The International Comparative Legal Guide to:

International Arbitration 2007

A practical insight to cross-border International Arbitration work

Published by Global Legal Group with contributions from:

Advokaterne Amaliegade No 42 Foigt and Partners / Regija Borenius Miranda & Amado Abogados
Alban Tay Mahtani & de Silva Freshfields Bruckhaus Deringer Molina & Asociados Central Law
Aluko & Oyebode Ghellal & Mekerba Morais Leitão, Galvão Teles, Soares da Silva
Arsov Natchev Ganeva Gilbert Walker & Associados
Attride-Stirling & Woloniecki Guevara & Gutierrez S.C. Servicios Legales Nishimura & Partners
Baier Boehm O'Melveny & Myers LLP
Haavind Vislie
Basham, Ringe y Correa Pachiu & Associates
Benedetti & Benedetti Central Law Hill Dickinson LLP
Homburger Posse Herrera & Ruiz
BKBG Sociedade de Advogados Quirós & Asociados Central Law
Blake, Cassels & Graydon LLP Johnson Stokes & Master
Raidla & Partners
Brick Court Chambers Kachwaha & Partners
Roschier, Attorneys Ltd.
Bustamante & Bustamante Kojovic Law Office
Rusconi, Valdez, Medina & Asociados Central
Carey y Cía. Ltda. Kyriakides - Georgopoulos & Daniolos - Law
Clayton Utz Issaias Law Firm S. Horowitz & Co.
Clifford Chance LLP Lee & Ko Shalakany Law Office
CMS Cameron McKenna LLP Lejins, Torgans & Partners
Cuatrecasas Abogados SJ Berwin LLP
Lombardi Molinari e Associati Stibbe
Dechert LLP Magister & Partners
Díaz-Durán & Asociados Central Law Vinge
Matheson Ormsby Prentice Werksmans
Elvinger, Hoss & Prussen
Estudio Alegria, Buey Fernández, Fissore & Medina, Rosenthal & Fernández Central Law WilmerHale
Montemerlo Mehmet Gün & Partners Winston & Strawn LLP

