U.S. Lawmakers Act to Tame 'Vulture Funds'

.....

A coalition of African solidarity and debt relief organizations applauded U.S. legislation introduced last week to protect countries from vulture funds -- companies that profit off of the debt of poor nations.           

June 25, 2009 - OneWorld.net

.....

What's the Story?

The Stop VULTURE Funds Act is a "key step in protecting developing countries from vulture funds," said Nicole Lee, executive director of the TransAfrica Forum, an African American human rights and social justice advocacy organization.

Reintroduced last week into the lower house of Congress, the bill would block U.S. investment funds from purchasing the debt of impoverished countries at reduced rates and then suing the countries to collect astronomical profits. The bill would also limit the amount of interest for which the firms could sue to six percent and require greater transparency during these transactions.

According to Neil Watkins, executive director of the Jubilee USA Network, an alliance of 75 religious denominations, development agencies, and human rights groups, "vulture funds make their profits by deepening the suffering of millions of people in some of the poorest countries in the world. They are stealing the resources that should be invested in education, health, and infrastructure improvement."

Preying on the Poor

Every year, African nations pay approximately $14 billion in debt remunerations to wealthy nations and international financial institutions while receiving less than $13 billion in international aid. Agreements to cancel or reduce debts have enabled states to spend more on much-needed social programs and translated into a higher quality of life for millions of people in developing countries.

Money used to pay back vulture funds is typically rerouted from programs intended to benefit these countries' least privileged citizens.

One report estimates the average potential cost of lawsuits brought against Heavily Indebted Poor Countries' (HIPCs) by vulture funds amounts to 18 percent of spending on health care and education, 59 percent of debt repayments, and 5 percent of budget revenue. A 2007 study by the organization Debt Relief International found that lawsuit costs totaled 52 percent of health and education expenditure in Niger and 98 percent of revenue in Cameroon.

Vulture funds prey on countries that qualify for debt cancellation precisely because their governments have access to money for such programs, writes the TransAfrica Forum.

"Since the vulture fund buys the loan from the creditor, not the debtor, the vulture fund can technically claim payment of the full amount, even if it paid only a fraction of the value," explains Africa Action. Investment funds that pursue vulture activities often do so in great secrecy, by basing their operations in tax havens like the British Virgin Islands and litigating in European and U.S. courts, which they see consider more creditor-friendly and efficient. Moreover, some investment funds -- known as hedge funds -- are exempt from certain regulatory processes and can more easily target indebted countries.

Zambia and Donegal International

In 1979, Zambia purchased agricultural equipment and services from Romania on credit. Shoddy equipment and European farm subsidies, however, prevented the southern African nation from bringing in the revenue necessary to repay the loan.

In 1999, the two countries agreed to liquidate the debt for $3.28 million. But Donegal International, a British Virgin Islands-based fund, moved quickly to purchase the debt from Romania for the liquidation price and then sued the Zambian government in a U.K. court for $55 million seven years later.

The British High Court ordered Zambia to pay $15.4 million to Donegal International, or what amounted to 65 percent of Zambia's savings in debt relief in 2006.

Clipping the Wings of Vulture Funds

"More than two-thirds of the lawsuits brought by vulture funds are adjudicated in U.S. or U.K. courts," explains the TransAfrica Forum. "In the majority of cases, vulture funds sue in courts located in New York, Paris, and London because these courts are viewed as more creditor-friendly and more efficient."

In addition to efforts in the United States, lawmakers in the United Kingdom introduced legislation in May that would allow funds to sue only for the amount they paid for the debt, force funds to disclose a list of their investors, and introduce measures to combat the corruption often involved in these deals.

The U.K.-based Jubilee Debt Campaign is calling on supporters to urge their local representatives to engage in various efforts aimed at ending "the vulture culture."

Similarly, Jubilee USA is encouraging people in the United States to take action against vulture funds by encouraging greater political support for the Stop VULTURE Funds Act currently under consideration in Congress.