview of Korea’s investment treaty regime and the type of provisions it has concerning corruption and illegality. It further analyzes how corruption and illegality issues have featured in cases related to Korea and Korean investors.

I first review how Korea has become a leading major exporter and importer of foreign direct investment (FDI). In the next section, I explore how Korea has established one of the most wide-ranging and extensive regimes of international investment agreements in the world. I will show how Korea has primarily used an array of bilateral investment treaties and free trade agreements with investment chapters.

Then, I analyze corruption and illegality related provisions in Korean international investment agreements (IIAs) and Korea’s investment treaty practice. Korea’s investment treaty provisions related to corruption and illegality remain generally under-developed. For instance, most of its treaties do not include an explicit requirement for the host states to take measures against corruption. Korea thus can be categorized as displaying passivity regarding the inclusion of corruption or legality related provisions in its treaties.

The recent rise in investor–state dispute settlement (ISDS) arbitrations through these IIAs brought by foreign investors against Korea and by Korean investors against various states is then explored. Notably, Korea’s overall passivity has appeared to be unaffected by foreign investors increasingly bringing cases against it in recent years and Korean investors becoming more active in bringing claims against states as well. While the extent that corruption or illegality features in cases brought by Korean investors remains largely unknown, some of the cases against Korea have corruption and illegality related elements.

The chapter concludes with a look into what is in store for Korea’s future in terms of IIAs and corruption and illegality provisions and practice. It is foreseeable that Korea might become more proactive in promoting anti-corruption provisions in its future treaties as part of its commitment toward transparency and as a means to enhance the legitimacy of ISDS.

2 Foreign Investment

Korea is known to stand out as a miracle in economic development. Once one of the poorest countries in the world, it rose from the ashes of war and poverty to become a developed economy in one of the shortest spans in history. It is an uncommon example of a country that has made the successful transition from being a capital importer to becoming a capital exporter. During this transition process, Korea became a modern and developed economy.

In its initial developmental stages, Korea eagerly sought foreign investment to spur its economic growth. Its current position as a major exporter of capital is an indicator of how far it has come. As of 2020, for instance, Korea’s outward FDI stocks amounted to 30% of gross domestic product. Although less than the OECD average in 2022 which was 51%, it still ranks highly, particularly among non-Western countries (Fig. 14.1).

Fig. 14.1

Korea’s outbound FDI as a percentage of GDP (Latest data available for each country from 2018 to 2022)¹

On a consistent yearly basis, starting from 2014, when it was only 16.4%, Korea’s outward investment has significantly increased in recent years (Table 14.1). By 2020, at 29.7%, it had nearly doubled since 2014. This most likely reflects the growth of the Korean economy and how Korean investors have sought to expand beyond the competitive and saturated Korean domestic market to find new destinations overseas.

Table 14.1 Korea’s inbound and outbound FDI as a percentage of GDP (2013–2020)²

In comparison, Korea’s percentage of inbound FDI relative to GDP has also been rising in recent years but from a low base and more slowly. From 11.37% in 2014, it rose to 14.14% in 2020. Yet, when contrasted with its outward investment, inward FDI stands at a modest level. This remains a quandary even if one considers such geopolitical factors as the security risks that arise from its relations with North Korea. From a comparative standpoint, its 14.1% of FDI in 2020 was, after Japan, the second lowest among OECD countries and far less than the OECD average of 51% in 2022 (Fig. 14.2).

Fig. 14.2

Korea’s inbound FDI as a percentage of GDP (Latest Data available for each country from 2018 to 2022)³

The quandary of Korea’s low inward investment is all the more perplexing when one considers that it has an open regulatory framework in addition to its extensive framework of investment treaties. As of 2020, for instance, Korea’s formal regulatory regime was assessed at 1.35 and sixth among OECD member countries on the OECD FDI Restrictiveness Index.⁴ It occupies the best rank in Asia and is considerably more open to FDI than the average among OECD countries of 0.063. Similarly, according to the World Bank’s Enforcing Contracts ranking, Korea is second in the world out of 190 countries, only behind Japan.⁵ In contrast, in terms of hurdles to FDI, the US State Department’s Investment Climate report on Korea lists ‘regulatory opacity, inconsistent interpretation of regulations, unanticipated regulatory changes, underdeveloped corporate governance, rigid labor policies, Korea-specific consumer protection measures, and the political influence of large conglomerates, known as chaebol’.⁶ Hence, identifying and addressing the obstacles to inbound investment and how Korea will be able to attract further foreign investment remains an ongoing challenge (Fig. 14.3).

