Tuesday, 28 June 2011

Vulture Funds - "simply left to rest"

Third world debt role questioned

AN official inquiry has been launched into Jersey's role in forcing third world countries to pay millions of pounds in crippling debt. Chief Minister Terry Le Sueur has revealed that senior Law Officers, top-ranking civil servants and finance experts have met to look at whether so-called vulture funds should be allowed to use Island courts to chase debts. The funds buy up the debts of developing countries for a fraction of the amount owed and then aggressively pursue the debtors through the courts to recover as much as possible. Some of the debts date back to the 1980s, with nations having already paid back the original figure borrowed several times over. (1)

In October 2007, reading the Tablet Weekly magazine, I came across a UK campaign being mounted to stop Vulture Funds. A letter sent to Gordon Brown from the Scottish Catholic International Aid Fund dealt with the issue:

Dear Prime Minister

Re: Stop the debt vultures profiting from poverty.

In the aftermath of a recent report by the International Development Association into the status of HIPC implementation and in advance of this weekend's World Bank and IMF autumn annual meetings, I am writing to draw your attention SCIAF's most recent campaign Stop the debt vultures profiting from poverty, launched in collaboration with Jubilee-Zambia.

With nearly a third of vulture funds based in the UK, vulture fund activity is of concern to citizens in developing countries and the UK alike. So far, over 2, 300 people have joined our postcard campaign Stop the debt vultures profiting from poverty with many more expected to join as the campaign continues to run. I am attaching the postcards received to date in order to evidence the current strength of feeling in the run up to the international financial institution's autumn meetings, with more to follow shortly.

The 2007 International Development Association - IMF report mentioned above Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI): Status of Implementation confirms campaigners' worst fears; it shows that vultures are a real and growing concern--11 post-HIPC completion point countries are facing lawsuits and that 8 new legal actions have been reported in the last year alone-and that UK companies are heavily involved.

The report notes that 'litigating creditors are concentrated in the US and the UK.and the British Virgin Islands' and shows that companies based in the UK or in UK-dependent territories have collectively been awarded $264.4 million by various courts for original claims of $83.9 million. Moreover, lawsuits continue to this day. The report notes that a private, UK-based company called Annadale Associates is claiming $8.9 million from St Tome and Principe for an original claim of $3 million.

Our campaigners are calling for clear and decisive leadership from you to tackle this issue.

Action is needed in three key areas; introducing new laws, amending existing ones and working at the international level. Introducing new laws to combat harmful vulture fund activity could have far reaching practical impacts, as well as sending a powerful message about the UK's commitment to poverty alleviation. SCIAF would like to suggest the following as useful starting points when looking at potential new legislation:

· Applying international examples; the US has introduced legislation which prohibits the purchase of debts solely for the purpose of litigation and Belgium has enacted legislation which helps to combat a particular legal principle applied by vulture funds in the past. The 'Pari Passu' principle states that all creditors "should be treated on equal terms without discrimination" and is has been a key plank in vulture funds' legal cases. This principle has been used to argue that even when some creditors have forgiven their portion of the debt, there is no need for other creditors to make similar concessions. In the case of Elliot Associates vs Peru, the application of this principle resulted in the company being awarded $58 million for a debt they had procured for $11 million - but the Bank of England notes that 'a recent change to Belgian law means that it is no longer possible for litigants successfully to enforce judgements in this way.' See Bank of England (2005) Sovereign bond contracts: a workshop at the Bank of England - Financial Stability Review: June 2005 for more information.

· Extending national debt legislation; UK law also amends the application of the Pari Passu principle as it states that creditors must abide by any debt relief plan that is agreed by creditors representing 75% of the value of the debt.

Equally important is amending existing legislation. The 2006 Companies Act was historic in introducing, for the first time, a requirement that company directors have a legal responsibility not simply to maximise profit but also to 'have regard . (to) the impact of the company's operations on the community and the environment" (see Part 10, Chapter 2, 172, 1d). However, this crucial provision does not apply to private companies, and it is unclear whether it applies to corporations based in dependent UK territories. Such loopholes ensure that many vulture funds are exempt from the very legislation designed to ensure that companies behave responsibility and minimise the negative impact of their operations. We thus suggest that the scope of the Act be expanded to private companies and that the question of its geographical scope is clarified.

