A Chinese investor lost an investor–state dispute settlement (ISDS) case worth 2 trillion won against the Korean government, applied to annul the award, and lost again.
The government said on the 13th that on the 12th (Korea time) it received a decision upholding the government's win (the claimant's application for annulment dismissed in full) in the award annulment proceedings for the ISDS case that Chinese national Min Fengzhen filed with the International Centre for Settlement of Investment Disputes (ICSID) in Aug. 2020 against the Korean government.
◇ Took out a loan from Woori Bank to acquire Beijing Huafu Building, an illegal investment
The case goes back about 20 years. Ethnic Korean Chinese national Min Fengzhen (Korean name Min Bong-jin) set up a company called Baekik Investment in Korea in 2007 and, saying he would acquire the Huafu Building in downtown Beijing, obtained a project financing (PF) loan of 380 billion won from domestic financial institutions. Woori Bank provided a payment guarantee, Hanwha Life Insurance lent 150 billion won, and KB Kookmin Bank lent 230 billion won. Baekik purchased the building by acquiring equity in Zhongtian Mining.
The Huafu Building is near the Forbidden City in Dongcheng District, Beijing. It has three underground floors and 25 aboveground floors. Previously, a Hong Kong investment firm called CCP, in which JPMorgan was a shareholder, owned it through a special purpose company (SPC) called Zhongtian Mining.
But problems arose because the collateral Woori Bank took was not the real estate but the equity of Zhongtian Mining. For Woori Bank to exercise substantive rights, the real estate had to be pledged as collateral, and holding only the equity of Zhongtian Mining meant it could not exercise rights in China. Hanwha Life Insurance and KB Kookmin Bank, concerned about the loan turning sour, asked Woori Bank to take over the claims, and Woori Bank acquired the 380 billion won in claims in 2009–2010.
After Min failed to repay the loan, Woori Bank enforced its collateral rights and sold Min's shares to a foreign company. Min filed a civil suit claiming the enforcement of collateral was unjust, but lost in 2017. Min was also sentenced in Mar. 2017 to six years in prison for charges including violating the Act on the Aggravated Punishment of Specific Economic Crimes by giving consideration to Woori Bank employees to obtain the loan.
Min then filed an ISDS with ICSID against the Korean government, arguing that Woori Bank's enforcement of collateral and the civil court's ruling amounted to unlawful expropriation, and that court judgments and investigative actions in civil and criminal cases constituted denial of justice and a breach of the fair and equitable treatment obligation under the investment treaty. The initial claim was about 2 trillion won, and the final claim was about 264.1 billion won.
In response, the Korean government countered that: ▲ Min's investment was an illegal investment and therefore did not qualify as a protected investment under the Korea–China investment treaty ▲ the acts of Woori Bank are not attributable to the Republic of Korea ▲ court judgments and investigative actions were lawful.
In particular, regarding the "illegal investment" issue, the government said Baekik's establishment and Min's share acquisition were merely part of an illegal scheme to buy the Huafu Building by offering money to Woori Bank employees and obtaining a loan, in violation of Korean domestic law.
On May 31, 2024, the arbitral tribunal accepted the Korean government's arguments and issued a full award in favor of the Republic of Korea. The tribunal ordered Min's side to pay about 4.9 billion won for the government's legal expenses and arbitration costs.
◇ Government: "Blocked any chance of Min's second arbitration at the source"
Min then filed an application with ICSID to annul the award on Sept. 28 of the same year. Min said, "I lawfully acquired Baekik's shares, but the original tribunal misinterpreted and misapplied the Korea–China investment treaty and domestic law, deemed it an 'illegal investment,' and improperly denied jurisdiction." The government countered, "Min is abusing the annulment process as an 'appeal' mechanism, and there is no ground for annulment in the original award."
After a little over two years, on the 12th, the ICSID ad hoc committee decided to "dismiss the claimant (Min)'s application in full." Specifically, it found no error (excess of powers) in the tribunal's reasoning that Min intended, at the time of Baekik's establishment, to use the shares for an unlawful loan financing plan. The committee also ordered Min to pay in full the 1.5 billion won in expenses the Korean government incurred in the annulment proceedings.
This was the first case in which a foreign investor claimed that Korea's civil and criminal judicial procedures and outcomes against the investor violated an investment treaty. A Ministry of Justice official said, "We also blocked at the source the possibility of a second arbitration by the claimant," adding, "By winning decisively in both the original arbitration and the annulment proceedings, we solidified the principle that 'an investment unlawful under domestic law is not protected by an investment treaty.'"