Fig. 14.3

Korea compared on the OECD FDI restrictiveness Index (2020)

3 Corruption

3.1 Domestic Bribery

In law and practice, Korea has a rigorous and extensive legal regime related to monitoring, punishment and enforcement related to corruption and bribery. The Korean Criminal Code has a standard bribery provision under Article 129. Bribery related crimes are subject to enhanced punishment depending on the size of the bribe, particularly if the bribe exceeds KRW30 million (USD23,067).⁷ In addition, in February 2008, Korea established the Anti-Corruption and Civil Rights Commission.⁸ In January 2021, it established the Corruption Investigation Office for High-ranking Officials (CIO),⁹ which has a special focus on senior government officials by special prosecutors and investigators at the Office.

In terms of corruption perception, Korea has consistently improved since 2016 and currently has reached its highest score of 63 under Transparency International’s Corruption Perception Index (CPI). This score is in the third out of eight tiers where countries have been evaluated. Korea continues to stand behind Singapore (85), Hong Kong (76), Japan (73) and Taiwan (68) among Asian countries, and has been slowly closing the gap with them, particularly after 2016 (Fig. 14.4).

Fig. 14.4

Korea’s CPI score (2013–2022)¹⁰

Transparency International considers the score more significant than the rankings, and Korea’s CPI ranking has also steadily improved since 2016. Korea achieved its highest ranking of 31 in the world in 2022 and continues to stand behind Singapore (5), Hong Kong (12), Japan (18) and Taiwan (25) among Asian countries, but again the gap with them has been narrowing in recent years after 2016 (Fig. 14.5).

Fig. 14.5

Korea’s CPI rank (2013–2022)¹¹

Similarly, Korea ranks in the top tier in the World Justice Project’s Rule of Law Index. In 2022, Korea was ranked 19 out of 140 countries surveyed and only stood behind Japan and Singapore in Asia.¹² The Index is compiled based on eight factors: Constraints on Government Power, Absence of Corruption, Open Government, Fundamental Rights, Order and Security, Regulatory Enforcement, Civil Justice and Criminal Justice. The Absence of Corruption factor is assessed by measuring such elements as bribery, improper influence by public or private interests and misappropriation of public funds or other resources, which are then examined with respect to government officers in the executive branch, the judiciary, the military, police and the legislature.¹³ Under the more specific Absence of Corruption matrix, in 2022, Korea’s global ranking was 35 and was the fourth best in Asia after Singapore (1), Hong Kong (9) and Japan (13).¹⁴

3.2 Foreign Bribery

Korea is a member of the major treaties related to foreign bribery regarding foreign public officials. This includes the 1999 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention)¹⁵ and the 2003 United Nations Convention against Corruption. These provisions were adopted through separate implementing legislation. According to Transparency International, however, Korea (like Japan and Singapore, for example) stands at the bottom tier out of 47 jurisdictions that are classified as having ‘little or no’ enforcement of the OECD Convention.¹⁶

4 Investment Treaty Practice and Innovations

4.1 Korea’s Investment Treaty Practice Generally

With 84 bilateral investment treaties (BITs) and 22 free trade agreements (FTAs) in force, Korea has one of the most extensive regimes of investment treaties.¹⁷ As a general policy, Korea’s IIAs provide for a wide range of investor protections that include such alternatives as investor–state arbitration (ISA) as a means of dispute settlement.¹⁸ Other than its BITs with Bangladesh (1988), Germany (1967), Pakistan (1990), Tunisia (1975) and the FTA with the European Union (EU), for example, almost all of Korea’s IIAs have ISA provisions.¹⁹ In its early years, Korea aggressively pursued IIAs, initially as a means to attract foreign investment and increasingly also to protect its investors overseas.

4.2 Korea’s Treaty Provisions Related to Illegality and Corruption

4.2.1 Anti-Corruption Obligations for States

Overall, Korea has not pursued a policy that pushes for the inclusion of provisions that are directed at corruption, as can be found in countries such as Japan.²⁰ Among its IIAs, the only major exceptions are corruption related provisions in the Canada FTA (2014) and United States (US) FTA (2012). The inclusion of the provisions in these IIAs no doubt was not driven by Korea but was at the behest of Canada and the US as part of their general treaty practice.

Korea’s FTA with Canada (2014) provides a general obligation as follows under Article 8.16:

8.16 Each Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognised standards of corporate social responsibility in their practices and their internal policies, including statements of principle that are endorsed or supported by the Parties. These principles address issues such as labour, environment, human rights, community relations, and anti-corruption. (Emphasis added.)

