Imagine a private, global supercourt that empowers corporations to bend countries to their will.
Say a nation tries to prosecute a corrupt CEO or ban dangerous pollution. Imagine that a company could turn to this super court and sue the whole country for daring to interfere with its profits, demanding hundreds of millions or even billions of dollars as retribution.
Imagine that this court is so powerful that nations often must heed its rulings as if they came from their own supreme courts, with no meaningful way to appeal. That it operates unconstrained by precedent or any significant public oversight, often keeping its proceedings and sometimes even its decisions secret. That the people who decide its cases are largely elite Western corporate attorneys who have a vested interest in expanding the court’s authority because they profit from it directly, arguing cases one day and then sitting in judgment another. That some of them half-jokingly refer to themselves as “The Club” or “The Mafia.”
And imagine that the penalties this court has imposed have been so crushing — and its decisions so unpredictable — that some nations dare not risk a trial, responding to the mere threat of a lawsuit by offering vast concessions, such as rolling back their own laws or even wiping away the punishments of convicted criminals.
This system is already in place, operating behind closed doors in office buildings and conference rooms in cities around the world. Known as investor-state dispute settlement, or ISDS, it is written into a vast network of treaties that govern international trade and investment, including NAFTA and the Trans-Pacific Partnership, which Congress must soon decide whether to ratify.
These trade pacts have become a flashpoint in the US presidential campaign. But an 18-month BuzzFeed News investigation, spanning three continents and involving more than 200 interviews and tens of thousands of documents, many of them previously confidential, has exposed an obscure but immensely consequential feature of these trade treaties, the secret operations of these tribunals, and the ways that business has co-opted them to bring sovereign nations to heel.
The BuzzFeed News investigation explores four different aspects of ISDS. In coming days, it will show how the mere threat of an ISDS case can intimidate a nation into gutting its own laws, how some financial firms have transformed what was intended to be a system of justice into an engine of profit, and how America is surprisingly vulnerable to suits from foreign companies.
The series starts today with perhaps the least known and most jarring revelation: Companies and executives accused or even convicted of crimes have escaped punishment by turning to this special forum. Based on exclusive reporting from the Middle East, Central America, and Asia, BuzzFeed News has found the following:
- A Dubai real estate mogul and former business partner of Donald Trump was sentenced to prison for collaborating on a deal that would swindle the Egyptian people out of millions of dollars — but then he turned to ISDS and got his prison sentence wiped away.
- In El Salvador, a court found that a factory had poisoned a village — including dozens of children — with lead, failing for years to take government-ordered steps to prevent the toxic metal from seeping out. But the factory owners’ lawyers used ISDS to help the company dodge a criminal conviction and the responsibility for cleaning up the area and providing needed medical care.
- Two financiers convicted of embezzling more than $300 million from an Indonesian bank used an ISDS finding to fend off Interpol, shield their assets, and effectively nullify their punishment.
When the US Congress votes on whether to give final approval to the sprawling Trans-Pacific Partnership, which President Barack Obama staunchly supports, it will be deciding on a massive expansion of ISDS. Donald Trump and Hillary Clinton oppose the overall treaty, but they have focused mainly on what they say would be the loss of American jobs. Clinton’s running mate, Tim Kaine, has voiced concern about ISDS in particular, and Sen. Elizabeth Warren has lambasted it. Last year, members of both houses of Congress tried to keep it out of the Pacific trade deal. They failed.
ISDS is basically binding arbitration on a global scale, designed to settle disputes between countries and foreign companies that do business within their borders. Different treaties can mandate slightly different rules, but the system is broadly the same. When companies sue, their cases are usually heard in front of a tribunal of three arbitrators, often private attorneys. The business appoints one arbitrator and the country another, then both sides usually decide on the third together.
Conceived of in the 1950s, the system was intended to benefit both developing nations and the foreign companies that sought to invest in them. The companies would gain a fair, neutral referee if a rogue regime seized their property or discriminated against them in favor of domestic companies. And the countries would gain the roads or hospitals or industries that those foreign corporations would, as a result, feel confident building.
“It works,” said Charles Brower, a longtime ISDS arbitrator. “Like any system of law, there will be disappointments; you’re dealing with human systems. But this system fundamentally produces as good justice as the federal courts of the United States.”
He defended the lawyers who often serve as arbitrators, saying they “are very aware of their responsibilities. Unlike politicians, we are up for election every minute of every day — somewhere in the world, somebody is trying to figure out whom to appoint in a case. We’re only as good as our reputations.”
As proof that ISDS delivers justice, Brower pointed to a wave of nationalizations by the Venezuelan government, many while Hugo Chávez was in charge, that led to “huge awards against them for uncompensated expropriation.”
ISDS has not only put rapacious leaders on notice, its defenders say, but it has also encouraged investment, especially in poor countries, helping to raise overall economic development. Some even say that it helps avoid gunboat diplomacy and tense international showdowns because countries have agreed on a forum where they can resolve disputes involving major investments.
But over the last two decades, ISDS has morphed from a rarely used last resort, designed for egregious cases of state theft or blatant discrimination, into a powerful tool that corporations brandish ever more frequently, often against broad public policies that they claim crimp profits.
Because the system is so secretive, it is not possible to know the total number of ISDS cases, but lawyers in the field say it is skyrocketing. Indeed, of the almost 700 publicly known cases across the last half century, more than a tenth were filed just last year.
ISDS has morphed from a rarely used last resort into a powerful tool that corporations brandish ever more frequently.
Driving this expansion are the lawyers themselves. They have devised new and creative ways to deploy ISDS, and in the process bill millions to both the businesses and the governments they represent. At posh locales around the globe, members of The Club meet to swap strategies and drum up potential clients, some of which are household names, such as ExxonMobil or Eli Lilly, but many more of which are much lower profile. In specialty publications, the lawyers suggest novel ways to use ISDS as leverage against governments. It’s a sort of sophisticated, international version of the plaintiff’s attorney TV ad or billboard: Has your business been harmed by an increase in mining royalties in Mali? Our experienced team of lawyers may be able to help.
A few of their ideas: Sue Libya for failing to protect an oil facility during a civil war. Sue Spain for reducing solar energy incentives as a severe recession forced the government to make budget cuts. Sue India for allowing a generic drug company to make a cheaper version of a cancer drug.
In a little-noticed 2014 dissent, US Chief Justice John Roberts warned that ISDS arbitration panels hold the alarming power to review a nation’s laws and “effectively annul the authoritative acts of its legislature, executive, and judiciary.” ISDS arbitrators, he continued, “can meet literally anywhere in the world” and “sit in judgment” on a nation’s “sovereign acts.”
That fate has not yet befallen the United States — but largely because of sheer luck, former government lawyers said. In theory, ISDS arbitrators must follow the rules laid down in trade pacts. But in practice, they have interpreted the vague language of many treaties as enshrining broad, unwritten rights far beyond protections against property seizures and blatant discrimination — even finding, in one case, a right to a “reasonable rate of return.”
Some entrepreneurial lawyers scout for ways to make money from ISDS. Selvyn Seidel, an attorney who represented clients in ISDS suits, now runs a specialty firm, one that finds investors willing to fund promising suits for a cut of the eventual award. Some lawyers, he said, monitor governments around the world in search of proposed laws and regulations that might spark objections from foreign companies. “You know it’s coming down the road,” he said, “so, in that year before it’s actually changed, you can line up the right claimants and the right law firms to bring a number of cases.”
The US officials who negotiated the Trans-Pacific Partnership have argued that it contains new ISDS safeguards, including opening up hearings and legal filings to the public. The changes, however, have loopholes, and lawyers at some big firms are already advising clients how they might use the new deal to their benefit.
Opposition to ISDS is spreading across the political spectrum, with groups on the left and right attacking the system. Around the world, a growing number of countries are pushing for reforms or pulling out entirely. But most of the alarm has been focused on the potential use of ISDS by corporations to roll back public-interest laws, such as those banning the use of hazardous chemicals or raising the minimum wage. The system’s usefulness as a shield for the criminal and the corrupt has remained virtually unknown.
Reviewing publicly available information for about 300 claims filed during the past five years, BuzzFeed News found more than 35 cases in which the company or executive seeking protection in ISDS was accused of criminal activity, including money laundering, embezzlement, stock manipulation, bribery, war profiteering, and fraud.
Among them: a bank in Cyprus that the US government accused of financing terrorism and organized crime, an oil company executive accused of embezzling millions from the impoverished African nation of Burundi, and the Russian oligarch known as “the Kremlin’s banker.”
Some are at the center of notorious scandals, from the billionaire accused of orchestrating a massive Ponzi scheme in Mauritius to multiple telecommunications tycoons charged in the ever-widening “2G scam” in India, which made it into Time magazine’s top 10 abuses of power, alongside Watergate. The companies or executives involved in these cases either denied wrongdoing or did not respond to requests for comment.
Most of the 35-plus cases are still ongoing. But in at least eight of the cases, bringing an ISDS claim got results for the accused wrongdoers, including a multimillion-dollar award, a dropped criminal investigation, and dropped criminal charges. In another, the tribunal has directed the government to halt a criminal case while the arbitration is pending.
“You have a lot of scuzzy sort-of thieves for whom this is a way to hit the jackpot.”
Of course, there are governments that don’t have clean hands themselves, and some claims by businesses have been justified. The legal systems of some countries are flagrantly unfair or riddled with corruption. Moreover, authoritarian or kleptocratic regimes sometimes do use their justice systems as political weapons. For example, arbitrators ordered Russia to pay compensation after finding that Vladimir Putin and his administration had used criminal and tax proceedings to destroy his political rival Mikhail Khodorkovsky’s oil company.
Lawyers say that some governments, faced with a legitimate ISDS claim, will even trump up a criminal charge to deflect from their own wrongdoing. For example, arbitrators found there was evidence suggesting that Bolivia had launched a fraud case against mining-company executives as a ploy to get the company’s ISDS claim thrown out.
But even some members of The Club said they were concerned by how often credible allegations of criminality arise. Many ISDS lawyers say that the system helps promote the rule of law around the world. If ISDS is seen as protecting criminals, they fear, it could delegitimize a system that is working well for many others.
One lawyer who regularly represents governments said he’s seen evidence of corporate criminality that he “couldn’t believe.” Speaking on the condition that he not be named because he’s currently handling ISDS cases, he said, “You have a lot of scuzzy sort-of thieves for whom this is a way to hit the jackpot.”
Even in the world of ostentatious opulence that Dubai real estate moguls inhabit, Hussain Sajwani and his company, Damac Properties, stand out. His promotions are gaudy — buy an apartment, get a Jaguar. He’s partnered with Donald Trump on a golf course for a Damac resort in Dubai. He’s raffled off a private jet and a private Caribbean island.
In the midst of his meteoric rise, he began looking beyond the oil-rich United Arab Emirates and, in 2006, ventured into an attractive new market: Hosni Mubarak’s Egypt. Top officials from the notoriously corrupt regime, including the prime minister, traveled to Dubai and cemented the new partnership with a signing ceremony for a splashy deal.
Within five years, in the wake of the historic 2011 revolution that ousted Mubarak, an Egyptian court would find Sajwani and the by-then former tourism minster guilty of working in cahoots on a land deal that would fleece the Egyptian people, sentencing both to five years in prison.
Egypt was in tumult, with the military controlling the government, frequent protests still roiling the streets, and the Muslim Brotherhood jockeying for what would become its electoral victory. Criminal trials in Egypt were often still gravely flawed, and corporate lawyers in Cairo said the military government was pursuing corruption trials to placate protesters and settle political scores. But anticorruption fervor had helped fuel the occupation of Tahrir Square, and to some activists and ordinary Egyptians, this once unthinkable verdict signaled that the elites who had enriched themselves through sweetheart deals with the regime might no longer be above the law.
But then some of those elites wielded a new weapon: ISDS. One of the first to do so was Sajwani.
The son of a disciplinarian shop owner in Dubai, Sajwani had rebelled against his conservative father and eventually found his way to the United States, where he earned a bachelor’s degree in economics from the University of Washington. Back in the United Arab Emirates, he sold timeshares and started a catering company.
By 2002, he’d determined the real money was in real estate, and he founded Damac Properties. The company quickly asserted itself as a major player in the booming Dubai property market and began expanding abroad.
Egypt beckoned. Hosni Mubarak’s authoritarian government had rolled out the red carpet to well-connected foreign businesses. A cabal of ministers sold off state assets — land, factories, retail chains — at bargain-basement prices and, in the process, accumulated far more wealth than their government salaries alone could possibly explain.
At the time Sajwani bought into Egypt, corruption was costing the nation about $6 billion every year, according to an analysis by Global Financial Integrity, a nonprofit based in Washington, DC, that tracks illegal financial flows. Meanwhile, hospitals and schools deteriorated; unemployment soared; and about 1 in 5 Egyptians got by on less than $2 a day, according to the World Bank. By some estimates, the majority of Cairo’s roughly 17 million citizens languished in “informal housing” — slipshod buildings or fetid slums, largely cut off from basic services such as water and electricity.
Amidst this squalor, verdant billboards selling Sajwani’s lavish properties emerged from the city’s oppressive sand-tinted haze. “It was clear and obvious, in your face on a daily basis,” said Maher Hamoud, who was editor-in-chief of a major Egyptian newspaper at the time. “Everyone saw these billboards, and everyone knew of this parallel world that the majority of the population have no access to.”
Sajwani’s first project wasn’t going to be just a luxury resort. He would build the Middle East’s largest tourist paradise — 11 square miles of villas, shopping centers, apartments, marinas, and even an extreme sports theme park, all along the sunny coastline of the Red Sea, a popular haven for foreign vacationers and rich Egyptians. Soon, those who could afford it would be able to “Live the Luxury” — Damac’s slogan — just a few hours’ drive from Cairo.
But when Hamoud’s newspaper asked what Damac had paid for this huge stretch of land, which previously had belonged to the Egyptian people, a company executive refused to answer. “Invasion of privacy is unacceptable,” he said, “and we are a private company.”
