When Globalization Fails:

Vulture Funds and Sub-Saharan Africa’s Debt Crisis

Lawrence Farry

Supervised by Professor James Desveaux & Kevin Riley, Graduate Fellow

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Introduction

Multilateral debt relief to Sub-Saharan Africa is under threat. Corporations called vulture

funds have appeared on the global scene and manipulate economic and legal loopholes in order

to achieve profits. They act as “international debt collection agencies”1 by purchasing defaulted

debt that is about to be renegotiated and then claiming the full amount of the debt plus interest

and other costs in international courts. In this way, they bypass other creditors – many of whom

are providing debt relief – and make full claims for debts that the countries can barely afford.

Often, debt relief that is intended to help the country move out of poverty is used to pay the legal

judgments granted to litigating commercial creditors like vulture funds. While morally

reprehensible, vulture fund activity is perfectly legal. Sovereign debt can be traded on open

markets. Developing countries find it difficult to contest debt transfers because their debts are

often in arrears. And all the while, international courts – or rather national courts whose rulings

hold international force – provide the assurance that the full amount of a debt can be recovered.

This scenario is symptomatic of a gap in the globalization process. Specifically, globalization has

occurred on dual tracks of economy and politics. The former track has advanced at a rapid rate –

largely due to advances in information technology – and electronic financial markets and free

trade are the results. Political globalization, however, has struggled to keep up. National

sovereignty is prized in the global system and international laws and regulations are weak and

difficult to enforce. This paper demonstrates how the globalization gap allows vulture funds to

thrive.

Question/Hypothesis/Theory/Significance

Question

Why does the global financial system allow vulture funds to exist?
1
Desveaux, James. Seminar Discussion. 2007.
 3

Hypothesis

Broadly, vulture funds exist because economic globalization has outpaced political

globalization. This often allows economic conditions alone to dictate activity in international

financial markets. Therefore, when undervalued debt in emerging markets can be bought and

claimed in international courts without international oversight, a company will exploit this

condition. In the case of vulture funds, a company purchases the debt of a developing country at

a low rate, holds out during sustainable debt renegotiations, and then sues the country for the

original amount of the debt plus interest and other costs in an international court. The high

tradability of debt coupled with weak international regulations causes vulture funds to find the

necessary loopholes in order to operate.

Theory

This hypothesis of dual-paced globalization not only accounts for the phenomenon of

vulture funds but also plausibly explains other observed disparities between international

economic activity and international economic standards. The existence of child labor would be

but one example. Vulture fund tactics also highlight the gap between economic and political

globalization. The vulture funds are often registered in countries with little to no government

regulation of corporate activity. This seems to vindicate the claim that they intentionally attempt

to avoid national laws when operating in the global economy. The timing of vulture fund

lawsuits often coincides with World Bank and International Monetary Fund approval of

multilateral debt relief. This demonstrates that vulture funds pursue economic profits even if

doing so hinders the goals of international law. Vulture funds actively undermine international

debt relief efforts in order to serve their own goals. In this way, they not only work between the
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gaps of economic and political globalization but also manipulate that gap to facilitate their

monetary claims.

Significance

By understanding how the global financial system allows vulture funds to exist,

policymakers can learn how best to close the globalization gap and shut out vulture fund activity.

The slow development of international law relative to the fast pace of economic globalization

creates a series of gaps in the international system. Global problems like vulture funds, child

labor, and environmental degradation are the inevitable results. Only by closing the globalization

gap and advancing the spread of international law can these problems be solved. Until then the

global south, especially Sub-Saharan Africa, suffers under the burden of multinational corporate

irresponsibility. Mitigating the effects of vulture funds in Sub-Saharan Africa can be justified on

many levels. From a humanitarian perspective, vulture funds increase human suffering by

diverting funds that were intended for development. From a social justice perspective, vulture

funds perpetuate the economic inequalities of the post-colonial era. From a global security

perspective, vulture funds fuel resentment toward the West and maintain poverty, the breeding

ground for terrorism, in the developing world. Halting the claims of vulture funds can even be

justified from a legal perspective. African debts are largely the result of irresponsible lending by

Western nations and banks and irresponsible borrowing by corrupt leaders and governments. The

burden of this unsound financial activity should not fall on the poverty-stricken populations of

Sub-Saharan African countries.