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 Chapter 5
Money Laundering as a
Defence in International
Commercial Arbitration: a
Practitioner’s Perspective
Winston & Strawn LLP
1. Introduction
This article examines, from a practitioner’s perspective, selected
issues that may arise from the assertion of a money laundering defence
in international arbitration. It is no secret that money laundering has
become the subject of increased international regulation,
criminalisation, and close cooperation among law enforcement
agencies, regulators and financial institutions during the last decade.
And these initiatives have only accelerated in the wake of the
September 11, 2001 terrorist attack, with new or revised legislation in
the United States, the European Union and many other jurisdictions,
and revised recommendations from inter-governmental and private
groups, such as the Financial Action Task Force (“FATF”) and the
Wolfsberg Group. [See e.g., the U.S. Patriot Act enacted in October
2001; the Second and Third EU Money Laundering Directives
introduced in December 2001 and October 2005.] It is thus not
surprising that money laundering has likewise received greater
attention from lawyers and arbitrators in international arbitrations,
who have at the same time become subject to increasingly complex
legal and ethical duties in this regard.
In the past, the assertion of an “illegality defence” has invariably
involved allegations of bribery or official corruption, since law and
public policy in certain jurisdictions provides that a contract may be
rendered unenforceable if its purpose or performance are deemed to
be illegal. [E.g., World Duty Free Company Ltd.v. The Republic of
Kenya, ICSID Case No. Arb/00/7]. In light of the increased
regulation and criminalisation of money laundering, however, we
are now for the first time seeing “money laundering” raised as a
defence in international arbitrations in response to breach of
contract claims. The assertion of a money laundering defence in a
private commercial arbitration raises a host of issues for arbitrators
and practitioners, some of which are the subject of this article.
The assertion of an illegality defence of any sort, of course, by its
very nature invokes issues of public policy. The assertion of a
money laundering defence, however, may also pose challenges to
the management and control of the arbitral process, and even test
the limits of arbitration as a dispute resolution mechanism, since
allegations of criminal wrongdoing involving non-parties to the
arbitration may be involved. For this reason, arbitral tribunals must
guard against money laundering allegations which are made solely
for tactical advantage by unscrupulous litigants. Similarly, a party
resisting the enforcement of an otherwise valid contract must be
held to a strict burden of proof in the assertion of money laundering
as a defence to the breach of its own contractual obligations.
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Marc S. Palay
Ricardo E. Ugarte
2. Elements Of A Money Laundering Claim
“Money laundering” is carefully defined in many national laws and
multi-lateral directives (e.g., Article 305bis of the Swiss Penal Code
and the Third EU Money Laundering Directive, Chapter 1, Article
1.2), but put simply, it is an attempt to disguise the origin of proceeds
which derive from a predicate criminal offence. An act of money
laundering is thus an act of conversion or transfer of the proceeds of
crime for the purpose of disguising or concealing their illicit origin, or
assisting any person involved in a predicate offence in this regard. The
proceeds of crime, whether laundered or not, are the subject of
criminal forfeiture, and one policy behind anti-money laundering
statutes is to avoid the frustration of criminal forfeiture provisions.
Generally, in the context of a commercial arbitration, in order to
establish the offence of money laundering, a party will need to
establish that:
a predicate criminal offence was committed;
the predicate offence generated funds that were directly or
indirectly received by the claimant;
the claimant received such funds with knowledge that they
derived from a predicate offence; and
the claimant nevertheless used such funds in the performance
of the contract in arbitration in furtherance of efforts to
conceal their illegal origins.
In most if not all jurisdictions, to qualify as a “predicate offence” to
money laundering the criminal activity in question must constitute
a serious offence, i.e., typically a felony as opposed to a criminal
misdemeanor. [See e.g., Third EU Money Laundering Directive,
Chapter 1, Articles 3(4) and 3(5); see also, Article 305bis of the
Swiss Penal Code.] Generally speaking, a predicate offence must
be an offence punishable by imprisonment; but a conviction on the
predicate offence is not required in order to establish the offence of
money laundering. Indeed, the money launderer and the person
committing the predicate offence are typically different parties, and
it is sufficient if the predicate offence is proven in the proceedings
brought against the alleged money launderer, although the ultimate
prosecution vel non of the alleged predicate offender should always
be taken into consideration.
One controversial issue is whether crimes arising out of tax evasion
or currency control violations should be recognised as predicate
offences. For example, evasion of income tax is not considered to
qualify as a predicate offence in many jurisdictions, or may not be
criminal. Generally, one state will not enforce the tax debts due to
another one, and this has influenced the treatment of tax evasion in
the context of the establishment of a money laundering offence. In
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Winston & Strawn LLP
Switzerland, for example, one commentator has stated:
“The recycling or laundering of capital or also money laundering is
a completely different phenomenon from the… tax offences
mentioned above. Indeed, in the first cases, the assets shielded from
the tax authority have one way or another a legal source (salary,
wealth, inheritance, donations, gain from games, etc.) and the
purpose is tax evasion. On the other hand, in the case of
laundering, the diminution of the tax burden is a secondary
purpose. Indeed, and contrary to the notions set forth above,
recycling of capital is conceivable only if a crime or an offence has
been committed beforehand and if a monetary profit was taken out
from the latter. These assets have, therefore, no legal justification
and can not be used as such by their “owner”. […] Hence it
appears that the evasion, the concealment, the tax evasion and
laundering are completely different actions from one another and
the confusion that surrounds them is not favourable to the
understanding of their significant differences, yet the understanding
is quite simple. It is necessary to underline that often, the channels
used in the phases of recycling of capital are the same as those used
for funds hidden from the fiscal authorities having the capacity to
tax.” [Nicolas Reichen, Evasion, soustraction et fraude fiscales et
blanchiment de capitaux. Des distinctions subtiles s’imposent, Der
Treuhänder 2002, pp. 705-709, 706-707); Unofficial Translation.]
Another prerequisite to a money laundering offence is that the
predicate offence is not barred by the statute of limitations at the
time the money laundering activity takes place. This requirement
derives in part from the fact that a principal purpose of the criminal
prohibition of money laundering is to prevent the frustration of
asset forfeiture, and thus if the statute of limitations has run with
respect to the predicate offence the resulting asset will no longer be
subject to forfeiture. Where the predicate offence takes place in a
jurisdiction other than that of the money laundering itself, the
foreign statute of limitations should normally apply.
3. Applicable Law
An arbitral tribunal confronted with money laundering allegations
must of course determine at the outset which country’s law to apply,
both to the issue of predicate offence and to the offence of money
laundering itself. Moreover, it is often the case that different laws will
apply to the predicate offence and the act of money laundering,
respectively, since the alleged predicate offence may have taken place
in one jurisdiction, and the money laundering activity in another.
The starting point for an arbitral tribunal, however, is invariably the
parties’ own choice of law, and leading jurisdictions such as the
United States, those of the European Union and Switzerland all
have established money laundering legislation. The public policy
of the forum state may also play an important role.
Once the arbitral tribunal has determined preliminary questions of
criminal law it will have to determine the effect, if any, of the
alleged crime on the civil law claims at issue. For example, a
tribunal will need to determine whether the crime of money
laundering, if established, justifies a ruling that the contract should
be deemed unenforceable. This criminal and civil law overlap
presents many unique issues for both the arbitral tribunal and the
parties. For example, it may be that the predicate offence is already
under investigation, or even active prosecution, in another
jurisdiction, where criminal procedures and arguably different
burdens of proof apply. For these or other reasons, an arbitral
tribunal seeking to make findings on an alleged predicate offence
may find itself with limited access to witnesses or proof, and
certainly will not have available to it the resources of a foreign
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Money Laundering as a Defence
prosecutor or regulatory authority. Whether to stay arbitration
proceedings in such cases, and how to proceed in a manner which
is fair to the litigants, protects both party and third party rights, but
nonetheless provides the expeditious and fair adjudication of the
dispute bargained for in the arbitration clause, can be a delicate
balancing act indeed. In a recent arbitration, a tribunal found a
predicate offence had occurred, only to have the responsible foreign
and domestic prosecutorial authorities subsequently reach the
opposite conclusion.
Money laundering in the context of a defence to a contractual claim
in a commercial arbitration will invariably require proof that the
funds used to perform the contract at issue derive from a predicate
offence. Once proven, such a finding can lead to a decision that the
contract itself is unenforceable, which would potentially undermine
a claim for relief based on breach. [See e.g., Lord Mansfield in
Holman v Johnson (1775) 1 Cowp 341, 343: “No court will lend its
aid to a man who founds his cause of action upon an immoral or an
illegal act”.] For example, under the English law rule in the
Bowmaker case, where a claimant must “plead or prove” an illegal
act in order to establish the elements of a cause of action, that cause
of action is unenforceable. [Bowmakers Ltd v Barnet Instruments
Ltd [1945] KB 65; Euro-Diam Ltd v Bathurst [1990] QB 1, 20;
Royal Boskalis Westminster NV v Mountain [1997] LRLR 523,
575.] A related principle of English law provides that a claimant
will not be permitted to establish a right based on the commission
of a crime; in other words, to sue for the benefits or proceeds of his
or her crime. This principle is sometimes referred to as the
Beresford principle. [Beresford v Royal Insurance Co Ltd [1937] 2
KB 197; [1938] AC 586.] At least under English law, however,
while illegal performance may render a valid contract
unenforceable, such a finding still leaves room for the pursuit of
extra-contractual claims, such as tort or property claims relating to
the contract.
4. The Need For Focused Pleadings
In an arbitration where a money laundering defence has been plead,
and is to be considered, a key issue will be the provenance of the
funds provided under the contract in arbitration. It follows that only
those predicate offences which are alleged to have generated such
funds should be the topic of permissible pleading, and a tribunal
faced with adjudicating a money laundering defence should in most
circumstances limit its inquiry to the predicate offence(s) which
generated the funds paid under the contract in arbitration.
An arbitral tribunal, when examining a money laundering defence,
should remain focused upon transactions directly related to the
contract at issue in the arbitration, and not allow itself to be diverted
into the conduct of a broad-based inquiry into alleged criminal
conduct unrelated to the contract at issue or the parties to the
arbitration. Indeed, one leading commentary makes clear:
“An arbitration agreement confers a mandate upon an arbitral
