Call for Jersey to block $100m DR Congo 'vulture' debt

Watch Newsnight's vulture fund film in full

Charities are calling for Britain's Privy Council to block an American speculator from taking $100m (£62.86m) from the Democratic Republic of Congo.

Peter Grossman runs a so-called vulture fund which buys up the debts of poor nations cheaply and then sues for 10 or 100 times what they paid for them.

Such funds were in effect made illegal in the UK last year.

But Mr Grossman exploited a loophole to sue in Jersey, which is currently not covered by the law.

Vulture funds, also known as "distressed debt" investors, buy up the debt of poor nations cheaply when it is about to be written off and then sue for the full value of the debt plus interest.

They pursue any companies which do business with their target country in courts around the world and try to force them to pay money to the fund instead of the country.

Critics say this holds poor countries to ransom and prevents them trading their way out of poverty rather than relying on aid.

Cholera outbreak

Although there was all-party backing for the UK clampdown on vulture funds, the law does not apply in overseas territories and crown dependencies such as Jersey.

Jersey bank notes The law clamping down on vulture funds does not currently apply to Jersey

And last year Mr Grossman sued successfully for $100m in the Jersey courts over a DR Congo debt.

DR Congo is still suffering from the effects of a five-year war which claimed an estimated three million lives, either as a direct result of fighting or because of disease and malnutrition.

Although the war officially ended in 2003, conflict is still a major problem in eastern regions. Poverty is widespread and the country is currently facing a cholera epidemic.

The UN children's fund Unicef told the BBC's Newsnight that, with millions of people in Congo still without safe water supplies and cholera outbreaks sweeping the country, $100m spent on clean water could save the lives of 200,000 children.

Bosnian deal

When Newsnight confronted Mr Grossman about his vulture fund operation, he said: "I'm not beating up the Congo. I'm collecting on a legitimate claim."

However, a joint BBC Newsnight/Guardian newspaper investigation has established that the debt in question, which was originally a loan from Yugoslavia to Zaire 30 years ago, was illegally sold to Mr Grossman's fund, FG Hemisphere.

Zufer Dervisevic, who is the chief of the financial police in Bosnia, told journalists: "Of course it was illegal," and said that the man who organised the sale, former Bosnian Prime Minister Nedzad Brankovic, "should go to jail".

Mr Brankovic was prime minister of Bosnia until he was indicted for separate corruption charges - charges of which he was acquitted last year.

The Centre for Investigative Reporting in Sarajevo obtained a police report, which is now with prosecutors, recommending that Mr Brankovic be prosecuted for his part in the sale of the loan to FG Hemisphere.

Bosnian police showed the Newsnight/Guardian team paperwork which reveals that FG Hemisphere paid $3.3m for the claim, of which more than a half a million went to another "vulture" operator who helped set up the deal - Michael Sheehan, an American who calls himself "Goldfinger" after the James Bond villain.

Asked by reporter Greg Palast whether he thought it was fair to take $100m from Congo for a debt for which he had paid $3m, Mr Grossman said: "Yeah, I do actually," but he denied paying just $3m for the claim.

Mr Grossman also said he did not know that the Bosnian police said the loan had been illegally sold to him.

'Time to act'

Vulture funds are increasingly being blocked in US courts from collecting on the debts they buy up.

In 2011, China blocked FG Hemisphere's attempts to sue China Railways for the DR Congo money and of course the British route is now stopped.

Congo is now about to appeal to the Privy Council over the decision not to include Jersey in the ban on vulture finds and Jersey is also carrying out an urgent consultation - which closes next month - on whether it should act to ban such funds.

Oxfam, Christian Aid and Jubilee Debt Campaign are all calling on Jersey to bring in a law like that in the UK quickly.

Tim Jones, of the Jubilee Debt Foundation, says if it was passed quickly enough, this would enable FG Hemisphere to be blocked from getting the money without the need to rely on the Privy Council to decide in DR Congo's favour.

"If it is passed in time before the appeal, the $100m can still be saved," he said.

Update 29 February 2012 - We have been asked to add that Mr Grossman is clear in his response that the Bosnian police have not accused or implicated him or FG Hemisphere Associates in any wrongdoing. For Mr Grossman's detailed response please click here.

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