Methodology

The research paper focuses on the activity of vulture funds in Sub-Saharan Africa. The

research findings are divided into two broad categories: the African debt situation and the
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development of the vulture fund industry. The first section briefly describes the Sub-Saharan

African debt crisis and the development of the international financial system. The vulture fund

section describes the history of vulture funds and outlines their techniques and tactics. The

section also provides a case study of Zambia and highlights some potential policy options. The

discussion of vulture funds hints at the broader problem of a weak international political

framework to deal with global economic challenges.

In researching the background section, the paper relies heavily on previous scholars’

work. Specifically, books dealing with African development and the World Bank and IMF will be

essential to the discussion of debt in Sub-Saharan Africa. The second section on vulture funds

will incorporate the most original research. First, the paper will use academic and journalistic

articles to piece together a loose history of vulture funds. Non-governmental organizations like

Jubilee Debt Campaign have published basic historical accounts that act as a good starting point.

Second, the paper will draw on interviews, legal summaries, and articles to discuss the tactical

approaches that vulture funds have used to navigate national and international laws. Next, the

paper will analyze court documents, government documents, and media coverage in explaining

the specifics of the Zambian case study. This example demonstrates the inadequacy of the

international political system in dealing with global financial transactions. The House Sub-

Committee on Africa and Global Health recently held a hearing on vulture funds. The paper

discusses the key issues that were raised in the hearing, highlighting the prospective steps that

the United States could take in dealing with the problem of vulture fund investors. Jubilee USA,

along with a coalition of other advocacy organizations, has been at the forefront of the movement

to combat vulture funds. The paper utilizes many of the memos, research, and policy suggestions

that this coalition has produced.

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Overall, the paper’s research draws on a wide range of sources – academic, advocacy,

corporate, governmental, legal, and institutional – to provide a holistic view of vulture funds and

the threats they pose. The majority of these sources are readily available to the public, either

through library or online access. The interview sources were largely facilitated through work

with the Institute for Policy Studies in Washington DC. Ultimately, understanding the vulture

fund industry illustrates the broader problem of economic globalization outpacing political

globalization.

Sub-Saharan African Debt

The Sub-Saharan African debt developed as a result of the widespread poverty and

underdevelopment in the region. These conditions were largely created in the post-colonial years

when corrupt governments and economic mismanagement left the fragile states unable to cope.

Furthermore, the international free market created an unfair trading regime between Africa and

the West whereby economic aid to the continent was tied to the opening up of markets.

Unfortunately, the Western states did not always reciprocate, subsidizing their own farmers and

agricultural produce. This left the African nations unable to compete. In order to facilitate the

financing of Sub-Saharan African countries, three types of debt emerged. Multilateral debt from

institutions like the World Bank, IMF, and African Development Fund provide the bulk of funds.

Again, however, they often couple financing with strict economic requirements that force the

Washington Consensus upon the continent. This helps fuel economic globalization worldwide. A

second form of financing has been bilateral debt, whereby developed or middle-income countries

provide loans – sometimes in the form of services or supplies – to developing countries. Since

the 2005 Group of Eight Meetings in Gleneagles Scotland, these two types of debt have seen

massive debt relief. Large amounts of unsustainable debt remain but progress is underway to
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eliminate the debts of the poorest countries. This is largely coordinated through the Highly

Indebted Poor Countries Initiative. The third type of debt often proves the most challenging with

regards to debt relief. Commercial debt represents loans from banks and private funds to the

developing world. These debt agreements are between sovereign states and private institutions.

While these commercial creditors often abide by debt relief agreements, there are certain

litigating creditors that take developing countries to court in order to claim the full amount of

their debts. Vulture funds are one such type of litigating creditor.

Vulture Funds

Historical Overview

This history of vulture funds is a recent one. Increasingly open global financial markets,

as facilitated by advances in information technology over the last two decades, have allowed

investors to operate across multiple borders. Unfortunately, information technology has not had

as revolutionary an effect on international politics. Highly impoverished countries, like those in

Sub-Saharan Africa, often suffer the consequences of the gap between open markets and the rule

of law. The first case of a vulture fund traces back just over a decade. In 1996, Paul Singer used

his investment fund to purchase discounted Peruvian debt for $11 million. He then ended all debt

renegotiations and threatened to bankrupt the country unless it paid him $58 million. In the

interest of maintaining good standing in international financial markets, Peru paid the sum.2 The

basics of this scenario are laid out on the website of TransAfrica Forum, an African advocacy

organization in Washington DC. The case provides a simple outline of the vulture fund

methodology. A company purchases unsustainable debt from a developing country and, instead

of participating in debt renegotiations, the company threatens to sue the country if it does not pay