tribunal to decide any and all of the disputes that come within the
ambit of that agreement. It is important that an arbitrator should not
go beyond this mandate;” [and if the arbitrator suspects that there
may be criminal activity involved in the arbitration], “[t]here is a
balance to be struck. It is not the job of the arbitrator to seek to
uncover criminal activity but rather to resolve the dispute which has
been referred to it within the scope of the arbitration agreement.”
[Alan Redfern & Martin Hunter, Law and Practice of International
Commercial Arbitration, 4th ed. at 3-37 and 5-28 to 5-29.]
Swiss law likewise recognises the principle of proportionality
(Verhältnismässigkeitsprinzip), under which any investigation related
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to alleged criminality in connection with the agreement at issue in the
arbitration should be proportional, suitable and necessary to the
determination of whether assets under investigation have criminal
origins. [See generally, Ulrich Häfelin & Walter Haller,
Schweizerisches Bundesstaatsrecht, 5. Aufl., Zurich 2001, p. 99 et seq.]
The proponent of a money laundering defence has in particular the
burden of establishing that the relevant contractual payments were
in fact the proceeds of crime, which would ordinarily require a clear
paper trail demonstrating the criminal origins of the funds in
question. Nonetheless, money laundering often involves the
substitution of assets, and by its nature is designed to conceal the
origin of the funds. The arbitral tribunal is thus tasked with striking
the proper balance between legitimate requests for disclosure in
response to the assertion of a prima facie case and a fishing
expedition into unrelated and possibly commercially sensitive
transactions. As stated in an important article on this subject,
“…concealment of the sources of funds should not automatically be
equated with money laundering, and departures from normal
accounting practices are not always evidence of fraud.” [Bernardo
M. Cremades and David J.A. Cairns, Transnational Public Policy
In International Arbitral Decision-Making: The cases of bribery,
money laundering and fraud in Arbitration - Money Laundering,
Corruption and Fraud (ICC Dossiers 2003) at p. 84.]
While exceptions to this targeted approach may be warranted, in
general a tribunal would be well advised to focus only upon the
pertinent predicate offences. To do otherwise could effectively
convert the tribunal into a quasi-governmental investigative body,
and undermine the duty of the tribunal to decide the rights of the
parties under and relating to the contract at issue. This is not only
a question of principle. Were a tribunal to adopt a broader approach
it may also later be asserted that it has acted ultra petita. [Id.]
5. Evidentiary and Proof Issues
The task of proving the existence of a money laundering offence in
an arbitral proceeding may raise complicated questions of proof and
evidence. For example, when adjudicating the existence of a
money laundering (or any other criminal offence), unique issues
confront the arbitral tribunal in the determination of the appropriate
standard of proof to apply. The tribunal will need to decide whether
to determine the existence of money laundering based on a civil law
standard (such as the balance of probabilities) a criminal law one
(such as the beyond reasonable doubt test), or possibly a hybrid
standard. The presumption of innocence applicable in criminal
proceedings should also apply here.
Before grappling with that issue, however, the tribunal and the
parties will need to determine which law to apply to the burden of
proof standard. Where an arbitration is seated in Switzerland, for
example, the standard of proof is normally considered to be a matter
of substantive law, and therefore with reference to the substantive
law chosen by the parties to decide the merits of the dispute. [See
e.g., Paolo Michele Patocchi & Ian L. Meakin, Procedure and
Taking of Evidence in International Commercial Arbitration - The
Interaction of Civil Law and Common Law Procedure, in:
International Business Law Journal No. 7 - 1996, 884-899 (889);
Michael E. Schneider, Commentary to Article 184 SPIL, in:
International Arbitration in Switzerland (Stephen Berti ed.),
Basel/Geneva/Munich/The Hague/London/Boston 2000, note 11.]
In England, however, issues concerning the standard of proof are
considered matters of procedure, such that the lex fori could provide
the relevant standard of proof.
Once the applicable law is determined, the tribunal must decide
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Money Laundering as a Defence
whether the standard of proof in adjudicating a money laundering
offence in an arbitral proceeding should be the apposite criminal
standard, the civil standard, or a hybrid of the two. For example,
English authorities have stated that in such a case the civil
“preponderance of the evidence” standard should continue to apply
but “the more serious the allegation the more cogent the evidence
required to overcome the unlikelihood of what is alleged and thus to
prove it.” [Phipson on Evidence, 15th Edition, 4-36.]
Arbitral jurisprudence offers insights as well. For example,
consistent with U.S. case law some arbitration awards have
suggested the application of a more stringent standard to cases
involving fraud. In Westinghouse v. The Republic of the
Philippines, a tribunal sitting in Switzerland (and applying
Pennsylvania law) acknowledged that allegations of fraud (and
bribery) face a higher standard of proof:
... fraud in civil cases ‘must be proved to exist by clear and
convincing evidence amounting to more than mere preponderance,
and cannot be justified by a mere speculation. This is because
fraud is never lightly to be presumed’ …Bribery is a form of fraud
and must be established by ‘a clear preponderance of the
evidence’… [ICC Case No. 6401, Westinghouse v The Republic of
the Philippines, in Mealey’s International Arbitration Report, 7(1),
1992, C-405 (p.34) (citations omitted).]
Similarly, Cremades and Cairns have stated that:
“The burden of proof is clearly on the party making the allegation
of bribery, money laundering or fraud and the proof should be
convincing. Uncorroborated evidence or evidence capable of
multiple explanations should normally be rejected.” [Bernardo M.
Cremades and David J.A. Cairns, Transnational Public Policy in