A state committee had determined that the land should be sold for no less than $3 per square meter. But court documents reviewed by BuzzFeed News reveal that Mubarak’s tourism minister, Zuhair Garana, had sold the prime real estate to Damac for just $1 per square meter.
Almost five years later, Damac still hadn’t built the resort, nor had it fully paid Egypt even that bargain-basement price, prosecutors’ files show.
In March 2011, shortly after the revolution felled Mubarak, prosecutors accused Sajwani and Garana of collaborating on the deal, which would cheat the Egyptian people out of about $41 million. What’s more, prosecutors alleged, the land on the Red Sea sat atop an oil deposit, so it was illegal under Egyptian law to sell the area as a tourism project. Through his lawyers, Sajwani has maintained he did nothing wrong.
Two months later, an Egyptian court found Sajwani and Garana guilty on corruption-related charges. (A court would later vacate Garana’s conviction.) A judge ordered Sajwani, who had not returned to Egypt for the trial, to forfeit the land, pay a penalty, and serve a five-year prison sentence.
The verdict rippled through the business community, stoking anxiety, according to a half-dozen corporate lawyers in Cairo. Many other businesses had cut land deals in the frenzied sell-off of once-public assets during the past decade, and they wondered if they might be next.
Sajwani himself had two other projects planned in Egypt — an exclusive gated community named Hyde Park and an upscale shopping mall dubbed Park Avenue — and authorities were investigating those, too, previously secret documents show. In these deals, authorities alleged in the documents, Sajwani worked with the housing minister, improperly reaped the equivalent of about a half-billion dollars by selling units earlier than allowed, funneled the money abroad using a web of holding companies, and still failed to pay the government the full amount owed for the land. Sajwani was never charged in relation to this investigation.
But, though Mubarak was gone, he had left behind a gift for investors like Sajwani: one of the world’s largest networks of investment treaties — twice the size of the United States’ — that allowed foreign businesses to file ISDS claims against Egypt. Within a week of Sajwani’s conviction over the Red Sea deal, Damac invoked one of these treaties and sued Egypt before the international arbitration arm of the World Bank.
The company announced the case with a defiant statement from one member of the powerhouse legal team it had assembled — an American who’d started his career as the youngest Republican state legislator in Texas.
“The criminal prosecution and conviction of Mr. Sajwani were a classic case of guilt by association,” wrote Ken Fleuriet, of the US firm King & Spalding. “No crime was committed by simply conducting business with the former regime.” The deal, he said, was “entirely proper” and “fully vetted by the appropriate Egyptian officials at the time of purchase.” Fleuriet did not respond to requests for comment. (A different law firm, the London-based Clifford Chance, later took over the case.)
This argument — that the government at the time gave its blessing, so the sweetheart deal couldn’t be criminal — became the template for other businesses facing similar accusations.
Sue Ellen, a native Egyptian named after the matriarch on the TV show Dallas, started working for Damac as its in-house counsel in Egypt after the land deal that resulted in Sajwani’s legal troubles. She resigned after only a year because, she said, she was uncomfortable with some company practices. When questioned about the Red Sea deal, she said, “I haven’t asked,” and said she doesn’t know any of its details. But she wrote her master’s thesis on Egypt’s rampant white-collar crime.
Speaking generally, she said, “They are very, very, very smart — the investors and the government.” She gave an example of how bribery can go undetected: “I provide you with a villa, a townhouse, but not in your name. The name will be someone else, but you will be the beneficiary.” She ticked off other common ploys: “It could be Rolex watches, free apartments. If you have a son, he could work” at the company “with a huge amount of salary. So it’s not only bribery. Sometimes you goof around the bribery and do something not visible.”
By filing an ISDS claim, Sajwani took his case out of the Egyptian court system and placed it in the hands of three private lawyers convening in Paris. For the arbitrator he was entitled to choose, Sajwani appointed a prominent American lawyer who had often represented businesses in ISDS cases. And to press his case, Sajwani hired some of the world’s best ISDS attorneys.
For Egypt, the potential losses were big and would come as the country struggled to revive its floundering economy.
The man who had been convicted of collaborating on a deal that would bilk the Egyptian people out of millions of dollars was now free and clear.
It decided to settle.
The terms of the settlement are confidential, but three lawyers who represented the company at the time described the key provisions. Damac paid some money to the government; Sajwani’s lawyers refused to say how much, though one called it a “savvy business deal.”
But the key benefit for Sajwani, according to all three: In exchange for dropping his ISDS case, Egypt would wipe away his five-year prison sentence and close out the probes of the other deals. The man who had been convicted of collaborating on a deal that would bilk the Egyptian people out of millions of dollars was now free and clear.
A Damac spokesperson declined to make Sajwani available for an interview. In response to a letter detailing the points in this story, the spokesperson wrote: “This story relates to issues that were resolved and settled in 2013. The assertions you make in your letter are factually wrong. As the matter was the subject of formal settlement, we are not in a position to comment any further.” Asked which facts were wrong, the spokesperson declined to answer.
The Damac case — one of the first post-revolution criminal convictions and one of the first ISDS claims filed as a result — set an example that other embattled executives soon followed. As Egypt groped for stability, a wave of ISDS claims rattled the new government.
“Damac, followed by multiple other cases filed, made them say, ‘You know what, no; there should be another way,’” said Girgis Abd el-Shahid, a lawyer who represents corporate clients and assisted with Sajwani’s arbitration claim. “I believe that, after Damac, Egypt learned its lesson.”
By the one-year anniversary of the revolution, Egypt faced more known ISDS claims than all but a handful of other countries, and corporate lawyers in Cairo told BuzzFeed News that still more businesses were threatening to file cases.
The potential liabilities from these claims were ruinous — one company alone was threatening to sue for $8 billion. What’s more, the ISDS cases were helping to sour the country’s business reputation at a time when the fragile Egyptian economy desperately needed foreign investment.
Virtually across the board, the government began trying to settle.
In one case, an Egyptian court had declared a foreign company’s purchase of a factory corrupt and nullified the deal, court records show. But after the company filed an ISDS claim, the government agreed to pay $54 million in a settlement — roughly twice the price the company had paid for the factory just a few years earlier, according to news reports and documents reviewed by BuzzFeed News. A lawyer for the company said that his client had not been found guilty of a crime and that the company had made “significant investments” in the factory after acquiring it.
In another case, a second Dubai developer was under investigation — until he threatened an ISDS claim, according to the Cairo lawyer Hani Sarie-Eldin, who has represented the company. Instead of a criminal trial, the government opted for a settlement, and the mogul’s company went forward with its project, Sarie-Eldin said.
Other ISDS cases are ongoing. Two involve a notorious deal that sent Egyptian natural gas to Israel, even as Egyptians suffered energy shortages at home. Egypt asked ISDS arbitrators to throw out both cases, alleging that the deal was a corrupt arrangement by Mubarak-regime officials and cronies to reap huge profits. In both cases, the request was denied. Investors in the gas company, like the Dubai developer, did not respond to requests for comment.
Meanwhile, the government has changed its laws, stripping public-interest lawyers and average citizens of the right to file court challenges to dubious public contracts, such as the sale of public land to a developer like Sajwani.
One purpose of the law, according to corporate lawyers in Cairo who said they lobbied for it, was to prevent the domestic court cases that had led to ISDS claims. As a result, several cases challenging Mubarak-era deals are now frozen.
Corporate lawyers cheered these developments. But even some supporters of ISDS now worry that the system has been misused to help the powerful evade justice and to hold hostage the economy of a nation still in turmoil.
“If you get something out of corruption, you should not have your day in court; it should be dismissed,” said Ahmed el-Kosheri, a native Egyptian and longtime arbitrator who recently received a lifetime achievement award from a leading international arbitration organization.
He worried that his country would be saddled with massive costs because of the ISDS cases. “That’s the irony of it,” he said, “that innocent people, the Egyptian public, would pay for the mistakes committed by the regime, which was corrupt.”
Since settling with Egypt, Sajwani has enticed customers elsewhere with free Lamborghinis; partnered with Trump, whose campaign did not respond to requests for comment, on a collection of luxury mansions; and sold Damac shares on the London Stock Exchange, reaping a windfall.
“If we try to expose corruption, then those investors will take us to court,” she said. “Which means we had better just shut up.”
This year, Forbes magazine estimated Sajwani’s net worth at $3.2 billion, making him No. 8 on the publication’s list of “World’s Richest Arabs” and landing him on the overall list of billionaires, ahead of Oprah Winfrey and tied with the Dallas Mavericks owner Mark Cuban.
Sajwani is now advertising a massive tower in London with apartments designed by Versace Home, and he told an Emirati newspaper he’s eyeing continued expansion; next might be projects in the United States.
Heba Khalil, a researcher at an Egyptian human rights organization, recently recalled the chaotic but hopeful days after the fall of Mubarak. “No one knew what Egypt would be like,” she said. “International investors were kind of scared that the kind of deals that they did with the Mubarak regime wouldn’t be possible anymore.”
Then came the ISDS claims. “I think the impact of international arbitration,” Khalil said, was that Egyptians “started knowing that, ‘Oops, if we try to expose corruption, then those investors will take us to court internationally, and we will lose the case. Which means we had better just shut up and let the wrongs of Mubarak continue the way they are.’”
In the rural hamlet of Sitio del Niño, about 20 miles from El Salvador’s capital city, Reyna Isabel Hernández de Avelar slumped in a plastic chair in an alcove outside her home, her eyes fixed on the small shrine before her — flowers, figurines of the Virgin Mary, a crucifix, and, at the center, a picture of her son César in a jacket and tie.
Six days earlier, César had suddenly collapsed and died. He was a healthy 16-year-old, she said, except for one thing: the lead in his body.
He’d complained of unceasing pain in his head, chest, stomach, and bones, she said, and he grew fatigued easily — all common symptoms of lead poisoning. The concentration of lead in César’s blood, a test had shown, exceeded the level internationally recognized to cause serious health problems.
“Imagine,” Hernández recalled César saying after a doctor explained what the results meant, “I’m the youngest son you have, and I’m going to die soon.”
Not far away, across the street from the village school, Fany Carolina held an X-ray up to the light streaming through her kitchen window and pointed to dark spots on the images of her son José’s leg bones. These, she said doctors told her, likely were deposits of lead. She unfolded reports showing levels of lead in her son’s blood above the safe limit. The hazardous metal had first appeared in his body when he was 5 years old. Eight years later, he has pain in his joints, and Carolina worries his development has been stunted.
Across town, René Gómez Colocho sat beneath the coconut and mango trees in his dirt yard, pounded the table with his fist, and choked back tears as he described his daughter, Ángela. She was 11 years old when tests had shown levels of lead in her blood more than triple what is considered safe. Doctors had tried to leach the heavy metal from her body, but the treatments left her weak and ill. She became depressed and eventually drank poison, ending her own life.
Sitio del Niño is a manmade disaster, a result of environmental neglect by the lead-acid battery factory nearby, legal documents show.
Not long after the battery factory set up shop on the edge of Sitio del Niño in 1998, people began noticing clouds of ash floating over from their new neighbor, descending on fields where children played soccer and seeping into their homes at night. It burned people’s throats and sent them into coughing fits.
Eventually, people started connecting the ash with the persistent headaches, dizziness, extreme fatigue, and constant bone and joint pain that children in particular were suffering. In 2004, a committee of local citizens began petitioning leaders for help, writing the town’s mayor, national government ministries, and eventually even other nations’ embassies and international aid organizations. For years, their efforts came to naught.
Then lead started showing up at potentially dangerous levels in the blood of the town’s children. Testing in 2006 and 2007 found that dozens of children, some as young as 3, had been contaminated.
Testing found that dozens of children, some as young as 3, had been contaminated.
The reason for the contamination, a court would later conclude: The factory had promised environmental regulators it would upgrade its deficient pollution controls — installing systems to remove lead from the factory’s water, for example, and improving how it stored contaminated slag. But the factory either delayed taking some of these steps for years, the court found, or never actually took them, even though the company’s profit statements showed it had the money to make the fixes. As a result, the court determined, lead seeped into the town’s water supply and blew over from smokestacks and waste piles.
Angry parents and a legal aid group demanded that the government take action. In 2007, the health ministry ordered the closing of the factory on the grounds that it lacked the proper permits. The following year, the attorney general brought charges of aggravated environmental pollution against the company, its three owners, and three lower-level managers.
The factory’s owners, members of a prominent family in El Salvador who also hold US citizenship, fled to the US, which was asked to extradite two of them. The US refused, on the grounds that environmental crimes are not covered under the US–El Salvador extradition treaty.
In an email to BuzzFeed News, José Gurdian, the company’s president, vehemently denied wrongdoing and insisted that his factory had been “confiscated by the government of El Salvador in violation of all local and international law.” No test results ever showed that the factory was “emitting lead into the air,” he said, and his company had “made all the necessary investments” to meet the safeguards that environmental regulators required. He disputed tests conducted before the factory closed that found lead contamination, and he said that the government’s closure process itself “could have caused limited pollution.” (The factory’s other two owners are Gurdian’s mother, Sandra Escapini, who directed questions to her son, and another relative, Ronald Lacayo, who did not respond to repeated requests for an interview.)
They were safe in Florida, and the case against them did not proceed. But the case against their company and three of its managers did. Before long, the company’s legal team turned to ISDS.
In May 2009, a threatening letter on behalf of the owners arrived at a government office in San Salvador. It was signed by Jonathan Hamilton, the head of Latin American arbitration at White & Case, recently named by an international arbitration industry publication as the world’s top firm in the ISDS field. By shutting down the factory and pursuing “unlawful criminal proceedings” against its owners, the Salvadoran government had violated the Central American Free Trade Agreement, Hamilton wrote. It had “expropriated” the factory “without a public purpose,” treated the owners unfairly, and imposed an “unlawful and discriminatory sanction.” They planned, he said, to file an ISDS case demanding that the Salvadoran government pay the owners $70 million. (Hamilton declined to comment. In a statement, White & Case said the firm “has not been involved in the matter for many years.”)