The Canada FTA asks that the contracting parties ‘encourage’ enterprises in their territories to incorporate corporate social responsibility (CSR) standards that include ‘anti-corruption’. Although not included in its 2004 Model BIT, since around 2013 Canada has included this type of CSR provision in its third generation of BITs.²¹ This provision remains hortatory, urging investors to ‘voluntarily’ comply with CSR.

The US has been among the leading countries pursuing a proactive approach in including anti-corruption related provisions in its IIAs.²² Korea’s FTA with the US (2012), for example, imposes a more far-reaching obligation on the contracting parties. As provided under a separate chapter on ‘Transparency’, in Article 21.6 that is titled ‘Anti-Corruption’, it requires that each party must: (1) maintain laws or other measures to criminalize corruption affecting international trade or investment; (2) maintain appropriate penalties and procedures; (3) maintain whistleblower protection; (4) recognize the importance of regional and multilateral initiatives to eliminate bribery and corruption in international trade and investment; and (5) endeavor to work jointly to encourage and support appropriate initiatives in relevant international fora.²³ The whistleblower protections are notable. The obligations under the US FTA remain the most comprehensive and explicit among Korea’s IIAs.

Notably, Korea’s trilateral investment treaty with China and Japan does not contain Japan’s shorter anti-corruption provision (2012), which may reflect the preferences of China rather than Japan, as the latter has often included a provision from around 2007. Korea is seeking to join but has yet to become a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which incorporates significant US IIA drafting preferences and contains a quite detailed Chapter 26 on ‘transparency and anti-corruption’.²⁴

4.2.2 Legality Requirements for Investors

Korea’s international investment agreements have some variation in their provisions related to illegality. Unlike corruption related provisions, it appears that Korea has generally promoted the inclusion of a legality requirement. The end result of this apparent policy has led to slightly different provisions. Among other things, different negotiating dynamics, priorities and economic interests most likely shaped these divergent outcomes. Korean IIAs can be broadly divided into four different types of legality requirement provisions.²⁵

First, Korean IIAs may include a general provision such as the following that appears in the BIT with Denmark (1988):

Each Contracting Party shall admit the investment by nationals and companies of the other Contracting Party in accordance with its laws and regulations, and promote such investments as far as possible²⁶

This provision places a general obligation upon the state to admit investments in accordance with its laws and regulations and does not impose an express obligation upon the investor in order to achieve treaty protection. In terms of limiting the definition of investment, UNCTAD classifies such provisions as not containing an express ‘in accordance with host state laws’ requirement. Korea’s IIAs that contain some variation of this type of provision include Albania (2006), Algeria (2001), Armenia (2019), Azerbaijan (2008), BLEU (2011), Bulgaria (2006), Burkina Faso (2010), Cambodia (1997), Congo (2011), Finland (1996), Hong Kong (1997), Indonesia (1994), Kenya (2017), Mongolia (1991), Philippines (1996) and Vietnam (2004). Korea’s trilateral investment treaty with China and Japan (2012) only has this first type of provision.

Although not common, a second type can be found in Korea’s BIT with Lebanon (2006) that provides wording as follows:

This Agreement shall also apply to investments in the territory of a Contracting Party made in accordance with its laws and regulations by investors of the other Contracting Party prior to the entry into force of this Agreement. However, the Agreement shall not apply to disputes that have arisen before its entry into force. (Emphasis added.)

UNCTAD also classifies this provision as not constituting the ‘in accordance with host State laws’ requirement. This provision apparently does not qualify as a legality requirement imposed on the state because it only applies to past investments before the treaty came into force that were made in accordance with host state laws and does not cover foreign investments made afterwards. Another example of the type two treaty is Tunisia (1975).²⁷

In contrast, Korean IIAs may impose a legality requirement upon investors to be eligible for treaty protection in the following form as found in the recent BIT with Uzbekistan (2023, emphasis added):

13.1. This Agreement shall apply to investments in the territory of the State of one Contracting Party, made in accordance with its laws and regulations, by investors of the other Contracting Party, whether prior to, or after the entry into force of the present Agreement.

This differs from the second type in that it applies to investments made after the IIA enters into effect as well. This would be like a substantive obligation that is prospective in nature and not limited to pre-existing investments. Korea’s BIT with China (2007) is another example of an IIA with this type of provision.²⁸

A fourth type of IIA contains a more explicit legality requirement on investors as found, for example, in the definition of investment in Korea’s BIT with Cameroon (2018):

1(1) ‘Investments’ means every kind of asset invested by investors of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter Contracting Party and in particular, though not exclusively, includes …

UNCTAD maps this fourth type as a legality provision. Similar provisions can be found in Korea’s BITs with Armenia (2019), Cameroon, (2018), Kenya (2017), Malaysia (1989), Myanmar (2018) and Rwanda (2013). Noticeably, many of Korea’s more recent IIAs include this type of provision. This suggests that Korea has been pushing for this type of legality provision as part of its more modern treaty practice.