International Arbitral Decision-Making: The cases of bribery,
money laundering and fraud at p. 83.]
Given the complexity of money laundering allegations, some
litigants have sought to rely upon the existence of money
laundering “indicators” published for use by financial institutions as
a substitute for direct proof of a predicate offence. Whether this is
an appropriate use of the “indicators” is open to debate.
Money laundering indicators have their origins in the efforts of
organisations such as the Financial Action Task Force (“FATF”), an
inter-governmental organisation which was established in 1989 by
the G-7 Member States, to encourage countries to implement
recommendations designed to combat money laundering. In 1990,
the FATF published “40 Recommendations” for the purpose of
recommending that general anti-money laundering measures be
adopted by countries, including in the areas of banking and finance
and law enforcement, including recommendations regarding the
publication of guidelines to detect suspicious transactions. For
example, FATF Recommendation 28 (since revised) provides that:
“The competent authorities should establish guidelines which will
assist financial institutions in detecting suspicious patterns of
behavior by their customers. It is understood that such guidelines
must develop over time, and will never be exhaustive. It is further
understood that such guidelines will primarily serve as an
educational tool for financial institutions’ personnel.”
Recommendation 25 (which superseded Recommendation 28 in
connection with the 2003 revisions enacted to the 40
Recommendations) now reads:
“The competent authorities should establish guidelines, and
provide feedback which will assist financial institutions and
designated non-financial businesses and professions in applying
national measures to combat money laundering and terrorist
financing, and in particular in detecting suspicious transactions.”
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The EU has vied to adhere to the recommendations of the FATF,
stating that “Community action should continue to take particular
account of the Recommendations of the Financial Action Task
Force…, which constitutes the foremost international body active in
the fight against money laundering and terrorist financing.” [Third
EU Money Laundering Directive, Preliminary Clause (5).]
As a result, a number of EU and non-EU countries have published
schedules of so-called money laundering indicators to assist
financial institutions in detecting and reporting suspicious
transactions. For example, on 1 July 2003 in Switzerland the
“Ordinance of the Swiss Federal Banking Commission Concerning
the Prevention of Money Laundering” entered into force. This
Ordinance included a schedule of “Indicators of Money
Laundering” which identifies as suspicious, for example, those
transactions “where the structure indicates some illegal purpose,
their commercial purpose is unclear or appears absurd from a
commercial point of view” or the transactions result “in significant,
but unexplained, activity on an account which was previously
dormant.” [Schedule of Money Laundering Indicators of the
Ordinance of the Swiss Federal Banking Commission Concerning
the Prevention of Money Laundering, A3 and A4.] Similarly, the
Wolfsberg Group, which consists of major international private
banks, has published anti-money laundering guidelines for private
banks which list money laundering indicators designed to alert
banks to suspicious transactions or transactions which may require
additional due diligence.
As referenced above in the FATF’s Recommendations 28 and 25,
however, it is important to recognise that money laundering
indicators are created primarily for banks and financial institutions
as general guidelines, and may be of limited use as predictors, let
alone proof, of actual money laundering activity. Indeed, the
schedule of money laundering indicators found in the Ordinance of
the Swiss Federal Banking Commission Concerning the Prevention
of Money Laundering states, for example, that:
“The indicators for potential money laundering activity set out
below are primarily intended to raise awareness among the staff of
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Money Laundering as a Defence
financial intermediaries. These indicators enable identification
and the reporting of higher risk business relationships or
transactions. A single indicator may not in itself be sufficient
grounds for suspecting that an illegal money laundering
transaction has been carried out, but the existence of more than one
such factor may be indicative of money laundering activity.”
The primary purpose of money laundering indicators arises out of
the fact that financial institutions are often on the front line of
detecting money laundering activities. If money laundering
indicators exist, the bank will typically report the existence of a
suspicious transaction or suspicious activity (an SAR) to the
appropriate financial investigative unit (or FIU). From there the
FIU will determine if the suspicion of money laundering is well
founded and, if so, forward the file to the appropriate prosecuting
authorities, who will decide whether or not to conduct a preliminary
investigation. In sum, money laundering indicators are early
warning tools which can often fail to accurately predict the
existence or not of money laundering or the underlying predicate
offence. Indeed the vast majority of SAR’s do not result in criminal
convictions. [See e.g., Money-Laundering Reporting Office
Switzerland (MROS), Annual Report, 2004, p.47.]
6. Conclusion
The increased regulation of money laundering, as well as the
increased focus of public authorities and private NGO’s on this
issue, makes it likely that money laundering will increasingly become
an issue in international arbitrations, and the subject of contractual
defences. It is the role of counsel and arbitrators to assure that the
arbitration remains focused on the issues that were contractually
agreed for submission to arbitration, and that when money laundering
allegations are raised the appropriate safeguards and burdens of proof
are established so that the rights of litigants to a fair and private
adjudication of their claims, and public policy, are respected.
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 Winston & Strawn LLP Money Laundering as a Defence