Gurdian, the company president, told BuzzFeed News the ISDS threat was not intended to help the criminal case. The architects of his company’s legal defense, however, said it was a key prong of their strategy. Arturo Girón, the lead criminal defense lawyer, said it was “necessary to strengthen” their case. In talks with the government, he said, he warned that the company might “play that card” if the case could not be resolved.
Another factory lawyer, who spoke on condition of anonymity, said that the threat to sue in ISDS was like a chess move intended to send the government an intimidating message: “I’m not so tiny; I have powerful people behind me.” After the ISDS threat, the government officials’ tone changed. “All of a sudden, they were very, very polite, and careful,” he said.
And Luis Francisco López, a lawyer who represented the community as an interested party in the case, said the ISDS threat came up in meetings he attended involving the attorney general’s office and the factory lawyers. “The message we got from the beginning was, ‘Even if you beat us here, we’re going to beat you there,’” he said.
In the midst of the trial, the prosecution agreed to settle. Prosecutors declined to comment on the role ISDS played, but the settlement document lays out the terms. The company agreed to pay for a limited cleanup of only the factory site, far short of the much more expansive cleanup the government has said is needed, and to establish a medical clinic in the village, albeit one that would provide only basic care and be funded for only three years. The company would also pay for some of the costs associated with the prosecution and make small donations to the community. And it agreed to drop its threat and not pursue an ISDS case.
Lawyers for the community denounced the deal, saying it failed to address the community’s problems. The judges also refused to sign off on the prosecutor’s bid to end the case, instead carrying it to its conclusion.
Ultimately, the court concluded that the factory had contaminated the village. But that same court acquitted the three lower-level managers, so, it reasoned, it had no choice but to exonerate the company, too.
A force that helped persuade the judges, said Girón, the company’s lawyer, was the ISDS threat and its potential to slam the government with huge compensatory damages.
Today, the legal wrangling — and the possibility of an ISDS claim — persists.
The factory is pursuing an administrative case against the government, and prosecutors have filed a new criminal case, accusing the owners of causing physical harm to the villagers. Gurdian dismissed the new charges as “completely baseless.” But they might leave him and the other two owners vulnerable to extradition. If prosecutors do try to pursue the owners abroad, the factory lawyer said he knew exactly what move he would recommend: an ISDS claim.
The failure to hold the factory accountable is an open wound for the impoverished residents of Sitio del Niño — a village whose very name, “Place of the Child,” is now a cruel joke. For six years, their community has been designated an “environmental emergency” by the government, which has warned them not to eat anything grown in the town’s contaminated soil. But many of them have no other option.
The government has estimated that the total cost to remove the lead from the area and to restore the land would be about $4 billion. “We have a solution,” the environmental minister, Lina Pohl, told BuzzFeed News. But, she said, “We are waiting for someone to give us the money.”
Meanwhile, Rosa Aminta Rodríguez de Morales is waiting to find out how dire her son’s health is. When she gave birth to Luis Jr., now 14, a doctor told her, “Don’t have any other children until the factory closes,” she recalled.
In 2007, when Luis Jr. was 5, tests showed unsafe levels of lead in his blood. He has suffered dizziness, extreme fatigue, and pain in his joints and bones.
Recently, his dizzy spells seemed to be getting worse, so his parents saved enough money from selling homemade cheese to take him to a private clinic. Doctors ran tests that indicated he had kidney disease — a classic symptom of lead poisoning.
The toxic metal is known to strike multiple organs, and Rodríguez and her husband said they hoped to save enough over the next month to find out whether their son’s liver was also failing.
“Psychologically,” Rodríguez said, “he already feels like he’s going to die.”
When NAFTA, the North American Free Trade Agreement, took effect in 1994, some lawyers at top firms took notice of ISDS for the first time. One heralded “a new territory” where some pioneering attorneys had ventured and “prepared maps showing a vast continent beyond.” What they saw was the opportunity to expand and reshape ISDS to their benefit, and the previously dormant system changed forever.
“A whole industry grew up,” said Muthucumaraswamy Sornarajah, an international lawyer and ISDS arbitrator who argued that the system is now being misused. Large law firms, he said, see ISDS “as a lucrative area of practice, so what happens is they think up new ways of bringing cases before the arbitration tribunals.”
Lawyers’ fees make up the bulk of the roughly $5 million in legal costs that each side pays in an average case, recent studieshave found. Big firms can easily bring in significantly more. Top lawyers sometimes bill more than $1,000 an hour. Attorneys billed Turkey more than $25 million in one case, and after Russia lost a mega-case, the country said it paid its lawyers more than $27 million.
A key service offered by the ISDS legal industry goes by various euphemisms: “corporate structuring,” “re-domiciling,” “nationality planning.” Critics have a different term: “treaty shopping.” It amounts to helping businesses figure out which countries’ treaties afford the most leeway for bringing ISDS claims, then setting up a holding company there — sometimes little more than some space in an office building — from which to launch attacks.
So it is that a private equity firm based in Texas can fly the flags of Belgium and Luxembourg, enabling it to sue South Korea, which convicted one of its executives of stock manipulation. The private equity firm declined to comment.
ISDS was designed to protect foreign investors, not people suing their own government. But members of the once-prominent Turkish Uzan family — accused of perpetrating a fraud worth billions and derided at one point by a US federal judge as “business imperialists of the worst kind” — found a way to sue their native land through a variety of companies primarily under their control in Cyprus, Poland, and the Netherlands. (Turkey won each case, but at a cost of tens of millions in legal fees.) The family’s telecommunications company, however, remained Turkish so it could bring a claim against Kazakhstan, with which Turkey has a treaty — and win a $125 million award. Attempts to reach the Uzans through numerous intermediaries were not successful.
ISDS lawyers also grow the market for their services by advocating for new treaties, and some of the most outspoken are beneficiaries of the revolving door between the US government and top law firms.
Daniel M. Price negotiated the section of NAFTA containing ISDS when he was a lawyer at the Office of the US Trade Representative. He later served as a top international trade official in the George W. Bush White House.
In between these government stints, he worked as a private lawyer helping clients in ISDS cases. Twice he used the treaty he himself had helped negotiate to help US-based businesses pursue claims against Mexico.
He founded and chaired the unit handling ISDS claims at Sidley Austin, a leading global law firm. Today, he promotes his services as an arbitrator and, along with a powerhouse team that includes other former government lawyers, sells international expertise on ISDS and related matters.
Price, who at first agreed to an interview but later stopped responding to messages, is only one of a number of private lawyers who have exerted outsize influence on American policy on ISDS.
Ted Posner, a partner at US firm Weil, Gotshal & Manges and a former official at the Office of the US Trade Representative, has acted as a direct conduit to treaty negotiators. As officials from his former employer were hammering out the details of the Trans-Pacific Partnership, Posner told BuzzFeed News, he met with them on behalf of his clients and said, “We want you to be aware of this concern and hope that you’ll take this point of view into account in the next round of negotiations.”
“I don’t see that as being a conflict,” Posner said. “I don’t think anybody gives my point of view more credibility just because they happen to have been a former colleague. I may be able to get a call returned more quickly or an email responded to more quickly, but I don’t think prior service in an agency and knowledge of how that agency works is something that should be considered problematic from a public-interest point of view.”
Private attorneys have emerged as some of the staunchest defenders of ISDS, accusing critics — from prominent scholars, to aid groups such as Doctors Without Borders, to the Australian government — of failing to understand the system and making exaggerated claims. While they concede that many arbitrators are chosen from their own ranks, they say that when lawyers adjudicate cases, they weigh the evidence without favor and reach just decisions in the overwhelming majority of cases. Their reputation for fairness is their currency, they say.
To prove that ISDS is not biased in favor of businesses, they point to the outcomes of known cases: Governments have won about 35% of the time, while business interests have won only about 25%.
But that statistic is anything but straightforward. It pertains only to the outcomes of known cases; ISDS is so secretive no one even knows how many additional cases there have been. Also secret are most of the settlements. Roughly a quarter of the known cases were settled, but the terms are almost never disclosed.
Moreover, subtract the cases that arbitrators tossed out because they didn’t have jurisdiction to hear the claim, and that win–loss balance flips: Business interests have won 60% of the time. Even then, cases recorded as losses for the corporation can actually be wins. In one case, an executive failed to garner a monetary judgment but obtained a finding that helped him wipe away a criminal punishment.
And no statistic could ever include the many ISDS claims that are merely threatened, intimidating governments and shaping their policies while leaving hardly a trace. ISDS lawyers told BuzzFeed News that threats far outnumber actual cases.
Finally, companies can gain advantages by bringing an ISDS suit, even if they don’t expect to win the case. Krzysztof Pelc, an associate professor at McGill University, found that there has been a proliferation of frivolous cases primarily intended not to win compensation but rather to bully the government — and other nations that want to avoid a similar suit — into dropping public-interest regulations. These new cases, Pelc found, represent a fundamental transformation of ISDS: The system was designed to deal primarily with theft by autocrats, but, in the majority of cases today, businesses are suing democracies for enacting regulations.
Such cases, he found, are far less likely to end in a settlement; the goal is to draw out the legal fight and run up the government’s cost to deter future regulation. Even when a government ultimately wins, foreign investment in that country drops, another study found.
“The noble intent behind investor-state dispute settlement,” Pelc told BuzzFeed News, is now “a tiny, tiny part of the action.” The system has a legitimate purpose, he said. “It’s just that, when it comes to this kind of use of aggressive litigation, then it really gets away from the objective.”
Not all lawyers involved in ISDS are opposed to reform. Some, in fact, say it is necessary in order to protect the system. Industry publications and conferences now are filled with hand-wringing over the mounting public criticism of ISDS.
V.V. Veeder, a prolific arbitrator, warned fellow ISDS lawyers during a panel discussion at a London law office that, while they might be convinced of the merits of the system, many members of the public are not. “And,” he said, “the more they find out what we do and what we say, and how we say it, the more appalled they are.”
The British financial guru Rafat Ali Rizvi had a big problem: In Indonesia, where he’d plied his trade, he and a business partner had been convicted of embezzling more than $300 million from one of the country’s banks. The government there had to bail out the bank — sparking enraged protests that police tried to quell with tear gas and water cannons — and Indonesian authorities were pursuing him and the money they said he’d stashed in accounts around the world.
Ensconced overseas, Rizvi was beyond the reach of the Indonesian authorities. But the conviction came with an Interpol “red notice,” meaning he risked extradition if he traveled abroad. Some of his bank accounts were frozen. And with this stain on his record, he was largelycut off from the world of global finance he’d played in for years.
Rizvi’s topflight criminal lawyer had threatened to sue Interpol if the agency didn’t delete the alert, but so far it hadn’t worked. What Rizvi needed was an entirely different type of lawyer. Someone like George Burn.
Burn had spent years representing businesses in corporate disputes, but, like many of his colleagues, he was drawn to ISDS as the system began to flourish in the 1990s. Now, he said, ISDS cases make up the majority of his work as a London-based partner at the U.S. firm Vinson & Elkins.
The strategy he crafted for Rizvi epitomizes the ingenuity of elite ISDS lawyers and the willingness of arbitrators — many of whom are also attorneys who argue ISDS cases — to expand their own authority. It is a stark example of how canny and audacious lawyers can work the system, crafting a win even when they technically lose. The only real losers: a nation of taxpayers.
Born in Pakistan and educated in Great Britain, Rizvi had been managing private investment funds set up in various tax havens when he met Hesham al-Warraq, a Saudi financier educated in the US.
The two started buying up shares of Indonesian banks that eventually merged to form Bank Century. The two men assumed top posts, but al-Warraq “was always the junior guy in the partnership,” explained Burn, who represented both men. Al-Warraq, Burn said, “really was just in the wrong place at the wrong time.”
The bank was short on cash. It had a hefty stash of bonds and other securities, but it couldn’t wait for them to pay out. The bank needed the money now.
Rizvi and al-Warraq got approval from the bank’s other executives to sell many of these long-term investments or use them as collateral to obtain loans. Step one was transferring them to offshore companies that Rizvi and al-Warraq controlled.
If there was a step two, it basically never happened; the bank never saw the vast majority of those valuable assets again, legal documents show.
The two men were supposed to return to the bank whatever they couldn’t sell or use to get a loan, but, for the most part, they simply didn’t, according to the documents. In some instances, the documents state, they used the assets to get loans not for the bank but for themselves.
By the time the bank was bailed out in 2008, Rizvi and al-Warraq had siphoned off about $361 million, concluded an expert analysis prepared for the Indonesian government by The Brattle Group, an economic consulting firm that is based in Cambridge, Massachusetts, and has a principal who won a Nobel Prize.
Rizvi and al-Warraq contended that they actually had obtained at least a few loans for the bank and that the assets had been seized by creditors after the bank failed to repay these loans. But the bank and the experts hired by the Indonesian government said they couldn’t find any evidence to support that claim.
The Brattle Group analysis summed it up: “Mr. Al Warraq and Mr. Rizvi controlled Bank Century, and treated it as their personal piggybank.”
A criminal court in Jakarta tried them in absentia, convicted both men of corruption and money laundering, sentenced each to 15 years in prison, and ordered them to repay the massive sum it found they’d stolen.
They could have returned to Indonesia and challenged their convictions in court or tried to file a claim with a United Nations human rights body designed to handle the kind of claims they were making. But they had a more attractive option.
Enter Burn. His overarching strategy, as he explained it, was to use ISDS to attack the validity of their Indonesian trial, arguing “that they’d never been given a fair hearing and that there had been an abuse of process at multiple stages.” But to get to that point, he had to deploy some of the most controversial tactics that ISDS lawyers have developed.
First, Burn needed to find a treaty that would apply to this case. His team discovered an obscure agreement among predominantly Islamic nations, including Indonesia, where the case was unfolding, and Saudi Arabia, where al-Warraq was a citizen. There was no record of anyone using that pact to file an ISDS claim before, but Burn audaciously forged ahead.
