Opinion - News Analysis   

How ‘vulture funds’ prey on poor nations

Many debt relief campaigners had been hoping that the headlines about a $50-million lawsuit against Zambia by a so-called “vulture” fund earlier this year would mark the end of this controversial legal action. But as delegates sit down at the annual meetings of the International Monetary Fund and the World Bank in Washington, they will be presented with figures showing that the vulture funds are still dragging developing countries into the courts in order to re cover unpaid debts from them.

Moreover, some top London law firms, who claim to support the United Nations’ millennium goals of reducing global poverty, are making fortunes representing the vulture funds.

Vulture funds buy up sovereign debt issued by poor countries at a fraction of its face value, then sue the countries in courts — usually in London, New York or Paris — for their full face value plus interest.

Donegal International, an offshore vulture fund, burst into the spotlight this year when it won an award for $15 million from impoverished Zambia in the U.K. High Court. Donegal paid $3 million for some old Zambian debt, then sued for $55 million, although the London judge reduced the award to $15 million.

But that was the tip of the iceberg. A paper prepared for the IMF/World Bank meetings this week shows there are now $1.8 billion of lawsuits against poor countries where people typically live on less than $1 a day. Eight cases were launched in the past year — five against Nicaragua, two against Cameroon, and one against Ethiopia. But the report warns the figures are far from complete and the real totals could be higher still.

It shows that of the 24 countries that have received debt cancellation under the Heavily Indebted Poor Countries initiative, 11 have been targeted for legal action by private creditors. And they have already seen awards in courts of just under $1 billion — money that could have been spent on schools and hospitals.

The IMF said litigating creditors were concentrated in the United States and the U.K., as well as the British Virgin Islands (BVI), the U.K. protectorate tax haven.

“It’s time for concerted action from the U.K. government, the IMF and the World Bank to tighten up the system and make sure the benefits of debt cancellation go to the people who need them,” said Trish Rogers, director of Jubilee Debt Campaign. “We are calling for national and international regulation to stop vulture funds from operating.”

Top London law firms are reaping the benefits from bringing many of the vulture funds’ cases to court in London. One such is Allen & Overy (A&O), which represented Donegal against Zambia and billed their clients about £2 million in fees. The average Zambian survives on less than $1 a day. But that was far from being an isolated case. Several London law firms have vulture funds as clients or have acted against the interests of poor countries.

Another big firm — Weil Gotshal — acted for a major U.S. vulture fund, Elliott Associates, in the successful pursuit of Peru for $55 million in 1995. Elliott is still a client of the firm. A&O also counts among its clients BVI-based Walker International — another vulture fund, which has sued Congo-Brazzaville for $13 million.

A&O is acting for British company Biwater, which was kicked out of Tanzania by the government of that country two years ago for failing to run Dar es Salaam’s water system properly. Biwater is suing Tanzania for millions of dollars of damages in a tribunal in The Hague.

Another vulture fund — Kensington International Ltd, domiciled in the Cayman Islands — is represented by law firm Dechert. In 2003 it sued Congo for $30 million, again in the High Court in London, although it was then represented by another London law firm.

While representing the vulture funds in court, law firms Weil Gotshal and A&O are members of a progressive organisation called Advocates for International Development (A4ID), which aims to support the MDGs for reducing global poverty. The organisation also provides pro bono advice to poor countries that otherwise could not defend themselves when attacked — by a vulture fund, for example.

“There is a lot of vulture fund activity in London because of the expertise the city [of London] has,” said a spokesman.

A4ID grew out of the development charity Oxfam’s “1,000 City Lawyers” initiative. Oxfam’s head of legal affairs, Joss Saunders, said: “We believe that vulture funds should be outlawed. They undermine debt relief initiatives and the financing of essential services such as health and education on which poor people depend. Oxfam would prefer that law firms do not act for vulture funds.”

British Prime Minister Gordon Brown has criticised vulture funds and called for international action to ensure that they cannot thrive. He wants the World Bank to help poor countries eliminate their commercial debts and creditors to establish a legal fund to help countries defend themselves. “We are determined to limit the damage done by such funds,” he says.

There is an early day House of Commons motion signed by 110 MPs urging the government to follow the example of influential U.S. Congressman John Conyers, who is pressing President Bush to change U.S. law so that U.S. courts cannot act in ways that contradict the country’s foreign policy — in this case, debt relief for poor countries. Most vulture funds originate in the U.S., though, so a tightening of the law could push more of them to pursue cases in London if they can no longer get their way in the U.S., meaning that the vultures will continue to circle London for years to come. —© Guardian Newspapers Limited, 2007

(James Lewis is the associate editor of Legal Business.)

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Only when warranted
Of mice and men
Dimensions of rural poverty in Tamil Nadu
Is it pause, halt or end?
Poland, ahead of a snap general election
How ‘vulture funds’ prey on poor nations
Corrections and clarifications
Sensex crash
On the nuclear deal
Guilty
Ban on mobile phones

Copyright © 2007, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu