Clipping vultures' wings - Adrienne Margolis

Vulture funds are legal but not ethical. Now there are calls to stop companies scavenging profit from the world’s poorest countries. In the last few years, many more people in the legal profession and wider society have become aware of vulture funds. The funds are set up specifically to buy old debt at huge discounts – not only corporate debt, but also sovereign debt. They are often hedge funds, set up solely to pursue a developing country debt. The debts can date back decades and are sometimes incurred by corrupt leaders. International organisations such as the International Monetary Fund (IMF) and World Bank negotiate reductions in sovereign debts, to ease the burden on struggling nations. But vulture funds buy these discounted debts and then litigate to recoup the full value, plus costs. The funds justify their actions by saying that the debts they are claiming against poor countries amount to a relatively small amount of money. This is not surprising, when some vultures are ultimately owned by hedge funds worth billions of dollars. But many people in heavily indebted poor countries (HIPCs) targeted by vulture funds live on less than US$1 per day. Take the Democratic Republic of Congo (DRC). This Heavily Indebted Poor Country (HIPC) has a GDP of US$8 billion and is embroiled in a civil war. US courts have awarded the vulture fund FG Hemisphere US$100 million against an original claim of US$44.1 million, relating to a credit agreement made in the DRC (then Zaire) that dates back almost 30 years. ‘Because of the large payments that are required to meet the demands of vulture funds, money earmarked for poverty reduction, education and sanitation is diverted to debt repayments. Countries that received HIPC status and have not been targeted by vulture funds have, on average, increased spending in education from seven per cent GDP to nine per cent GDP’, explains Michael Stulman, an associate director of US-based NGO Africa Action.

Numerous lawsuits

World Bank and IMF data reveal that many countries are being targeted by vulture funds. In Africa alone, these include Cameroon, Ethiopia, Sudan and Uganda. It is hard to know exactly how many lawsuits are involved, because countries are reluctant to disclose this. But in some cases, where IMF data lists one creditor, lawyers reckon there may be as many as 30 lawsuits involved.

In such circumstances, law firms have to decide whether or not they are prepared to act for vulture funds. Their decision depends on their ethical stance. At Clifford Chance, the ethical position is clear. ‘We do not knowingly act for vulture funds’, Andrew Yianni, head of the sovereign debt restructuring group, says. ‘We act for large financial institutions and sovereign countries. When it comes to litigation we have experience in defending institutions such as central banks’, he explains. ‘If we were faced with a case involving suing an emerging market country’s central bank, we would not do it.’ Yianni says that his department makes ‘more than the regular checks’ to establish who they are dealing with. When it comes to vulture funds, he notes that there is an important ethical dimension.

Ethical approach

‘If lawyers are free to choose with whom to act, law firms need to consider whether they have an ethical approach or not’, argues Joss Saunders, Oxfam legal adviser. ‘If you want to be held out as ethically responsible, then it becomes a question of values’, he believes.

Major international firms such as Allen & Overy and Weil Gotshal have acted for vulture funds while at the same time encouraging lawyers to do pro bono work helping targeted countries. Saunders suggests that if large firms do act for both sides in vulture fund cases, the issue is whether or not they espouse an ethical policy. ‘They should be responsible in their business behaviour’, he says. ‘If the aim is solely to make money, they do not mind who they are acting for.

Some NGOs representing HIPCs suggest that if lawyers represent a vulture fund, it gives them experience that could then help them defend a targeted country. Yianni does not subscribe to this. ‘Most defences are now well aired so it would not necessarily be an advantage to use a lawyer who had represented a vulture fund, to defend a poor country being targeted’, he argues.

Michael Sullivan is the QC who represented Zambia when vulture fund Donegal sued for US$55 million in 2006, after buying the debt for US$3.28 million seven years earlier. Sullivan helped bring the settlement down to US$15.4 million. ‘I personally would never work for vulture funds and deplore their actions’, he says.

In the UK, barristers may not always be free to choose clients, but these rules do not apply to solicitors. Law firms can turn clients away. Saunders believes an increasing number of law firms are taking an ethical stance. ‘A lot of people did not know about vulture fund litigation a few years ago, and Oxfam and the Jubilee Debt Campaign have been educating them about the impact on developing countries’, Saunders says. Now younger lawyers seek to avoid certain kinds of work, including defending vulture funds, he says.

Need for pro bono work

Lawyers can help poor countries through Advocates for International Development organisation like (A4ID), which developed from an Oxfam initiative, 1,000 City Lawyers. Through A4ID, lawyers from top firms undertake pro bono work to defend countries targeted by vulture funds. ‘Law firms may do pro bono work for A4ID and they might work for the vulture funds too’, Saunders notes. ‘In large firms it is nuanced – the very large will do both. They will stop doing it when they no longer think that it is a good thing.’