In fact, an official present at the creation of that treaty 30 years earlier told the tribunal that the agreement was not supposed to allow ISDS cases at all. The arbitrators waved off this objection as “irrelevant.”
The key argument that Burn planned to make was that the criminal trial in Jakarta had violated al-Warraq’s right to fair treatment as a foreign investor. This protection is now commonplace in investment treaties and trade deals, and it has become one of the most controversial aspects of ISDS.
Guaranteeing foreign businesses “fair and equitable treatment” sounds like common sense. But many treaties don’t say what exactly that means, so arbitrators have found that governments have acted unfairly even when they regulated the price of water or merely complied with European Union law. Critics argue that such judgments have transformed a system that was supposed to uphold the rule of law into one that places foreign businesses above the law, able to get out of obeying almost any statute or regulation, no matter how worthwhile, that cuts into profits.
Many scholars and activists say the “fair and equitable treatment” provision, which is included in the Trans-Pacific Partnership now being considered by Congress, is the most widely abused element of treaties containing ISDS. Numbers from the UN’s trade and development body show that arbitrators find violations of this controversial provision far more than any other.
As it happened, though, the treaty Burn had invoked didn’t include that clause. But the agreement did have another common and often controversial clause, which requires a government to treat foreign businesses covered under one treaty at least as well as businesses covered under any of its other treaties.
So Burn plucked the fair-treatment provision from another agreement and applied it to the Islamic nations pact. In effect, he constructed his own super-treaty.
And the ISDS arbitrators allowed it, giving themselves the authority to rule on the actual merits of the case.
“Mr. Al Warraq and Mr. Rizvi controlled Bank Century, and treated it as their personal piggybank.”
Burn enlisted a lawyer with perfect credentials for this case: Rutsel Martha, a former general counsel of Interpol who now specializes in, among other things, challenging the international police agency’s actions.
He argued that the Indonesian authorities had committed numerous procedural errors, such as not confirming that al-Warraq had received the court summons and not enlisting the Saudi authorities to question al-Warraq. He also argued that Indonesia hadn’t met the criteria under international law for conducting a trial in absentia and that it hadn’t ensured al-Warraq was promptly notified of the guilty verdict. He even argued that the entire prosecution was a politically motivated ploy to scapegoat Rizvi and al-Warraq for the government’s own contentious decision to bail out the bank.
For its part, the Indonesian government produced evidence that it had done many of the things it was accused of neglecting: It did seek help from the Saudi government, and it did seek out Rizvi and al-Warraq at various locations around the world. What’s more, the government contended, Rizvi and al-Warraq had asked their lawyers to write to government officials, and the men had dispatched representatives to meet with Indonesian authorities as the trial approached. Those actions, the government said, made it clear that Rizvi and al-Warraq knew about the case against them and could have returned to face the court in person, avoiding the trial in absentia, but chose not to do so.
Ultimately, the tribunal did not find that the prosecution had been politically motivated. But siding with Martha and Burn, it did make a key finding: Indonesia had committed procedural errors that violated al-Warraq’s right to fair treatment. The arbitrators didn’t award any money, however, because they also determined that al-Warraq had “breached the local laws and put the public interest at risk.”
But, Burn said, winning the case outright and getting monetary damages had never been the “primary target.” Above all, he said, he wanted a finding that al-Warraq’s rights had been violated. And the ISDS arbitrators handed him exactly that.
Martha took that crucial finding and presented it to his former employer. He argued that, unless Interpol dropped its red alerts against Rizvi and al-Warraq, the international cops themselves would be violating international law. Interpol obliged, deleting the red notices.
“Unprecedented Concessions by Interpol,” trumpeted a press release put out on behalf of Martha’s firm. The international cops also had agreed to delete information about the two convicts from its files and to send letters to certain risk profiling and due diligence agencies, as well as the roughly 190 Interpol member countries, according to the release.
“As a result, Mr. Rizvi and Mr. Al-Warraq will be able to travel and conduct business without restriction,” the release boasted. “Such results have never been obtained before from INTERPOL.” Reached by BuzzFeed News, Martha at first agreed to an interview but didn’t respond to subsequent messages.
Now the legal team is trying to use the ISDS decision to block Indonesia from seizing the men’s foreign bank accounts. Initially, Indonesian authorities had won a small victory when a Hong Kong court granted them access to a $4 million account. But that’s been put in doubt.
“I am trying to bury this part of my life,” al-Warraq wrote in an email to BuzzFeed News.
“The Hong Kong government is now very cautious, and they are retaining international experts,” said Cahyo Muzhar, an official in the Indonesian Ministry of Law and Human Rights who has been pursuing Rizvi’s and al-Warraq’s assets for years.
Legal side skirmishes continue, but Rizvi and al-Warraq have won the war. Rizvi is, for the most part, back to traveling and conducting business, Burn said. Rizvi himself did not respond to detailed questions sent to his email address, hand-delivered to a London home listed in his name, and provided to Burn and other intermediaries.
Al-Warraq has had a much tougher time than Rizvi, Burn said, even though, as “the junior guy,” he “didn’t take any of the commercial decisions.” In addition to the Interpol red notice, Burn said, Indonesia petitioned Saudi Arabia to extradite al-Warraq, then asked Saudi Arabia itself to try him. “Al-Warraq probably for the last four years has had to report to the police every week,” Burn said. But, he added, the ISDS finding was the key to persuading the Saudi court to finally drop the case.
“I am trying to bury this part of my life,” al-Warraq wrote in an email to BuzzFeed News, but “to this date I am banned and unable to travel from Saudi Arabia.” In reference to a detailed summary of the facts in this story, he said “so many points” are “not correct,” but he did not respond to follow-up questions asking for specifics. Calling himself “wrongly accused,” he said it was “a life mistake I got involved with bank century.”
As for Burn, “I take a great deal of pride in holding states like Indonesia to account for their lack of rule of law,” he said. “There is no meaningful evidence that Rizvi and al-Warraq were involved in any frauds, but, even if they were, the absolutely tainted nature of the process over a number of years means that nobody will ever know.”
But to Cahyo, who said that years of effort by his team haven’t led to the recovery of a single dollar of the bailout money, the ISDS gambit looks rather different.
“They are playing this game as if they are honest investors coming to Indonesia trying to do business,” he said. “That is not the case. This is really somebody robbing the people’s money.” ●
Sarah Esther Maslin in El Salvador and Maged Atef in Egypt contributed reporting to this story.
In a remote tropical forest in Indonesia’s Spice Islands, villagers planned their last stand.
A foreign gold-mining company was preparing to gouge out a massive pit from the mountain that had sustained these farmers and fishermen for generations. To protect their way of life, the villagers planned to hike to the summit and refuse to leave.
Newcrest Mining had won the right to explore this mineral-rich area during the 30-year rule of Suharto, Indonesia’s military dictator. But when mass protests swept Suharto from power, the new parliament outlawed the environmentally devastating open-pit mining method in certain areas like this one, where it could endanger the water supply.
Newcrest, however, was proceeding as if the new law didn’t apply — because, effectively, it didn’t. The Australian company had found a way to trap Indonesia in the deals of the deposed dictator and, in the process, reap huge profits.
The weapon that Newcrest and other powerful foreign mining companies wielded was a threat. A highly specialized legal threat: They warned they might haul Indonesia before a sort of private global super court. Though most people have never heard of it, this justice system has the power to make entire nations fork over hundreds of millions or even billions of dollars to companies that say their business was unfairly hampered.
Known as investor-state dispute settlement, or ISDS, this legal system is written into a vast network of treaties that set the rules for international trade and investment. It is as striking for its power as for its secrecy, with its proceedings — and in many cases its decisions — kept from public view. Of all the ways in which ISDS is used, the most deeply hidden are the threats, uttered in private meetings or ominous letters, that invoke those courts. The threats are so powerful they often eliminate the need to actually bring a lawsuit. Just the knowledge that it could happen is enough.
The threats are so powerful they often eliminate the need to actually bring a lawsuit. Just the knowledge that it could happen is enough.
An 18-month BuzzFeed News investigation into ISDS for the first time casts a bright light on the use of these threats. Based on reporting from Asia, Africa, Central America, and the US; interviews with more than 200 people; and inspection of tens of thousands of pages of documents, many of which have never before been made public, the series has already exposed how executives accused or convicted of crimes have turned to ISDS to help them get off the hook. Stories later this week will show how some financial firms have used ISDS to protect their most controversial and speculative practices and how the US, a major booster of the system, is surprisingly vulnerable to ISDS suits. Today’s story reveals how corporations have turned the threat of ISDS legal action into a fearsome weapon, one that all but forces some of the countries where these corporations operate to give in to their demands.
ISDS was originally devised as a forum in which to resolve conflicts between countries and the foreign companies that do business within their borders. But the system puts countries at a striking disadvantage.
Only companies can bring suit. A country can only defend itself; it cannot sue a company. Arbitrators who decide the cases are often drawn from the ranks of the same highly paid corporate lawyers who argue ISDS cases. These arbitrators have broad authority to interpret the rules however they want, without regard to precedent and with almost no public oversight. Their decisions carry extraordinary power. Often, countries are obligated to obey ISDS judgments as if they came from their own highest courts. And there is no meaningful appeal.
ISDS is so tilted and unpredictable, and the fines the arbitrators can impose are so catastrophically large, that bowing to a company’s demands, however extreme they may be, can look like the prudent choice. Especially for nations struggling to emerge from corrupt dictatorships or to lift their people from decades of poverty, the mere threat of an ISDS claim triggers alarm. A single decision by a panel of three unaccountable, private lawyers, meeting in a conference room on some other continent, could gut national budgets and shake economies to the core.
ISDS was once an obscure quirk of international law, but it has exploded in recent years, as elite law firms have devised new and creative ways to deploy it. They have used ISDS to punish nations for limiting profits during economic crises, reforming tax and environmental regulations, or prosecuting executives accused of crimes.
But those are cases that actually proceeded all the way to arbitration. Often, say lawyers who are involved in the system, the mere threat of an ISDS claim is enough to achieve the same results. It’s like flashing a gun at a tense negotiation — better not to use it, but the guys across the table know it’s there.
“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.”
The power of such threats is at the heart of political debates over ISDS. Academics and activists argue that, behind closed doors, businesses can brandish the threat of ISDS to halt or roll back legitimate public-interest laws. These threats, they argue, are a much greater danger than the sliver of cases that go to arbitration and make it into public view. Supporters of ISDS shoot back, where’s the proof?
It’s hard to come by. In fact, a recent study for the Dutch government called finding such proof “nearly impossible.” The lawyers involved almost always have pledged confidentiality to their clients, and the threatened governments — afraid of appearing weak or sparking a public backlash — are loath to admit they capitulated. In fact, many ISDS supporters flatly say it never happens.
“Some people say states are always getting screwed or their public policy initiatives are being frozen because they’re scared of investment arbitration,” said Jan Paulsson, a legend in ISDS circles who has worked as a lawyer or arbitrator in dozens of cases. “I’d like somebody to show that to me. I’d really like somebody to show me an example where that happened.”
In government and corporate offices in Jakarta and the tropical forests of the Spice Islands, BuzzFeed News found that not only can it happen, it did. With grave consequences. This is how.
For decades, Suharto and big mining companies had a good thing going. The general turned dictator didn’t worry much about the environment or indigenous people, and the mining industry’s spoils helped fill his regime’s coffers.
To keep it all running smoothly, his government had created a kind of one-stop shop to award lucrative contracts: favorable terms, few hassles. “If you have a problem,” such as uncooperative locals, recalled Ketut Wirabudi, who worked in the mining industry during that era, “you give a donation to the military, and they solve the problem.”
The companies “just did whatever they want,” said Rachmat Witoelar, a recent minister of environment.
So when the post-Suharto government enacted a forestry law that forbade open-pit mining in some areas, mining companies fought back, arguing that the law violated contracts they had signed under Suharto.
In a statement to BuzzFeed News, Newcrest at first said it “is not aware of any threats/ISDS action made in relation to the enforcement of the 1999 forestry law.” But Syahrir AB, who at the time was a Newcrest executive in Indonesia, was unequivocal: “My company, Newcrest,” made that threat, he said in an interview in Jakarta.
He himself had delivered the company’s “message to the government” during a meeting with mining ministry officials, he recalled. “If we cannot mine in this area,” he remembered telling them, “we will wash our hands [of] Indonesia and go to international arbitration.” The message was clear: Indonesia would be sued, perhaps for hundreds of millions of dollars.
Told what Syahrir said, a Newcrest spokesman wrote that the company “is not aware” Syahrir had made the threat, adding that “it is not something that we would condone.”
Interviews with current and former officials from multiple government ministries, four mining companies, and the industry’s lobbying association, as well as thousands of pages of documents reviewed by BuzzFeed News show that other foreign mining giants privately made similar threats, warning that they would sue Indonesia for billions of dollars in damages if the country tried to make them follow the new environmental law.
Their billion-dollar ultimatum was no idle threat. As the mining companies knew well, Indonesia was still reeling from another staggering judgment.
That case involved the Karaha Bodas Company, which had contracted with companies owned by Indonesia to build a geothermal power plant. The Asian currency crisis struck not long after the deal was signed, and the government put that and many other projects on hold.
But unlike most other affected companies, Karaha Bodas, primarily owned by two US energy firms, went to international arbitration. The tribunal awarded it $261 million, despite the fact that the company had not yet sunk even half that amount into the project. The bulk of the award was for the loss of future profits — potential future profits, which no one could prove would actually have accrued.
In other words, Indonesia owed a quarter-billion dollars to a private company for electricity it would never receive, from a power plant that hadn’t been built, all while it was battling a historic financial crisis. When the government resisted paying, Karaha Bodas filed to seize Indonesian assets around the world. The company did not respond to requests for comment.
The country stood to lose half its entire annual budget.
