At its 14th session, last February, the Human Rights Council Advisory Committee (“the Advisory Committee”) addressed for the first time the impacts of so-called vulture funds on human rights. “Vulture fund” is a generic name used to designate financial entities that use as a profit-making strategy the purchase of distressed debt owed by a sovereign debtor – that is, a State- on the cheap with the purpose of suing for the full amount once conditions for repayment improve.
In a resolution adopted last September, the Human Rights Council entrusted the Human Rights Council Advisory Committee with the preparation of “a research-based report on the activities of vulture funds and the impact on human rights.” In preparation of that report it requested the same Committee to seek views of, among others, national human rights institutions and non-governmental organizations, human rights mechanisms, Member States and relevant international and regional organizations. The resolution condemned the activity of vulture funds for their impacts on the capacity of governments to fulfill their human rights obligations.
In a presentation to Advisory Committee members, the UN Independent Expert on Foreign Debt and Human Rights explained how his mandate had begun looking at the issue of vulture fund litigation when it emerged that several poor countries that had been provided with debt relief under international debt relief initiatives were targeted with legal claims by vulture funds. The claims eroded gains from debt relief for such countries, thus compromising their ability to fulfill human rights obligations. But he went on to mention that the matter was no longer exclusive of poor countries, but increasingly middle-income and high income countries had been victims of such litigation.
He cited a study finding that “between 1976 and 2010 there have been about 120 lawsuits by commercial creditors against 26 defaulting Governments in the United States and the United Kingdom alone, the two jurisdictions where most sovereign bonds are issued. While in the 1980s only about 5 per cent of debt restructurings were accompanied by legal disputes, this figure has gone up to almost 50 per cent and the total volume of principal under litigation reached USD 3 billion by 2010.”
Indeed, legal experts confirm that vulture funds have been steadily making gains in judicial jurisprudence, which shows a tendency to expand the rights of such entities, at the expense of those of debtor countries and posing growing risks for the success of sovereign debt restructurings. The Independent Expert referred to the issues raised by the litigation between NML Capital and Argentina before New York courts as “a problematic legal precedent,” arguing that the ruling will make future debt restructurings more difficult and remove financial incentives for creditors to participate in orderly debt workouts.
He called for regulation of private commercial entities in the financial sector, such as vulture funds, that may through their behavior or activities cause negative human rights impacts, on the basis of the Guiding Principles on Business and Human Rights. This regulation needs to address the impacts that vulture fund litigation in one country has extraterritorially, on the enjoyment of economic, social and cultural rights in another country.
In the same session, Ms. Yuefen Li, Senior Advisor to the South Centre, also addressed Advisory Committee members agreeing that the legal precedent in NML v Argentina would make debt restructurings more difficult in the future. This was going to hurt especially the poorest countries, she said, as the vulture funds see them as easy prey. Statistics show that poor countries sued by the vulture funds tend to systematically lose the cases.
Ms. Li mentioned as a positive example of a country response to this problem how the United Kingdom had passed a law to limit the damage that vulture funds could inflict, ensuring they could not sue debtor countries for more than what other creditors had obtained. But, as she also clarified, such law is limited only to beneficiaries of the Heavily Indebted Poor Countries Initiative, thus leaving without protection other countries that may be sued during a debt restructuring process or where vulture fund activity may undermine gains from debt restructuring reached with other creditors.
In a statement I made on behalf of Jubilee USA, I recalled how the network had come into contact with the issue of vulture funds. After heavy campaigning with its partners in the Jubilee worldwide movement to ensure successive rounds of debt relief in 1996, 1999 and 2005, Jubilee USA learned that recipient countries were being sued by financial firms that had bought the debt when it was cheap and were now demanding full repayment. For us this was highly disturbing because the debt relief we had campaigned for was not for paying 100 per cent of the claims of creditors not willing to provide their share of debt relief, but to allow necessary social investments to happen in those countries.
I also discussed the ambiguity of legislation in the United States, which had allowed a US judge to side in his interpretation with the vulture funds. My statement, thus, called for introducing “legislation that unambiguously prevents vulture funds from profiteering from debt they bought on the cheap at the expense of other creditors that accepted a restructuring, and of course, of the debtor and its people.”
The lack of legislation to prevent vulture funds’ activity in the US, a preferred debt issuing jurisdiction, remains a permanent risk. For instance, in 2012 the New York’s legislature, lobbied by vulture funds, attempted to introduce legislation that would have left judges no option but to grant vulture funds recovery of 100 per cent of their claims (plus damages and interest). Jubilee USA was able to mobilize citizens and once they became aware they massively called their lawmakers and that attempt was, fortunately, stopped.
In the coming months the Advisory Committee will engage in a process of consultation with the stakeholders specified in the Human Rights Council resolution. Since vulture funds’ behavior is not an act of nature, but one whose impacts can be stopped with adequate legal and judicial remedies, we expect the responses to that consultation will shed clarity on the particular actions States can take to shield themselves from responsibility for human rights violations linked to such behavior.
Click here for information on the Advisory Committee’s questionnaire for States, civil society and National Human Rights Institutions.