There is clearly a need for pro bono assistance in countries targeted by vulture funds. ‘Governments in poor countries may not have access to lawyers so they may not have understood the case being brought against them. If more people are aware that they can get help at early stages from lawyers and those lawyers are there from the start, it would help in a lot of vulture fund cases’, Katie Hutt, executive officer of A4ID, explains.

Sullivan identifies a need for even more expertise. ‘A4ID provides pro bono work but there is a limit to what can be done. You have to invest a huge amount of expertise and time, and this can’t always be provided free of charge’, he argues. ‘But we’ve got to have people willing to do the work. We need less talk and more doing, and the people doing need to have experience. That’s what’s lacking. They need to know what they are working for and need to be prepared to find out more than what is happening on the surface.’ Judges also need experience of corruption cases to understand the complexities of vulture fund cases, Sullivan adds.

Political lobbying

Politicians in the US and the UK have been lobbying their governments to curb vulture funds for several years. ‘As long as something is legal, it’s going to happen. I would not expect lawyers to take action if the legislature won’t. The responsibility is on governments. It is important to keep the profile of this high and keep pushing for action’, says MP Sally Keeble says. She spearheaded the Developing Country Debt bill in the United Kingdom, to stop vulture funds taking legal action to recover poor countries’ debts.

The UK Government put proposals out for consultation this year. It suggests limiting the amount that a commercial creditor could be awarded in UK courts, but restricts this to HIPC countries. ‘The idea is to stop developing country debt ending up in private hands’, Keeble explains. Sullivan assisted in drafting the UK legislation and he believes it would go a long way towards solving the problems posed by vulture funds. But Keeble would like to see the legislation extended to protect more countries, because each can only go through the HIPC process once.

The British Government is reluctant to include more than the poorest countries in its legislation, because it fears the consequences for the financial sector. ‘If they outlaw this kind of debt they are worried about the effects on the secondary debt market’, says Sarah Edwards, senior policy and campaigns officer at the Jubilee Debt Campaign.

‘I do not accept the arguments that legislation could upset the financial markets if more than the HIPC countries are helped’, Keeble argues. ‘But we do need a definition of where any legislation would apply.’

Tamara Gaw, in-house counsel at US-based TransAfrica Forum, also refutes the argument that secondary debt markets could be damaged if there was a clampdown on vulture funds. ‘Vulture funds disrupt everything including secondary debt renegotiation. They can derail London or Paris Club talks to reduce sovereign debt. Our goal is to have the best interests of the poor country at heart – they need a level playing field.’ There is also the issue of how many of the debts that are being chased were odious in the first place, she notes.

Keeble cautions that there is concern about how far some developing countries are complicit in helping vulture funds. ‘There are a lot of different vested interests in this and it’s important that we’re not too starry eyed about it’, she says. ‘It is important to look at arguments and to see how to safeguard UK taxpayers’ (by making sure that their money goes to help alleviate poverty and not into the bank accounts of either the vultures or corrupt rulers).

People are increasingly conscious about the problems created by vulture funds and legislation is moving fast because the argument is an obvious one, Keeble explains. ‘I think that if we keep to a narrow definition of which countries are involved, we stand a good chance of getting legislation through. I am confident that there will be some action if the government does not legislate. A private member’s bill that does not try to ban all activity and that recognises the limits of what is possible will definitely achieve something.’

US position

In the United States, the Foreign Corrupt Practices Act (FCPA) should limit some vulture fund activities. But lawyers say that it is not properly enforced. ‘The problem is that there is too much work and insufficient time for officials to get to the bottom of the problem. There is also a limitation period on when cases can be brought’, Sullivan says.

Several years of political lobbying mean that in the United States, the Stop Vulture Funds Act is now under discussion. Introduced by California Democrat congresswoman Maxine Waters, the Act would allow vulture funds to recoup only the purchase price of a debt plus six per cent interest. The bill is limited to countries that can borrow from the International Development Association (IDA), the World Bank concessional loan facility. It excludes countries eligible to borrow from the International Bank for Reconstruction and Development (IBRD), which lends at market rates.

The bill also excludes countries that commit gross violations of human rights, engage in excessive military spending, support international terrorism or fail to cooperate with the United States on international narcotics control.

‘We cannot allow vulture funds to erode the progress that has enabled many of the world’s most impoverished nations to reduce poverty,”’Congresswoman Waters commented. “‘The Stop VULTURE Funds Act would protect impoverished countries from these predatory practices and allow these countries to use their limited resources to meet the needs of their people.’

‘People are very receptive to proposed legislation’, says Stulman of Africa Action. ‘The economic crisis has meant that people are thinking in new ways about debt and this has given the topic a lot of momentum. Our aim is to end profiteering by vulture funds, and if they can still collect six per cent, which is the internationally acceptable interest rate, it will obviously make vulture funds a less attractive proposition.’