The mining companies brought up this painful episode in meetings, former government officials recalled. The government got the point. “Because of this bitter experience, we tend to find solutions,” said M.S. Kaban, who became minister of forestry in 2004.
And this time, the potential losses were much bigger — as much as $22.7 billion if some of the biggest mining companies sued, according to a government analysis obtained by BuzzFeed News. That was about half of the previous year’s budget for the entire government.
Stuart Gross, an American lawyer who advised local environmental groups, said he believed Indonesia could have beaten the mining companies in arbitration but still wasn’t sure what he would have done if he’d been in the president’s position.
“The liability that these mining companies were talking about was in the billions,” he said. “Indonesia just doesn’t have that kind of capital. It’s crippling. This threat had no legal merit, but because of the consequences and the way these cases are adjudicated — by a private panel without appeals — that threat is very effective.”
He added, “A country like Indonesia, unless it’s got a backbone of steel, when faced with one of these threats, is likely going to cave.”
Under cover of night, the villagers picked their way through the tropical forest in the Spice Islands, bound for the summit of the mountain Newcrest wanted to carve out.
The villagers had depended on that mountain, along with the forest and the waters surrounding it, for generations. It was where they cultivated coconut, cassava, jackfruit, and cocoa; hunted deer and wild pigs; drew water and harvested fish; and gathered the cloves and nutmeg that had first made this unforgiving territory a prize for colonial powers.
“Our elders told us to guard this location,” said Petrus Kakale, who had tended a plantation of clove trees on the mountain for 40 years.
But that night, in January 2004, someone else was guarding it: members of the Brimob, Indonesia’s infamous paramilitary police.
The villagers hoped to slip past the Brimob in the middle of the night by splitting into smaller groups that would converge on the summit. But, in the early morning hours, these plans dissolved, according to interviews with five people who participated in the demonstration and an investigation report, never before made public, by the Indonesian government’s independent human rights agency.
Dozens of villagers, led by a young farmer and protester named Fahri Yamin, had made it part of the way up the mountain when Brimob officers brandishing rifles told them to turn back. Fahri said he refused. “We only demand our rights,” he recalled telling the officers.
The Brimob ordered the villagers to the ground and beat them with heavy sticks and the butts of their rifles. The officers shoved Fahri, his hands bound and a few teeth knocked out, into the back of a vehicle and sped off toward Newcrest’s offices.
Another group of villagers, led by a farmer named Salmon Betek and village priest Pordenatus Sangadi, had made it farther up the mountain before encountering the Brimob. The officers herded the group to the summit — once a forest, now cleared in preparation for mining — and ordered them to lie on the ground. Here, too, the Brimob beat the villagers with heavy sticks and rifle butts, fracturing ribs and opening gashes on heads.
Salmon said he heard the bullet scream by, then the horrified cries of his neighbors. He turned his head, he recalled, and saw the man just behind him slumped on the ground, shot in the forehead.
Group leaders including Fahri and Pordenatus said the Brimob took them first to Newcrest offices nearby for interrogations, then flew them on a company helicopter to a nearby island where they were jailed without being told why.
In its statement, Newcrest said it “had no authority over” the Brimob’s actions but that it paid police expenses in accordance with “standard practice in Indonesia.” The company also said its helicopter was not used to transport community members.
Some were released after a few days, but Fahri said he was jailed for 44 days. His wife and 2-month-old son were allowed to see him once a week, traveling hours for their few minutes of allotted visitation.
It’s unclear what offenses, if any, the protesters were charged with. An official at the local court clerk’s office said she could find no record of any charges filed against the men.
But the detained men said that, based on their interrogations and other dealings with authorities, the message was clear: Stop protesting.
A Newcrest spokesman told reporters at the time that the company regretted that the shooting had occurred, but said, “It’s really in a sense nothing to do with Newcrest although it did happen on our site.”
And as for the villagers, Newcrest said a lot were not protesting — they were stealing. “Many of the protestors were people who were illegally mining,” Newcrest said in its statement to BuzzFeed News.
The Brimob commander got off with probation after two of his subordinates told a court that the shooting was an accident. But investigators for the government’s human rights agency found that authorities had illegally detained people, tortured them, and murdered one. The findings also raised broader concerns: that the government had violated the people’s economic, social, and cultural rights in allowing Newcrest to mine the sensitive forest area.
The agency wanted the government to re-evaluate the company’s permit.
But human rights agencies had only the power to recommend. Foreign businesses had the power to sue for billions.
Two months after violence broke the will of the villagers, the ISDS threats broke the will of the Indonesian government.
Soetisna Prawira, the mining ministry’s top lawyer at the time, said he helped draft the decree to avoid the potentially catastrophic costs of ISDS claims.
“This is the pressing emergency circumstance: the fact that companies will bring the case to international arbitration,” Soetisna said. “Arbitration is the only reason” that Indonesia issued the decree.
By late 2006, the gold was gone, and the mountaintop was a cavernous pit.
He added, “Under such circumstances, we had no choice.”
Parliament still had to sign off on the arrangement. Environmental groups, scientists, and academics urged legislators not to approve the decree, warning that open-pit mining in protected forests not only would destroy a precious resource but would also contaminate people’s water and expose them to landslides and floods. One politician implored his colleagues to stand firm, saying, “We do not need to be haunted by arbitration.”
But, in meetings and hearings, legislators fretted over the possibility that the nation would lose another financially devastating case.
During a hearing, the forestry minister called international arbitration a “real threat” that “compelled” Indonesia to grant the mining companies’ wishes. Then another minister invoked the Karaha Bodas debacle and said that if Indonesia did not satisfy their demands, the country would “face a similar situation.”
Newcrest’s Syahrir and officials from four other mining companies spoke at the hearings, and one warned lawmakers that if they didn’t sign off on the decree, they should “prepare for a depleted state budget.”
On July 15, 2004, parliament gave Newcrest and the other mining companies what they wanted, voting to approve the decree and allow the companies to carve up protected forests.
Today, 8 of the 12 companies given exemptions have mined in protected forest areas, according to the mining ministry. When they finish, they are supposed to restore the land.
Newcrest wasted little time getting started. Soon after the parliament voted, the company reported that it had dug out and sold more than $30 million worth of gold from the mountain and told investors this was a key reason for the year’s “much improved profit figure.” The following fiscal year, the mountain yielded upwards of $90 million worth of gold for Newcrest.
By late 2006, the gold was gone, and the mountaintop was a cavernous pit.
When some governments around the world have sought to unwind the destructive legacies of dictators or modernize their laws, they’ve arrived at a similar quandary to Indonesia’s: ISDS gives companies a powerful tool to preserve the advantages they won under the old regime.
In the wake of the Arab Spring, for example, Libya has faced claims over contracts from the time of Muammar al-Qaddafi. Egypt has been flooded with claims by companies that got special treatment from the Hosni Mubarak regime, some of which have used ISDS to help extract payouts and other concessions.
The dominant view in ISDS circles is that a deal’s a deal. Unless there’s solid proof that the deal was obtained illegally, it doesn’t matter how immoral, incompetent, or kleptocratic the leader who signed it might have been or how much the arrangement harms the average citizen. International law, they say, depends on that approach.
“The people already have suffered from having had the authoritarian regime,” said Paulsson, the ISDS lawyer and arbitrator. The effects of whatever contracts that regime handed out “will be one more thing that they suffer as a result of it. The people who were killed by that dictator remain dead. The poor deals that were made under his offices are there. They have created debts. So let’s not pretend that they’re not debts because, if we do, we do that at the cost of destroying commercial certainty.”
For years, some African nations have seen their mineral wealth flow abroad to private companies, even as some of these nations’ own citizens remained in abject poverty, thanks in large part to bad deals cut by leaders who either got outmaneuvered or were out to enrich themselves. Now international organizations including the United Nations are trying to help some of these countries get their fair share, largely by updating their tax codes and other laws.
But companies are using ISDS to undermine those reforms, suing even impoverished countries that try to raise tax revenue, according to sustainable development organizations and a recent report by the South Centre, a Geneva-based research group.
Indeed, some ISDS lawyers have alerted corporate clients that their services are “more important than ever,” as a leading London firm put it. In a 2014 presentation, the firm gave businesses a playbook for simultaneously minimizing taxes and ensuring they can sue if governments update their tax laws.
When Algeria passed a law taxing windfall profits, Maersk Oil claimed the tax amounted to a “breach of contract” and used ISDS to reach a settlement that the company said would provide it about $920 million in benefits. When Uganda tried to collect a tax bill of more than $400 million from Tullow Oil, the UK company claimed it was exempt and filed an ISDS claim. In a settlement, Uganda agreed to knock $150 million off that sum. In response to questions from BuzzFeed News, Tullow referred back to a statement it made at the time, describing the settlement as “good news for Tullow and Uganda.” Maersk also referred back to a previous press release, in which the company’s CEO called the settlement “a solid basis for moving ahead with our Algerian activities.”
And ISDS has put Romania in a no-win situation because it tried to follow European Union laws. During its struggling, newly post-communist days, the government had enacted a set of generous tax incentives. When it was trying to join the EU, it was instructed to end those incentives, which the European authorities regarded as “illegal state aid.” After the government did just that, the owners of a food manufacturing business — Romanian-born twin brothers who became Swedish citizens — filed an ISDS claim in 2005.
The European Commission told the tribunal that the tax incentives violated EU law. Unmoved by that fact, the tribunal awarded those brothers about $250 million. And when the European Commission ordered Romania not to pay, the brothers moved to seize Romania’s overseas assets. In a statement, the brothers’ company, European Food SA, said the tribunal’s award was justified because Romania owed the company damages for removing the incentives.
These and many other cases reflect a fundamental shift that has given heft to the mere threat of a claim. The system was set up to ensure that businesses don’t suffer outright property seizures or blatant discrimination, according to those who have studied its origins. But today the majority of ISDS cases are not about this type of egregious government behavior; they’re about government actions — many of them ordinary and similar to those taken by developed and democratic governments — that businesses contend are unfair. Some arbitrators now regard the system as protecting not just the rule of law but also business’ “legitimate expectations” and even a “reasonable rate of return on investment.”
“The ISDS regime reaches far beyond its original intention,” the UN’s trade and development body wrote in a recent report. The system today suffers from a “lack of coherence, consistency and predictability” that “raises systemic concerns,” the agency wrote in another report.
So it’s hardly a surprise that just the threat of an ISDS claim can rattle a government.
The executives terminated the interview. “You never met us,” one of them said.
“Some governments I’ve worked with have been very hesitant to push for changes that were very much needed because they were afraid of arbitration,” said Lou Wells, a longtime professor at Harvard Business School who has advised developing countries throughout the world.
In publications for current or potential clients, lawyers at major firms tout ISDS threats as effective. For example, a publication from Crowell & Moring noted, “Indeed, for every investor-State case that goes through to completion, there are several instances” in which companies used investment treaties “as leverage to negotiate with the host government and cause it to change its behavior more quickly and less expensively.”
Today in Indonesia, 18 years after Suharto resigned, the government is still trying to untangle itself from deals his regime struck decades ago, but it keeps encountering ISDS.
In 2009, parliament voted to implement a licensing process for mining companies that would bring Indonesia more in line with developed nations. As it took effect, one American company responded by filing an ISDS claim; another responded by raising that possibility.
Two top officials for the mining association — executive director Syahrir, the former Newcrest executive, and Martiono Hadianto, the association’s chairman at the time — insisted during a recent interview that the old system should remain in place, as it made mining companies and the government equal business partners.
But after speaking with BuzzFeed News for an hour, Syahrir and Martiono demanded to see this article before publication. BuzzFeed News refused, and the two men walked out of the interview, with Syahrir stating, “You never met us.” The mining association followed up with a letter saying it had “decided that the interviews was [sic] never happened.”
By 2012, the Indonesian government had seen enough. It launched a review of its treaties containing ISDS and began consulting experts around the world. It now has canceled more than 20 investment treaties in hopes of renegotiating them on more equitable terms, said Abdulkadir Jailani, an official from the Ministry of Foreign Affairs who is leading the review.
“I personally think that an investment protection regime is very necessary in international law,” Abdulkadir told BuzzFeed News. “The key is to strike a balance between protection and the right to regulate.”
Indonesia is part of a growing list of countries that are trying to renegotiate or nullify treaties containing ISDS. Some Latin American countries, particularly Ecuador, Venezuela, and Bolivia, have taken the hardest line, denouncing the entire system, terminating treaties, or withdrawing membership from the World Bank’s arbitration body.
Other nations have adopted a less drastic approach. After a controversial challenge to a post-apartheid law designed to remedy years of discrimination against black people in business, South Africa terminated its treaties and replaced them with a more limited domestic law protecting foreign businesses. India is seeking to renegotiate its treaties after being hit with controversial cases, some of them related to a notorious corruption scandal, others to the government’s attempts to crack down on tax avoidance.
Developed countries also have joined the backlash. Australia has refused to include ISDS in some of its recent treaties. The European Commission has proposed turning ISDS into an Investment Court System with a panel of potential arbitrators pre-selected by governments and a genuine appeals process. Canada recently agreed to this in a trade deal with the EU states.
The United Nations Conference on Trade and Development (UNCTAD) was once a big booster of ISDS, even hostingevents that amounted to international treaty speed-dating, at which diplomats would meet their counterparts from other countries, go through rounds of negotiations, and emerge from the gathering with multiple new treaties.
In recent years, however, it repeatedly has sounded the alarm. “The continuing trend of investors challenging generally applicable public policies, contradictory decisions issued by tribunals, an increasing number of dissenting opinions, concerns about arbitrators’ potential conflicts of interest all illustrate the problems inherent in the system,” a 2013 report said.
“The question is not about whether to reform,” UNCTAD said in a report this year, “but about the what, how and the extent of such reform.”
The most outspoken defenders of ISDS often are lawyers and arbitrators. “The system is not broken,” said Charles Brower, who long has been one of the most in-demand arbitrators and is almost always appointed to the panels by businesses. The system’s critics, he said, are primarily “NGOs and the populist politicians who don’t know what they’re talking about.”
