Logo Assembly Logo Hemicycle

Protecting financial aid granted by Council of Europe member states to poor countries against financial funds known as “vulture funds”

Report | Doc. 11862 | 21 April 2009

(Former) Committee on Economic Affairs and Development
Rapporteur :
Mr Paul WILLE, Belgium
Reference to committee: Reference 3467 of 27 June 2008. 2009 - May Standing Committee


The current world economic and financial crisis should not conceal the action of “vulture funds” which are private speculative investment funds, ruthlessly active in the trade in debts. These funds buy debt securities from poor countries, most of which are in the South, at a very low price and then apply to the courts to claim reimbursement of the initial value of the debt together with interest on arrears and legal costs, thereby depriving poor countries of the resources they need in order to develop.

For example, in 1999, an investment fund bought US$15 million worth of Zambian debts from the Romanian Government for US$3.3 million. Bringing the case before a British court, the fund claimed US$55 million. The court granted them US$15.7, that is, a profit of 370% on the back of a country where two thirds of the population live on less than one dollar a day.

A Draft recommendation

1. At a time when the world economic and financial crisis is affecting the whole population and giving rise to colossal losses in the banking system and certain private investment funds, the Parliamentary Assembly draws the attention of governments to the risks for states and citizens, particularly in the poorest countries, of certain finance companies engaged in debt restructuring transactions, which are regarded as “vulture funds”.
2. “Vulture funds” are investment funds which purchase at a cheap price the borrowings of poor countries, often heavily indebted, then bring court proceedings to wear them down and compel them to pay the nominal value (the initial amount owing) of these debts at the time when the loans were issued, together with the interest on arrears and legal costs.
3. The Assembly strongly condemns the action of these funds which have no compunction in taking advantage of opportunities arising from debt waivers granted by creditor countries, particularly European, or blocking worldwide the assets of the countries concerned and threatening them with bankruptcy.
4. These funds make use of a huge legal arsenal, often bringing debtors to their knees. While international fund providers grant debt remissions for persistent debts (HIPCI – Heavily Indebted Poor Countries Initiative) and western governments for their part work to secure debt reduction and remission (Paris Club, for example), these funds take over the benefits of the programmes, thus jeopardising the United Nations Millennium Development Goals (MDGs). Some “vulture funds” do not hesitate to interfere with the debt rescheduling programmes set up for the poorest developing countries – the HIPCs or Heavily Indebted Poor Countries.
5. In the context of unprecedented global crisis, some states, companies or banks could attempt to negotiate assignments of bad or doubtful debts as discreetly as possible on the over-the-counter market. The Assembly deplores the opacity of and lack of control over this type of market.
6. According to Oxfam International, commercial creditors have to date brought at least 40 actions against third world countries deepest in debt. The International Monetary Fund has voiced concern at the “vulture funds’ ” practices, but attempts to work out a solution at international level have failed.
7. Nonetheless, the Assembly welcomes the few initiatives taken at national and international level. It subscribes fully to the May 2007 statement by Paris Club creditors who confirmed that they were “committed to the full implementation of the HIPC initiative” and urged “all official and commercial creditors and HIPC countries to take the necessary steps to implement this initiative”. It also supports the initiatives taken by certain countries such as France and Belgium; in March 2008 the latter’s parliament passed a law to make co-operation aid secure against any attachment or transfer by the “vulture funds” method.
8. Lastly, the Assembly would like to prevent financial aid or the benefits of substantial debt remissions that may in future be granted to poor or developing countries by Council of Europe member states from being put to innappropriate uses on account of certain creditors.
9. Accordingly, the Assembly calls on the governments of the Council of Europe member states, at national level, to:
9.1 reinforce their legal arsenal in order to curb the “vulture funds’ ” action, for example by giving no effect to foreign judgments and conducting no judgment enforcement procedures in favour of “vulture funds” in cases where the debt arises from unethical speculation;
9.2 insert into the bilateral aid contracts they conclude with developing countries a clause providing that the contract will be void under such circumstances. In this way, if the money is not used for development (in other words if it is seized), it must return to the original donor country;
9.3 establish rules of good conduct to prevent debts being resold to “vulture funds” engaging in improper and aggressive practices;
9.4 offer technical and legal assistance in the area of debt policy and management to the partner countries with which they pursue development co-operation, so as to avoid, among other things, legal proceedings with creditors.
10. Furthermore, the Assembly calls on the governments of the Council of Europe member states, at international level, to:
10.1 take action with the International Monetary Fund and the World Bank so as to ensure that lobbying by “vulture funds” does not prevent a country’s access to a debt reduction programme under the Heavily Indebted Poor Countries Initiative;
10.2 call on the governing bodies of the Bretton Woods institutions to insist that countries granted debt relief employ greater transparency in managing their revenue (from oil, minerals, etc.) and draw up a plan to combat the corruption that could seriously undermine their society, and to establish rules of transparency regarding information and transactions applicable to over-the-counter traded loans markets.