2
TransAfrica Forum. “Vulture Funds Info Brief”. <http://www.transafricaforum.org/VultureFundsFactSheet.html>.
March 22, 2007.
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up. The debtor country can either fight its case in the courtroom, refuse to pay the debt, or pay

the company its claim. Since the first option usually results in a legal loss and the second option

results in a tarnished international credit, the third option is often the most viable.

Singer coordinated the Peru transaction through Elliott Associates, a subsidiary of his

larger company:

“Elliott Management manages hedge funds Elliott Associates L.P. and Elliott International L.P,
which together manage some $6 billion of capital on behalf of large institutional investors and
wealthy individuals and families. Founded in 1977 by Paul Singer, Elliott Associates is known
for focusing on distressed or underperforming investments (including corporate, real estate, and
sovereign debt), and prefers to be considered an activist investor rather than a so-called ‘vulture
fund.’”3

This excerpt from a business profile directory provides three key insights. First, vulture funds

often operate as subsidiary companies of larger firms. This allows the litigating company to

register in a different, perhaps more favorable, domain than its parent company. Also, it allows

the litigating company to aggressively pursue the developing country’s debt while minimizing

the associated risks to the parent company. Second, the excerpt reveals the enormity of the

finances that the vulture funds deal with and the exclusivity of its member investors. This allows

the company to employ far greater legal resources than those of a debtor country. Third, the

excerpt reveals the ideology that Singer uses to justify his actions, namely a designation as

“activist investor” as opposed to “vulture fund.” Singer believes that he is simply enforcing

legitimate debts. He sees this as essential to maintaining lender confidence in emerging markets.

Also, he views it as a way to ensure responsible borrowing practices by often corrupt African

governments. This perspective is flawed, however, since it overlooks the fact that the lending

practices of creditors are just as irresponsible as the borrowing practices of developing countries.

The corrupt and despotic leaders who often took on these loans are further evidence of the

3
Hoovers. “Elliott Management Corporation”. <www.hoovers.com>. 2007.
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illegitimacy of the debts. Also, the debt relief initiatives of the World Bank and IMF show that

international standards – which generally favor Western practices – support a re-evaluation of

previously incurred debts. This contradicts Singer’s justification that the international lending

system needs debt enforcement. Regardless, however, Singer’s actions fall well within the

confines of the law – or lack thereof.

Many of today’s Sub-Saharan African debts are inflated after years of accumulated

interest and default penalties. In the case of Liberia, the majority of external public debts were

accrued during years of civil war and military dictatorship, leaving the current democratically

elected government with an illegitimate debt burden. Diverting further funds from these

developing economies is clearly not the correct approach to eliminating corruption and poverty.

As one Financial Times reporter euphemistically puts it, “Singer’s style… is based on using the

law to combat unfairness suffered by small investor groups.”4 As this same article reports, Elliott

Associates earns an average of 14.1 percent compounded returns per year. A more accurate

assessment of the situation might suggest that Singer’s style is based on manipulating legal

loopholes to cater to the financial interests of small investor groups. Because recent vulture fund

lawsuits have coincided almost exactly with multilateral debt relief for specific countries, the

intentions of such investors come under even greater scrutiny. Furthermore, Singer fails to

acknowledge that standard bankruptcy law states that all creditors should be treated equally. By

suing a debtor country for the full amount of a debt while other creditors offer concessions under

sustainable debt renegotiations, litigating creditors like Singer violate basic lending practice. The

liquidity of sovereign debt, as facilitated by economic globalization, and the prospect of

4
Davis, Phil. “Elliott’s activist chief has no time for cheats but denounces aggressive tactics”. Financial Times. April
10, 2006.
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unilateral litigation to claim debt, as facilitated by a lack of political globalization, cumulatively

allow for vulture fund investors like Paul Singer to operate.