Third and finally, it is crucial that the UK government acts not in isolation but also works with other countries and actors to establish a fair, transparent international system to deal comprehensively with developing country debt, including the issue of vulture funds. A recent paper produced by the international Catholic network CIDSE (International Co-operation for Development and Solidarity; www.cidse.org) entitled A Human Development Approach To Preventing New Cycles of Debt provides more detail about what this system could look like in practice, and a copy is enclosed for your information. Action towards achieving this end could not prove more timely; as this weekend's World Bank and IMF autumn meetings provide the ideal opportunity for the UK government to discuss how best to take this initiative forward.

On behalf of our campaigners, let me thank you for your time and assure you we eagerly await your response.

Yours sincerely,

Chris Hegarty
SCIAF Advocacy Manager

And I read of Deputy Kevin Lewis, who had asked a question about a case "whereby a company operating out of the British Virgin Islands purchased a debt owed to Romania, I believe it was for agricultural equipment, owed by Zambia for a few million dollars and then went on to charge Zambia $48 million; thereby negating much of the good work done by our own Overseas Aid Committee."

I sent the following letter to our Chief Minister, Senator Frank Walker

Dear Senator Walker,

I read recently about the loopholes at present in place in the U.K. Companies legislation regarding "Vulture Funds" (see Tablet article below for more detail), and am writing to ask if there are any plans - as implemented in the USA and in Belgium, to prevent the purchase of debts solely for the purpose of litigation in this manner. I also see that France too is bringing in legal proposals regarding Vulture Funds.

I noticed that when the matter was brought up (19/06/2007) in the States, Senator Le Sueur said that "Any attempt to try to legislate against Vulture Funds" specifically would be extremely difficult without closing the door to a whole range of legitimate corporate debt restructuring."

With respect, if Belgium can also introduce legislation against such practices, surely it is not beyond the ability of Jersey to do likewise? What seems to be clear among the European countries, as well, is a general move to seek out ways and means of preventing vulture funds from operating from within their jurisdictions, and it seems that one of the main distinctions is whether the corporate debt relates specifically to the government of third world countries (and not private individuals or corporations).

I know that in the UK, as can be seen from their statement on May 2007, Hansard, are not prepared to just let the matter rest, but state that "The Chancellor raised this issue with his G8 colleagues at their meeting in Potsdam in 19 May, and set out the Government's proposals for action. G8 Ministers expressed their concern about the actions of some litigating creditors against heavily indebted poor countries, and agreed to work together to identify measures to tackle this problem"

Could I ask for your assurance that the matter will not simply be left to rest (as is suggested by my reading of the States session), but will be actively reviewed, particularly with regard to:

- introducing new laws to combat the problem, as has been done in the US and Belgium

- amending the Companies Act to close the loopholes that exclude vulture funds

The reply from Terry Le Sueur (Treasury Minister) - and not from the Chief Minister - was as follows:

Thank you for your e-mail addressed to Senator Walker. I am sure that the latter is not being "simply left to rest" and I have urged all firms involved in international activities to be aware of, and refrain from, activities involving 'vulture funds'. I have been given an assurance that they will, and we all recognise the potential harm this could cause to Jersey' s reputation, as well as to the 'victims' of the vulture fund. As you probably know, we are shortly to have a visit from members of the International Monetary Fund looking into the quality and strength of our legislation and procedures, and I will also listen with interest to their views.

I am happy to listen to further advice, as I am sure are my colleague the Minister for Economic Development and officers of Jersey Finance Limited and the Jersey Financial Services Commission. One problem which I saw, and for which I should be interested to see if Belgium has solved, is how one defines a 'vulture fund'. It is relatively easy to see the outcome of vulture fund activity ; it is, I fear, much harder to legislate in advance for such activities without impinging on totally legitimate financial services.

I should welcome the views of those to whom I have copied this correspondence in case they have anything to add.

Terry Le Sueur

What has been happening in the meantime?

