TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? A Eurodad Report By Gail Hurley, Eurodad August 2008

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1 TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? A Eurodad Report By Gail Hurley, Eurodad August 2008

2 About EURODAD EURODAD (the European Network on Debt and Development) is a network of 54 non-governmental organisations from 17 European countries who work together on issues related to debt, development finance and poverty reduction. The Eurodad network offers a platform for exploring issues, collecting intelligence and ideas, and undertaking collective advocacy. Eurodad s aims are to: Push for development policies that support pro-poor and democratically defined sustainable development strategies. Support the empowerment of Southern people to chart their own path towards development and ending poverty. Seek a lasting and sustainable solution to the debt crisis, promote appropriate development financing, and a stable international financial system conducive to development. More information and recent briefings are at: EURODAD Information Updates Want to stay ahead of the game on what s happening globally on debt and aid strategies? Need the truth behind the debt and aid deals we hear so much about? Want information about European and Southern civil society actions and reports? Then why not join 2000 other subscribers to EURODAD s DEVELOPMENT FINANCE WATCH. Subscribe for free at: aspx?id=108 Disclaimer This report was written by Gail Hurley at EURODAD. It is a EURODAD paper but the analysis presented does not necessarily reflect the views of all EURODAD member organisations. Acknowledgements: The author would like to thank the following people for their advice and comments: Sarah Edwards (Jubilee Debt Campaign UK), Dominique Monti (Eurodad), Marta Ruiz (Eurodad), Henk van den Heuvel (Jubilee Netherlands), Neil Watkins (Jubilee USA), Alex Wilks (Eurodad), Philippa Wood (Eurodad for the cover art and layout).

3 Table of Contents TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? 1. EXECUTIVE SUMMARY... page 4 2. INTRODUCTION... page 5 3. VULTURE FUNDS: THE FACTS... page 5 Box: Recent commercial creditor lawsuits against heavily indebted poor countries... page 7 4. OFFICIAL INITIATIVES TO COMBAT VULTURE FUNDS... page 8 5. FURTHER MEASURES REQUIRED... page 11 Case study: Donegal versus Zambia... page CONCLUSION... page REFERENCES... page ENDNOTES... page 19

4 August EXECUTIVE SUMMARY The actions of so-called vulture funds or speculative investors in the debt of distressed companies or sovereign states have grabbed international media headlines over the past 18 months. Some of the dramatic media headlines have read: Vultures leave the developing world hungry, How top London law firms help vulture funds devour their prey, and Vulture funds against poor countries. 1 The issue became a particularly hot topic in 2007 when it was revealed that a company by the name of Donegal International was suing the Government of Zambia in the London courts for US$ 55 million on a debt it had paid just US$ 3.2 million to acquire. The company was eventually awarded US$ 15.4 million. The concern voiced by NGOs and governments alike is that the small gains in debt cancellation which countries such as Zambia have recently benefited from could be instantly wiped-out by aggressive vulture fund litigation. Since then, there has been a flurry of announcements by individual creditor governments such as Belgium, the UK and USA on steps they are taking to combat such practices. International bodies such as the European Commission, Paris Club and World Bank have also announced their own measures to combat so-called vulture funds. This is due in large measure to advocacy and awarenessraising by Eurodad member organisations and other allies in these countries. This Eurodad report explains and critically assesses some of the recent official policy announcements and asks how robust they are. Will they achieve their stated aims, and what are some of the views and proposals of heavily indebted poor country governments themselves? The paper also highlights the worrying increase in recent cases of vulture fund action, in particular against some of the world s poorest countries. It ends with a demand for immediate action on a series of proposals which Eurodad believes could be more effective to tackle the problem in the long-term. In particular, the key recommendations of this report are that: 2. Governments should make it clear that internationally-agreed debt relief measures are binding on all creditors. Governments of industrialised countries should publicly support developing nations decisions not to settle commercial speculative litigators claims and instead demand that commercial creditors offer the same debt relief terms as other creditors. 3. The international community should vigorously promote the implementation of some form of fair and transparent debt work-out procedure at the international level. This framework will ensure that all legitimate creditors claims are dealt with fairly and efficiently while the citizens of the debtor nations are protected. The UN FfD process should result in a concrete and time-bound plan to take forward this work. 4. The international community should support the putting in place of international and legally binding standards on responsible financing which contain provisions restricting the right of creditors to unilaterally assign the claim to another entity. The proposals outlined in Eurodad s Charter on Responsible Financing represent one constructive approach The international community should support urgent international action to tackle the tax haven problem. Tax havens facilitate vulture fund activities. Immediate steps to be taken include financial levies on transactions with tax havens and sanctions on tax havens who do not co-operate on the disclosure of information. Governments should actively support measures to force companies to report their financial activities with a breakdown for each country they operate in. 6. Debtor Governments should improve the loan contraction process at national levels to ensure that it is transparent, participatory and accountable to citizens. This should be combined with urgent attention to improve debt management capacities. 1. Governments enact legislative changes at the national level to prevent vulture funds from using national courts to pursue their claims. Legislation should make profiteering in the defaulted sovereign debt of developing countries illegal. 4

