Churchill Mining loses $1.3bn fraud claim against Indonesian government

A London-listed mining company whose coal mining licences were revoked after its Indonesian business partner had forged the documents has had its compensation claim for U.S.$1.3bn against the Indonesian government thrown out by an international tribunal.

The World Bank-affiliated International Centre for Settlement of Investment Disputes (ICSID) ruled in December that London-listed Churchill Mining’s entire investment in East Kalimantan in Indonesia was tainted by fraud and was not protected by international investment treaties.

To add insult to injury, the tribunal ordered Churchill, which was joined in the case by its Australian subsidiary, to pay nearly U.S.$9.5m toward the Indonesian government’s legal costs.

The case has been wrangled in legal battles for six years. Churchill Mining began operating in Indonesia in 2008 after acquiring a 75 percent stake in its local partner, the Ridlatama Group, which had coal-mining permits for what had been billed as the world’s seventh-largest undeveloped coal resource—a 35,000-hectares concession area in Busang, Muara Wahau, Telen, and Muara Ancalong districts in East Kutai, East Kalimantan.

Churchill thought it had struck it rich when exploration activities revealed far more coal than expected. In April 2008, the company announced its initial target had been exceeded by 150 percent, with the project’s coal resources now estimated at 250 million metric tons.

However, its dreams came crashing down in 2010 when the East Kutai administration revoked Ridlatama’s mining permits over its alleged involvement in illegal logging and operations and for forging permits. The authenticity of 34 documents dating from 2007 to 2010 was called into question. These included exploration licenses, survey licenses, spatial analyses, and legality and cooperation letters, all purportedly signed by officials from either the East Kutai district or East Kalimantan province.

In 2010, Churchill filed a claim against the decision to revoke its licence to the Samarinda Administrative Court. However, the court said that the permit revocation was in compliance with necessary procedures. In 2011, Churchill appealed to the Jakarta State Administrative Court, which gave the same ruling. Another appeal at the Supreme Court also ruled in favour of the Indonesian government.

Churchill and its Australian subsidiary Planet Mining (which also held an interest in the East Kutai coal project through its 5 percent shareholding in PT Indonesia Coal Development) then took Indonesia to the ICSID in 2012 (Indonesia had consented to ICSID arbitration under the bilateral investment treaty the country had with the United Kingdom), claiming that the revocation of licences had resulted in total losses amounting to U.S.$1.3bn. In February 2014, the ICSID said that Churchill could pursue its damages claim against the Indonesian government.

“It is unclear which ground(s) Churchill may be considering but if an application is to be brought it needs to be done quickly as the time limit for requesting annulment is 120 days after the award—or any subsequent decision or correction—has been published.”

Roger Milburn, Of Counsel, Berwin Leighton Paisner – Singapore Office

In its ruling on 6 December, however, the ICSID found that the 34 disputed documents were not authentic and were most likely forged by “a person or persons acting for or on behalf of Churchill’s Indonesian partner, the Ridlatama group, in collusion with a person inside the East Kutai regency” who “introduced the fabricated documents into [East Kutai district’s] databases and archives.” The ICSID tribunal also concluded that there was no finding that Churchill or its officers were involved in any forgery of documents (the Indonesian government had conceded in 2015 that the Ridlatama Group—and not Churchill—was the sole perpetrator of the fraud, and that the group acted without the knowledge or consent of any Churchill official).

Fraud can be difficult to detect, but the tribunal found that many key documents were blatantly forged and that Churchill should have queried the documentation earlier. For example, one of the key officials testified that he only ever signed official documents by hand rather than by an auto-pen or electronic signature (one expert witness said that a physical signature “is the last bastion of power” and would be “concerned” if documents were not hand-signed).

There were other obvious red flags. In some cases, digital cut-and-paste jobs were so crude that the signature block obscured surrounding text, while in other cases “nonsensical” legends appeared on survey maps (that did not have proper latitude or longitude numbers) reading “I Lover you” and “Oh yes/no.” The company did not even think that there was any problem with the fact that the application featured a different location to the one named in the licence.

In the end, the ICSID was “struck by the seriousness of the fraud that taints the entire [project].” It found that Churchill’s due diligence investigations conducted at the time of acquiring the East Kutai Coal licenses were insufficient, and that subsequent fraud red flags were not followed up. As a result, Churchill’s claims were dismissed, and the mining company was ordered to pay the Indonesian government a total of U.S.$9.44m (including U.S.$8.64m, or 75 percent of Indonesia’s total legal costs, plus U.S.$800,000 in arbitration tribunal fees paid by the country over the past four years).

The ruling, however, did not entirely go Indonesia’s way, and compliance officers whose organisations operate in developing countries working with local operators should take note of the litany of problems. For example, Awang Faroek Ishak, former head of East Kutai district and current governor of East Kalimantan, described the situation as “a major corruption case in our country.” According to transcripts quoted in the verdict, Ishak alleged that Isran Noor, his successor as East Kutai district head (regent), may have been implicated in the scheme: “I do not know what happened after I left, but what is clear, one difficulty I have, suddenly the Regent has a private jet. It doesn’t make sense. An official suddenly has a private jet. How much it [sic] price for a private jet?”

