More Details On How Corporate Sovereignty Provisions, Like Those In TPP & TTIP, Are Dangerous

from the it's-bad-news dept

“I do a ton of work that involves threatened claims that never go to arbitration,” said Michael Nolan, a partner in the Washington, DC, office of Milbank, Tweed, Hadley & McCloy. “That’s much more common,” he said. “It’s much better to get things done quietly.”



“Every month I get a threat,” said Marie Talasova, a top lawyer for the Czech Republic’s Ministry of Finance. “We have to review the risks, how strong the claim is. We try to minimize the costs of the state.”

Deutsche Bank’s response was swift. It had already made more than $6 million on the deal, but it demanded to be paid more — much more. More than $60 million, which was 24 times more than the bank ever could have lost on the deal.



Deutsche Bank didn’t bother pressing its case in Sri Lankan courts or even in the business-friendly English court where the bank and the state oil company had agreed in their contract to settle disputes. Instead, the bank pursued an audacious strategy. It turned to a powerful worldwide legal system and commandeered it for a novel purpose: helping financiers profit from some of their most controversial and speculative practices.



It was a gamble, but it worked; the tribunal accepted the case. This breakthrough came as a delightful surprise to some lawyers around the world who specialize in this legal system, known as investor-state dispute settlement, or ISDS. They saw in it not just a single judgment, but also a lucrative new horizon for the financial industry.



“I admire the boldness of counsel and the vision of the management of Deutsche Bank to opt for investment arbitration at a time when there were no precedents,” said Georges Affaki, a lawyer with a large ISDS practice. Calling the case “a huge step,” he said he is leading an International Chamber of Commerce task force to advise financial firms on how they can use ISDS.

ISDS gives particular leverage to traders and speculators who chase outsize profits in the developing world. They can buy into local disputes that they have no connection to, then turn the disputes into costly international showdowns. Standard Chartered, for example, bought the debt of a Tanzanian company that was in dire financial straits and racked by scandal; now, the bank has filed an ISDS claim demanding that the nation’s taxpayers hand over the full amount that the private company owed — more than $100 million. Asked to comment, Standard Chartered said its claim is “valid.”



This tactic is especially damaging to nations battling an economic crisis or struggling to lift their people from endemic poverty. Companies in crisis can declare bankruptcy, forcing the debt collectors to back off, but countries can’t do this, which can lead to a feeding frenzy

Soon, top officials in the Justice Department, State Department, and Office of the US Trade Representative were on red alert.



In meetings, government officials scribbled notes that reveal how rude an awakening the Loewen claim was:



“No one thought about this when NAFTA implementing law passed.”



“Floodgates, giving up sovereignty.”



“How much $, who pays, how big a blow up.”

“Allowing foreign investors to attack the decisions of our domestic courts through international arbitration could severely undermine our system of justice and, as a result, threaten continued public and political support for the NAFTA and, perhaps, other international agreements as well,” a top Justice Department official wrote in one memo. “This could result in a flood of arbitrations against the United States, the cost of which could be extraordinary.”

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A few weeks ago, we wrote about a really great and detailed look by BuzzFeed's Chris Hamby into "investor state dispute settlement" (ISDS) provisions in international trade agreements -- something we refer to as corporate sovereignty , because it enables companies to effectively force countries away from certain regulations. Hamby's piece was about how rich corporate execs were using corporate sovereignty provisions to get out of criminal prosecutions . That was only part I of his investigation. Part II of the series may have been the most useful, because it detailed how the mere threat of an ISDS case could pressure countries into changing regulations. This is, because one of the key talking points from defenders of corporate sovereignty provisions is to point to stats on actual cases. But if the threats are really effective, the stats on cases really is only showing a portion of what ISDS is doing.The article quotes ISDS defenders saying "where's the proof" of such problems -- which most people can't show, since it all happens behind closed doors and no one wants to talk about it. But then it goes on to show clear examples of it happening, and it's somewhat frightening, where mere threats basically wiped out important regulatory policies.Part III of Hamby's report goes on to detail how some giant Wall St banks basically bled Sri Lanka dry , selling it complicated derivatives, and then going ballistic -- via ISDS corporate sovereignty provisions -- when the government stepped in to investigate the deals and whether they were legit or just a scam. Basically, the banks sold Sri Lanka derivatives that were a bet on the price of oil (just like a lot of the housing bubble was driven by bets on the prices of mortgages, where people were basically buying "insurance" on assets they didn't own), and the bet went way, way bad. But, the banks didn't want the government sniffing around to see if the sale of these derivatives had been legit:As you can see from the quote above, the corporate sovereignty case over Sri Lankan derivatives lit up a bunch of lightbulbs in law firms. And it's why they'rethat ISDS is necessary today, even in things like TTIP. If you understood the reasons given for ISDS originally, this makes no sense. The point of these tribunals was to allow recourse inwhere the fear was some tinpot dictator would show up and take all of the investment that, say, an Exxon put in to build up its presence in a country. Under that belief, an ISDS provision acts as a form of insurance for big investors, encouraging them to invest in less stable parts of the world. So that's semi-reasonable. But why the hell would you need that between the US and the EU? Or the US and Australia or Japan? You're not dealing with unstable governments (mostly!) in those countries.The real reason is because it's really got nothing to do with that any more. Now it's just a way for companies and lawyers to profit through threats on just about any regulatory change. And even the story about it protecting investment in less developed nations is not really true any more either. Now it's used for shaking them down:The final piece of Hamby's reporting is also really important. A key point that the White House has used in defending ISDS is that the US has never lost an ISDS case. As we've pointed out , that's kind of meaningless for a variety of reasons, in part because TPP and TTIP would massively expand the opportunities for companies to use corporate sovereignty claims in the US. On top of that, since using these to shake down countries is growing increasingly common, it's crazy to think more lawyers won't start targeting the US. In fact, Hamby's final piece in the series points out that the folks who drafted NAFTA were taken completely by surprise in a big ISDS case that was filed under it in response to a weird dispute between Mississippi funeral homes.To keep a long and complicated story short, there was a dispute that went to court, and in court, the lawyer for one funeral home played up the fact that the owner of the other was Canadian and won a huge monetary settlement. The owner of the losing side (the Canadian) then invoked ISDS, claiming that NAFTA guarantees no discrimination against foreign businesses -- and this trial showed there was discrimination. Apparently, the US gov't (which had supported ISDS strongly) freaked completely the fuck out:And, what's amazing is that even though US officials started waking up, they're now still pushing ISDS:Also, in case you're wondering: the case was dropped because the Canadian company went bankrupt and was bought up by American investors. But, Hamby discovered, the USand would have lost big, according to one of the members on the tribunal overseeing the case. So the claim that the US hasn't yet lost an ISDS case may be true, but it's based on a massive technicality.After reading all of these, it's difficult to see how anyone can still support corporate sovereignty in any shape or form. It's unnecessary, it's damaging and it's given way to a massive industry of companies and lawyers that abuse the system for profit.

Filed Under: corporate sovereignty, isds, tpp, trade agreements, ttip