B Explanatory memorandum, by Mr Wille

1 Definition

1. “Vulture funds” are investment funds which purchase at a cheap price the borrowings of often the most indebted and poorest countries, then bring court proceedings to wear them down and compel them to pay the nominal value (the initial amount owing) of these debts at the time when the loans were issued, together with the interest on arrears. These funds, initially developed in the United States, belong mainly to the English-speaking world and are often domiciled in tax havens (for example the Cayman Islands). Their names are, most notably: Debt Advisory International,Note Donegal International,Note Elliot Associates L.P,Note F.G. Hemisphere AssociatesNote and Kensington International Ltd.
2. According to Oxfam International, to date the investment funds have brought at least 40 actions against this class of Third World countries deepest in debt, called “heavily indebted poor countries (HIPCs)”. According to the International Monetary Fund (IMF), the “vulture funds” have already extracted almost US$2 billion from these HIPCs.

2 Issues

2.1 Immorality of the funds

3. “Vulture funds” make use of a huge legal arsenal, often bringing debtors to their knees. They are comparable to extortions of funds from the economies of poor countries, while remaining strictly legal as there is no obstacle at present in international law to their obtaining satisfaction before certain courts (principally in the English-speaking world).
4. In fact these funds get round the international conventions on debt reduction, while Western governments for their part work to secure debt reduction and remission. While international fund providers grant debt remissions for persistent debts, these funds take over the benefits of the programmes, thus jeopardising the United Nations Millennium Development Goals (MDGs). Some “vulture funds” do not hesitate to interfere with the debt rescheduling programmes set up for the poorest developing countries – the HIPCs.
5. These funds take advantage of opportunities arising from debt waivers granted by creditor countries or succeed in worldwide blocking of the assets of the countries concerned and in threatening them with inevitable bankruptcy. Such practices are morally wrong and imperil the efforts made by the international community to achieve the MDGs. The present United Kingdom Prime Minister, Mr Gordon Brown, publicly condemned these acts in an address to the United Nations in 2002: “We particularly condemn the perversity where “vulture funds” purchase debt at a reduced price and make a profit from suing the debtor country to recover the full amount owed – a morally outrageous outcome”.

2.2 Threat to financial aid and debt remission

6. The example of Zambia is typical of the problem presented by “vulture funds”. In 2005 this country had its US$1.92 billion debt waived by the Paris Club as part of a special aid scheme for HIPCs. After regaining a somewhat more tenable financial situation, Zambia was sued by the Donegal International fund. Donegal demanded a sum of US$55 million from Zambia. The London High Court ruling of 24 April 2007 finally ordered Zambia to pay Donegal US$15.7 million in respect of a debt bought up in 1999 for only US$3.3 million (it was a debt of US$30 million contracted in 1979 by Zambia towards Romania).
7. This judgment delivered by the British High Court has two major repercussions. Firstly it scores a direct hit on Zambia’s possibilities for using its resources on behalf of its population. Secondly, it hampers the international community’s efforts in support of Zambia under a targeted debt reduction programme.
8. Another example concerns Belgium, victim of the Kensington fund which bought up US$1.8 million worth of Congolese debts and now claims over US$120 million from Congo-Brazzaville. And indeed on two occasions it has secured the attachment of nearly €12 million derived from Belgian development co-operation in Congo-Brazzaville.
9. While this is not a new phenomenon – back in 2000, Peru was compelled to discharge a debt of US$55 million bought by a “vulture fund” for US$11 million – it is becoming widespread with the cancellations of debts granted by the rich countries (Paris Club) and the international fund providers (IMF, World Bank).

