Vulture Funds Put to UN Human Rights Test

Debt campaigners hold a pots and pans protest against vulture fund attack on Argentina in New York. 26 February 2013. (Photo: Jubilee Debt Campaign)Debt campaigners hold a pots-and-pans protest against the vulture-fund attack on Argentina in New York, February 26, 2013. (Photo: Jubilee Debt Campaign)

Inequality is rising at an alarming pace everywhere. Less than 62 people own as much as the poorest half of the world’s population. At their current pace of accumulation the richest 1 percent could soon own everything. While some international development NGOs are raising the alarm, many human rights organizations are staunchly silent, failing to hold states and corporations to account in their obligations to protect economic and social rights.

This is particularly clear in the realm of business and human rights, where developing countries such as Ecuador are leading initiatives for accountability, while NGOs such as Amnesty International and Human Rights Watch remain quiet.

Countries most hit by predatory business and investment practices are seeking to put mass inequality under a microscope. This week, the UN Human Rights Council’s Advisory Committee on vulture funds is preparing a detailed research-based report on the activities of these particularly pernicious species of hedge funds. They are an example of how the richest 1 percent gain larger and larger pieces of the wealth pie, while investments in health care, education and other social services dwindle. Unlike many other UN processes ,the largest and most influential NGOs have failed to contribute to the research.

The key contributors include Argentina, El Salvador, Mauritius, Philippines, Venezuela, the Portuguese Ombudsman, the Greek National Commission for Human Rights, the Centre for Legal and Social Studies, the Centre Europe – Tiers Monde and the Asamblea Permanente por los Derechos Humanos. The participants are either countries that can be described as being on the periphery of global financial power, or interested human rights entities in countries seriously impacted by the conduct of vulture funds. Countries where a high number of vulture fund beneficiaries reside (particularly the US and Europe) have chosen to ignore the process. Disappointingly, so have a number of usually quite vocal NGOs.

Vulture funds prey on the sovereign debt of countries facing multiple social and economic crises, often (but not always) following periods of violent conflict or economic shock. From Panama, Peru and Argentina to the Democratic Republic of Congo, Liberia, Zambia and Greece, vultures swoop-in when most creditors have given up on sovereign debt repayment, buying debt cheaply, refusing any write-down, and holding-out for any sign of a heartbeat in the economies of these low-income countries. A heartbeat that they – vulture funds with wealthy investors in Brooklyn and Soho penthouses – might eventually fully exploit.

Vulture funds pay only a fraction of the value of the debt. Yet, if an economic heartbeat is detected, they demand full repayment, interest and (often) penalty costs. In some cases, vulture funds have turned US $3 million purchases of debt into profits upward of US $100 million, including in countries where large segments of the population live on less than US $2 per day. In this context, the average rate of return for many vulture funds is 3 to 20 times more than what they invested, equivalent to returns of 300-2000 percent.

Vulture funds not only seek to siphon resources of low income countries to tax havens in Jersey (for example), they also benefit from taxpayer supported debt relief programs. In Zambia about 65 percent of the country’s debt relief was intended to assist in development projects. But, in 2007, a vulture fund took almost 15 percent of total government social welfare expenditure. Money that could have been channeled to education, health care, and poverty alleviation.

In 1996 Elliot Associates L.P. bought defaulted bank debt owed by Peru for US$11.4 million (with a face value of $20.7 million) and in 2000 successfully sued the country for US $58 million. The International Monetary Fund estimates that in some cases claims by vulture funds constitute as much as 12 to 13 percent of a country’s gross domestic product (GPD). Sound crazy? It is.

Vulture funds exploit failures in the regulation of the international financial system. They target sovereign states with distressed economies and generally weak capacities for legal defence. They acquire sovereign bonds in the secondary market. This means that they have never lent money to the country or aided it with debt relief or restructuring. Original creditors sell sovereign bonds to vulture funds without informing the concerned debtor state. Economic decision making power is moved outside the affected country. Between them, teams of corporate lawyers representing the original creditors and the vulture funds draft clauses that ensure any future contentious issues will be solved in the US or British territories; countries where courts have overtly creditor-friendly biases. Vulture funds then hold-out for repayments in multiples of over three times what they paid for the debt, refuse to participate in any orderly and voluntary debt restructuring processes, and bring complex litigation over periods of years, effectively holding the social development of developing countries to ransom. A mitosis of debt occurs, which developing countries have no relief from.

Innovations in banking outpace the development of international finance law. Nobel prize winning economist, Joseph Stiglitz, has highlighted the rule of law black hole in which vulture funds operate. This absence of accountability motivated the previous Argentinean government, led by Cristina Fernandez de Kirchner, to call for the application of human rights norms to the conduct of vulture funds.

On Feb. 22, 2016, the UN Human Rights Council’s Advisory Committee on vulture funds began exploring what these human rights norms should look like. This committee is an important legacy of the previous Argentinean government. Kirchner’s government originally fought vultures through litigation in New York (where even President Obama agreed with their legal reasoning against the creditors). When consecutive New York courts failed to protect common sense interests – favoring vulture fund investor interests – Kirchner’s team turned to the UN Human Rights Council. Comparatively, after two months in office, President Mauricio Macri’s government voluntarily offered payments of over US$6.5 billion to vultures.

The call for accountability, transparency and regulation of vulture funds by the UN Human Rights Council’s Advisory Committee on vulture funds echoes other hopeful initiatives – led by Latin American countries – in the sphere of business and human rights. Last month, Ecuador successfully moved forward in its initiative for a binding treaty on business and human rights. Such a treaty would aim to hold transnational corporations to account for their conduct in developing countries.

The response of countries in the global north to UN oversight over vulture funds and business conduct is strikingly similar. European countries and the US originally resisted the creation of a UN mechanism that would explore the conduct of vulture funds. After unsuccessfully voting against it, they have simply chosen to ignore the Committee’s work. Similarly, they have aggressively resisted the creation of a binding treaty on business and human rights. If one is created, they will likely ignore it.

Instead, they have accelerated efforts to protect business rights. International trade agreements, such as the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership, would frustrate efforts to apply human rights frameworks to the conduct of businesses. These trade agreements include provisions for binding dispute resolution mechanisms designed to prioritize the right to profit, over environmental and human rights.

While rhetorically supporting voluntary non-binding codes of conduct for businesses (the UN Guiding Principles on Business and Human Rights), European countries and the US vehemently oppose any initiatives to move towards a binding treaty that could enforce our human rights – civil, political, economic, social and cultural – over the right to profit.

Companies do not adhere to the voluntary codes of conduct promoted by the UN Working Group on Business and Human Rights. The Guiding Principles have failed to protect 99 percent of the world’s population – albeit to strikingly different degrees – from the devastation caused by inequality. While NGOs like Amnesty International and Human Rights Watch criticized the original mandate of the UN Working Group on Business and Human Rights for lacking teeth, they have failed to support initiatives by Ecuador to create a binding treaty. They have also ignored the work of the Advisory Committee on vulture funds. Their silence is noted. Leadership on business and human rights is coming from the global south.