In comparison with its BITs, Korea’s FTAs demonstrate even less variety. Among Korea’s FTAs, the ASEAN FTA (2009), China FTA (2015), Indonesia FTA (2023), and the Regional Comprehensive Economic Partnership (RCEP) FTA (2022) appear to call for type one provisions according to UNCTAD’s mapping system.²⁹ RCEP (2022), for instance, provides as follows:

covered investment means, with respect to a Party, an investment in its territory of an investor of another Party in existence as of the date of entry into force of this Agreement or established, acquired, or expanded thereafter, and which, where applicable, has been admitted, by the host Party, subject to its relevant laws, regulations, and policies

The Indonesia FTA (2023) in Article 7.1 states similarly as follows:

covered investment means, with respect to a Party, an investment in its territory of an investor of the other Party in existence as of the date of entry into force of this Agreement or established, acquired or expanded thereafter and which, where applicable, has been admitted according to its laws and regulations

Among Korea’s FTAs, the Chile FTA (2004) includes an explicit legality provision, like type four BITs, in Annex 10.20 that provides:

1. An investor of a Party, on its own behalf or on behalf of an enterprise, may only make a claim under Section C [ISDS] of this Chapter, in relation to investments made and materialized in accordance with the laws and regulations of the other Party

Korea’s FTA with Israel (signed in 2021 but not in effect) also contains a similar provision in Article 9.31.

The Australia FTA (2014), Central America Free Trade Agreement (CAFTA) (2019), Cambodia FTA (2016), Canada (2014), Colombia FTA (2016), European Free Trade Association (EFTA) (2006), India FTA (2010), New Zealand FTA (2015), Peru FTA (2011), Singapore FTA (2006), Turkey FTA (2015) and US FTA (2012) do not have a separate legality provision in their investment chapters. In contrast, the Cambodia FTA (2022) and UK FTA (2021) do not contain a separate investment chapter.

Overall, Korea’s IIA regime is extensive and provides a wide range of protections but its provisions related to corruption and illegality have a range of different categories. The country’s practice with respect to corruption and legality provisions is varied. Other than its agreements with such countries as Canada and the US, express anti-corruption provisions are not common. Recent practice suggests, however, that Korea is becoming more proactive in negotiating for an express legality provision. The reason behind this apparent trend is unclear. It may be part of Korea’s general transparency efforts to impress upon Korean investors who are investing in destinations where lack of transparency and corruption concerns exist that they must be vigilant not to engage in corrupt or illegal acts or they will not benefit from protections under IIAs.

5 Investment Treaty Arbitration Cases Involving Korea and Korean Investors

Korea signed its first IIA in 1964 with Germany. Despite its considerable outflow and inflow of investment and long history and extensive regime of IIAs, the various protections offered through its provisions, and particularly ISDS, remained unused until recently. Yet, during the past decade, the landscape has changed. Among countries in Asia, starting from 2012 and 2013, investors into Korea and Korean outbound investors have become active users in ISDS. While the exact reasons remain unclear, this most likely represents a confluence of factors. To some degree, it reflects the considerable amount of inbound investment into Korea and outbound foreign investment by Korean investors in recent years. Other factors include a first mover effect, the growing awareness of ISDS as a means of redress for violations and the growth of large Korean law firms as well as branches of international firms in Seoul.

5.1 Korea as a Respondent³⁰

In recent years, starting from 2012, Korea has faced a string of investor claims.³¹ These can be divided into three types of investors. The first type are large investors with substantial claims exceeding USD100 million. The second type involves medium-sized enterprises with claims roughly between USD10 and 100 million, and the third comprises various individuals mostly claiming violations associated with real estate development regarding residential projects. The overall results have been mixed, with investors prevailing in some cases and the state prevailing in others. Most of the cases remain pending (Table 14.2).

Table 14.2 Korea inbound ISDS claims (30 April 2023)³²

5.2 Korean Investors as Claimants

At about the same time Korea started to become exposed to ISDS, starting from 2013, Korean investors began to bring cases through ISA. Whether this is a coincidence or related remains unclear. It is anticipated that cases will continue to increase for a variety of reasons. First, Korean investors have become more familiar with investment protections provided under IIAs, investment contracts and investment laws as well as the availability of investment arbitration to seek remedies for violations of protections provided under these instruments. Second, the success of first-mover investors in ISA will further educate and embolden other investors and, to some degree, will add to the bandwagon effect. Third, the experience gained by legal counsel specializing in investment arbitration will enable them to advise their clients about investment protections and dispute resolution as an alternative. Finally, anecdotal evidence suggests that Korean companies are gaining experience with third-party funding in commercial arbitration cases, and this may contribute to the potential for them to use it in investment arbitration in the future (Table 14.3).