2.3 Risk for the development of the poorest countries

10. In the hope of alleviating the problems of indebtedness of poorer countries, the international community (IMF, World Bank) set up in 1996 the Initiative for the Heavily Indebted Poor Countries (HIPCs), followed by its reinforced version in 1999, then the Multilateral Debt Relief Initiative (MDRI) in 2005. The initiative seeks to adjust the scale and the conditions of debt relief as closely as possible to the needs of the HIPCs and thereby speed up progress towards the United Nations’ MDGs.
11. For their part, the HIPCs have endeavoured to negotiate the most favourable possible terms in order to attain a tolerable level of indebtedness. Thus in 1998 they availed themselves of the Heavily Indebted Poor Countries Capacity Building Programme (HIPC CBP) to pool information on the best negotiating terms and strategies. Thanks to the CBP, these countries were able to obtain substantial increases in their debt relief, which enabled them to release additional resources allocated to their national development goals and to the MDGs.
12. Unfortunately the action of the “vulture funds” poses an intolerable risk to the HIPCs by denying them all possibility of development and extrication from poverty, since these funds prey on their debt rescheduling programmes.
13. As early as 2002 Mr Francis Mer, then French Minister for the Economy, Finance and Industry, stressed in a statement to the International Monetary and Financial Committee of the IMF the dangers which “vulture funds” represented for the development of indebted poor countries: “I would also like to see efforts continued to involve all creditors, in keeping with the universal scope of the HIPC initiative. The lawsuits that ‘vulture funds’ have initiated against HIPCs are very disturbing in this respect”.

3 Recent developments

3.1 Initiatives in the national parliaments

14. Some creditor countries have reacted to this scourge by trying to find a suitable answer at the national level for averting or prohibiting the legal actions that may be instituted by “vulture funds” to secure the acknowledgement and validation of debts bought in complete legality but in a thoroughly immoral manner.
15. In the Netherlands for instance, several initiatives were taken in 2007 to mobilise the NGOs active in the field of debt relief, in order to raise the awareness of Dutch parliamentarians. In that regard, attention should be drawn to the initiative by MP Waalkens who on 15 May 2007 questioned the government about the action of “vulture funds” and the possibilities for offering legal aid to the countries wronged by the funds. The Netherlands Government moreover undertook to institute awareness-raising campaigns for private and bilateral creditors, so that debts would no longer be sold on to “vulture funds” like Donegal International.
16. France for its part, currently chairing and providing the general secretariat of the Paris Club, has decided to act at the national level and in the various international forums to raise the awareness of the other creditors, whether public or private, and to identify concrete measures for tackling the problem. Of significance in this context is the bill of 2 August 2007 to combat the action of the “vulture funds” through very strict regulation of the possibilities for recovery of debts by a French court.
17. Belgium has also made moves by adopting a bill (passed by the Belgian Senate on 31 January 2008) to prevent the attachment or transfer, by the “vulture funds” method, of public monies intended for international co-operation. The bill forms a sequel to a resolution adopted by the Belgian Senate in March 2007, asking the government to arrange an audit concerning the “reprehensible” character of Belgian claims on the developing countries.
18. In the United Kingdom, Mr Gordon Brown, then Chancellor of the Exchequer, announced on 10 May 2007 a series of measures to contain the damage done by “vulture funds” to the poorer countries (voluntary code of conduct for private creditors, legal aid to the HIPCs and optimised management of their debt).

