Vulture funds, often called “Distressed Debt Funds” are predatory hedge funds that siphon off newly freed resources from poor-country debt cancellation efforts. They do this by buying up a poor country’s debt in default for pennies on the dollar and then engaging courts in U.S., Britain and beyond to sue for the full amount of the debt plus exorbitant interest rates and court fees. Instead of this newly freed up money in a poor country going to poverty alleviation projects like building schools and treating HIV/AIDS, it goes into the bank accounts of these greedy vultures.
In November of 2008, a British court ordered Liberia to pay $20 million to two vulture funds investors, Hamsah Investments of the British Virgin Islands and Wall Capital of the Cayman Islands. The sum is equivalent to 5 percent of the 2009 budget of Liberia, which is recovering from a 14-year civil war that ended in 2003. The claim appeared to be based on a $6.5 million loan to Liberia by former U.S. bank Chemical Bank in 1978. A New York court ruled in 2002 that Liberia owed $18 million, and the two funds were trying to collect that sum plus interest.
There is a lawsuit in the Washington, DC, court by FG Hemisphere against the Democratic Republic of the Congo (DRC). FG Hemisphere aims to profit off of critical debt relief which Congo is trying to receive from the International Monetary Funds (IMF) at the expense of the impoverished people of the DRC. In 1980, the brutal and corrupt Mobutu dictatorship took out a $30 million loan with the Sarajevo-based company ENERGOINVEST to supposedly construct a hydroelectric facility and an electric power line. The debt remained in default for more than 20 years. After the DRC qualified for debt relief, FG Hemisphere bought ENERGOINVEST’s claim for an undisclosed amount. FG Hemisphere pursued the claim in the Washington, DC court system, suing the DRC for $105 million—more than three times the original price of the debt. As partial payment, FG Hemisphere tried to seize the DRC’s embassy properties in DC. The court rejected this claim, but ordered the DRC to document all of its assets outside the country. The DRC refused to comply with the court order arguing that the court’s demands were overly broad and burdensome, and now faces fines of an additional $4 million per year.
The people of the DRC—struggling to emerge from crushing poverty, colonial rule, brutal dictatorship, civil war and cold-war intervention – are being asked to prioritize repayment of this decades-old debt, taken on by a corrupt and unaccountable regime, plus fines, interest and legal fees.
In Zambia’s case, the debt was incurred as far back as 1979, when Zambia was lent $15 million by Romania in order to buy Romanian tractors. Twenty years later, Zambia was unable to repay its debts and became eligible for debt relief. The Zambian and Romanian Governments were negotiating the cancellation of the tractor debt as part of this process. Donegal International was able to purchase the debt from Romania for $3.3 million and then sue Zambia, in the British courts, for $55 million, eventually winning $15 million in 2007, despite the judge expressing deep concern about the dishonesty involved in the case. In essence, some of the debt relief Zambia had been given was snatched back by a vulture fund. Zambian presidential advisor Kalunga-Banda said paying Donegal meant foregoing medicines that would have been available to in excess of 100,000 people.
Liberia, Congo and Zambia are far from alone. The International Monetary Fund claims that at least 54 vulture fund companies have taken legal action against 12 of the world’s poorest countries, for claims amounting to $1.5 billion. If a country fails to pay up, the vultures go after the country’s assets abroad, threatening trade, investment and even aid agreements.
In a Reuters article January 21st, 2010, Jonathan Lynn reported that Cephas Lumina, one of 39 independent experts mandated by the Human Rights Council of the U.N. to look into issues such as these, will concentrate on Vulture Funds and call for legislative measure in his annual report this coming June. Lumina monitors different countries or topics, influences the debate on regulation through his reports to the council, which feed through to the U.N.’s broader work. He is also working with an expert group set up by the United Nations Conference on Trade and Development (UNCTAD) and is being funded by Norway to draw up criteria for establishing the legitimacy of sovereign debt. Attention to the funds is due to the response by many countries on how to better respond to the recent global financial crisis. Although he recognizes the legitimacy of profit, doing so in such a predatory way—buying a debt for $3 million dollars and then suing for $15 million—is not justifiable.
There is legislation moving through Congress to address this issue. The Stop Vulture Funds Act (HR 2932), is a bill in the House of Representatives that would prevent vulture funds from making excessive profit off the debt of the world’s poorest nations. The bill was introduced by Representatives Maxine Waters (D-CA) and Spencer Bachus (R-AL) in June of 2009. The Stop Vulture Funds legislation currently has 29 co-sponsors in the House. The Act will prevent Vulture Funds from utilizing U.S. courts to profiteer off of resources freed up from debt cancellation. It prohibits the use of U.S. courts towards sovereign debt profiteering – when a creditor demands more than the amount for which the debt was purchased. It will also put a cap on annual interest rates so as to stop Vulture creditors from charging double or triple-digit interest rates. Finally, the Act will shine a light on this behavior through disclosure requirements; before suing a poor country in court, a Vulture Fund will have to provide information on who owns the debt, how much it was bought for, and whether fraud took place in acquiring said debt.
AFJN, as a council member of Jubilee USA, encourages its members to familiarize themselves with this legislation and support efforts to free the chains of debt in all its ugly forms. AFJN is part of a working group on this bill. We also ask that you write to your House Representative asking him or her to join in sponsoring this bill. A week of education and advocacy begins February 8th. Look out for our e-blasts and other aids to let Congress know where we stand on Vulture Funds. More information on this bill and the realities of Vulture funds can be found on the Jubilee USA website at www.jubileeusa.org.
Originally published in the Jan-Feb edition of Around Africa
By Rocco Puopolo, s,x, Executive Director