Melaki Sekola hopped effortlessly from one rock to the next, crossing the river near his farm in the shadow of the mountain that his ancestors had named Toguraci — “place of gold” in the local language — long before Newcrest arrived.
For generations, the forest had supported his tribe, the Pagu, and his village of maybe 100 people. The small house he built — crooked wood bound together with cable and nails; mostly dirt floor; and a roof of dried leaves — is home to his wife, six children, and three grandchildren.
Dressed in black wading boots, ripped cargo shorts, and a mud-stained yellow shirt, Melaki bounded up a rocky path and paused.
A vast, charcoal-colored lake spread out before him. Much of it was caked over, a crack-filled coating baked by the equatorial sun. In the distance, a black pipe spewed dark liquid.
This is where Newcrest dumps its waste. When the company clawed out and ground up much of Toguraci, it separated out the gold using cyanide and discharged the leftovers here. And it has continued dumping waste here from newer, underground mines.
Melaki scampered down the embankment and arrived at a river. He pointed to a creek flowing into the river from the direction of Newcrest’s inky lake — one conduit for mine waste to enter the village’s water supply, he said.
“We used to have a lot of fish here,” he said. “Now the water will make our skin itch.”
These are common complaints among the people in this cluster of villages where blackouts are frequent, malaria is endemic, and the traffic on the few roads consists mostly of trucks bound for the mine and the jacked-up tactical vehicles of local authorities.
Something is wrong with the water, the people who live here say, and the problems started when mining began. Many won’t bathe in the rivers anymore; the water causes rashes. Most of the fish in the rivers and the nearby bay have died off, effectively killing the industry that had fueled the local economy. And they don’t dare drink from the rivers as they once did.
Six years ago, a researcher from a prominent Indonesian university came to this remote area and tested the fish that remained at deeper levels in the bay. The fish contained so much cyanide — a poisonous chemical that Newcrest uses in its mining processes — that they “could harm the health” of people who ate them, the scientist found.
Said Basalamah, the government official in charge of environmental monitoring for the province, said his office doesn’t have evidence of serious water pollution, but he acknowledged that the ministry’s “sampling is not yet representative if we want to get the real picture of environmental conditions around the mining area.” He said he was unaware that a published study had found serious cyanide contamination.
Newcrest said that its Indonesian subsidiary and the government have investigated local villagers’ claims of health and environmental problems but “found no evidence to support the allegations.” The company also said it complies with Indonesian environmental and water-quality regulations.
Near his farm, Melaki squatted among the stones beside the river. Soon, he said, it would be the rainy season — a months-long stretch of downpours that would send this river cascading over its banks and flood his farm with the water he otherwise assiduously avoids.
Asked where the river originated, he pointed, and his gaze traced its path. It wound deeper into the forest, reaching toward the summit — his tribe’s “place of gold,” now a gaping pit.
“Toguraci,” he said. ●
Rin Hindryati in Indonesia contributed to this story.
In 2006, near the height of Wall Street’s disastrous speculative frenzy, some of the world’s biggest banks smelled an opportunity.
They saw a way to turn the soaring price of oil into hefty profits. And it involved the tiny island nation of Sri Lanka.
The bankers presented officials who ran the state oil venture there with a way to hedge against further price hikes.
What the banks were selling were derivatives, an often complex and risky type of financial instrument that became associated with the financial crisis. They amounted to a bet on the price of oil, but it was a lopsided bet. The banks — including giants such as Citibank, Deutsche Bank, and Standard Chartered Bank — bore very little risk. The risk for Sri Lanka, if the price of oil fell, was potentially catastrophic.
One Standard Chartered executive found the terms to be so “one sided” that she actually refused to sign off on the transaction, protesting to her colleagues that it could cause “unbearable losses” for the already-struggling oil venture, according to a sworn statement she later gave. But one of her bosses, she said, ridiculed her in a meeting and told her not to stand in the way of several million dollars of profits.
The deal went through, and the other banks struck similar arrangements. Then, instead of rising, the price of oil crashed. The Sri Lankan state company found itself forced to pay the banks millions. Sri Lanka’s Supreme Court ordered a temporary freeze of payments while authorities scrutinized the deals.
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.
An 18-month BuzzFeed News investigation reveals how the financial industry is elbowing its way inside the doors of this global super court, transforming a system of justice into an engine of profit. Spanning three continents, more than 200 interviews, and thousands of pages of documents, the investigation has already shown how executives have used ISDS to help escape punishments for crimes they were convicted of committing, and how the system is so powerful and tilted that the mere threat of an ISDS suit can intimidate nations into rolling back their own laws. Now, it shows how the financial industry, once largely absent from the system, is increasingly pressing ISDS claims, often against nations that are poor or in the throes of economic crises.
Enshrined in thousands of trade and investment treaties such as the North American Free Trade Agreement, ISDS was designed as a careful bargain. Poorer nations needed foreign businesses to invest in projects that could spur economic development — bridges, pipelines, mines, factories — but foreign businesses needed a stable, independent legal system to protect them from rogue politicians and biased local courts.
The solution was ISDS, a form of binding arbitration that was granted exceptional power. Countries often must give its rulings the same deference as those from their own highest courts, and there is effectively no means of appeal. The system was meant to be available only to those companies that had invested the time and money to create something of broad economic value.
But over the past two decades, corporate attorneys have stretched the parameters of ISDS, allowing banks, hedge funds, and private equity firms to shatter the careful bargain that participating nations thought they had made. Indeed, financiers and ISDS lawyers have created a whole new business: prowling for ways to sue nations in ISDS and make their taxpayers fork over huge sums, sometimes in retribution for enforcing basic laws or regulations.
ISDS lets banks buy into local disputes that they have no connection to, then turn them into costly international showdowns.
In South Korea, for example, a US private equity firm and a Middle Eastern investment fund bought and then sold companies at a large profit. When the Korean government tried to tax these gains, both firms ran to ISDS arbitrators, alleging violations of international treaties. Both cases are ongoing. The US firm declined to comment, and the Middle Eastern fund did not respond to requests for comment.
The financial industry is pushing novel ISDS claims that countries never could have anticipated — claims that, in some instances, would be barred in US courts and those of other developed nations, or that strike at emergency decisions nations make to cope with crises. When Spain, in the throes of economic distress, announced it would reduce subsidies to the solar energy industry, more than 2o businesses — many of them investment funds associated with big banks or venture capital firms — brought ISDS claims alleging that the government had broken its promises and rendered their investments unprofitable.
To be sure, some cases involving financial firms are straightforward. Sometimes countries do mistreat the companies that operate within their borders, deliberately doing harm in order to favor domestic competitors, exact political revenge, or brazenly steal profits. Pointing to such cases, defenders of ISDS insist it is a crucial check on rogue acts by autocratic or corrupt regimes.
But critics say that ISDS is vulnerable to exploitation by elite corporate lawyers and their financial-industry clients. The three-person arbitration tribunals that decide the cases tend to be made up of corporate lawyers; they may argue for a company in one case and sit in judgment in another. And they are not bound by precedent; they have broad license to interpret the rules however they want. Most of the time, not even transparency serves as a check on their power, because hearings, evidence, and, in some cases, the judgments themselves remain secret. And the field is tilted in yet another way: Only companies can bring an ISDS suit. Countries cannot sue the companies that operate within their borders. They can only try to defend themselves, which typically costs millions of dollars.
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.”
“I see it as a new form of investing, which is, let’s make them poorer, and we’ll get rich.”
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.
The World Bank and the International Monetary Fund have a debt-forgiveness program for impoverished nations. When a country in crisis owes more than it can pay, international organizations often coordinate a negotiation in which all creditors share the pain.
ISDS, however, allows investors to pull an end run around these efforts and demand that their one debt get paid no matter what. They remove their claim from a public process — one that weighs the interests of the population that stands to suffer — and instead place it before a private tribunal designed only to protect the investor.
Michael Waibel, a lawyer specializing in international economics, warned in a 2006 legal journal article titled “Opening Pandora’s Box” that allowing creditors to use ISDS could “blow a hole” in the crucial negotiations that allow nations to emerge from crises.
Nonetheless, in 2011, a panel of arbitrators did just that. After Argentina plunged into economic free fall, the government negotiated a restructuring deal. But a group of investors rejected the deal and went to ISDS, arguing that Argentina was negotiating in bad faith.
The tribunal allowed the case to go forward, prompting Georges Abi-Saab, the arbitrator appointed by Argentina and a veteran international lawyer, to resign from the case. In a scathing dissent, he warned that allowing creditors to use ISDS in this way opened a “vast new field” of litigation in support of “all manners of financial transactions, including the most speculative varieties.” These deals, he said, were “light years away from the economic investment” that ISDS was designed to protect.
Within ISDS circles, some worried that case had handed a bazooka to so-called “vulture funds” — predatory investors who buy bad debt for pennies on the dollar and sue to collect the full amount.
Even some ISDS lawyers and arbitrators think that using the system for this purpose is going too far. “I see it as a new form of investing, which is, let’s make them poorer, and we’ll get rich,” said Mark Cymrot, an attorney at BakerHostetler. “I find that to be economically inefficient and geopolitically dangerous.”
Many ISDS lawyers defend the new types of claims they’re bringing for the financial industry. At issue, they say, is basic fairness: Countries should keep their promises and pay their debts.
“It’s rather an old-fashioned view to say that an investment has to have only a physical, bricks-and-mortar characteristic,” said Matthew Gearing, the global co-head of international arbitration at the firm Allen & Overy and one of the lawyers who represented Deutsche Bank against Sri Lanka.
But Abi-Saab said these cases go far beyond the natural evolution any legal system undergoes. “It has reached the point that the system has lost its legitimacy,” he told BuzzFeed News. This new species of case, he said, is “a kind of speculation in order to suck the last cent or the last drop of blood of poor countries.”
The man tasked with shielding Sri Lanka from high oil prices was already famous — as a star in the nation’s favorite sport, cricket. Ashantha de Mel went on to a career as a manager for clothing manufacturers before he took on a new role: leading the state-owned oil venture. He had been on the job only a few months when he found himself sitting across the table from some of the world’s leading banks, negotiating complex financial deals.
His experience in high finance? Pretty much just playing the stock market, he told BuzzFeed News. He didn’t even have consultants to help him, noted one Standard Chartered executive in an internal email. In fact, the bank executive warned that “they really need expert and disinterested advice on this subject.”
The banks were happy to oblige. They whisked him on tripsaround the world — Deutsche flew him to Singapore, others to trading floors in New York and London, and an oil refinery in Houston. Standard Chartered hosted de Mel and his family at a conference in a beach-resort city in India, and the bank later gave his daughter an internship — unpaid and only for a month, de Mel told BuzzFeed News, dismissing any notion of undue influence as “just bogus.”
The jaunts were intended to educate de Mel on how derivatives work, the banks said. “We learned quite a lot” from the trips, de Mel said. “We were relying on the banks.”
De Mel generally didn’t read the whole contract before signing, he later admitted. But he told BuzzFeed News that he understood most everything about the deals, except for one detail: Sri Lanka couldn’t get out if they went south. “They didn’t explain that,” he said.
When the price of oil cratered and the deals blew up in his face, de Mel resigned but denied any wrongdoing.
Sri Lanka’s Central Bank investigated the deals. It ended up faulting the state oil venture for skirting normal government procedures and entering the deals without the authority to do so. But it also faulted the banks, accusing them of failing to tell the company just how risky the deals were. Moreover, it said, the banks failed to perform due diligence on whether the Sri Lankan venture had the authority to make the deals or the ability to cover potential losses. The Central Bank concluded that the deals were “substantially tainted” and ordered an end to all payments.
Deutsche Bank wanted the $60 million it said it was owed, and ISDS offered by far the best way to help it collect. Thanks to the international treaties that established the system, failure to heed ISDS rulings can carry such severe penalties that even combative countries usually comply. Nations that try to ignore ISDS decisions risk not only having their assets seized but also losing out on much-needed loans and access to global markets.
“It could have a major impact on the macroeconomics and the finance of that country,” said Kenneth Reisenfeld, an international lawyer based in Washington, DC.
The main obstacle for Deutsche Bank, however, was getting access to ISDS.
The treaties and conventions that created the system generally contain lofty language about promoting economic development. The original purpose was to protect businesses that had built something of enduring value — protection that apparently had never been granted to a derivative.
What’s more, by the time the bank filed its claim in 2009, the very thing it stood accused of doing — hawking complex derivatives to people who couldn’t afford the downside and who hadn’t been given fair warning of the risks — had become synonymous with the global financial crisis and the enormous bailout it occasioned. Deutsche Bank itself, through the bailout of AIG, would receive more than $11 billion from US taxpayers.
Two of the three ISDS arbitrators, however, found that the derivative the bank had sold Sri Lanka was not risky speculation but a “substantial contribution” that had “substantial economic value to Sri Lanka” — meaning it qualified for protection under ISDS.
They also blasted Sri Lanka’s Supreme Court and Central Bank: The government’s actions were bad-faith attempts to get out of paying a debt. But the third arbitrator, the one appointed to the panel by Sri Lanka, sharply disagreed. In his biting dissent, Makhdoom Ali Khan, a veteran international lawyer and former attorney general of Pakistan, wrote, “This is an extra-ordinary finding without any credible evidence to support it.”
“The rational[e] underpinning the entire system of investment treaty arbitration is a quid pro quo between private foreign investors and host countries,” he added. “The former seek profitable avenues for investing their resources and the latter seek investment for their economic development.” The majority’s decision, he wrote, threw that bargain out the window.
Regardless, Sri Lanka was ordered to pay Deutsche Bank not only the $60 million plus interest it had demanded but also the roughly $8 million in legal fees the bank’s London-based lawyers had racked up. Sri Lanka applied to have the award annulled. But this type of review is extremely limited — it’s not an appeal — and very rarely successful.