5 TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? 2. INTRODUCTION The first time I came across the term vulture fund was outside the Iceland frozen food supermarket in central London in The store in question was owned by the Big Food Group which was involved in litigation for a total of 12 million (US$ 24 million) against the Government of Guyana, a heavily indebted poor country. The original debt had a face-value of just 7.1 million (US$ 14 million) but the creditor demanded heavy interest and penalty payments as well as litigation costs. The company owned a large chain of frozen food supermarkets in the UK and the Government of Guyana had solicited the support of UK NGOs to publicise the case. A campaign of picketing the supermarkets began, led by Eurodad member, World Development Movement, which dissuaded many potential customers including myself from entering the Big Food Group s stores. 3 In 2003, the company eventually dropped the case saying that the interests of both our company and those of the people of Guyana, are best served by not proceeding. It also admitted that it had made provisions against non-payment many years before, and therefore cancelling this debt had no impact on the company s financial position million was seemingly a paltry sum to the company. But at the time, it represented 10% of Guyana s GDP. That s a significant amount to a small and heavily indebted poor country. asks whether current international policy measures are enough to effectively tackle the problem and reports on the views of several heavily indebted poor country governments. It ends with a series of proposals Eurodad believes could be more effective in the long-term. It demands immediate action from the international community on the strategies put forward in this report. Such action is a necessary step towards policy coherence for development and is part of a wider set of measures needed to prevent private finance from undermining public policy objectives. 3. VULTURE FUNDS: THE FACTS What are vulture funds? What are so-called vulture funds? Vulture funds are commercial entities which on the secondary debt market buy-up the debt of rapidly weakening companies or in the case of sovereign states, developing countries, usually for a sum far less than the face-value of the debt obligation. They then sue to recover the nominal full face-value of the debt plus interest, penalties and legal fees. Vulture funds also resort to other measures to recover the debt such as the seizure of assets overseas or political pressure. This report focuses on vulture fund actions against developing countries, and in particular the poorest countries. The actions of so-called vulture funds have captured the attention of policy-makers, the media and the public. The image of vultures circling over developing countries and swooping down to help themselves to the meagre financial resources of some of the world s poorest countries has understandably shocked and angered a wide spectrum of people. The recent increase in such vulture fund action, as reported by the World Bank, has prompted some wealthy creditor governments and the international financial institutions to announce measures to combat such predatory behaviour by commercial actors. This Eurodad report explains and critically assesses some of the recent official policy announcements on vulture funds. This includes measures taken by individual creditor countries such as France, Belgium, the UK and US as well as announcements by multilateral bodies such as the World Bank, Paris Club and European Commission. The report also looks at the increase in recent cases against heavily indebted poor countries and highlights the human cost of vulture fund litigation. It In the recent case of Donegal International vs. Zambia, heard in the British courts in 2007, Donegal International purchased a Zambian sovereign debt from Romania in 1999 for a total of US$ 3.2 million. The debt had a face value of US$ 30 million. The company then sued the country for a total of US$ 55 million which included calculations of interest, penalty interest and supposed damages and litigation costs. The vulture fund was finally awarded US$ 15.4 million by the British courts. 5 The human cost of vulture funds In 1999 and 2005, the G8 announced commitments to cancel over US$ 100 billion and US$ 55 billion in debt owed by the heavily indebted poor countries to the major multilateral institutions such as the World Bank and IMF. This followed sustained campaigns by anti-debt groups around the world who argued that poor countries scarce resources could be better spent on the welfare of their citizens rather than external debt service to wealthy creditor nations and institutions. The major objective of debt relief 5

6 August 2008 was therefore to free-up funds for investments in health, education and poverty reduction. One of the reasons the activities of vulture funds has captured international attention is that policymakers and the wider public are incensed that payouts to vultures transfer the benefits of debt relief efforts from their intended beneficiaries, i.e. the citizens of poor nations, to speculators in sovereign debt. For example, Sierra Leone, one of the world s poorest countries and a nation still struggling to emerge from a brutal civil war will benefit from debt service savings of approximately US$ 17.4 million in Sierra Leone has also been the recent victim of at least 5 commercial lawsuits which have resulted in pay-outs of over US$ 26.4 million. This wipes-out much more than one year s debt service savings. 6 In Latin America, according to Jubilee USA, in Nicaragua lawsuit cost was some US$ 425 million in one year, only a little less than combined expenditure on health and education. 