With Singer’s 1996 success, other vulture fund investors soon followed. Singer himself

pursued two more vulture fund cases, one in Argentina and the other in the Republic of the

Congo. In the Republic of Congo case, Singer’s New York-based Elliot Associates sued the

Republic of Congo (Congo Brazzaville) for $400 million for a debt it acquired for $10 million.5

While vulture fund practices originated in South American countries, the method has

increasingly been used to target Sub-Saharan African countries. The IMF reports that, “The

HIPCs [Heavily Indebted Poor Countries] facing the most litigation are the Republic of Congo,

Guyana, and Uganda, with eight, seven, and six lawsuits respectively.”6 It is important to note

that these lawsuits represent cases brought by commercial creditors against developing countries.

A commercial creditor is not necessarily a vulture fund but rather any corporate entity that lends

money to a debtor country. Vulture funds are unique in that they seek out such debts, as well as

those held by creditor countries, and then avoid debt renegotiations in favor of lawsuits. While

the IMF provides a list of commercial creditors litigating against HIPCs, discerning the vulture

funds proves difficult. Vulture funds tend to be highly secretive and exclusive by nature and out-

of-court settlements often involve non-disclosure agreements with the debtor countries.

International regulations do not track vulture fund activity and the global economy allows

vulture fund corporations to structure themselves in multiple jurisdictions. This set of conditions

allows vulture funds to pursue their legal claims unchecked. Most national laws ensure that debt

restructurings treat all creditors equally within that country. Unfortunately, no such international

law exists.
5
TransAfrica Forum. “Vulture Funds Info Brief”. <http://www.transafricaforum.org/VultureFundsFactSheet.html>.
March 22, 2007.
6
International Development Association and International Monetary Fund. “Heavily Indebted Poor Countries
(HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Status of Implementation”. August 21, 2006.
 11

In general, litigating commercial creditors represent much of the same problem as vulture

funds. They are companies that hold out during debt renegotiations in order to claim debt

repayment in an international court. The cases are brought before courts in such cities as London

and New York, cities where the debt contract stipulates the debt will be enforceable. These

national courts – and their judgments to pay – have standing in the international financial system.

In the most recent IMF report, 44 litigating creditors have filed suit against HIPCs with 26

receiving judgments in their favor. Many cases are settled before reaching court and others are

still in arbitration. The scale of the problem becomes apparent when considering that the “total

reported claims under litigation amount to about US$1.9 billion, and are about 22 percent higher

than the total HIPC Initiative debt relief to be provided by commercial creditors.”7 This excerpt

emphasizes that litigating creditors, including vulture funds, operate in such a way that

undermines multilateral debt relief. The total amount of debt relief that commercial creditors

were supposed to provide to HIPCs is lower than the amount that a select few commercial

creditors have sought through litigation. In this way, litigating commercial creditors free ride on

the debt relief provided by non-litigating creditors.

The potential scope of the problem in future cases is even more drastic. Returning to the

Liberia example, that country alone has approximately $4 billion in external debt. Roughly $2.5

billion of that debt will be forgiven through multilateral debt relief from the World Bank and

IMF and through bilateral debt relief from developed nations like the U.S., Britain, and

Germany. The remaining $1.5 billion of debt represents the amount of the country’s external

public debt that is held by commercial creditors.8 With lawsuits by commercial creditors

returning favorable judgments, Liberia’s looming commercial debt represents a grave threat to

7
International Development Association and International Monetary Fund. “Heavily Indebted Poor Countries
(HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Status of Implementation”. August 21, 2006.
8
Jubilee USA Network. “Never Again.” Drop the Debt. Summer 2007.
 12

that country’s future development. Attempts to claim the debt would weaken the efforts of the

fledgling government of Ellen Johnson-Sirleaf to establish stability as the country emerges from

civil war and despotic rule. The decade-long history of vulture funds and their expanding reach

in the future coincide with increasingly open financial markets under the Washington Consensus.

International regulations have been slow to respond to these changes in global economic

conditions. Specifically, sovereign debts have emerged as a global market commodity but

international debt proceedings still abide by courts with weak international reach. While political

globalization is advancing international law, economic globalization has far outpaced it.

Tactics, Methods, and Political Connections

The strategic approaches to carrying out a vulture fund acquisition are for the most part

straightforward: form a legal corporation; locate a developing country with an unsustainable debt

burden; purchase the soon-to-be-written-off debt from an impatient creditor for a discounted rate;

pull out of any debt level renegotiations; wait until the country is about to benefit from

multilateral debt relief; sue the country for the full amount of the debt plus interest and costs in

an international court; pursue any and all means to acquire the resulting court award. There are,

however, certain techniques and connections that push the boundaries of legality and ethics.