There are a number of unreported judgments which seem deal with Vulture funds over the last year. However, access to the details of these are only available to lawyers who have applied for a login and password - the normal layman can't get there. Nevertheless the indications are that the matter had "simply been left to rest", after all, despite assurances - in October 2007 - to the contrary by our present Chief Minister, then Treasury Minister. On the contrary, in reply to Daniel Wimberley, Senator Le Sueur replied that:

Although we have been aware of it for some time, we wanted to see what conclusions would be drawn from the review of the U.K's temporary legislation of last year before considering our position.

In other words - "simply left to rest"! As usual, what Senator le Sueur says (in 2007) and what Senator le Sueur did are totally at variance; he said the matter would not be left, but that appears to be exactly what happened. Jim Hacker, in "Yes Minister", surely could not have done better for dithering andf vacillating = I believe the phrase Sir Humphrey used of Jim Hacker was ""lots of activity but no actual achievement"

I sincerely hope that Deputy Wimberley can get the States to be more pro-active, rather than just seeing what the UK does and slavishly following it. I will be doing a follow up on his latest question shortly.

This is the most detailed item, which is confirmed by Senator Le Sueur in related to Deputy Wimberley's question to indeed be a case of Vulture activity:

2.14 The Deputy of St. Mary of the Chief Minister regarding the enforcement of debt repayments by the Democratic Republic of Congo:
Would the Chief Minister confirm whether FG Hemisphere is using the courts in Jersey to enforce debt repayments by the Democratic Republic of Congo in a way which has just been outlawed by the U.K. Parliament and, if so, does the Chief Minister think it is appropriate for the Jersey courts to be used in this way and what actions, if any, has he taken and does he propose to take on this matter

Like a magician producing a rabbit out of a hat, Senator Le Sueur said there was a "high level review board" looking into the matter. It's had a very long time to do so!

2.14.1 Deputy G.P. Southern:
Can the Minister tell Members who constitutes this high level-review board and is he content that the reputation of the Island is protected when it becomes obvious that we are a safe haven for these so called vulture funds?

Senator T.A. Le Sueur:

At this stage this has been a very hastily produced answer and I do not have details of the composition of that working party, other than to know it is in existence and it is working. In due course I hope to be able to present those details to the Members.

and the final answer to questions was:

Senator T.A. Le Sueur:
I will be happy to ensure that there is a balanced representation on that working party, including people with civil interests, as I am sure we all do. It is not fair to say that there are no members in the working group. I just do not have at the moment details of their names. Whether the discussions will lead to legislation or not is a matter which would be premature to say at this stage. I hope it does lead to legislation in some form or some other measure which will ensure that such activities are not permitted to take place in Jersey

Well, Senator Le Sueur has been hoping since 2007 that the matter would not "simply be left to rest". Now he tells us of a working group, but hasn't got any details of their names. The word "hopeless" rather than "hope" springs to mind. And in the meantime, while the UK Goverment has recently (and finally) passed legislation outlawing Vulture Funds, Jersey still has taken no action, with nothing prepared on the Statute books. The Jubilee Debt Campaign (in a public press release) notes that:

The Act has already made two vulture funds settle out-of-court with Liberia for a fraction of the $40 million they were claiming. No new vulture fund cases have been lodged in UK courts. However, the Act has not been extended to cover UK overseas territories such as Jersey. Vulture fund FG Hemisphere is suing the Democratic Republic of Congo $100 million through the Jersey courts

Congo's debt was due to be cut by $7,252 million based on creditors cancelling 80 per cent of debts owed. In addition, the IMF, World Bank and African Development Bank committed to cancel 100 per cent of pre-2004 debts, and some bilateral creditors such as the UK also committed to cancel 100 per cent.

However, a vulture fund called FG Hemisphere has been pursuing a debt claim for $100 million against DRC. If this amount is paid, DRC would have paid out $80 million more to these creditors than expected under the HIPC process, effectively transferring public money from debt relief to private claimants

England has a toxic reputation for so-called "libel tourism". If Jersey doesn't enact legislation (which despite Senator Le Sueur's 2007 remarks, is perfectly possible - the UK managed it), then we may well have the unenviable reputation of being a centre of "vulture tourism" as foreign companies pursue claims against third world countries in Jersey courts! While Senator Le Sueur cannot comment on a case under appeal, he can at least get the wheels in motion to pass legislation as soon as possible, even though it will probably now be beyond his tenure as Chief Minister. Let's hope not commenting is not another means of avoiding the matter, so that it is "simply left to rest"!