7 Litigation is also costly for poor country government administrations. It is costly not only in dollar terms but means that over-stretched administrations have to dedicate scarce human resources and capacities to the fight against speculative litigators. Vultures are breeding Litigations by vulture funds against some of the world s poorest countries have increased over recent years. Experts estimate that in the 1990s there were between 15 and 20 true vulture fund cases. 8 But recent World Bank estimates for the group of countries classified as heavily indebted poor countries (HIPCs) indicate that the problem is on the rise. The World Bank reports that at least 11 HIPCs have recently been targeted by lawsuits by a total of 44 commercial creditors. HIPCs that have recently faced the most litigation cases are Nicaragua, the Republic of Congo and Uganda, with nine, eight, and six lawsuits respectively. 9 Details of the most recent cases, the vulture funds responsible and amounts that have been sued for are summarised in the table on p7. What quickly becomes clear is that commercial investor lawsuits are most frequently filed in the courts of industrialised, developed countries. This may be where the vulture fund is registered and based or it may be the legal jurisdiction which is specified in the original loan contract. The World Bank reports that litigating commercial creditors are concentrated in the US, UK and British Virgin Islands (two of which can be classified as tax havens). Meanwhile lawsuits have been most commonly filed in New York, Paris and London. A smaller number of lawsuits have been filed in the courts of HIPCs themselves. 10 This is no accident. The jurisdictions of New York, Paris and London are perceived by many commercial investors as creditorfriendly and ready to uphold creditors debt claims. The supposed creditor-friendliness of these jurisdictions is reflected in the outcomes of most vulture fund cases against developing nations. For example, of the 44 litigation cases reported by the World Bank against HIPCs, 24 have obtained court judgements in their favour. This amounts to over US$ 1 billion in pay-outs on original debts of just US$ 434 million. 19 of these 24 judgements awarded creditors the full amount of their claim, i.e. the debtor had to pay-out on the full face value of the debt plus interest, penalties and legal fees even though in most cases the vulture fund acquired the debt for a fraction of its face-value. When you are an impoverished country government desperately trying to make ends meet, a few million dollars means that stark choices need to be made about which propoor expenditures to prioritise and which will have to wait. Other HIPCs, worried about the amount which may be awarded to a speculative commercial trader in any final court judgement, have opted to settle the matter out of court. This has occurred most notably in the Republic of Congo which has opted to settle all of its cases out-of-court. Guyana, Serra Leone and Uganda have also reached out-of-court settlements with litigating commercial entities. Several cases of litigation are still pending against Cameroon, Honduras, São Tomé and Principe, Sierra Leone and Uganda. 11 It is very telling to note that out of the 44 recent cases reported by the World Bank, only one case was unilaterally and voluntarily dropped; that of Booker plc (Big Food Group UK) vs. Guyana cited in the introduction to this report. More recently, Nicaragua was able to settle the cases of litigation against it with the assistance of the World Bank s Debt Reduction Facility which provided the country with a US$ 61 million grant contribution to fund a US$ 1.4 billion buy-back of most of the country s commercial external debt. 12 In this case, the commercial debt holders which held court judgements against Nicaragua accepted sums smaller than the full value of the debt claim, but this is not the same 6

7 B0B0B0 TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? Box 1: Recent commercial creditor lawsuits against heavily indebted poor countries Debtor country Vulture fund Domicile of vulture fund Court location Status of legal action Original debt (US$ mn) Amount claimed by vulture (US$ mn) Judgement for creditor (US$ mn) Cameroon Winslow Bank Bahamas France, UK & USA Judgement awarded 9 46,3 46,3 Del Favero Italy UK Judgement awarded 0,8 4,6 4,6 SCONSET British Virgin Islands Switzerland In arbitration 18,2 53,9 Gracechurch (Paris) Cayman Islands France, UK & USA In court 9,5 39,7 Antwerp British Virgin Islands In arbitration 15,2 196 Total 52,7 340,5 DRC FG Hemisphere USA Belgium Judgement awarded 55,8 81,7 81,7 KHD Humboldt Wedag AG Köln and others Jersey Judgement awarded 67,1 67,1 Total 55,8 148,8 148,8 Republic of Congo (1) Groupe Antoine Tabet (GAT) Lebanon Switzerland & France Judgement awarded ,6 92,2 NUFI-AIG C ITHO Middle East USA USA Judgement awarded 11,2 24,3 8,3 FG Hemisphere associates LLC USA USA, France Judgement awarded 35, ,9 AF-CAP Inc Bermuda USA & Europe Judgement awarded 9,6 20,8 10,9 Berrebi France France Judgement awarded 2,1 13,7 13,7 Kensington International ltd Cayman Islands UK, USA & others Judgement awarded 29,6 118,6 118,6 Walker international holding ltd British Virgin Islands UK, USA & others Judgement awarded 20,8 47,8 47,8 Commisimpex Rep. Of Congo France Out of court settlement 292 Not known Total 527,2 465,8 Ethiopia Kintex-Bulgaria Bulgaria Russia In arbitration 8,7 8,7 Yugoimport Serbia Russia In arbitration 122,8 178 Total 131,5 186,7 Guyana Citizens Bank Guyana Inc Guyana Guyana Out of court settlement 24,3 24,7 Not known Booker plc UK ICSID Dropped 4,1 7,5 0 Export services incorporated USA Guyana Judgement awarded 14,1 14,1 5,3 Total 42,5 46,3 Honduras BAGO Laboratories Argentina In court 1,5 1,5 Nicaragua (2) (2) LNC Investment Inc USA USA Judgement awarded 26,3 87,1 87,1 Hemisphere Associates USA USA Judgement awarded 30, Greylock Global Opportunity Marster Fund ltd British Virgin Islands USA Judgement awarded 10,5 50,9 50,9 Hamsah Investments ltd British Virgin Islands USA Judgement awarded 2,5 11,6 11,6 Inex-Interexport Belgrade 14 October Krusevac IMT AD Belgrade Serbia USA In court 9,6 9,6 DP FAP Famos MFK Corporation ltd Total 81,3 286,7 Sao São Tomè Tomé && Principe Annadale Associates UK France In arbitration 3 8,9 Sierra Leone J & Franklin ltd UK UK Judgement awarded 1,1 3,4 3,4 UMARCO France UK In court 0,6 0,6 Executive Outcome Panama Sierra Leone Sierra Leone Judgement