Marc S. Palay Ricardo E. Ugarte

Winston & Strawn LLP Winston & Strawn LLP
43 Rue du Rhone 43 Rue du Rhone
1204 Geneva 1204 Geneva
Switzerland Switzerland

Tel: +41 22 317 7576 Tel: +41 22 317 7575

Fax: +41 22 317 7500 Fax: +41 22 317 7500
Email: MPalay@winston.com Email: RUgarte@winston.com
URL: www.winston.com URL: www.winston.com

Marc S. Palay is the managing partner of the Geneva office of Winston Ricardo E. Ugarte is a partner of Winston & Strawn LLP. He specialises
& Strawn LLP. For more than 20 years his practice has focused on in international arbitration and commercial litigation. He has tried
international arbitration, complex litigation, international commercial various arbitrations and has appeared as counsel in both institutional
transactions, and international trade and unfair competition matters, (ICC and SCC) and ad hoc arbitrations. He has both U.S. and
the last dozen years from Geneva, Switzerland. international litigation experience, having advised clients in a number
Mr. Palay’s practice cuts across all areas of business disputes, including of European and Latin American jurisdictions. He received a B.A.
complex contract, fraud, insurance, product liability, securities, degree from the University of Chicago with Honors, and received a Juris
construction, competition, and trade disputes, as well as intellectual Doctor degree from Northwestern University School of Law. His
property matters arising out of licensing and technology transfer languages include English, Spanish, French and Italian.
agreements. Mr. Palay also has extensive experience in the drafting
and negotiation of international commercial agreements, licenses and
distributions agreements, and counsels clients on a wide variety of
international commercial matters. Mr. Palay employs a practical,
client-centred approach to business disputes, and has developed an
impressive track record in major cases. He is an experienced trial
lawyer who practices before a wide variety of international arbitral and
judicial forums, including those constituted under International
Chamber of Commerce Rules, the Swiss Rules of International
Arbitration and the English Arbitration Act. In addition, Mr. Palay
continues to represent multinational firms before various state and
federal courts throughout the U.S. He has been counsel of record in a
number of leading U.S. cases involving the recognition and
enforcement of international arbitral agreements and awards.

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