Table 14.3 Korean Outbound ISDS Claims (30 April 2023)³³

Among the cases brought by Korean investors that are publicly known, most of them are pending. Among the remaining cases, most of them are either settled, have been dismissed at an early stage or remain undisclosed. Unfortunately, given the lack of public information, for purposes of analysis, it is uncertain to what extent the claims brought by Korean investors were related to corruption or illegality.

Nevertheless, it should be noted that the countries that have been the subject of claims by Korean investors are not in the top tiers of the CPI scores or the Rule of Law rankings on the absence of corruption. For the CPI scores, out of the eight tiers in which countries have been evaluated, Saudi Arabia (53) and Oman (52) are in the fourth tier, China (45) and India (40) are in the fifth tier, Vietnam (39) is in the sixth tier, Kyrgyzstan (27) is in the seventh tier, and Nigeria (24) and Libya (17) are in the eighth (bottom) tier. For the Rule of Law rankings on absence of corruption and scores, China (55/0.53) stands in a high tier while India (93/0.40) and Vietnam (88/0.42) are in a middle tier, and Nigeria (118/0.41) and Kyrgyzstan (127/0.30) are in the lowest tiers. Data for Saudi Arabia, Oman and Libya do not exist. Based on these perceptions and rankings, one may speculate that there is a higher likelihood that corruption or serious illegality might have featured as elements in the claims that Korean investors brought. This conjecture remains to be confirmed if and when the cases become public.

6 Lone Star and Mason/Elliott

6.1 Lone Star³⁴

In 2012, Lone Star, a private-equity firm based in the US, brought the first major arbitration against Korea. A complex, large-scale dispute, with multiple facets, it also involved one of the few cases where illegality featured as a prominent issue. As part of its defence, Korea stressed that the investor engaged in illegal misconduct. While allegations of corruption were also raised and created some legal uncertainties, they were not significant factors in the ultimate decision.

The case arose out of Lone Star’s 2003 acquisition of a controlling stake in Korea Exchange Bank (KEB), a distressed bank, and subsequently of KEB Card, its credit card subsidiary.³⁵ Lone Star made the USD1.7 billion acquisition of KEB through LSF-KEB, a Belgian special purpose vehicle. After multiple attempts failed, in February 2012, LSF-KEB was able to sell its interest in KEB to another local bank for USD3.5 billion.³⁶ Lone Star claimed that the Korean government improperly delayed the approval of the sale of KEB on several occasions and intervened to reduce the price of the sale that caused it to suffer substantial harm. It claimed USD433 million in damages based on, among other things, a breach of fair and equitable treatment under the Belgium–Luxembourg BIT (2011).³⁷

The Korean government claimed that one of the major reasons for the delay in approving the sale of KEB was because there was an ongoing criminal trial against LSF-KEB and some of its senior executives.³⁸ After appeals and a remand from the Supreme Court, in October 2011, LSF-KEB and a senior executive were found guilty of engaging in stock manipulation during the acquisition of KEB Card. The Seoul High Court found that the executive of LSF-KEB engaged in an unlawful deceptive scheme, in collusion with Lone Star’s nominees to the KEB Board, that caused the stock price of KEB Card to fall and enrich LSF-KEB and KEB at the expense of KEB Card’s minority shareholders.³⁹

In the end, while finding that Korea breached its treaty obligations, a majority of the tribunal also concluded that ‘Lone Star by its criminal misconduct and related legal consequences contributed substantially and materially to the USD 433 million loss’.⁴⁰ The majority cited Yukos v. Russia and other cases where tribunals apportioned fault where an investor committed an unlawful act. A key factor was whether the investor’s wrongdoing materially and significantly contributed to the loss claimed. In the Lone Star case, the majority determined that ‘there was a single indivisible loss to which both the Claimants and the Respondent made a material contribution. The loss cannot be broken down into individually distinct elements that could be assigned exclusively to Lone Star or the FSC’.⁴¹ Finding equal blame on the claimants, the majority reduced the award by half to USD216.5 million.