awarded 19, Chatelet Investment ltd Sierra Leone Sierra Leone In court 0,4 0,4 Scancem International ANS Norway Norway Out of court settlement 3,7 3,7 Total 25,3 31,1 Uganda Uganda Banco Arabe Español Spain Uganda Judgement awarded 1 2,7 2,7 Transroad ltd UK Uganda Judgement awarded 4 16,7 16,7 Industry Machinery 14 Oktobar Former Yugoslavia Uganda Judgement awarded 7 8,9 8,9 Sour Fap Famous Former Yugoslavia Uganda Judgement awarded 0,3 1,4 1,4 Iraq Fund for International Development Iraq Uganda In court 6 6,4 Shelter Afrique Kenya Uganda Out of court settlement 0,1 0,1 Total 18,4 36,2 Zambia Zambia Connecticut Bank of Commerce USA Judgement awarded 0,9 0,3 0,3 Donegal International ltd British Virgin Islands UK Judgement awarded 15, ,4 Total 16,3 55,3 15,7 Grand total 955,5 1607,8 Source: World Bank, Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) Status of Implementation, September 2007, p. 95. (1) Note that Republic of Congo how now settled all of its claims with litigators via negotiation (2) Note that Nicaragua has now been able to settle claims with litigators with the assistance of the World Bank Debt Reduction Facility and no further commercial litigation processes are underway against the country 7

8 August 2008 as voluntarily dropping litigation. In fact they were essentially bailed-out by scarce public money. The reluctance of vulture funds to drop their cases is a very clear indication of their true intentions: to make money out of some of the world s poorest countries regardless of the human consequences. And the fact that vulture funds are almost always guaranteed to recover their money shows that being a vulture currently makes good business sense. The objective of public policy in this area should be to change that. 4. OFFICIAL INITIATIVES TO COMBAT VUL- TURE FUNDS What s being done about it? So what is being done to tackle the predatory behaviour of vulture funds? There has been lots of noise against such practices by governments around the globe but what concretely are they doing to stop vultures from breeding? Eurodad has analysed recent steps taken by individual governments such as France, UK, Belgium and US as well as announcements by multilateral bodies such as the World Bank, G8, Paris Club and European Commission. We welcome the attention that is being paid to this issue but ask, to what extent do these policy measures make the grade? Efforts by individual governments to combat vulture funds France has been the jurisdiction of choice for 7 recent commercial lawsuits against Cameroon, Republic of Congo and São Tomé and Principe. 13 Claims filed in French courts amount to US$ million on original debt with a nominal face value of US$ million. 14 In June 2006, 31 French parliamentarians presented the French National Assembly with a legislative proposal designed to tackle the problem. The deputies expressed concern that current legislation was ineffective in the face of vulture funds and pointed to a lack of coherence in internal policies. More specifically, they argue that it is absurd to cancel poor country debt with one hand while the French judiciary upholds vulture fund claims with the other. The legislative proposal puts forward small amendments to the national civil code to prevent vulture fund activity in France. These state that even where a debtor country has not formally denounced the speculative investor, the French courts have a right to intervene in the case. More specifically, the French courts are permitted to take three elements into consideration in their judgements: 1. Whether the debtor country is a beneficiary of official development assistance; 2. Whether other creditors have provided debt relief to the country in question; 3. What the economic situation and prospects of the country look like. The proposal also states that if a judge considers that the only reason a distressed debt trader has purchased the debt has been to engage in speculative litigation, the vulture fund should not expect to be reimbursed. 15 French deputies admit that the text may only have a somewhat limited impact given that vulture funds could take their business elsewhere and make use of other jurisdictions. Nevertheless, they stress that it should serve as a model for other industrialised countries. But despite the progressive nature of this legislative proposal its future at least at this stage does not seem promising. Officially the proposal must be accepted onto the agenda of the Assemblée Nationale and debated and approved by deputies. It must then pass to the Senate for approval before it can be confirmed as law. It has twice been put forward as an agenda item to the National Assembly and twice been rejected. It has therefore not even been debated by the lower house and has not passed the first hurdle in the legislative process. 16 Just how far we can expect this legislative proposal to go any further remains unclear at the moment and will depend crucially on the interest and political will of French legislators. The UK also has preferred jurisdiction status with many vulture funds and English law is cited as the legal jurisdiction in many debt contracts. Its courts have heard at least 7 recent cases against heavily indebted poor countries, including the notorious Donegal International vs. Zambia case in 2007 (see Country Case Study) of these cases have resulted in judgements in favour of the creditors totalling US$ million on debt with a nominal face value of just US$ 65.3 million. Put simply, distressed debt traders have managed to recover over 3.6 times their original investment. 18 One case (UMARCO, France vs. Sierra Leone) is still pending. UK Prime Minister Gordon Brown prides himself on his development credentials so what actions has the 8