[2010 JLR Note 15]
COURT OF APPEAL (William Bailhache, Deputy Bailiff): February 17th, 2010
Civil Procedure-execution-arrêt entre mains

An arrêt entre mains is a well-established procedure in Jersey law by which a plaintiff may, by way of a provisional order, restrain assets in the hands of third parties that are or might be those of a defendant, to satisfy a debt due by the defendant (e.g. Richardson v. Besnard, Royal Ct. (1894), 216 Ex. 371, unreported, considered; J.W. Huelin Ltd. v. Eloury, Royal Ct. (1935), 238 Ex. 326, unreported, considered). It is clear that the Royal Court has a discretion as to whether or not to grant the confirmation of such a provisional order. The process is not dissimilar to the garnishee process or Third Party Debt Orders under Part 72 of the English Civil Procedure Rules.

In the unreported judgments, which alas I can't access, the summary indicates these are probably relevant:

FG Hemisphere Associates 27-Oct-2010
... Jurats Tibbo and Kerley. BetweenFG Hemisphere Associates LLCRepresentorAnd(1) The Democratic ... proceedings launched by the
Representor ("Hemisphere") on 12th March, 2009, against ... the substantive issues raised by Hemisphere's Representation. 2. Hemisphere is the assignee of the ...

FG Hemisphere Associates 4-Oct-2010
... Tibbo and Kerley. Between FG Hemisphere Associates LLC Representor And (1) The ... informed by e-mail that settlement discussions between Hemisphere, Gecamines and the DRC were currently in progress ...

FG Hemisphere Associates 17-Feb-2010
... 17th February 2010 Before : W. J. Bailhache, Esq., Deputy Bailiff, sitting alone. Between FG Hemisphere Associates LLC Appellant And The Democratic Republic of the Congo First Respondent And L'Office ...17/02/2010

FG Hemisphere and Dem Rep Congo 15-Dec-2009
... J. A. Clyde-Smith, Esq., Commissioner and Jurats de Veulle and Clapham. Between FG Hemisphere Associates LLC Representor And The Democratic Republic of Congo First Respondent And L'Office des ...

Part 2 | FG Hemisphere Associates 27-Oct-2010
C and China with the aim, on the one hand, of giving China access to a substantial stake in the DRC's mineral wealth and, on the other, the
generation of funding for a massive national programme of infrastructure ...

FG Hemisphere and Dem Rep Congo 15-Dec-2009
... J. A. Clyde-Smith, Esq., Commissioner and Jurats de Veulle and Clapham. Between FG Hemisphere Associates LLC Representor And The Democratic Republic of Congo First Respondent And L'Office des ...

(1) http://www.thisisjersey.com/2011/06/27/third-world-debt-role-questioned
(2) IMF and IDA. (2010). Congo: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point Document and Multilateral Debt Relief Initiative (MDRI). International Development Association and the International Monetary Fund. Washington DC. 15/06/10.


Tom Gruchy said...

My 20 November 2010 "Jersey Vultures" blog dealt with the October Jersey case re DR Congo etc.
The Judicial Greffe did issue a copy of that judgment to me so should do the same to you - but if not, and you want it, let me know.

TonyTheProf said...

Thanks Tom,

Tom's link is here:


TonyTheProf said...

It saddens me though, because I am not anti-finance industry, just against the abuses that it seems to let through time and again, because - despite all the talk of "good regulatory framework" - that just doesn't translate well into actual practice.

The IMF gave Jersey a glowing review, and around the same time Panorama showed how easy it was to put a massive amount of funds into a Jersey bank account, no questions asked. Clearly the IMF looked at the controls, but did not surreptitiously test them to see how good they were in practice.

But on the other hand, I know of finance industry business who do take money laundering seriously, who do practice due diligence, and know your client, and would not have been caught in the Panorama sting.