A strong dissenting opinion argued that, among other things, the claimant had no right to a control premium. This was because control was obtained through a financial crime and the regulators acted prudently in light of the stock manipulation case.⁴²

6.2 Mason⁴³ and Elliott⁴⁴

In 2018, two large US institutional investors of Samsung C&T, a very large listed construction and engineering company, each brought claims against Korea for breach of investment protections under the Korea–US FTA.⁴⁵ Both cases did not involve more traditional examples such as where a foreign investor allegedly engaged in corruption or illegal behavior and the state cited the illicit acts as a defense against the claims. The case was also not an example of a state soliciting or extorting bribes from the investor. While corruption was a prominent fact that served as a key factor in the claimants’ claims, corruption was not an issue that was directly associated with the investors themselves. The investors instead based their claims on the harm that they allegedly suffered as a result of corruption between the controlling shareholder and senior government officials. On 30 June 2023, a final award was rendered in Elliott v. Korea whereas an award remains pending for Mason v. Korea where post-hearing briefs were filed in April 2022.⁴⁶ According to the Korean Ministry of Justice, out of the USD770 million that was claimed, the Elliott v. Korea tribunal found Korea liable for USD54 million plus interest and the claimant’s legal costs.

Both cases arose out of the merger between Samsung C&T and Cheil, at the time both affiliates within the prominent Samsung Group. Shareholders approved the merger in July 2015. With a stake of 11.21%, the National Pension Service (NPS) was the largest shareholder of Samsung C&T and, according to the claimants, provided the decisive vote in favor of the merger despite the opposition of various shareholders. Mason held 2.18% and Elliott 7.12%.

The two foreign shareholders, Mason and Elliott, claimed that they suffered damages due to bribes under a criminal scheme that was perpetrated by Korean public officials, including the then President, the Minister of Health and Welfare and the Chief Investment Officer of the NPS. The President was sentenced to 20 years in prison for bribery and other charges.⁴⁷ Elliott sought USD539.8 million and Mason USD191.4 million in damages plus interest and other relief.

A key part of the case concerned whether the President provided ‘decisive assistance’ to approve the merger as a quid pro quo for receiving bribes from the controlling shareholder of the Samsung Group. The claimants contended that the President received the bribes in exchange for her assistance in getting NPS to approve the merger. The claimants asserted that the President requested the bribe in the form of sponsorship of certain sports organizations and that there was a common understanding that the economic support was in exchange for the President’s help for the controlling shareholder’s succession plan through the merger.

As a result, the claimants asserted a breach of the minimum standard of treatment because, among other things, Korea’s actions were arbitrary, grossly unfair, unjust, discriminatory, in disregard of due process and proper procedure, and lacked transparency. They argued that Korea’s action violated the International Court of Justice’s Neer judgment standard and that ‘Korea's corruption, bribery, overt discrimination, and flaunting of its own laws was outrageous’.⁴⁸ According to them, Korea had no legitimate interest to vote in favor of the merger.

In its reply, Korea argued that the ‘High Court did not find that President provided any assistance to the Merger, let alone that she gave instructions to implement any measures against Mason or any foreign hedge fund’.⁴⁹ Korea stressed that the courts held that any quid pro quo relationship and payment of bribes occurred after the President met the controlling shareholder on 25 July 2015, which was after the NPS’s Investment Committee’s decision on 10 July 2015 and the shareholders meeting on 17 July 2015, both to approve the merger. Korea asserted that there was no evidence that the bribes were connected with the merger and could have been intended to induce its approval. The claimants also lacked a legally significant connection between Korea’s alleged measures and their investments.⁵⁰

Korea also stated that the NPS did have a legitimate interest in supporting the merger because supporting the Samsung Group’s succession process was in the interest of the Korean economy. It did not have as a purpose the expropriation or extraction of value from SC&T’s shareholders. They cited that the High Court did not conclude that the merger ‘extracted value from SC&T’s shareholders, much less that the Korean government intended to extract value’.⁵¹ According to Korea, the goal was to instead support the succession process and stabilize the Samsung Group.

The Elliott tribunal found that the NPS’s merger vote was the result of the improper influence by Blue House and the Ministry of Health and Welfare (MHW) and not of its own independent, professional judgment. More specifically, the tribunal found that the NPS ‘did not take its decision independently, based on the commercial merits of the Merger, but acted under the direction and instructions of the MHW and thus effectively as an instrument of the MHW in the implementation of a government policy’.⁵² Quoting from Waste Management v. Mexico, the state’s conduct was deemed to be ‘unjust’ and amounted to a ‘willful neglect of … duties’ and ‘a pronounced degree of improper action’ that breached the minimum standard of treatment required.⁵³