9 TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? government taken to combat the activities of vulture funds on UK soil? The measures Brown appears to favour are mostly voluntary codes of conduct for creditors coupled with increased financial resources from the UK to help countries faced by aggressive litigation. In a statement on the issue in May 2007, Brown stated that the UK will: 1. Take forward talks with leading commercial creditors on a voluntary code of conduct that will set out the actions that responsible creditors should take to help reduce the risk of litigation, including the requirement to participate in collective action to reduce unsustainable debts; 2. Work with our G8 partners to develop a Charter on Responsible Lending that includes a commitment to protect developing countries from vulture fund activity; 3. Work to ensure that HIPCs have access to the legal assistance they need to defend themselves against litigation. 19 These policy measures have been widely criticised as inadequate by many UK NGOs since it is precisely those creditors which have signed up to a voluntary code of conduct which are least likely to sue to recover their so-called investment. Moreover, they do not prevent vulture funds from using British courts to advance their claims. Sarah Edwards, of Jubilee Debt Campaign in the UK commented recently, there need to be changes in law, at national and international level, to stop the vultures from acting. 20 Some prominent UK lawyers agree. [Brown] has the resources to legislate in order to make it harder for companies, law firms and the courts to facilitate this obscene and reprehensible practice. The voluntary groupings and voluntary codes will not be enough. He needs to legislate and make it illegal to use London s High Court for this. 21 There also appears to be broad UK parliamentary support for more robust measures than those proposed by Gordon Brown. For example in 2007, 124 MPs signed an Early Day Motion which called on the Government to press the IMF to consider new regulations at the international level to prevent vulture fund activity (this represents 1/6th of UK MPs). 22 At the moment at least, it appears as though the UK Government is not prepared to contemplate any policy measures which would make vulture fund claims unenforceable in British courts. The United States has recently heard 11 cases against Cameroon, Republic of Congo and Nicaragua. 23 Commercial investor claims have amounted to US$ 695 million on HIPC debt with an original face-value of US$ million. Judgements in the vultures favour have amounted to US$ million. 24 This shows very clearly that vulture funds are not only suing for amounts which are 3 times or even more than the original value of the debt, they are successfully being awarded these inflated sums. US NGOs 25 have successfully highlighted the problem at national level and have pushed several members of Congress to introduce a bill in the US House of Representatives which aims to limit the damage caused by vulture funds. The Stop Vulture Funds Act introduced on 1 August 2008 points to the disruptive activities of vulture funds and states that in order to successfully prevent the speculation and profiteering in the defaulted sovereign debt of poor countries in a uniform fashion, and prevent the use of the courts of the United States to assist in such profiteering, national legislation is required to regulate the practices and procedures used in litigation against foreign sovereigns. This legislation will mandate the public disclosure of relevant information concerning the acquisition, ownership, and consideration provided by creditors in obtaining their property interests in the defaulted sovereign debt of poor countries. The bill then declares that: It shall be unlawful for any United States person, directly or indirectly, to engage in sovereign debt profiteering, or for any person, directly or indirectly, to engage in sovereign debt profiteering in the United States. Whoever willfully violates [this provision] shall be fined an amount equal to the total amount sought by the person through the sovereign debt profiteering. 26 Neil Watkins, National coordinator for the Jubilee USA Network, recently said of the Act: We welcome the strong leadership showed by the Congressional co-sponsors of this important new legislation. Vulture funds are grabbing the proceeds from debt relief of some of the poorest countries in the world. This bill should make vulture funds think twice before suing the poor for profit. 27 9

10 August 2008 Back in Europe, Belgium has seen several recent cases of commercial litigation against a heavily indebted poor country. In the case of FG Hemisphere (USA) vs. Republic of Congo, the Belgian courts awarded the vulture fund US$ 81.7 million on claims with an original value of US$ 55.8 million. In January 2008, the Belgian Senate approved a resolution and a law which aim to prevent Belgian development cooperation funds from falling into the hands of so-called vulture funds. The issue became a hot topic among policy-makers in Belgium after it was revealed that vulture funds had launched cases against both the Democratic Republic of Congo and Congo-Brazzaville. In the case of the DRC, at the time the resolution was approved, there were 10 cases of litigation open against the country. DRC is the principal recipient of Belgian ODA and it was feared that vultures could lay claim to development cooperation funds intended to benefit the country if creditors were awarded the power to seize the assets of the debtor overseas. In the case of Congo-Brazzaville, Kensington International bought some of the country s debt on the secondary market for a total of US$1.8 million. The vulture fund then sued the country for US$ 120 million and attempted to seize funds which were supposedly destined for the country. This included a 10.3 million Belgian development cooperation grant to fund a thermal power station in the country and a 587,000 national television grant. The Belgian law would prevent these scarce funds from falling into the claws of vultures. It describes ODA funds as insaisissables et incessibles (untouchable and non-transferable). If no action is taken, development cooperation funds risk becoming paralysed by vulture fund actions says the resolution. A broader non-binding resolution was also agreed. This called on (but did not oblige) the Belgian Government to: Urge the World Bank and IMF to develop the necessary legal instruments to ensure debt relief programmes are binding on all creditors; Increase Belgium s contribution to the IDA Debt Reduction Facility; Provide technical and financial assistance to partner countries which are the subject of litigation. 