Corruption and Illegality in East andSouth Asian Investment Agreements:
An Empirical Analysis
Dr Nobumichi Teramura and Professor Luke Nottage11. Introduction• Asian countries seem to be striving to curb corruption and othersimilarly serious illegal misconduct.

23 Asian states are members of the Anti-Corruption Initiative for Asia and thePacific (ACIAP) established by OECD and ADB.
All Asian countries (excluding North Korea) have adopted the United Nations
Convention against Corruption addressing the supply and demand sides.
Almost all Asian countries have domestic legislation prohibiting corruption andbribery.

• BUT corruption and bribery remain real in Asia.

Transparency International’s Corruption Perceptions Index (TICPI) and the World
Justice Project’s Rule of Law Index (WJPRLI) indicate that corruption and poor
governance are still prevalent across Asia.
Especially, Asia still seems to have difficulty controlling FDI-related
corruption through international investment agreements (IIAs).
2

• So there appears to be some ambivalence in Asian states’ approach towards
corruption and other serious misconduct in FDI.

 They have engaged with general anti-corruption initiatives. BUT, for FDI, they have signed
IIAs that are not always effective for anti-corruption.
 Only 45 out of 2584 IIAs concluded before 2012, and 16 out of 89 IIAs signed after 2021,
contained express anti-corruption clauses.
 Legality requirements on foreign investors are pervasive in IIAs in Asia. Host states may
invoke such requirements to deprive the corrupting investors of investment protection,
including the jurisdiction of the ISDS tribunal. No real sanctions against bribed hoststates.

• Why this ambivalence? Is it rational, serving individual national
interests? Or is it the ‘bounded rationality’ particularly of transitioning
economies suggested by Lauge N Skovgaard Poulsen in relation to signing up
to the modern investment treaty regime?
• Our paper primarily investigates this empirically; but also
• Can be used (normatively) for IIA drafters, advisors, researchers & internationalorganisations trying to be rational.

3

2.1 Methodology• The empirical analysis uses data collected from UNCTAD’s
International Investment Agreements Navigator (the Navigator).
We gathered information on anti-corruption provisions and legality requirements
in IIAs concluded by select countries in East and South Asia – China, South
Korea, Japan, ASEAN countries (excluding East Timor ) and India.
We used the details and texts of Bilateral Investment Treaties (BITs) and Treaties
with Investment Provisions (TIPs) provided by the Navigator until 31 December
2023, which are ‘in force’, ‘signed’ and ‘terminated’ by that time. But our analysis
focuses on BITs as stronger evidence of a party’s rational strategy or otherwise.
We also used the Electronic Database of Investment Treaties (EDIT) by the World
Trade Institute at the University of Bern to supplement missing information.

4

2.2 Hypotheses• Then, we tested the following hypotheses to see if the select Asian
countries have concluded IIAs rationally.
• Re: anti-corruption provisions
Hypothesis I (H-I): Net FDI-exporting states* are likely to adopt anticorruption provisions in IIAs, to protect their outbound investors from
corruption in investment destinations; net FDI-importing states areunlikely to be keen to conclude those provisions to avoid further liability.
Hypothesis I-A (H-IA): However, a subset of net FDI importers with very
little domestic corruption will not hesitate to agree to anti-corruption
clauses as these provisions will not practically affect their obligations
under IIAs.

5

• Re: legality clausesHypothesis II (H-II): Net FDI-exporting states* are reluctant to agree to IIAs
containing legality clauses, to protect their outbound investors (because hoststates may use such clauses as defences against corruption claims),
whereas net FDI-importing states (with significant domestic corruption andinbound ISDS disputes) will likely conclude legality clauses to protect theirfinances (and perhaps at least some officials).
Hypothesis II-A (H-IIA): A subset of net FDI-exporting states with significant
domestic corruption and inbound ISDS cases are more willing to adopt
legality provisions to protect themselves from inbound ISDS claims forcompensation under the IIA, despite such clauses disadvantaging theiroutbound investors bringing claims.
Hypothesis II-B (H-IIB): A subset of net FDI-importing states with very little
corruption are less prone to adopt legality provisions as they do notsignificantly increase their chances of successfully defending inbound ISDS
claims.
6

* Classification of legality clauses• Article 1.1 of the United Arab Emirates-Vietnam BIT (2009) provides that:
The term “investment” shall mean every kind of asset in the territory of one
Contracting Party invested by an investor of the other Contracting Party inaccordance with the laws and regulations of that former Contracting Party …

This provision provides robust protection for the host state where thehome state’s investor commences arbitration. We call legality
provisions of this kind “direct legality clauses (provisions)”.
• BUT (1) ‘legality in the scope of application clauses’, (2) ‘legality in the[promotion and] admission of investment clauses’ and (3) ‘legality
requirements linked to the substantive standards of investment
protection’ require foreign investors to follow the home states’ domestic
laws indirectly and thus offer less protection for the host state.
7

* FDI-Exporting States v FDI-Importing States?
• FDI Exporting Countries

Japan

South Korea

Brunei (?)