EXPLAINING ICSID

The International Centre for Settlement of Investment Disputes (ICSID) is an international arbitration organisation set up 50 years ago and is part of the World Bank. It has a strong reputation for facilitating the resolution of disputes involving cross-border investors, and is often a tribunal of choice in many bi-lateral investment treaties (BITs).
BITs are intended to offer certain protections to foreign investors, guaranteeing fair and equal treatment, protection and security and no arbitrary or discriminatory measures. They are meant to prevent expropriation and effectively act to mitigate country risk. Non-observance results in recourse against the host state in arbitration.
ICSID does not actually conduct arbitration or conciliation proceedings itself—instead, it offers support as an institution to arbitration tribunals and rules by which arbitrations must be conducted—but it is acknowledged that ICSID arbitration is a powerful tool for bringing claims against governments, says Roger Milburn, of counsel in the Singapore office of law firm Berwin Leighton Paisner. One aspect of ICSID arbitration that makes it unique is its lack of an appeal process, he says.
“Article 53 of the ICSID Convention requires each contracting state to recognise an ICSID award as binding and enforce the obligations imposed by the award within its territory as though it were a final judgment of a court in that country,” says Milburn.
As of May 2016, there were 153 contracting member states that have agreed to enforce and uphold arbitral awards arising out of ICSID arbitrations in accordance with the ICSID Convention.
However, according to Milburn, Indonesia looks set to deliver on its 2014 threat to terminate all of its 67 BITs with other nations, which should sound alarm for foreign investors as future disputes would no longer be able to be brought to ICSID’s attention (and it is perhaps unlikely that an Indonesian Court would be inclined to find against the State in new proceedings which would be required in an Indonesian court).
During 2014/15, Indonesia’s BITs with China, Laos, Malaysia, the Netherlands, Italy, France, Slovakia, Bulgaria, and Egypt were all allowed to lapse. More are set to lapse this year, with no plans to renew them, including those with Spain, Cambodia, India, Romania, Turkey, Vietnam, Hungary, Singapore, Pakistan, and Switzerland.
—Neil Hodge

Indonesia did not make Noor available for testimony, and declined to provide the tribunal with details of investigations by Indonesia’s anti-corruption authority, the KPK.

East Kutai’s poor recordkeeping also came in for stern criticism. Proceedings were repeatedly delayed due to Indonesia’s difficulty locating relevant documents, which increased legal costs (and is why the tribunal capped Churchill’s reimbursement of Indonesia’s costs at 75 percent).

The case also highlighted a number of problems with regard to administration and governance. For example, under the country’s 2009 Mining Law, local administrations have the authority to issue licenses, even to inexperienced mining companies. Investigations by Indonesia’s anti-corruption investigators, the KPK, have found that more than 1,000 coal mining licenses have been issued in violation of existing laws, and it has moved to revoke around 490 of them. Brett Gunter, a Jakarta-based consultant who managed drilling operations for Churchill, testified that over 5,000 overlaps of mining licenses exist in the country.

Churchill Chairman David Quinlivan has said the firm was “obviously extremely disappointed” and believes there are grounds to annul the decision, which is the only legal avenue available (ICSID decisions cannot be appealed and awards cannot be revised). The company is working with its lawyers Clifford Chance to determine which grounds may be best to pursue. As part of that application, Churchill said it would seek a stay of the costs orders that have been made.

The annulment process is governed by Article 52 of the ICSID Convention and is not concerned with the merits of the underlying decision. However, Article 52(1) states that awards can be annulled only on the following five narrow grounds: the tribunal was not properly constituted (Article 52(1)(a)); the tribunal has manifestly exceeded its powers (Article 52(1)(b)); there was corruption on the part of a tribunal member (Article 52(1)(c)); there was a serious departure from fundamental rules of procedure (Article 52(1)(d)); and the award failed to state the reasons on which it was based (Article 52(1)(e)).

Roger Milburn, of counsel in the Singapore office of law firm Berwin Leighton Paisner, says that “it is unclear which ground(s) Churchill may be considering, but if an application is to be brought it needs to be done quickly, as the time limit for requesting annulment is 120 days after the award—or any subsequent decision or correction—has been published.”

If the award is annulled in whole or in part, says Milburn, either party may request the resubmission of the dispute to a new ICSID arbitral tribunal. The results of annulment requests vary and are entirely fact specific. It is not possible to express an opinion on a theme, he adds.

The whole episode flags up a number of lessons that compliance professionals should take note of and learn from. Lisa Osofsky, EMEA chair at financial crime and risk firm Exiger, says that “it is the fundamental job of the compliance function of any company to perform background checks of any partner company it engages with and to monitor that relationship, particularly in high-risk jurisdictions.”

Ensuring appropriate and proportionate due diligence is carried out prior to investing in a foreign market is a crucial consideration, says Milburn. “Due diligence should routinely form part of an investor’s risk analysis ahead of making any investment decision or entering into any business relationship, especially in high-risk jurisdictions. This is particularly the case where a foreign investor is exposed to potential penalties under the Foreign Corrupt Practices Act of 1977 (FCPA) and/or the U.K. Bribery Act 2010,” says Milburn.

Stewart Hey, partner at law firm Charles Russell Speechlys, says that “a key lesson of this case is one of the core legal fundamentals of corporate transactions—‘let the buyer beware.’ Due diligence is often mistakenly regarded as a compliance ‘box-ticking’ exercise, but a proper and thorough process is essential.”

“Businesses should undertake due diligence not only in respect of the commercial documentation immediately to hand, but should also undertake associated searches against individuals and corporate entities with whom they are contracting,” says Hey.

“Alongside this, proper examination of the associated laws, nuances, and procedures of the relevant jurisdiction is vital to prepare for the eventuality of a future dispute which may question the legality and validity of an agreement thought legally sound,” he adds.