28 Multilateral initiatives to combat vulture funds At the multilateral level, other international institutions and organisations also claim to be definitively tackling the problem of vulture funds. For example, the European Commission recently announced that following the May 2008 General Affairs and External Relations Council all 27 EU Member States had committed not to sell official claims on the secondary market: The EU [ ] agrees not to sell claims on HIPCs to creditors unwilling to provide debt relief. 29 The EC argues that this pledge could have prevented the Donegal International vs. Zambia case since Romania owned the original debt titles. The Paris Club of 19 official creditors has also recently taken similar steps. In May 2007 it announced that members are committed to avoid selling their claims on HIPC countries to other creditors who do not intend to provide debt relief under the HIPC initiative, and urge other creditors to follow suit. 30 The G8 meanwhile announced in May 2007 that Finance Ministers were concerned about the actions of some litigating creditors against Heavily Indebted Poor Countries. They agreed to work together to identify measures to tackle this problem, based on the work of the Paris Club. 31 One year later, G8 Ministers expressed broad satisfaction at the commitments taken by the Paris Club and to the setting-up of a Legal Support Facility at the African Development Bank and a Debt Buy-Back Facility at the World Bank. 32 Ministers clearly viewed their work on the issue as done. The World Bank s Debt Reduction Facility which provides grant funding to eligible poor country governments to buy back at a significant discount the debts owed to external, commercial creditors has recently been strengthened with new commitments of cash from donors. The fund has so far supported 22 buy-back operations in 21 poor countries helping countries to clear US$ 4.5 billion in commercial debt principal and US$ 3.5 billion in interest, arrears and penalty charges. 33 In September 2006, the Commonwealth Secretariat established a HIPC Legal Debt Clinic which offers a resident legal advisor and deals with requests for counsel from Commonwealth and non Commonwealth HIPCs. 34 The African Development Bank (AfDB) is also exploring the possibility of establish- 10

11 TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? ing a technical assistance facility on legal issues for HIPCs. 5. FURTHER MEASURES REQUIRED Are these measures enough? But are all of these measures really enough to stop the vultures from swooping? Although many of these measures are welcome steps in the right direction, Eurodad argues they do not go nearly far enough if the international community wants to seriously tackle the problem of vulture funds. Instead, we propose a series of concrete steps which creditors and debtors can take to dramatically curb if not eradicate the incidence of vulture fund action against some of the world s poorest and most vulnerable nations. Moral suasion: not a reliable tactic 25 out of 32 multilateral lenders participate in the Heavily Indebted Poor Countries Initiative. The 19 Paris Club bilateral creditors have also provided significant debt relief to HIPCs. A further 23 bilateral creditors have provided partial debt relief and a further 21 none at all. 36 But the World Bank reports that only a small number of commercial creditors have agreed to provide debt relief via the HIPC Initiative. This is precisely the problem. Lenders are not legally obliged to participate in international debt relief efforts such as the HIPC Initiative and Multilateral Debt Relief Initiative (MDRI). Quite the opposite, some commercial creditors have seen a unique window of opportunity with the advent of expanded debt cancellation. Countries that have recently had significant portions of their debt written-down are in a more favourable fiscal position to be able to service other external debts, i.e. the vultures debts. The World Bank and IMF report that, given the voluntary nature of the HIPC Initiative, creditors do not have a legally binding obligation to participate in the Initiative. Instead the Boards of the two institutions have encouraged staffs to use moral suasion to promote participation of commercial creditors in the HIPC Initiative rather than pursue their claims in the courts (emphasis ours). This has been coupled with efforts to raise public awareness of the issues and costs involved in lawsuits against HIPCs as well as contacts with NGOs. 37 The policy measures proposed by UK Prime Minister, Gordon Brown also rely on moral suasion. He has spoken of the need to develop voluntary codes of conduct for creditors. The European Commission and Paris Club have also secured voluntary commitments from official creditors not to sell official claims on to potential vulture funds. But given the rising incidence of speculative commercial investor litigation against some of the world s poorest countries, this would suggest that moral suasion and voluntary codes of conduct are insufficient to deal with the problem except in a piecemeal manner. Out of the 44 recent cases of commercial creditor litigation against HIPCS, only one vulture has voluntarily dropped its case. These measures also dramatically miss the point: it is entirely legal for vulture funds to pursue their claims in court. It doesn t matter how much a vulture fund paid to acquire a debt title or whom they purchased it from or under what circumstances, under current international debt management procedures, the claim must legally be honoured by the sovereign debtor. The inevitable result of such a system is all too visible: vulture funds can sue for many times the face value of the debt to recover supposed losses and are almost always guaranteed to win. Changes to national laws required What makes vulture fund action not only possible but highly profitable? Michael Sheehan of Donegal International told a London High Court in 2007 that, [O]ur experience and that of others in this business is that you always eventually recover. You have a legal claim. Eventually if you litigate and work hard enough, you will always recover a sufficient amount to cover your costs. 38 While NGOs and many other concerned citizens may argue that vulture fund actions represent an immoral attempt by wealthy actors to exploit the frequent vulnerabilities of debtor nations, many vulture funds would respond in turn that their purpose is to make a profit and it is entirely legitimate and legal to pursue their claim through litigation. This has prompted many NGOs, elected parliamentarians and others to call for changes in national laws especially in those countries where courts have been sympathetic to creditors (US, UK and France) to make vulture fund profiteering illegal. In this regard, the language proposed in the US Stop the Vultures Act of August 2008 looks promising and should serve as a model for other countries to follow. Quite simply, it should be illegal to buy 11