While the following example deals with a vulture fund investor in Argentina and Brazil, the

techniques utilized are especially instructive for similar cases in Africa. The vulture investor is

Kenneth B. Dart. A Cayman Islands news source writes,

“The most talked about name in the Cayman Islands today, is that of Mr. Ken Dart, whose
development company is poised to proceed, following recent planning approval, with a billion
dollar project along the West Bay peninsula, which could sustain this country's hope of economic
growth for at least the next five years. A very private individual and generous benefactor, a rare
photograph of Mr. Dart appeared recently along with another near 2000 applicants for the grant
of Caymanian Status (citizenship).”9

9
“Special Report: Who Is Kenneth Dart?” Cayman Net News.
<http://www.caymannetnews.com/Archive/Archive%20Articles/November%202001/Issue%20123/Who%20is%20.
 13

This description of Dart portrays him as a “generous benefactor” and a boon for the Cayman

Islands economy. The final sentence of the excerpt reveals, however, that his development

project coincides with his application for Caymanian citizenship. The praising news blurb

demonstrates an interesting – and insidious – vulture fund technique. Dart curried favor with the

Cayman authorities through his development deal on the islands and received legal residence in

return. Not that the development deal was an outright payment; no doubt it will be a large profit-

maker for Dart. The key part of the story is that Dart manipulated his legal residency in order to

avoid the national laws of the United States. Any U.S. anti-corruption or tax-evasion laws could

now be avoided. More importantly, any future U.S. ruling against vulture funds making claims

against foreign governments become inapplicable to Dart. In this way, vulture fund investors

continue to operate in the global economy and, under the absence of strong international laws,

are able to find legal havens.

The next illustrative anecdote again involves investor Paul Singer: “He was the biggest

donor to George Bush and the Republican cause in New York City - giving $1.7m since Bush

started his first presidential campaign. Rudy Guiliani is the favorite to be the next Republican

presidential candidate and a leaked memo from his campaign shows that Paul Singer has pledged

to raise $15m for Guiliani’s campaign.”10 This excerpt from a BBC news article brings to light

some significant political connections. Because the U.S. president has the power to invalidate

any American citizen’s claim against a foreign government – and the responsibility to do so if

deemed appropriate – there is a potential conflict of interest for Bush to receive Singer’s

contributions, even if indirectly through the National Republican Party. This example

demonstrates how vulture funds purchase power in the political process, supporting the

html>. November 20, 2001.

10
Jones, Meirion. “‘Vulture Funds’ Threat To Developing World”. BBC Newsnight. February 14th, 2007.
 14

campaigns of candidates that uphold their unjust practices. As the vulture fund issue gains

traction in the new U.S. Congress, it will be interesting to observe how the administration

handles the issue domestically. Pressure to deal with vulture funds has also been increasing at the

international level. At the 2007 Group of Eight Finance Ministers Meeting, the United States

actively worked against including language on vulture funds in the group’s communiqué. The

United States argued that inclusion of such a provision would weaken commercial markets. It

instead chose to focus on environmental issues on which there was broader consensus.11 In this

way, international regulations on financial market participants fail to advance or receive the

legitimacy they need.

One of the most significant obstacles that vulture funds face is claiming their legal

awards. In some cases, the debtor countries are already isolated from the international financial

system and simply refuse to make payments. The country’s financial isolation prevents the

vulture fund from seizing its international assets. Other tactics on gaining payment remain:

“Among other strategies for collecting these judgments, vulture funds have aggressively sued oil
companies doing business in West Africa to garnish royalties and other obligations arising out of
oil concessions. The vulture funds have argued that garnishment writs preclude the companies
from complying with oil contracts with the debtor states. As a result, the oil companies have
faced the risk of contractual termination and even competing orders from foreign courts. Recent
decisions of the Fifth Circuit Court of Appeals have rejected these garnishment actions in the
context of in-kind royalties and have adopted rules that will govern efforts to garnish monetary
obligations owed to the foreign states.”12

This excerpt from a legal publication describes an approach by the vulture fund FG Hemisphere

Associates against the Republic of Congo. FG Hemisphere Associates is a company of Keith

