Surely the most egregious corruption offense of the decade is Mozambique’s “hidden debt” scandal. According to a January U.S. indictment, executives of the Lebanese shipbuilding company Privinvest and Swiss banking giant Credit Suisse paid senior Mozambican officials tens of millions of dollars to approve loans to finance a coastal protection service, a tuna fishing fleet, and a shipyard to maintain the vessels. The scam produced little more than a cluster of overpriced boats rusting in the Maputo harbor while saddling the citizens of one of the world’s poorest countries with billions in debts they cannot repay.
The key to the scam was the debts were incurred without the executive telling auditors, the parliament, or citizens. As Mozambique’s Constitutional Court recently affirmed, Mozambique law requires the disclosure and parliamentary approval of government debt. Part of the bribe allegedly went to ensuring then Minister of Finance Manuel Chang and his accomplices would keep the debts secret. It will take years to repair the damage done by these hidden debts. Full recovery may never be realized.
One scandal is enough. The international community must make ending “irresponsible lending” a priority. At a July conference the Open Society Initiative for Southern Africa held in Johannesburg, I was on a panel that discussed what can be done to end hidden debts. While the other members, all from borrowing countries, offered measures borrowers could take, I advanced five that financial regulators in the countries where private lenders are located should take. Largely stolen from a paper by Tim Jones of Debt Jubilee Campaign and a forthcoming Illinois Law Journal article co-authored by Fordham Law Professor Susan Block-Lieb and University of North Carolina Law Professor W. Mark C. Weidemaier, they follow. Comments welcome.
- The Basel Committee on Banking Supervision should issue an international standard requiring complete transparency in loans to sovereign governments. The agencies that belong to the committee regulate lending practices in the 28 most important capital exporting nations. The standard should require not only disclosure of the full terms of the loan but the business case for extending the loan. In addition to loans in any form (bonds, notes, loan participation agreements, and the like), disclosure requirements should extend to any loan guaranteed in whole or part by a sovereign. The requirement should extend to all public-private partnerships whether no matter whether the sovereign is a borrower, explicit guarantor, or not.
- The financial regulatory agencies in all capital exporting nations should be required to write the Basel Committee standard into their regulations and include significant fines up to as much as three times the amount of the loan for a violation of the standard.
- The laws of New York state, the United Kingdom, and other jurisdictions commonly used to govern the terms of sovereign loans should be amended to provide any loan extended in violation of the Basel Committee’s international standard is void. The amendment should apply retroactively with a reasonable period, no longer than six months, for existing loans to be brought into compliance.
- The African Development Bank, the IMF, the World Bank, and other international financial institutions should advocate for the development and adoption of an international standard on irresponsible lending. These institutions should sponsor research on the need for an international standard and the harms caused by its absence. They should use their convening powers to push regulatory agencies in the countries in which they operate to adopt rules imposing the standard on all financial institutions in those countries.
- The laws of capital exporting countries should be amended to permit citizens of countries harmed by an irresponsible loan to bring an action for damages. Citizens or a class of citizens injured directly or indirectly by an irresponsible loan should be able to pursue a civil suit for damages against the lender or lenders either: i) in the country where one or more of the lenders is headquartered, ii) the country where one or more of the branches or subsidiaries that extended or approved the loan is located, or iii) in any country where the lender or lenders have a substantial presence.