12 August 2008 debt with the sole intention of suing the debtor for repayment This call has also been echoed by the Finance Ministers of several heavily indebted poor countries. In April 2008 Finance Ministers from 9 HIPCs issued a call to lender nations for changes in the laws by governments of countries where commercial creditors reside to protect HIPCs from litigation. 39 Eurodad has also called for binding restrictions on creditors rights to sell sovereign debt titles on the secondary market in its recent Charter for Responsible Financing. The Eurodad Charter outlines the steps lenders and borrowers must comply with in the loan negotiation process in order to ensure a responsible, development oriented transaction. More specifically, Eurodad s Charter proposes that loans should restrict the creditor s right to assign the debt to another party, i.e. the lender cannot unilaterally sell or assign the debt to other entities. The lender must first obtain the free and informed consent of the borrower. In the event the debt is sold-on, assigned, transferred, restructured or replaced with a successor loan, all provisions as outlined in the original loan agreement apply, such as the provision for independent arbitration and change of circumstance. 40 The Charter also calls for the systematic use of collective action clauses in sovereign loan agreements which will help prevent aggressive creditor hold-outs. 41 Eurodad also argues that the ex ante and ex post rules of the road it proposes should be legally binding on all lenders and sovereign borrowers. While many HIPCs have expressed support for Eurodad s proposals on vulture funds, some lenders have been more reluctant and have complained that such restrictions would serve to increase the cost of lending. Many debtor countries however see the problem quite differently. The cost of inaction however is very clear. More transparency and information required Several HIPC Finance Ministers have stressed that they believe the IMF and World Bank could do more to support poor countries, the victims of litigation. At an April 2008 conference of Commonwealth HIPC Finance Ministers: [Ministers] urged the IMF and World Bank not to regard proactive support for HIPCs in debt litigation as compromising their neutrality. 42 In particular, HIPC Governments stressed the need for collective diplomatic efforts at the international level to combat vulture funds to involve donors, the international financial institutions and borrower country governments alike. The World Bank could also do more to keep NGOs and citizens informed of litigation underway against developing nations as a whole. Currently, the data provided by the World Bank on commercial lawsuits is limited to cases against HIPCs only. But vulture fund profiteering is not just limited to this small set of countries. The case of Elliot Associates vs. Peru in 2000 in which a New York-based hedge fund successfully sued Peru for US$ 58 million on a debt it had purchased for just US$ 11 million (the debt had a face value of US $ 20.7 million) is an example. Paul Singer, Head of Elliot Associates pursued his claim in the US, Canada, Germany, Luxembourg, Belgium and the UK. A US court eventually awarded Singer the authority to seize Peruvian commercial assets overseas. 43 The hedge fund has also takenup cases against Argentina and the Republic of Congo which demonstrates that the problem is not confined to HIPCs but affects many other developing countries also. The World Bank could provide essential support to advocacy efforts against such profiteering by providing up-to-date public information on vulture fund cases filed against developing countries. This would be far from compromising the Bank s neutrality. Several NGOs have also called on the World Bank to use its IDA Debt Reduction Facility to more aggressively buy back outstanding commercial debts in all low-income IDA-only countries to get at-risk debts out of the public domain. It should also expand the IDA Debt Reduction Facility so that it is available to heavily indebted poor countries before they reach decision point and allow repeat operations. Curb tax havens: they facilitate a dirty business Biologists will tell you that vultures have evolved naked heads because devouring the bloody remains of some ill-fated animal is a dirty business. No less than 14 of the recent 44 cases of litigation against HIPCs reported by the World Bank were by vulture funds registered in tax havens. However this figure is probably much higher. 44 Put simply, tax havens facilitate the dirty business of vultures. The reality is that many commercial holders of defaulted sovereign debt act through offshore entities, despite being substantially owned and operated by citizens from outside the offshore financial centre and despite conducting most (if not all) of their business outside the borders of that territory. The 12