Fogerty and Peter Grossman and, according to its website, “specializes in problematic emerging

market assets… [including] sovereign… debt obligations.”13 Although FG Hemisphere won its

11
Moore, Matt. “Business Issues Slide Off Radar At G8.” Associated Press. June 6th, 2007.
12
Vinson & Elkins LLP. “Developments in Garnishment of U.S. Oil Companies to Collect Foreign-State Debt”.
V&E International Dispute Resolution. April 2, 2007.
13
FG Hemisphere. <www.fghem.com>.
 15

initial case against the Republic of Congo, it lost subsequent lawsuits that attempted to claim the

legal damages. The description of the attempt to garnish royalties demonstrates the creativity and

ruthlessness with which the vulture funds pursue debtor assets. The conflicting orders that oil

contractors faced, both from the Republic of Congo government and the various foreign courts,

highlights the lack of legal clarity in the international political system. While vulture funds

typically benefit from this lack of clarity, in the case of in-kind royalties the debtor countries won

out. This was largely due to the Fifth Circuit Court of Appeals establishing standardized protocol

to follow in future cases. While claiming legal damages presents many challenges to vulture

funds, they often still prevail. This is largely because most countries, unlike the Republic of

Congo, are at least partially plugged into the international financial system or are so eager to

maintain good standing that they make the payments. Economic globalization has largely

integrated the financial activities of the world’s various countries. Financial claims against a

country, as legitimized by an international court ruling, can therefore be redeemed through

international financial organizations. Because no international laws explicitly prohibit the actions

of vulture funds, the international financial institutions are bound to help fulfill a litigator’s

claim.

Case Study: Zambia

The most recent case by a vulture fund against a developing country received a judgment

in late April 2007 and is largely responsible for the increased media attention that the issue has

received. The case is also a perfect example of the modern methodology of vulture funds,

highlighting key legal and ethical flaws in the system. The case has been covered extensively on

the BBC and has been picked up on other news sites. The story begins in 1979 when the

Zambian government borrowed $15 million from Romania in order to purchase agricultural
 16

supplies and tractors. Twenty years later, it was clear that Zambia would be unable to repay the

debt whose value with interest had ballooned to about $30 million. The Romanian and Zambian

governments began brokering a deal whereby the debt would be written off for a payment of $3

million. Before the deal could be finalized, however, Donegal International Limited offered

Romania $3.28 million for the debt. Although it was an irresponsible sale of the debt, the

Romanian government recognized that it could recover more of its losses by accepting Donegal’s

deal. As soon as Donegal acquired the debt, it pulled out of the debt level renegotiations and

began filing legal proceedings against Zambia for the full amount of the debt plus further interest

and other costs, a total of over $40 million. The case coincided with Zambia being on the verge

of receiving multilateral debt relief from the World Bank, IMF, and African Development Fund.

The UK Royal Court of Justice in London ruled in Donegal’s favor but limited the

amount the vulture fund could claim. Still, it ordered Zambia to pay Donegal $15.4 million plus

yet-to-be-determined legal costs.14 This amounts to over a third of the money that Zambia was

due to save this year as a result of debt relief (it usually makes $40 million worth of payments

annually on its debt). The money was intended for domestic spending on education and

healthcare. Donegal is currently trying to claim corruption funds that the Zambian government

recently won from its former president. Questions remain as to whether Donegal’s head, Michael

Sheehan, bribed the former Zambian president in order to have the debt recognized by the

Zambian government.15 The U.S. Judiciary is currently building a case against Sheehan under the

Foreign Corrupt Practices Act. Sheehan made a payment to the former Zambian president

Frederick Chiluba’s favorite charity during the debt takeover process. It is alleged that the

payment constituted a bribe and resulted in Zambia easing the debt deal and acknowledging the

14
Jubilee USA Network. “Never Again.” Drop the Debt. Summer 2007.
15
Jones, Meirion. “‘Vulture Funds’ Threat To Developing World”. BBC Newsnight. February 14th, 2007.
 17

new debt contract with Donegal. In this case, it appears as though national laws might have

enough reach to convict Sheehan. But for cases where bribery does not occur, where bribery is

less evident, or where investors are not U.S. citizens, the Foreign Corrupt Practices Act falls

short. Economic activity seems to occur unbounded with electronic payments, sovereign debt

markets, and transnational operations while political oversight is inhibited by weak international

laws and porous international borders. Although Donegal is a subsidiary of Washington DC-

based Debt Advisory International, it itself is registered in the British Virgin Islands. This leaves

open the question of jurisdiction. Like in the Singer example, political connections also come

into play: “Debt Advisory International are very generous to their lobbyists in Washington. They

have been paying $240,000 a year to the lobby firm Greenberg Traurig - although recently they

jumped ship to another firm after Greenberg Traurig's top lobbyist was put in jail.”16 This case

study draws into question the international financial system, illustrating the corruption,

inconsistencies, and injustice it entails.