Both cases did not involve a situation of a failure to prosecute as was raised in such cases as World Duty Free v. Kenya⁵⁴ and Wena v. Egypt.⁵⁵ Instead, the claimants relied extensively on the prosecution’s cases and the resulting court awards against the former Korean government officials. The tribunal even noted the state’s diligent prosecution of those involved and described ‘the action taken by the Korean State in this regard is commendable and demonstrates its commitment to the rule of law’.⁵⁶

7 Conclusions

Among countries in Asia, Korea has become a major net capital exporter as well as a significant destination for foreign investment. Korea also maintains one of the most extensive networks of IIAs in the world, particularly in the Asia–Pacific region. Yet Korea has remained overall quite passive with regard to anti-corruption and legality related provisions. This passivity appears to be unaffected by foreign investors increasingly bringing cases against Korea in recent years and Korean investors becoming more active in bringing claims against states as well. In terms of its IIAs, however, recent practice suggests that Korea is becoming more proactive in negotiating for an express legality provision. The reasons behind this apparent trend are unclear. It may be part of Korea’s general transparency efforts to impress upon Korean investors that they must be vigilant and avoid corrupt or illegal acts or else they will not benefit from IIA protections.

Despite this confluence of factors, until 2012 and 2013, Korean IIAs were not widely used. Korea has become the subject of a host of claims, many that are quite substantial (and therefore sometimes politically controversial). Korean investors have increasingly become the more active users of ISDS in Asia. With the rise in cases, the corruption and illegality issues have emerged in some of the cases against Korea, most prominently already in the Lone Star case, but also in the ongoing claims by Mason and Elliott. Most of the cases brought by Korean investors remain pending, so the extent to which they involve corruption or illegality remains unclear.

At present, there is no indication that Korea may become more proactive in terms of anti-corruption provisions, although there are some signs, including clearer legality provisions. Nevertheless, it is foreseeable that Korea might become more proactive in promoting anti-corruption and legality provisions in its future treaties as part of its commitment to transparency (a related hot topic), or to preserve the wider legitimacy of the ISDS arbitration regime.⁵⁷

Notes

• 1. OECD n.d.-c.

• 2. OECD n.d.-d.

• 3. OECD n.d.-b.

• 4. OECD n.d.-a.

• 5. World Bank n.d.

• 6. US State Department’s Investment Climate report on Korea.

• 7. Act on the Aggravated Punishment, etc. of Specific Crimes [Enforcement Date 5 May 2020.] [Act No.16922, 4 Feb. 2020, Partial Amendment].

• 8. The Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission. [Enforcement Date 18 Feb. 2022.] [Act No.18438, 17 Aug. 2021, Partial Amendment].

• 9. Act on the Establishment and Operation of the Corruption Investigation Office for High-Ranking Officials [Enforcement Date 1 Jan. 2021.] [Act No.17646, 15 Dec. 2020., Amendment by Other Act].

• 10. Transparency International.

• 11. Transparency International.

• 12. World Justice Project 2022, p. 22.

• 13. World Justice Project 2022, p. 29.

• 14. World Justice Project 2022, p. 29.

• 15. Act On Combating Bribery of Foreign Public Officials in International Business Transactions [Enforcement Date 9 Jan. 2022.] [Act No.18470, 8 Oct. 2021., Partial Amendment].

• 16. Transparency International 2020.

• 17. Korea finalized negotiations of an FTA with the Philippines on October 26, 2021 but which has yet to be ratified. fta.go.kr. Accessed 30 April 2023.

• 18. Kim 2018.

• 19. For convenience, BITs are abbreviated with the name of the other contracting party and the year the treaty entered into force in parenthesis while FTAs are abbreviated with the name of the other contracting party with ‘FTA’ included.

• 20. See Chap. 11 in this volume.

• 21. Brower and Ahmad 2019.

• 22. See Chap. 1 in this volume.

• 23. The provisions follow similar requirements under the US FTAs with DR-CAFTA (Article 18.7), Colombia, Peru and Panama.

• 24. See respectively Chap. 11 on Japan and Chap. 4.

• 25. See also the typology in Chap. 11 on Japan.

• 26. Article 2, Denmark (1988).

• 27. UNCTAD has mapped the definition of investment in the separate and earlier BIT with Japan (2003) as ‘in accordance with host State laws’ but it appears that this has been incorrectly categorized as such because it only applies to investments made prior to the entry into force of the BIT.

• 28. UNCTAD has mapped Austria (1991) as not ‘in accordance with host State laws’ but it appears that this has been incorrectly mapped as such because it applies to investments made prior to and after the entry into force of the BIT.

