Guest Post: The Other Face of Vulture Funds–Digging in the Right Pockets

Ignacio A. Boulin Victoria and Enrique Cadenas, the co-directors of the Center for Law and Development at Universidad Austral in Buenos Aires, Argentina, contribute the following guest post:

It looks like a boxing fight. On the one side, the so-called “Vulture Funds” (mainly the US hedge fund NML Capital, CEO’d by the famous—or infamous—Paul Singer) threaten to inflict serious damage over a whole country’s economy. On the other, Argentina’s government, headed by President Cristina Fernandez de Kirchner, whose administration—like that of her predecessor and husband, Nestor Kirchner—has been dogged by serious allegations of corruption, and whose vice president is currently being prosecuted for corrupt practices. Both parties have made remarkable efforts to win the media battle through propaganda and lobbying, with President Kirchner accusing the Vulture Funds of being “economic terrorists,” and the Vulture Funds denouncing Argentina as “a model of unsoundness” that “refus[es] to pay its debts.” Whatever the international perception, the conflict with the Vulture Funds seems to be helping President Kirchner, whose standing in national polls has been rising during the standoff.

But—though this may sound perverse to many Argentine citizens—from an unconventional perspective it’s possible that the attack of the Vulture Funds may produce, at the end of the day, good consequences for Argentina. The reason has to do with how the Vulture Funds’ attack may expose pervasive high-level corruption, and deprive some corrupt leaders of the proceeds of that corruption.

Consider this example, which may be a bellwether: Recently, the Vulture Funds requested an American Judge from Nevada to uncover information about private companies, owned by an alleged associate of (and alleged figurehead for) former President Nestor Kirchner. This request aimed at seizing private assets related to corrupt acts, to cover national debts. This is not unprecedented: a previous case, concerning Congo’s former President Denis Sassou-Nguesso, also involved Vulture Fund-led corruption investigations into private assets. But Argentina’s case may become much larger. By pursuing this line of attack, Vulture Funds may – perhaps unintentionally – be contributing to the international credit ecosystem by doing what vultures do: scavenging and hence “cleaning up” corruption from the ecosystems. How? By creating personal (and not only institutional) incentives for the proper use of taxpayer’s money. Think about it in the following way:

  • First important fact: political elites in weak rule of law countries often do not face significant legal risks associated with corruption-related crimes either in their domestic systems or in the international realm.
  • Second important fact: State assets are usually protected from seizure by sovereign immunity.
  • Third important fact: personal assets should not be confused with state assets.

Put all those facts together, and it seems that Vulture Funds may be digging in the right pockets: not the state’s protected assets, but the personal assets of corrupt leaders, acquired (unlawfully) from national resources supplied by international lenders. In pursuing this strategy, the Vulture Funds, unsavory though they may seem, also demonstrate what is missing from the system at other times: personal incentives, and personal responsibility, for the well-connected political elite who squander their country’s wealth. After all, even though international credit organizations (ICOs) have indicated that corruption is a priority, the international legal framework needs to be strengthened if corrupt leaders are to be prosecuted at the international level for unlawfully diverting to personal use funds that were borrowed in the name of the people of their nations. ICOs seem to have a captive market so, unlike the Vulture Funds, they do not have a pressing need to go after corrupt leaders; they know that sooner or later, debts will be paid by future governments (that is, by the taxpayers). Thus, from the perspective of the citizens, it may be better for the country to be relentlessly pursued by Vulture Funds than the more merciful ICOs.

We recognize that even suggesting that the attack of the Vulture Funds may be good for Argentina may seem paradoxical, even perverse. But that very perversity illustrates the larger problem that must be addressed: the absence of personal responsibility for national leaders who misappropriate national funds, and leave future taxpayers with the bill.

5 thoughts on “Guest Post: The Other Face of Vulture Funds–Digging in the Right Pockets

  1. Ignacio & Enrique:

    Very interesting and provocative post! I’m interested to learn how your fellow Argentinians react to the suggestion that the Vulture Funds may actually doing something good (or at least not so bad) for Argentina.