Vulture funds are a direct product of the system that they exist in. The global economy

allows debts to be traded like commodities. The global capitalist ideology emphasizes the pursuit

of profit. The international legal system allows debts to be claimed in national courts. These

courts have pseudo-international jurisdiction in that they are only able to evaluate debt contracts

on a case by case basis, not taking into account other non-litigating creditors of a country. The

legal effect of their rulings, however, has full international force. Therefore, multinational

investors – who can also benefit from tax and jurisdiction loopholes – will purchase developing

country debt that is about to be renegotiated (an undervalued commodity) and sue for the full

amount of the debt in international courts. The vulture funds bypass other creditors with equal

claims against a country and often benefit from non-litigating creditors’ debt relief. This includes
16
Jones, Meirion. “‘Vulture Funds’ Threat To Developing World”. BBC Newsnight. February 14th, 2007.
 18

debt relief from the World Bank and IMF. In the Zambia case, Sheehan simply fulfilled the role

the global economy created. Most investors’ moral sensibilities fill in the gaps that the

international legal framework leaves. Vulture investors, however, either disregard such

sensibilities or place greater emphasis on legal technicalities and credit enforcement principles

than they do on the alleviation of human suffering and global inequality.

Policy Options

Until recently, there has been little action to deal with vulture funds. At the state level,

courts in countries like the United States and Britain continue to enforce debt obligations to

vulture funds. Legislative steps in these countries are slowly been undertaken to deal with

vulture funds. At the international level, the Bush administration is putting pressure on other

states to maintain the status quo. The policies of the World Bank and IMF are very much affected

by this U.S. influence. There is concern about not wanting to turn back the perceived progress

made by the advancement of economic globalization. Also, with campaign funding for

Republicans coming from vulture fund sources, issues of conflict of interest also come into play.

Increasingly, however, non-governmental organizations are mobilizing to deal with vulture

funds. Jubilee Debt Campaign in the U.K., Jubilee USA Network in the States, and other debt

relief organizations across the globe are coordinating efforts to pressure their respective

governments and the international financial institutions into taking action. It is important to

remember that international debt relief measures such as the HIPC Initiative have no legal force

in individual countries unless they are passed into law by that country.17 Largely, such initiatives

function as regulatory guidelines and international cooperation and pressure are necessary in

order to have them enforced.

17
Gueye, Coumba Fall. Vaugeois, Michael. Martin, Michael. Johnson, Alison. “Negotiating Debt Reduction in the
HIPC Initiative and Beyond.” Publication 11. Debt Relief International Limited. 2007.
 19

A memo produced by a coalition of debt relief activist organizations outlines some of the

main strategies that are being considered.18 With regard to action in the United States, one

approach would try to prevent the enforcement of debt contracts in U.S. courts. To do this,

legislation could be passed in Congress that declares the debts unenforceable. Comity might be

given as a justification for such a law. Lee C. Bucheit explains that, “… comity is premised on

the belief that foreign governmental actions… are entitled to deference in an American court of

law if those actions are consistent with U.S. law and policy.”19 Bucheit is currently a lawyer at

Cleary Gottlieb Steen and Hamilton, a law firm that has represented debtor countries in cases

brought by vulture funds. If Congress can be persuaded that vulture fund lawsuits undermine the

sovereignty of foreign nations, then such legislation would make vulture fund lawsuits

unenforceable in U.S. courts. Another justification could be made that the debts are odious and

therefore should not be enforceable. The odious debt doctrine states that debts incurred during a

corrupt regime and that were not used for the benefit of the people in whose name the debt was

undertaken are illegitimate; payments should not fall to the generations that follow. With either

justification, however, the feasibility of such a law is low. Many members of Congress would be

hesitant to interfere with the judicial system. Furthermore, many share the premise of the Bush

administration that limiting vulture fund lawsuits might undermine the validity of commercial

markets. If such a law were to pass, it would not work retroactively and would only apply to

future vulture fund cases. This approach highlights the interaction between national and

international law, showing how neither is fully capable of dealing with vulture funds.