Outbound Stocks (million USD)

1 948 555.4

647 568.0

N/A

Inbound Stocks (million USD)

225 367.1

272 328.0

6 797.8• FDI Importing Countries
China
Outbound Stocks (million USD)
Inbound Stocks (million USD)

2931 653.0
3822 449.4
MyanmarOutbound Stocks (million USD)
Inbound Stocks (million USD)

Cambodia

N/A
38 427.5

Indonesia

1 418.4
44 537.1

103 941.2
262 920.0

Laos

Malaysia

94.7
12 736.0

137 654.7
199 205.9

Philippines

Singapore

Thailand

VietnamIndia

67 280.1
112 964.6

1 595 380.9
2 368 396.2

179 828.1
306 163.0

14 545.0
210 471.3

222 556.8
510 718.5
8

3. Anti-Corruption Provisions and Legality
Clauses in IIAs
Graph 1: IIAs Containing Anti-Corruption Clauses and Legality Provisions (Ratio)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

BITs

TIPs

Japan

BITs

TIPs

S Korea

BITs

TIPs

Brunei

BITs

TIPs

China

BITs

TIPs

India

BITs

TIPs

Singapore

Anti-corruption clauses

BITs

TIPs

Malaysia

BITs

TIPs

Thai

Legality provisions

BITs

TIPs

Vietnam

BITs

TIPs

Indonesia

BITs

TIPs

Philippines

BITs

TIPs

Cambodia

BITs

TIPs

Laos

BITs

TIPs

MyanmarDirect legality provisions

93.1 FDI-Exporting Countries:
Their Compatibility with Hypotheses
Japan
IIAs (Number)
BITs (37)
TIPs (22)
9 (41%)
Number (and ratio) of 22 (59%)
treaties having anti[moderate[H-I]
corruption provisions
H-I]
Number (and ratio) of 34 (92%)
treaties having legality[not H-II]
clauses

6 (27%)

Number (and ratio) of 6 (16%)
treaties having direct[H-II]
legality clauses

2 (9%)[H-II][H-II]South Korea
BITs (105) TIPs (26)
0 (0%)

4 (15%)[not H-I][not H-I]

101 (96%)

7 (27%)[H-IIA][not H-IIA]

46 (44%)[moderate
H-IIA]

5 (19%)[not H-IIA]• [ ] – The country’s
compliance with the
hypothesis. H-I is
Hypothesis I, H-II is
Hypothesis II, and so on.
• 50% as the dividing line for(dis)satisfaction and 30%
for moderate(dis)satisfaction.
• Black shading – rational
behaviour for direct legality
provisions in BITs.
• Dark shading – rational
behaviour for anti-corruption
provisions in BITs.
• Light shading – rational
behaviour for any legality
clauses in BITs.
10

* JapanJapan’s approach to anti-corruption and legality clauses appears to
be rational, although it was slow to expand its IIA programme.
• Accelerated BIT signings from Second Abe Administration (2012-2020).

But Japan maybe influenced by status quo bias: still using anticorruption provisions whose effects need more scrutiny, viz• Article 10 of the Cambodia-Japan BIT (signed in 2007) states: “EachContracting Party shall ensure that measures and efforts are undertaken toprevent and combat corruption regarding matters covered by thisAgreement in accordance with its laws and regulations”.
• Such ‘best efforts’ clauses are in 22 (59%) out of 26 BITs signed by Japan.
11

3.2 FDI-Importing Countries:
Their Compatibility with Hypotheses
IIAs (Number)

BITs (145)
Number (and ratio) of treaties 0 (0%)
having anti-corruption provisions [H-I]

China
TIPs (25)
1 (4%)

BITs (86)
3 (3%)

India
TIPs (15)
2 (13%)

Singapore
BITs (54)
TIPs (39)2 (4%)
5 (13%)

[H-I]

[H-I]

[H-I]

[not H-IA][not H-IA]

Number (and ratio) of treaties 143 (99%)
having legality clauses[H-II]

7 (28%)

86 (100%)

3 (20%)

48 (89%)10 (26%)[not H-II][H-II][not H-II][not H-IIB][H-IIB]

Number (and ratio) of treaties 138 (95%)
having direct legality clauses[H-II]

6 (24%)

84 (98%)1 (7%)

33 (61%)6 (15%)[H-II][not H-II]
ThailandTIPs (25)
3 (12%)[not H-IIB]

IIAs (Number)

BITs (71)
Number (and ratio) of treaties 0 (0%)
having anti-corruption provisions [H-I][not H-II]
Malaysia
TIPs (26)
3 (12%)

BITs (42)0 (0%)

BITs (67)0 (0%)[H-IIB]
VietnamTIPs (28)
6 (21%)

[H-I]

[H-I]

[H-I]

[H-I]

[H-I]