Weeks after BuzzFeed News first approached Deutsche Bank for comment, a spokesperson sent an email saying that the bank had settled with the Sri Lankan state oil venture. In response to a detailed summary of the story, a bank spokesperson said only that “Deutsche Bank disagrees with several of the inferences, conclusions and statements.” The spokesperson declined to provide any specifics.
Standard Chartered noted that it took its dispute with Sri Lanka to a British court, where it won. Citi, which declined to comment, went to yet a third forum, a type of arbitration for disputes between companies. It lost. The Sri Lankan state oil company did not respond to repeated requests for comment.
At the time the ISDS tribunal issued its decision, in 2012, the settlement with Deutsche Bank was nowhere on the horizon. By a majority vote, the tribunal had extended ISDS’s extraordinary protection to include a paper transaction that had been in effect for just 125 days — during which Deutsche Bank paid the Sri Lankan oil venture about $35,000 and the Sri Lankans paid the bank about $6.2 million.
While that landmark decision helped open ISDS to new kinds of financial claims, entrepreneurial lawyers and financiers are now devising even more ways to profit from the system.
The oil-industry lawyers gathered at a Houston law office to hear a trio of financiers deliver a presentation titled “Do You Want Someone Else to Pay Your Legal Fees? It’s Possible.”
No longer did a company’s legal department have to be a budget drain; it could become a moneymaker, said the financiers, beaming in by videoconference from New York and Chicago. International arbitration — for ordinary claims against other companies as well as ISDS claims against governments — had exploded in popularity in recent years, but some opportunities seemed too expensive to pursue.
The financiers had a solution: “third-party funding,” a fast-growing, secretive, and controversial field of investing in lawsuits, footing the legal bills in exchange for a cut of the eventual award. Attracted to ISDS by the staggering sums in play, financiers have created an increasingly sophisticated marketplace around the claim itself.
“We try to look at all of the different ways you can make money out of this,” said Peter Griffin, a London-based lawyer and consultant who works with companies and funders.
The New York hedge fund Tenor Capital Management just scored big by injecting $36 million into a small Canadian mining company in exchange for, among other things, 35% of whatever arbitrators awarded in the company’s ISDS claim against Venezuela. This year, a tribunal ordered that country to pay a whopping $1.4 billion. Tenor did not respond to repeated requests for comment.
Sometimes, a funder will wait until an ISDS panel has actually issued its ruling, then buy the award outright. According to brokers and lawyers who said they’ve been involved in such deals but were not authorized to provide details, an investor — often a savvy hedge fund — buys the award before the government has paid it. The investor might pay $20 million for a $100 million award, then hound the government to collect the full payout.
“One of the attractions for some of these folks,” Griffin said, is anonymity: “They kind of hide behind the entity that’s suing.”
Indeed, one such deal came to light only when WikiLeaks released tens of thousands of US diplomatic cables. One of those cables described how Blue Ridge Investments LLC, a Bank of America subsidiary, bought an almost $180 million ISDS award that an American gas company originally had won against Argentina. Blue Ridge, the cable said, was rumored to have paid roughly 30% of the award’s value.
Griffin said he expects large trading houses will soon emerge to trade ISDS and other legal cases “on an industrial scale.”
“‘Vulture fund’ Blue Ridge belongs to a new class of financial market players” that views ISDS “claims against Argentina as just another attractive class of assets to be appropriately discounted and traded,” a diplomatic officer in Buenos Aires wrote. Blue Ridge’s parent company, Bank of America, declined to comment.
Griffin said he expects large trading houses will soon emerge to trade ISDS and other legal cases “on an industrial scale.” Indeed, the industry seems to be moving in this direction already with firms such as ClaimTrading, which promises “secure immediate access” to “several billions of USD” to underwrite lawsuits. A managing director at the firm, John Mooren, said it connects clients looking to sue with the best-matched funder from a list of more than 30 financial institutions with which the firm often does business.
The rise of this new industry means that nations can suddenly find themselves pursued by debt collectors with vast legal resources. Large financial companies aren’t likely to go away, no matter how long it takes. Indeed, Griffin said his firm helps investors put together “a playbook” with “a plan of escalation” that often includes suing to seize assets around the world, intervening in other deals the country wants to get done, and launching a PR campaign.
Another option for companies that want to make sure they get paid: Buy an insurance policy that kicks in if a government resists forking over the amount ordered by the tribunal. The insurance company will take it from there, thanks to a policy arranged by leading brokerage Arthur J. Gallagher & Co. The insurer pays the company — either the full amount of the award or just part of it, depending on the terms of the policy — then pressures the country to pay. Steve Jones, an executive with Gallagher, declined to provide specifics but said it had arranged policies for cases against impoverished countries “with some of the lowest GDPs in the world.”
When third parties invest in ISDS suits, critics say, new and difficult-to-unearth conflicts of interest can arise. Financiers that fund ISDS claims have enticed some arbitrators and attorneys to consult for them or even to join their staffs. Because funding arrangements generally haven’t been disclosed, critics worry that arbitrators might have a vested interest in a claim they are tasked with deciding, or that an outside funder may have bankrolled a separate claim in which the arbitrator acted as counsel.
The biggest concern, though, is that access to all of this “litigation capital” could encourage more and more ISDS claims that have little merit or that are downright abusive. Some funders attend conferences and socialize with attorneys in the hopes of getting a call when a potential client needs money to sue.
“It’s like ambulance-chasing,” said Muthucumaraswamy Sornarajah, an international lawyer and arbitrator who has been involved in the system since its early days.
Getting outside parties to fund ISDS lawsuits “can be a vicious weapon.”
Third-party funding does not in and of itself make an ISDS claim dubious. In some cases, it may make it possible for a company, especially a smaller company with limited resources, to fight for rights that a host country has trampled.
“Does the funding give access to justice, or does it give access to injustice?” said Selvyn Seidel, founder of Fulbrook Capital Management and a lawyer himself. “Despite the dangers and despite some of the injustices, this is an industry which adds to justice. It’s another form of trying to help the inequality that everybody is complaining about today.”
As for the possibility that third-party funding encourages nuisance lawsuits, he called it a “valid concern.” Outside funding, he said, “can be a vicious weapon for a plaintiff that is unscrupulous and also a funder who’s unscrupulous.” His proposed solution is to enable arbitrators to impose stiff penalties against those who fund frivolous claims and to allow the market to weed out bad actors.
Even if third-party funding does provide access to justice, this access is available almost exclusively to businesses, not governments. Examples of funding arrangements for countries that have been sued are rare, funders and lawyers said. That’s a product of ISDS’s design: Only businesses can hit pay dirt and pass along a chunk to a funder. Governments can’t win; they can only try to contain the damage.
On the 17th floor of a glimmering office tower on Manhattan’s Madison Avenue, men in dark suits picked over a catered spread, munching on shrimp cocktail and sharing war stories.
They were gathered for an event at the headquarters of the Emerging Markets Traders Association, the trade organization for investment firms that buy the higher-risk, higher-reward debt of countries such as Greece, Argentina, and Russia.
Billed as a panel discussion, the gathering quickly became an attack on the government of Peru. Gramercy Funds Management, a hedge fund, was turning up the heat in its battle to collect a debt from the South American nation. The fund already had tried public pressure. Now it was announcing a dramatic escalation: That very day, Gramercy had filed an ISDS claim against Peru, the fund’s lawyer told those in attendance.
“Why should three foreign arbitrators who have no view on the local, internal political give-and-take of a democracy make this decision?”
This was the moment some lawyers and economists had feared: What some people call a vulture fund (Gramercy rejects the label) had deployed ISDS in a public assault on a developing nation’s government.
In this instance, Gramercy bought into a 45-year-old domestic dispute and turned it into an international controversy.
Back in the late 1960s, Peru’s leftist dictator seized some wealthy farmers’ land and redistributed it to the poor. To compensate the original owners, the government issued bonds, to be paid out over the coming decades. But by the 1980s, following a series of economic crises, supersized inflation, and changes in currency, the bonds were basically worthless. Since at least 1992, the government hasn’t been paying the bondholders anything at all.
In 2001, however, a Peruvian court ruled that the government ought to pay some approximation of fair value. It didn’t specify what that would be.
Meanwhile, Gramercy, which is headquartered in Greenwich, Connecticut, and manages $6 billion in assets, saw an opportunity. Starting in 2006, company officials traveled to Peru, finding individual bondholders and paying them far less than what Gramercy now claims the bonds are worth. The fund has said it bought almost 10,000 bonds, or somewhere between 15% and 20% of the total thought to exist.
In 2013, a Peruvian court issued a decision on how the government should value the bonds, and the government later decreed how much bondholders would actually get paid.
From the conference room in Manhattan, Gramercy’s ISDS lawyer, Mark Friedman, derided the court decision as a “scandal,” alleging that it had been doctored using Wite-Out and a typewriter so that the government wouldn’t have to pay bondholders a fair value. By Gramercy’s calculations, Peru had wiped out 99% of the bonds’ value.
“Fortunately, we have this investment treaty,” he said, referring to the US–Peru Trade Promotion Agreement that took effect in 2009. “They’re now going to finally, at last, have to answer in an international forum under international law.”
Mark Cymrot, a lawyer who also was on that panel at the Emerging Markets Traders Association, told BuzzFeed News that Gramercy was misusing ISDS by injecting itself in a longstanding domestic dispute. “Why should three foreign arbitrators who have no view on the local, internal political give-and-take of a democracy make this decision?” he said.
In a public statement, Peru accused Gramercy of waging a “smear campaign” in an attempt to collect an undeserved windfall at the expense of Peruvian bondholders.
Gramercy has argued that it is trying to remedy a “longstanding injustice” and help all bondholders. But if Gramercy prevails in the ISDS case, the Peruvians who still own bonds — the people whose land actually was taken by the government — won’t get a cent of those spoils. They’re not part of the case, and they can’t be. ISDS is available not to them, but only to foreign investors — in this case, the Americans who bought the bonds decades after the fact.
Friedman, Gramercy’s ISDS lawyer, nevertheless argued that a victory could help other bondholders by pushing the government toward some sort of settlement. If that were to happen, then Cymrot’s family could benefit. In a strange happenstance, he said, his wife’s grandfather and uncle were among the original group of people who were given bonds after the government seized their land decades ago. Yet that hasn’t changed Cymrot’s view on the hedge fund’s tactics.
“They’re weeping crocodile tears over what happened to the local people,” he said, while Gramercy is “probably going to reap a huge profit.” ●
The crisis was setting off alarms at the highest levels of Bill Clinton’s White House. If the administration got this wrong, it could lose hundreds of millions of taxpayer dollars and spark a backlash against one of the president’s hard-won achievements, the North American Free Trade Agreement.
The Justice Department even warned that failure “could severely undermine our system of justice.”
All of this over a small-time spat in Mississippi between funeral home companies.
It was not the sort of thing that ordinarily catches the attention of top officials in the federal government, let alone causes them to panic. But one of the companies was based in Canada, and it had taken a groundbreaking step: It had filed the very first case against the US under a little-known provision of NAFTA that empowers foreign businesses to sue entire nations before a panel of private arbitrators, usually elite corporate attorneys. Designed to protect international companies when rogue governments seized their assets or flagrantly discriminated against them, this worldwide private justice system has morphed into a tool companies can use to force nations to fork over hundreds of millions or even billions of dollars for enforcing ordinary laws or regulations.
Since NAFTA took effect in 1994, that obscure legal channel, known as investor-state dispute settlement, or ISDS, has widened into a torrent of legal claims, many of them against countries that are poor or facing economic crises. The judgments of this global super court carry enormous power — in the US, they often carry the same authority as Supreme Court rulings — and there is no serious right to appeal.
ISDS has a towering champion, a backer with immense economic and diplomatic muscle: the United States of America.
This week, an 18-month BuzzFeed News investigation has for the first time revealed the system’s true reach and the dangers it poses: how businesses have used ISDS to intimidate nations into gutting their own laws and to get executives off the hook for crimes they’ve been convicted of committing, while some financial firms have found ways to transform this global legal system into a cash cow. Meanwhile, a backlash has turned political figures on the right and left against ISDS, and some countries are rejecting the trade and investment treaties that give ISDS its authority.
But ISDS has a towering champion, a backer with immense economic and diplomatic muscle: the United States of America. Indeed, President Barack Obama is asking Congress to usher in an enormous expansion of ISDS by ratifying a sprawling new trade deal, the Trans-Pacific Partnership, or TPP.
While trumpeting the virtues of ISDS to other countries, the US has only rarely bound itself to treaties with rich countries, the kind that have large corporations likely to launch major ISDS suits. The Trans-Pacific Partnership would radically change that, leaving the US vulnerable to claims from major companies of developed nations such as Japan and Australia.
Responding to fears that signing new trade deals would expose the United States to a deluge of costly ISDS claims, the agency leading the negotiations, the Office of the US Trade Representative, points out that the country has never lost a case. “We have a 100% success rate defending cases against the United States,” the trade representative said in a statement to BuzzFeed News.
That is true. But the untold story of the US government’s frenetic response to the Mississippi dispute belies this public bravado and shows that this unblemished record is largely a function of luck.
The facts of the Mississippi case read like a farce — complete with a bombastic plaintiff’s attorney who called himself the “Giant Killer” and traveled in a private jet he named Wings of Justice.
The facts of the Mississippi case read like a farce — complete with a bombastic plaintiff’s attorney who called himself the “Giant Killer” and traveled in a private jet he named Wings of Justice.
But there was nothing remotely humorous about the demand for $725 million that the US suddenly faced.
As government lawyers traded anxious memos, groping for some way to make the case go away, the Justice Department offered a blunt assessment of ISDS — one that flatly contradicts what the trade representative has told the American public.
“NAFTA does not simply protect foreign investors from discrimination,” the department concluded. “It provides foreign investors and foreign companies with more rights than Americans have and arguably gives foreign companies an advantage over domestic companies.”