3.2 Initiatives in the context of international forums

19. States having taken measures at the national level have committed themselves to pursuing their action in the context of various international forums in which they participate (IMF, World Bank, G8, Paris Club and other bodies).
20. The Paris Club creditors were thus the first to react by publishing on 22 May 2007 a press release in which they confirm that they are “committed to the full implementation of the HIPC initiative” and “urge all official and commercial creditors and HIPCs to take the necessary steps to implement this initiative”. They further confirm that they are “committed to avoid selling their claims on HIPC countries to other creditors who do not intend to provide debt relief under the HIPC initiative, and urge other creditors to follow suit”.
21. At the level of the Bretton Woods institutions (IMF and World Bank), which are behind the debt relief initiative on behalf of the HIPCs, the countries most deeply committed to fighting the “vulture funds” act in order that these two institutions may render legal aid to the poorest countries for their defence before the courts when sued. It is also their wish that the member countries of the IMF and the World Bank, which are public creditors too, undertake to refrain from any further sale on second markets of debts in their possession against HIPCs. That would be a way of making the supply of easy victims for the vultures dry up.
22. Finally, note the initiative taken by the Organization for Security and Co-operation in Europe (OSCE) Parliamentary Assembly which at its 17th annual session in July 2008 in Astana (Kazakhstan) adopted a resolution on “urging adoption of the Paris Club commitment” regarding “vulture funds”, particularly by encouraging “all OSCE participating states to formally adopt and implement policies equivalent to the Paris Club commitment, and formally commit not to sell on their claims on HIPC creditors to creditors who do not intend to provide debt relief”.

3.3 New hazards linked with the international financial crisis

23. The current financial crisis presents “vulture funds” with wider scope for action. Indeed, “vulture funds” are likely to respond to the mobilisation of the developing countries’ creditors by attempting to take advantage of the prevailing distress. They could purchase the claims held by states or enterprises in difficulties in order to sell them at a higher value as soon as the situation is back to normal, or they could use them to take over companies incapable of meeting these maturities.
24. Banks and finance companies, themselves severely affected by the crisis, become targets! However, because buying out banks, unlike business undertakings, raises acute regulatory problems, the interest of “vulture funds” in banks should happily be limited. Conversely, they might be interested in securities backed by real estate loans or in certain property portfolios left ownerless by the bankruptcy of the proprietor company or financial institution.
25. The financial crisis could also affect aid payments by fund providers. It is true that many creditor countries are suffering the full throes of the financial system's problems and their economic consequences. As a result traditional providers of funds could become more hesitant about granting new facilities (assistance or debt remission) to the poorest countries.
26. In this connection, the conclusions the Council of the European Union adopted at its session on 11 November 2008 concerning guidelines for EU participation in the International Conference on Financing for Development, held in Doha from 29 November to 2 December 2008, are to be welcomed. On behalf of the European Union the Council will "ensure that Official Development Assistance (ODA) commitments are not curtailed" and that "all measures taken at the global level to improve the financial situation take full account of the situation and needs of developing countries, especially the poorest and most fragile."

4 Conclusion

27. The solutions will be hard to put in place, so it is important that the international community takes every opportunity available to it for sounding the alarm in order to deter lenders from selling their claims on their debtors to “vulture funds”: “naming and shaming” as it is expressed in English.
28. However, countries experiencing structural difficulties must also be more transparent in managing their revenue and public accounts, particularly when their situation has improved as a result of debt reduction or cancellation. The fight against the action of “vulture funds” should not serve as an excuse for leaders to use funds received for purposes other than those originally intended, that is, reducing poverty and improving citizens’ living conditions, so that they end up, via front companies, in Western bank accounts or tax havens.
29. That is why I would like the Parliamentary Assembly to ask the governments of the Council of Europe member states to align their positions at the national level by adopting exact rules aimed at curbing the action of “vulture funds” (for example, contractual clauses on non-transferability that would void contracts of assistance to developing countries if not complied with); to afford the countries victimised by “vulture funds” legal aid; to offer technical assistance in the area of debt policy and management, as well as in setting up national plans against corruption; and also to support all initiatives at the international level for aiding and protecting the most heavily indebted countries and preventing the trade in claims on them.