    I wanted to ask a quick question, just to help me understand the law and practice in this area (which is not something I know very much about). My understanding of your post seems to suggest the following:

    Suppose country X borrows money from lender Y, ostensibly for public infrastructure investments or some other purpose. Then Z, the President of country X, steals the money and deposits it in a personal offshore account. Lender Y then tries to collect its debt from country X, and X says it can’t or won’t pay. If I understand your post correctly, you seem to be saying that in that situation, lender Y could bring some sort of legal action seeing to collect all or some of the money in Z’s personal account, in order to cover (part of) the debt that X owes to Y. My questions:

    1) Am I correct that this is what you are saying?
    2) If so, could you clarify a bit how the law works in this area — when can a court require that personal assets be used to cover sovereign debts?
    3) Whether or not this is how the law works at present, is part of your argument that this is how the law _should_ work? Should we have a system in which, when a country defaults on its sovereign debts, the lenders can bring private actions to go after assets allegedly stolen by the country’s leaders?

  2. Fascinating! I am intrigued by the idea, raised in Matthew’s third bullet, that there may be a private means of seizing corruptly obtained assets. I think such a possibility can be evaluated along the lines of the American experience with the so-called Private Attorneys-General. Lawyers in the U.S. can bring Qui Tam actions to recover on behalf of the government for violations of the False Claims Act. As I understand it, this system has worked fairly well to stem fraud against the government using the incentive of a substantial payout for the attorneys who take the risk to pursue these claims.

    The same logic extends to the Vulture Funds in this case; they have taken on the risk of seeing their claims through court and, along the way to their desired payout, may deprive corrupt actors of their ill-gotten gains. We may think, “who cares about the motives of the corruption fighter, so long as they deter corruption!”

    Despite the sense that these kinds of systems can engage unseemly and perversely-incentivized claimants, others seem to agree that the pros outweigh the cons — the Dodd-Frank Act, for instance, included new private rights of action for whistleblowers, and their future use in an FCPA case cannot be far away.

  3. Matthew,

    1) Yes, that is the idea.

    2) Our post is not about what the law is right now, but about how the law should be improved. As to the possibility of “cashing” the sovereign debt from personal assets, there is no such a mechanism that would allow a vulture fund to attack personal assets directly since this would mean a gross violation of the due process of law. But if we think this as a problem of contracts law, in almost every country there are figures of fraud that help lenders to recover money from debtors that have misused the money received for a predetermined goal. It might help this analogy to describe our main idea: if a father receives money from a bank to start a business (and he presents all the requirements, and the bank gives him the money for that exclusive reason), and then he uses this money to buy a Ferrari and does not repay the loan, the bank will be able to go after the Ferrari. No matter what, the bank will never go after the salary of his children or grandchildren. Therefore, there is a personal incentive for the father of this family. Recognizing the limits of the analogy, we think it might help to understand what is missing at the international level. We can make also the analogy with corporations and fraud committed by board directors: they might not only go to jail, but to respond with their personal assets. Yes: we know states are not corporations or families, but we think these examples help to describe the problem.

    3) We believe it would be an interesting idea to have the possibility of going after the personal assets of corrupt leaders. There are papers and articles that suggest the possibility of framing corruption as a crime against humanity: this would give a powerful message to political leaders: even if you can deal with local tribunals, international courts might have jurisdiction over you. We are suggesting something similar in the area of private law: collecting money from the personal assets of politicians (after due process) might be a powerful incentive.

    • Very interesting. Thanks for the clarifications. In light of what you said, could you clarify a bit more about what the Vulture Funds are doing now — that is, what they can already do under current law — and distinguish that from what you’d like to propose in the way of legal reforms?

      Also, for what it’s worth, I’d be very interested in hearing more about your more general proposals for legal reforms that would allow private lenders to pursue the assets of officials (or their families) who corruptly misappropriated funds loaned to sovereign states. It seems like the legal issues in this area might be quite complicated, and I’d love to learn more.

      • Vulture Funds are trying to freeze personal assets of figure heads of Argentine government officials, allegedly acquired through money obtained by corruption. Nevertheless, this strategy seems more as a threat to reveal names in order to put pressure on the Government to pay the debt rather than a real intent to cash the defaulted bonds.

        What we suggested is not so much for private lenders but for ICOs. From a general perspective we could distinguish between prevention measures and post facto measures. ICOs have some tools to prevent that loans are not diverted for the personal use of government officials. However, ICOs can’t go after a corrupt official anywhere. We think that an interesting alternative would be, first of all, to compel ICOs to participate in the accusation side of the criminal procedures that might take place for the misuse of the loaned funds. And second of all, to compel ICOs to sue leaders suspected of corruption in order to recover at least part of the money, and to allow this to be done in the jurisdiction where the money is invested or the assets located.

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