13 TAMING THE VULTURES: ARE NEW MEASURES ENOUGH TO PROTECT DEBT RELIEF GAINS? Case study: Donegal versus Zambia In 1979, Romania extended a US$15.4 million loan to Zambia for the purchase of agricultural machinery, vehicles, spare parts and technical assistance. Zambia defaulted and fell into arrears in Subsequent efforts to reschedule this debt failed. In 1999, Donegal International Limited, registered in the British Virgin Islands in 1997, offered to buy the debt from Romania. The company was run by Mr. Michael Sheehan of the United States. After lengthy negotiations and, notwithstanding Zambia s slightly higher offer of US$ 3.5 million, Romania sold the debt to Donegal International for US$3.2 million (on a claim with a face value of US$30 million). The company s major asset was the claim against Zambia. Following the debt assignment to Donegal International, and in controversial circumstances, Zambia acknowledged the validity of Donegal s claims. The assignment was controversial because Romania had given Zambia until 31 January 1999 to confirm its offer to purchase the debt after which date Romania would be free to sell the claim on the secondary debt market. Just 12 days before this deadline, Romania broke its word and sold the debt to Donegal International. Donegal attempted to convert the claim into investments in Zambia but after three years of unsuccessful negotiations, Donegal commenced litigation in the British Virgin Islands seeking compensation of US$42 million. A settlement agreement was reached in return for Donegal discontinuing legal proceedings in the British Virgin Islands, and Zambia agreed to repay US$ 14.8 million over a three-year period. The settlement agreement, governed by English law, stipulated that if Zambia defaulted on its obligations, Zambia would pay the original debt plus interest. Zambia fell into arrears in 2004, after it had paid Donegal International a total of US$ 3.4 million in 3 instalments, i.e. more than the creditor had originally paid for the debt. Donegal then commenced litigation in England seeking a staggering US$55 million. In February 2007, the English High Court ruled in favour of Donegal International. The end-result was a judgement in favour of Donegal International for a total of US$15.4 million. 35 Zambia had recently completed the HIPC and MDRI Initiatives and had benefited from an annual debt service reduction of approximately US$50.3 million. The US$15.4 million settlement to Donegal therefore wiped out a significant proportion of this to the detriment of the people of Zambia. 13

14 August 2008 main purpose of companies incorporated in offshore financial centres is to avoid regulation and taxation of their activities in their home countries and/or principal place of business. 45 Because tax havens offer businesses a high degree of secrecy, NGOs and citizens have little or no information about who owns and operates vulture funds. A company may be set up simply to pursue a debt and then shut down. It may have no other legitimate business purpose. It is therefore often difficult for concerned citizens to campaign effectively against vulture funds because information is unavailable. Some of the world s most important tax havens are located in Europe, or are dependencies or overseas territories of European countries. It is probably for this reason that their important contribution to the proliferation of vulture fund activities has been markedly absent from European policy-makers discourses on the issue. The UK is one of the world s biggest financial centres and together with its crown dependencies some of which are major tax havens make the UK the world s largest tax haven. UK Prime Minister, Gordon Brown didn t mention tax havens in his speeches on the subject. Belgium is another tax haven. Its recent resolution doesn t mention tax havens either. The EC s commitments from EU Member States on vulture funds don t include any pledges to tackle tax havens. The Paris Club which counts several tax havens among its members is also silent on the matter in its public statements on combating vulture fund action. This suggests that policy-makers are only willing to tackle part of the problem even though tax havens clearly facilitate the flight of much-needed capital from developing countries. Tax havens serve no other purpose than to help rich individuals and companies hide their money and profits from taxation or to assist criminal groups launder the proceeds of criminal activities. They also assist vulture funds to set-up-shop and maintain high levels of secrecy. This ultimately supports their abilities to successfully sue sovereign debtors for large amounts of money. Tax havens are therefore a development issue and need to be urgently tackled by governments around the world. Tax havens should be closed down. But there are important interim measures which could be taken by governments to dramatically curb the use of tax havens and make them less profitable. These include the automatic disclosure of information to put an end to bank secrecy and financial levies on transactions with tax havens. Sanctions should be imposed on tax havens which do not cooperate with the exchange of information. 46 A fair and transparent debt work-out procedure: in everyone s interest The World Bank argues that commercial investor litigation raises concerns of inequitable treatment between creditors. In its most recent HIPC update report, the Bank says, the HIPC Initiative s goal of proportional burden-sharing among creditors is undermined when commercial debt is paid back on more favorable terms than for most bilateral and multilateral creditors. It also prevents HIPCs from using resources freed by debt relief for the initially intended purposes. 47 This is also a complaint commonly voiced by many European Governments. This should therefore be prompting international policy discussions over the development of some form of fair and transparent debt resolution procedure. Profiteering in defaulted sovereign debt is made possible by the absence of some form of international insolvency procedure which is available to private debtors. Many proposals for the internationalisation of some form of international insolvency or arbitration procedure already exist. The key features of such models include: a neutral decision-making body which decides which debts should be declared null and void, and which should be repaid (and on what terms); the institution of automatic stay; the right of both debtor and creditor to be heard; majority decision-making between legitimate creditors to prevent hold-outs; protection of the human, social and economic rights of the citizens of the debtor nation; transparency of process and decisions. 48 Internationalisation of this procedure would ensure comparability of treatment between debtor countries and between creditors. It will therefore avoid preferential payments to a minority of vulture creditors and will help identify instances of illegitimate debt. 14