In addition to the United Kingdom and the United States, legislation is needed in the European Union, to stop vulture funds jurisdiction shopping, Keeble says. In September, she visited the European Commission to discuss how it could help.

In the United States, the Waters team believes that Congress should not hesitate to move forward, whatever other countries are doing in terms of legislation. They argue that if the United States does not do anything to stop vulture funds, it could become an excuse to other countries not to do anything.

Loophole

The legal loophole that has allowed vulture fund cases to be brought against impoverished countries has prompted calls for legislation to curb the activities of such funds. This will mean that most of the difficulties are addressed, experts say. As for lawyers who represent vulture funds, there will always be someone willing to take a case if a client can pay, one US government adviser suggests. If there was more publicity about vulture funds in the United States, including bad publicity for the law firms that represent them, that might make lawyers more hesitant, she suggests.

Case study: DRC/FG Hemisphere

In 1980 and 1986, the DRC and its national electricity company entered into credit agreements with Energoinvest, a Yugoslav company, to provide electrical infrastructure. The Zaire Government guaranteed the amount but by the late 1980s both the electricity company and the government had defaulted on the debts. In 2003, the International Chamber of Commerce entered two arbitral awards in favour of Energoinvest for US$18.43 million and US$11.725 million plus nine per cent interest, plus the cost of arbitration. In 2004 the US District Court for the District of Columbia confirmed the US$11.725 million arbitration award and in 2005 confirmed the US$18.43 million arbitral award. Energoinvest then sold its interests in the arbitral awards and judgments to a company called FG Hemisphere (now FG Capital Management). In the legal wrangles that have followed, FG has tried to take control of DRC assets in the Bahamas, Europe, Hong Kong, South Africa and the United States. In March 2009, the District of Columbia court ruled that the DRC should pay penalties starting at US$5,000 a week and doubling every four weeks to a maximum of US$80,000 a week, for failing to produce information sought by FG Hemisphere. ‘All assets worldwide are included. It is an extraordinary order. Our position is that an American court does not have the authority to award such coercive monetary sanctions against a foreign state’, explains Steve Cundra of law firm Roetzel & Andress, representing the DRC. The judge said this ruling was a warning to those who did not pay their debts. ‘There is a war in the DRC and there are no facilities because of the war’, argues Cundra. ‘Conditions are such that people can’t be fed. It would be irresponsible of them to hire costly lawyers to defend vulture funds cases, in circumstances like this.’ Cundra is working with Stephen Malouf, who runs a Dallas-based trial law firm. Malouf has been working for the DRC for the past seven years for no pay and has successfully resolved by settlement two other claims against the country, a debt default claim and an expropriation claim. Malouf and Cundra strongly support moves to improve legal assistance to indebted poor countries, to help them handle future cases. Both lawyers also stress the need for a better international debt assessment regime. ‘When the World Bank and the IMF go into a poor country, it is essential that they analyse the debt’, says Malouf. These institutions impose conditions on debt negotiations, but if they do not put an expert in place who can evaluate the debt structure, problems like those of the DRC will never be solved, he argues. ‘We need an international regime to see if the debt is enforceable or not. If the country is poor and at war, enforcement might be difficult and it might mean having to take human rights into account’, he adds. ‘If you do not have the money to pay for lawyers, you cannot engage in the legal process’, Cundra says. He also suggests that an international body is needed to investigate claims to see if they are actually valid, particularly where there are no records. ‘This is a human rights issue. It affects things like infant mortality and the provision of health care.’

In-depth analysis

Better legal advice In addition to changes in the law, targeted countries could be helped by better legal advice, many argue. In June, the African Legal Support Facility was launched. The African Development Bank and 29 member countries have signed an agreement to provide technical assistance for African countries needing legal help related to vulture fund cases. The hope is to minimise the diversion of the gains from debt relief. ‘It will be a huge help if lawyers can train people in the poorest countries to help fight vulture fund lawsuits, for example through the African Development Bank initiative’, says Katie Hutt of A4ID. It means that lawyers can have more impact right at the start of cases. Access to credit Some City lawyers suggest that legislation on vulture funds will make commercial creditors wary of lending to poor countries because they may not get their money back. Some also maintain that poor countries will get less access to credit. A legitimate creditor has nothing to fear, the Jubliee Debt Campaign (JDC) argues. The law could restrict the amount awarded when a discounted debt is pursued in full so the only loser will be the vulture fund bringing the case. The JDC also argues that vulture funds operate with impunity which actually disrupts developing countries’ access to capital. They note that arguments about reductions in available credit were made when the HIPC scheme was devised in the 1990s, but those countries have still attracted commercial investment. Sally Keeble MP notes that ability to raise money is important for developing countries, and they will only be in a position to get loans if lenders think they will be repaid. This makes resolving the issue of vulture funds particularly pressing.

 

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Adrienne Margolis is a freelance writer and editor. She can be contacted by e-mail at adrienne.margolis@googlemail.com.

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