Another U.S.-based approach would entail the U.S. forcibly purchasing the debts from

the vulture funds through eminent domain and then writing them off. This would constitute a

18
Weissman, Rob. “Legal/Policy Options to Address Vulture Funds.” Vulture Fund Memo. 2007.
19
Bucheit, Lee C. “Act of State and Comity: Recent Developments.” Judicial Enforcement of International Debt
Obligations. 1987.
 20

form of debt relief. To ensure that the vulture funds are not paid their unnecessarily high claims,

the U.S. would forcibly purchase the debt at a set interest rate, eliminating the various penalties

that vulture funds include in their lawsuits. This would mean paying the vulture funds the

original amount that they purchased the debt for plus a standard interest rate for each year they

held it. This approach allows the state actor to temporarily assume control of the international

financial instruments within the state in order to clean up the backlog mess that the gaps of

economic globalization created. It does not solve the root of the problem but rather acts as a

temporary relief for the current manifestations of the problem. Also in line with temporary

solutions, the creation of a “rapid response legal technical assistance facility” would give

developing countries the swift and experienced legal counsel they need when faced with a

vulture fund lawsuit.20 This seems like a pragmatic and achievable aim until a comprehensive

solution can be found.

Conclusion

A final proposed solution in the memo gets at the heart of the issue. It calls for the

establishment of a comprehensive debt workout system that brings international laws and

regulations up to speed with the current economic conditions. It calls for debts to be evaluated in

the context in which they were undertaken, evaluating their fairness and legitimacy. In this way,

the approach brings accountability to the lender as well as to the borrower. The main mechanism

of such a comprehensive framework would be the inclusion of a pari passu clause. This Latin

phrase meaning “with equal step” or “at an equal rate”21 ensures that all creditors to a country are

treated equally in debt renegotiations. This means that a litigating creditor cannot amass the

benefits that another creditor grants in debt relief. Instead of a case-by-case review, the debt of a

20
Weissman, Rob. “Legal/Policy Options to Address Vulture Funds.” Vulture Fund Memo. 2007
21
Merriam-Webster Online Dictionary. <www.m-w.com>.
 21

country would be analyzed holistically to ensure that all lenders lower their debt claims equally.

Unfortunately, after more than a decade of debt campaigning, such a solution is yet to become a

reality. Without it, economic globalization will continue to run rampant while political

globalization struggles to catch up in piece-by-piece legal solutions. If the vulture fund industry

is to be shut down, the globalization gap between economic markets and political jurisdiction

needs to be closed. This needs to occur in specifics, such as in the establishment of a

comprehensive debt workout system, and in broader terms so that multinational corporations no

longer maneuver the system at the cost of human welfare.

Bibliography

Bucheit, Lee C. “Act of State and Comity: Recent Developments.” Judicial Enforcement of

International Debt Obligations. 1987.

 22

Davis, Phil. “Elliott’s activist chief has no time for cheats but denounces aggressive tactics”.

Financial Times. April 10, 2006.

Desveaux, James. Seminar Discussion. 2007.

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Gueye, Coumba Fall. Vaugeois, Michael. Martin, Michael. Johnson, Alison. “Negotiating Debt

Reduction in the HIPC Initiative and Beyond.” Publication 11. Debt Relief International

Limited. 2007.

Hoovers. “Elliott Management Corporation”. <www.hoovers.com>. 2007.

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e%20123/Who%20is%20.html>. November 20, 2001.

TransAfrica Forum. “Vulture Funds Info Brief”.

<http://www.transafricaforum.org/VultureFundsFactSheet.html>. March 22, 2007.

Vinson & Elkins LLP. “Developments in Garnishment of U.S. Oil Companies to Collect

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 23

Weissman, Rob. “Legal/Policy Options to Address Vulture Funds.” Vulture Fund Memo. 2007.
 24

When Globalization Fails:

Vulture Funds and Sub-Saharan Africa’s
Debt Crisis

UCLA Center for American Politics and Public Policy

Political Science M191DC – Spring 2007