Number (and ratio) of treaties 66 (93%)
having legality clauses[H-II]

12 (46%)34 (81%)

10 (40%)63 (94%)

11 (39%)[moderate H-II] [H-II][moderate H-II] [H-II][moderate H-II]

Number (and ratio) of treaties 64 (90%)
having direct legality clauses[H-II]

10 (38%)7 (28%)

48 (72%)9 (32%)[not H-II][H-II][moderate H-II]
12

22 (52%)[moderate H-II] [H-II]

3.2 FDI-Importing Countries:
Their Compatibility with Hypotheses (cont’d)
IIAs (Number)
BITs (74)
Number (and ratio) of treaties 1 (1%)
having anti-corruption provisions [H-I]
Number (and ratio) of treaties 71 (96%)
having legality clauses[H-II]
Number (and ratio) of treaties 59 (80%)
having direct legality clauses[H-II]IIAs (Number)
BITs (26)
Number (and ratio) of treaties 1 (4%)
having anti-corruption provisions [H-I]
Number (and ratio) of treaties 20 (77%)
having legality clauses[H-II]

Indonesia
TIPs (23)
5 (22%)

Philippines
BITs (40)
TIPs (18)0 (0%)
4 (22%)

Cambodia
BITs (27)
TIPs (20)
1 (4%)
2 (10%)[H-I]
11 (48%)[H-I]
35 (88%)[H-I]
10 (56%)[H-I]
25 (93%)[H-I]
9 (45%)[moderate H-II][H-II][H-II][H-II][moderate H-II]

8 (35%)

30 (75%)6 (33%)

15 (56%)6 (30%)[H-II][H-II][moderate H-II]

BITs (12)1 (8%)[moderate H-II]
MyanmarTIPs (17)1 (6%)[H-I]
8 (44%)[H-I]
11 (92%)[H-I]
7 (41%)[moderate H-II][H-II][moderate H-II]

6 (33%)

8 (67%)

4 (24%)[moderate H-II][H-II][not H-II][moderate H-II]
Laos
TIPs (18)
2 (11%)

Number (and ratio) of treaties 10 (38%)
having direct legality clauses[moderate H-II]

13

* China
The pattern in China’s BITs suggests quite rational behaviour
considering the country’s FDI-importing country status (for now).

• China has a large BIT network: 145 treaties.
• No BITs contain anti-corruption provisions, whereas 138 BITs (95%) contain direct
legality clauses.

But it would be rational for China to transition away from legality
provisions to protect its increasing outbound investors when theoutbound FDI stocks exceed the inbound stocks (many years later).

• ‘One Belt One Road’ initiative sharply increased Chinese FDI abroad after 2013.
• FDI into China has fallen dramatically since (before) the COVID-19 pandemic.

14

* Singapore
Singapore’s BIT approach to anti-corruption clauses appears to be irrational,
probably influenced by some status quo bias.

• Clauses referring to corruption are included in only two (4%) of 54 BITs, yet a virtuallycorruption-free country like Singapore should not mind agreeing to anti-corruption
provisions even as a net FDI importer.
• Singapore concluded the first BIT in 1972 having no anti-corruption clauses when it was
still working to eliminate corruption. It started performing impressively in the CPI in 1995
(always in the top in the ranking until today), but BITs concluded later do not containanti-corruption provisions.  Status quo bias by negotiators/drafters?

Singapore is also partly irrational in retaining many legality clauses in BITs –33 (61%) among 54 BITs have direct clauses (but less than say China)• Unlike China, Singapore has almost no corruption, and indeed no known inbound ISDS
claims, so pressing to include a legality clause is not needed for defensive purposes.
• And if Singapore expects exporting more FDI, it should stop agreeing to legality clauses.
Recent BITs still contain legality clauses, suggesting some possible status quo bias.
15

* Thailand
Thailand’s economy has developed strongly by attracting FDI
since the 1980s (albeit especially into manufacturing)The country has had a few high-profile cases concerning
corruption and other serious misconduct.
• Alleged in Kingsgate v Thailand case under Australia FTA (settled?)

However, its overall approach to FDI-related corruption is rational.
• None of Thailand’s BITs have anti-corruption provisions• 22 BITs (52%) have direct legality provisions – although could rationallypress for more.

16

4. Conclusions• Overall, South and East Asian net FDI-importing states and some FDIexporting states have generally achieved rational outcomes innegotiating IIA provisions for FDI-related corruption.
• Their TIP strategies sometimes appear more irrational. Eg, see thedirect legality provisions agreed by India and Singapore as the ratio of
their TIPs having such provisions is significantly low – respectively 7%
and 15%. But TIPs are usually more varied than BITs, and the latterprovide better evidence of IIA strategies.
• There are further complexities, eg, countries transitioning from FDI
importers to exporters. Nevertheless, our research suggests Asianstates adopt quite rational strategies, or they could do so - which IIA
drafters and policymakers need to consider when consideringinterfaces with corruption.
17