Reporting committee: Committee on Economic Affairs and Development.

Reference to committee: Reference 3467 of 27 June 2008.

Draft recommendation adopted by the committee on 11 March 2009.

Members of the committee: Mr Márton Braun (Chairperson), Mr Robert Walter (Vice-Chairperson) (alternate: Baroness Detta O’Cathain), Mrs Doris Barnett (Vice-Chairperson), Mrs Antigoni Papadopoulos (Vice-Chairperson), Mr Ruhi Açikgöz, Mr Ulrich Adam, Mr Pedro Agramunt Font de Mora, Mr Roberto Antonione, Mr Robert Arrigo (alternate: Mrs Marie-Louise Coleiro Preca), Mr Zigmantas Balčytis, Mrs Veronika Bellmann, Mr Radu Mircea Berceanu, Mr Vidar Bjørnstad, Mr Luuk Blom, Mr Pedrag Bošković, Mrs Maryvonne Blondin, Mr Patrick Breen (alternate: Mr Frank Fahey), Mr Erol Aslan Cebeci, Mrs Elvira Cortajarena Iturrioz, Mr Valeriu Cosarciuc, Mr Joan Albert Farré Santuré, Mr Relu Fenechiu, Mr Guiorgui Gabashvili, Mr Marco Gatti, Mr Zahari Georgiev, Mr Paolo Giaretta, Mr Francis Grignon, Mrs Arlette Grosskost (alternate: Mr Michel Hunault), Mrs Azra Hadžiahmetović, Mrs Karin Hakl, Mr Norbert Haupert, Mr Stanislaw Huskowski, Mr Ivan Nikolaev Ivanov, Mr Igor Ivanovski, Mr Miloš Jevtić, Mrs Nataša Jovanović, Mr Antti Kaikkonen, Mr Emmanouil Kefaloyiannis, Mr Serhiy Klyuev, Mr Albrecht Konečný, Mr Bronislaw Korfanty, Mr Anatoliy Korobeynikov, Mr Ertuğrul Kumcuoğlu, Mr Flemming Damgaard Larsen, Mr Bob Laxton, Mr Harald Leibrecht, Mrs Anna Lilliehöök, Mr Arthur Loepfe, Mr Denis MacShane, Mr Yevhen Marmazov, Mr Jean-Pierre Masseret, Mr Miloš Melčák, Mr José Mendes Bota, Mr Attila Mesterházy, Mr Alejandro Muñoz Alonso (alternate: Mr Pedro María Azpiazu Uriarte), Mrs Olga Nachtmannová, Mrs Hermine Naghdalyan, Mr Gebhard Negele, Mrs Miroslawa Nykiel, Mr Mark Oaten, Mrs Ganira Pashayeva, Mrs Marija Pejčinović-Burić, Mr Viktor Pleskachevskiy, Mr Jakob Presečnik, Mr Maximilian Reimann, Mr Andrea Rigoni, Mrs Maria de Belém Roseira (alternate: Mr Maximiano Martins), Mr Giuseppe Saro, Mr Samad Seyidov, Mr Steingrímur J. Sigfússon, Mr Leonid Slutsky (alternate: Mrs Natalia Burykina), Mr Serhiy Sobolev, Mr Christophe Steiner, Mr Vyacheslav Timchenko(alternate: Mr Yury Isaev), Mrs Arenca Trashani, Mrs Ester Tuiksoo, Mr Oldřich Vojíř, Mr Konstantinos Vrettos, Mr Harm Evert Waalkens, Mr Paul Wille, Mrs Maryam Yazdanfar.

NB: The names of the members who took part in the meeting are printed in bold.

Secretariat of the committee: Mr Newman, Mr de Buyer and Mr Chahbazian.