The United Nations independent expert on foreign debt is targeting vulture funds after a couple of high-profile rulings ordering poor African states to make multi-million-dollar payments to the shadowy investors.
Cephas Lumina told Reuters his annual report in June to the UN Human Rights Council would concentrate on vulture funds and call for legislative measures to control them.
The funds investors who buy up deeply discounted sovereign debt and then pursue payment at face value through the courts are in focus as governments mull tough reforms of financial regulation and developing countries seek resources in the wake of the global financial crisis.
“There is a need for more concrete action, preferably through legislation, to ensure that these vulture funds do not have the opportunity to make a profit in circumstances that are clearly unethical,” the Zambian human rights lawyer said.
“What the vulture funds do at present is not illegal but one can make the argument that what they do is unethical,” said Lumina, who holds an extraordinary professorship in human rights at the University of Pretoria.
Lumina, one of 39 independent experts mandated by the Human Rights Council to monitor different countries or topics, influences the debate on regulation through his reports to the council, which feed through to the UN’s broader work.
He is also working with an expert group set up by the United Nations Conference on Trade and Development (UNCTAD) and funded by Norway to draw up criteria for establishing the legitimacy of sovereign debt.
Lumina said the profit motive was understandable but there was simply no justification for a fund to buy discounted debt for $3 million and then sue a developing country for $55 million to repay it.
He was citing the example of Donegal International, registered in the British Virgin Islands, which sought $55 million from Zambia to settle a $15 million loan made by Romania in 1979, which Donegal had bought for $3.2 million.
After a British court fought for Donegal in 2007, Zambia settled for $15.5 million.
In November last year a British court ordered Liberia to pay $20 million to two funds, Hamsah Investments of the British Virgin Islands and Wall Capital of the Cayman Islands.
The sum is equivalent to 5% 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 US 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.
Lumina noted that Liberia was a user of the International Monetary Fund’s multilateral debt relief initiative, which gives heavily indebted poor countries 100% relief on eligible debt from the IMF, World Bank and African Development Bank.
One instrument already exists to help poor countries repurchase discounted debt the World Bank’s debt reduction facility.
But the participation of commercial parties is voluntary: they can opt to sue for the full value rather than selling at a discount.
Lumina said there was a need for states to curb vulture fund activity, and litigation was typically initiated in creditor countries like the United States, Britain and France.