• 29. ASEAN FTA (2009), Article 1(C); China FTA (2015), Article 12.2.2. UNCTAD examples include the Australia–PRC FTA and the Canada–Cameroon BIT. See Reinisch 2018.

• 30. Some of the largest claims, which have a connection to corruption and illegality, are analyzed separately in the next section.

• 31. The first known case against Korea was filed in 1984 but was based on consent to arbitration in a contract rather than a treaty, which the country settled. Colt Industries Operating Corporation v. Republic of Korea (ICSID Case No. ARB/84/2).

• 32. UNCTAD n.d.

• 33. Adapted from UNCTAD n.d. (accessed 28 May 2023).

• 34. LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37.

• 35. In 2006, LSF-KEB acquired an additional 13.6% stake in KEB.

• 36. In June 2007, LSF-KEB sold its 13.6% stake for USD1.28 billion.

• 37. This figure excluded an additional tax claims and allegations based on conduct before the 2011 BIT went into effect.

• 38. Korea also claimed serious uncertainties to justify the delay because of a 2006 Bureau of Audit and Investigation (BAI) report that LSF-KEB allegedly acquired KEB through misconduct (Award, 198). The BAI found that the approval for LSF-KEB’s acquisition of KEB was ‘attained illegally, as well as unjustly, based on, among others, a distorted forecast BIS ratio …[that] was derived from the overstated weakness of Korea Exchange Bank according to Lone Star’s lobbying and improper requests for such overstatement.’ Award, para. 199.

• 39. The stock manipulation yielded Lone Star a profit of USD806 million of which USD64 million was deducted because it was found to be due to another joint venture partner. Award, para. 548.

• 40. Award, para. 20.

• 41. Award, para. 839.

• 42. Dissent, paras. 64, 79. The dissent also disagreed with the majority’s finding of illegality and a violation of fair and equitable treatment on the part of Korea.

• 43. The two claimants were Mason Capital L.P. and Mason Management LLC (Mason).

• 44. Elliott Associates, L.P. (Elliott). While the cases are technically separate and have been argued differently by the parties, the factual scenarios largely overlap, and the cases will be analyzed together for purposes of this chapter.

• 45. Mason Capital L.P. and Mason Management LLC v. The Republic of Korea, PCA Case N° 2018–55 (Mason v. Korea); Elliott Associates, L.P. v. The Republic of Korea, PCA Case N° 2018–51 (Elliott v. Korea).

• 46. Mason v. Korea, https://pca-cpa.org/en/cases/198/; Elliott v. Korea, https://pca-cpa.org/en/cases/197/. Pursuant to KORUS FTA, the memorials of the parties are available on the PCA’s website, but the factual exhibits, legal authorities, witness statements and expert reports are not. For updates, see Kim 2023. The Elliott v. Korea award remains unpublished.

• 47. The controlling shareholder was also found guilty of bribery. Notably, no evidence existed that the President, Minister or CIO personally benefited from the payments and the only direct beneficiary was a close confidante of the President. Furthermore, the senior government officials were not found guilty of bribery and the Minister was sentenced to two and a half years for abuse of power and perjury and the CIO was sentenced for two and a half years for occupational breach of trust.

• 48. Mason v. Korea, Claimant’s Request for Arbitration and Statement of Claim, para. 73.

• 49. Mason v. Korea, Respondent’s Post Hearing Brief, para. 20.

• 50. Korea argued, among other things, that the actions of NPS did not have a legally significant connection with the claimants because (i) in exercising its shareholder right to vote on the merger, NPS did not owe any duty to the claimants; (ii) the NPS exercised its shareholder voting rights in the same way as any other Samsung C&T shareholder; (iii) the merger did not impair or expropriate Mason’s rights as a Samsung C&T shareholder; and (iv) there was no evidence that Korea and the NPS intended to extract value from Samsung C&T’s shareholders through the merger. Mason v. Korea, Respondent, Post-Hearing Brief, para. 11; Elliott v. Korea, Respondent, Statement of Defense, para. 541.

• 51. Mason v. Korea, Respondent, Post-Hearing Brief, para. 14.c.

• 52. Elliott v. Korea, Award, para. 623.

• 53. Elliott v. Korea, Award, para. 603.

• 54. World Duty Free v. Kenya, ICSID Case No. ARB/00/7. See further Chap. 4 in this volume.

• 55. Wena Hotels Ltd v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award on Merits (8 December 2000), paras. 82–84.

• 56. Elliott v. Korea, Award, para. 604.

• 57. See further Chaps. 11 and 15 in this volume; and generally on more transparency provisions in Korea’s IIAs, Kim 2018.