Since the Mississippi funeral home case ended in 2004, the stakes have only grown. The US is staring at a new ISDS suit demanding more than $15 billion. If the US loses major cases — which ISDS lawyers told BuzzFeed News is only a matter of time — then it could find itself grappling with the same grim choice other nations hit with massive ISDS judgments have faced: pay out tens of billions of dollars to private companies or roll back democratically enacted laws.
“I think the US fooled itself into thinking that it wouldn’t be sued because its laws were so investor-friendly,” said José Alvarez, a former State Department lawyer. “The US didn’t anticipate just how creative investment lawyers can be.”
The lawyer Willie Gary had flair — even his enemies would give him that that. He loved to tout his rise from a childhood in poor, Southern farm communities to Ebony magazine’s list of “100 Most Influential Black Americans.” He represented the underdogs, taking down corporate titans with the rhetorical flourishes of a revivalist preacher and winning eye-popping financial judgments. A philanthropist and motivational speaker, he flaunted his Florida mansion, collection of luxury cars, and custom-designed Boeing 737.
He brought that showmanship to bear in the case of O’Keefe v. Loewen, which he turned into a grand battle over race, income inequality, and American values. The actual substance of the case, however, was rather mundane.
The Loewen Group, a funeral home and cemetery company led by the British Columbia mogul Raymond Loewen, was expanding rapidly into the US. Loewen and a Mississippi businessman named Jerry O’Keefe got in a dustup, largely over the right to sell insurance through a local funeral home. O’Keefe sued Loewen, alleging breach of contract and accusing the Canadian company of trying to mount an illegal takeover of the market. He initially demanded $5 million.
But Gary said he saw more than a simple fight over a contract, something far more sinister: a predatory business model that had to be stopped. “Legally, I tried to crush” Loewen, Gary told BuzzFeed News.
In the Mississippi courtroom, Gary framed the fight in Manichaean terms: Loewen was a rich, white Canadian who came to the state to prey on a local American businessman — O’Keefe — who served black Americans at their moment of deepest grief. O’Keefe was white, but in front of the jury — 8 of whose 12 members were black — Gary painted him as a steadfast friend of the black community, bringing in local black politicians to proclaim that he didn’t have a racist bone in his body.
The invocations of race and class were so frequent that the judge, who was also black, said he’d heard enough about Loewen’s yacht and noted that “the race card has been played.”
So had the nationality card. O’Keefe, Gary intoned, was an “American hero” standing up for his community against a foreign interloper. Gary’s references to Loewen’s foreign citizenship were unending.
Gary even invoked Pearl Harbor. On the day that will live in infamy, “a little voice” had told O’Keefe to fight, Gary told jurors, and he’d volunteered to serve his country the next day. Likewise, when Loewen had “lied to him,” “cheated him,” and “jacked him around,” Gary said, that same “little voice said fight on.”
“You see, that little voice, members of the jury, has a name, and it’s called faith, faith in God,” Gary proclaimed. “It’s called pride, pride in America.”
The jury came back with an award for $260 million.
“I think it was a fair trial,” Gary told BuzzFeed News. He denied stoking anti-foreigner bias and said race became an issue during the trial only after Loewen’s lawyers brought it up. The jurors, he added, “knew that the Loewen Group were bad people. They really were.”
Attempts to reach Loewen through various intermediaries were not successful. As for O’Keefe, he was hospitalized so could not comment. His son, Jeffrey O’Keefe, said his father had won the case fair and square.
But there were clear problems with how the jury had awarded such outsize damages. In their haste to penalize Loewen, the jurors had gone rogue — and while the judge reined them in a bit, they weren’t finished. After they piled on punitive damages, the total award was half a billion dollars. It was the largest in Mississippi history, and it made national news.
After the trial, the jury foreman said Loewen “was a rich, dumb Canadian politician who thought he could come down and pull the wool over the eyes of a good ole Mississippi boy. It didn’t work.”
That’s pretty much a textbook example of the kind of anti-foreign bias ISDS is supposed to rectify. While the American judicial system may not be entirely immune to such bias, the trade representative has insisted that the US offers a whole battery of safeguards that would kick in long before a company would reach for its last resort: ISDS.
One of the critical safeguards is the right to appeal to a higher court within the United States — and that’s what Loewen tried to do. But under Mississippi law, to appeal he first would have to post a bond for 125% of the award. Loewen didn’t have $625 million sitting around. And though the courts have the option to reduce a bond that “would effectively bankrupt” the company, in this case the state’s supreme court refused.
With the verdict set to take effect in just a few days, and with no good options to pursue, the company’s executives swallowed hard and chose to settle with O’Keefe. Loewen agreed to pay a staggering $175 million.
ISDS traces its roots to the 1950s when Western nations worried that their newly independent colonies would start seizing factories, mines, and oil fields. Some Western leaders also wanted to help these and other economically struggling countries attract major investment. The solution: a neutral, fair system of binding arbitration to settle disputes between countries and the companies doing business within their borders.
But despite proselytizing by the World Bank and some Western European governments, many nations resisted signing up. In the 1980s, as US businesses began to pour more money into projects abroad, many demanded greater protection, and they found a receptive audience in the administration of Ronald Reagan. The US began developing model treaties and convincing a few countries — mostly poorer nations in Africa and Latin America — to sign on.
Then the 1990s arrived. The Soviet Union collapsed, and the economic policies of the US — including ISDS — swept much of the world. Under initiatives backed by the World Bank and the American Bar Association, lawyers fanned out around the world and advised developing countries to sign treaties so they could attract foreign investment. The United Nations’ trade and development body sponsored events where officials from a host of countries went through a round-robin of negotiations and returned home with newly minted treaties.
The number of treaties exploded, swelling in the 1990s alone from fewer than 400 to more than 1,800, laying the foundation for the current boom in ISDS cases.
When the cases started to land, the system took on a distinctly American flair. The 1994 implementation of NAFTA was a watershed. Though the treaty continues to anger those who believe it gutted American manufacturing, NAFTA’s role in the growth of ISDS is a less known but immensely consequential legacy. After the treaty took effect, lawyers began devising ever more creative ISDS claims. Major US law firms saw a lucrative new market for their services. Corporate litigators who had cut their teeth in high-stakes court battles over energy and infrastructure projects flocked to a field where the stakes often were even higher, bringing their bare-knuckle tactics with them.
The people who negotiated the early treaties in the 1980s, wrote Alvarez, the former State Department lawyer, “would never have predicted that the United States would find itself” sued and on “the receiving end of our insistence that the world adhere to our ‘civilized’ standards of treatment.”
But just this year, TransCanada filed a $15 billion ISDS claim against the US, arguing that the Obama administration’s rejection of the company’s controversial Keystone XL pipeline was unfair and discriminatory. The massive project would have a “minimal environmental impact,” a company spokesperson said, and the denial actually was motivated by politics.
In January, another Canadian company accused the United States of violating NAFTA and threatened to hit the US with a separate ISDS suit. Northern Dynasty Minerals had proposed digging out gold and copper from the Pebble Mine, which sparked fierce opposition because it’s located in one of Alaska’s biggest salmon-spawning grounds. After the Environmental Protection Agency said it planned to veto the project, the company’s DC-based lawyer dispatched a letter to the State Department warning, “Since the NAFTA’s entry into force over 21 years ago, the United States — in contrast to its Mexican and Canadian partners — has never lost” an ISDS claim. “I am writing with regard to a case that we believe would change that result, should it go to arbitration.”
In a statement to BuzzFeed News, a Northern Dynasty spokesperson said the EPA’s attempt to block the mine before the company even got to apply for permits was “premature” and “unprecedented.”
These companies don’t allege that they built a pipeline or excavated a mine, only to see it stolen by the US government — the kind of outright expropriation that ISDS was originally set up to check. Instead, these suits strike at US environmental policies, which these companies say have been applied in ways that unfairly harm their businesses.
Around the world, countries facing huge ISDS judgments — topping $1 billion in the biggest cases — have gutted their own laws rather than pay the massive sums and risk still more costly judgments from more companies affected by the laws. In the US, a coalition of activist groups and unions have warned that companies could use ISDS to eviscerate not only environmental regulations but also labor laws. Politicians such as Elizabeth Warren have said the system could endanger financial regulations enacted after the 2008 crisis. And New York Attorney General Eric Schneiderman cautioned that ISDS could curtail his office’s efforts to combat predatory lending and consumer fraud.
The Nobel laureate economist Joseph Stiglitz, Harvard Law School’s Laurence Tribe, and other leading scholars last year urged members of Congress to keep ISDS out of the Trans-Pacific Partnership. Their stark warning: ISDS “risks undermining democratic norms because laws and regulations enacted by democratically-elected officials are put at risk.”
Abner Mikva was a big supporter of NAFTA, including when he served as White House counsel to Bill Clinton shortly after the trade deal took effect.
Nonetheless, he said in an interview before he died this summer, he was surprised when Justice Department officials approached him with a request. A Canadian company had invoked an obscure chapter of that treaty to file an ISDS claim against the US. The way it worked, the company picked one arbitrator, the US another, and both sides would agree on the third. The US government wanted to know: Would Mikva be their guy?
His first reaction, he told BuzzFeed News: “I did not know that there was an arbitration clause” in the treaty. Still, he accepted.
When Loewen and his funeral home company filed their ISDS claim in 1998, it marked the first time the US had been sued under the system it had so avidly promoted. The court proceedings in Mississippi, Loewen alleged, were blatant violations of NAFTA’s guarantees against anti-foreign discrimination and grossly unfair treatment. The sham trial, excessive damages, and requirement that he pay the staggering sum of $625 million merely for the right to appeal had, he argued, coerced him into paying the $175 million settlement and severely damaged his business and his reputation. For compensation, he demanded $725 million.
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.”
As the February 2000 deadline loomed for the US to file a response to Loewen’s complaint, a memo marked “urgent” landed on the desk of Clinton’s chief of staff, John Podesta, who now runs Hillary Clinton’s presidential campaign. (The campaign declined to make him available for an interview.) Written by some of the president’s top advisers, the memo outlined a crucial strategic decision that the White House needed to make, one that could “affect the long-term viability of the NAFTA itself.”
The different federal agencies all agreed that the US had its back to the wall. The Mississippi court proceedings were widely viewed “as a miscarriage of justice,” the urgent memo said, so, if the ISDS arbitrators got to weigh the actual merits of the case, the US was very likely to lose. The government had to figure out a way to get the case tossed.
But the agencies couldn’t agree on how to do that.
The Justice Department wanted to make the strongest possible argument: that ISDS arbitrators had no authority to sit in judgment of US court decisions.
“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.”
But the trade representative and the State Department weren’t on board. They feared that argument would leave American businesses operating in Mexico or Canada exposed, unable to seek protection if they got railroaded in those nations’ courts.
The memo recommended a compromise, which the government ultimately adopted and presented to the tribunal. ISDS arbitrators could review certain US court decisions, the government argued, but not ones that were strictly between two private companies, such as Loewen’s Mississippi case.
It didn’t work. The arbitrators rejected the argument and let the case continue. A hearing took place in October 2001, and then the tribunal needed to make its decision.
Mikva, the US-appointed arbitrator, recalled that he agonized over his vote. It was impossible, he said, not to think about the political fallout that could follow if he sided with Loewen. He worried that if the US were held “liable for this huge amount of money under a very minor dispute, that the opposition to NAFTA — which was already there — would just have another big talking point for getting rid of it.”
But, he said, “my home-court prejudice was being very, very sorely tested.” He and the other two arbitrators “were just aghast at what had gone on in that Mississippi court,” he said. “The facts were so egregious, so outrageous.”
Then the US got lucky: The Loewen Group filed for bankruptcy and emerged in a new form — as an American company.
The US immediately asked arbitrators to throw out the case, arguing that NAFTA no longer applied, because American companies can’t pursue ISDS claims against the US. Only foreign companies can.
Loewen countered that it needed to be Canadian only when it filed the claim, not all the way through the years-long proceedings. What’s more, the company argued, it was the financial damage from the Mississippi court case that had helped drive it into bankruptcy. It would be perverse, the company argued, to allow the US to take “advantage of its own wrong.”
“By any standard of measurement, the trial involving O’Keefe and Loewen was a disgrace.”
Unmoved, the arbitrators dismissed the company’s claim, accepting the new US argument. They also offered another reason they could have thrown out the case: Loewen couldn’t file an ISDS claim because the company hadn’t first exhausted every option available in US courts. It had decided to settle even though it still could have filed an emergency petition with the US Supreme Court, the panel wrote.
The arbitrators acknowledged that, given the circumstances at the time, the decision to settle might have been “inevitable.” After all, Willie Gary was just a few days from being allowed to seize the company’s assets, and petitioning the Supreme Court would almost certainly have failed and wasted precious time. Nonetheless, the panel wrote, the company should have explained to the ISDS tribunal why it didn’t go this route. (In fact, a company director and a lawyer had testified on exactly that point.)
But then the arbitrators did something extraordinary. They offered a sort of postscript seeking to justify their decision to punt the case.
“By any standard of measurement, the trial involving O’Keefe and Loewen was a disgrace,” they wrote. Yet there were larger considerations — considerations that had little to do with the case at hand and everything to do with the politics of intervening in a US court case. The arbitrators had to think about “both the integrity of the domestic judicial system and the viability of NAFTA itself,” they wrote. “The natural instinct, when someone observes a miscarriage of justice, is to step in and try to put it right.” In this instance, however, “the interests of the international investing community” required the arbitrators to “stay our hands.”
In a recent interview, Mikva was more blunt: If not for the fortuitous bankruptcy, the US “absolutely” would have lost.
The Loewen decision sparked condemnation within the small circle of ISDS lawyers and arbitrators. The moderator of a private email list where members of this elite club air their views conducted a poll on the decision. Of the 31 people who weighed in, 28 of them thought the arbitrators got it wrong. America not only got lucky, but it also benefited from something that may not last: deference to the United States — even an outright bias in favor of the US and the trade and investment treaties it has helped promote around the world.
As of today, the US has successfully fought off more than a dozen cases and lost none. “We have been successful,” the US trade representative said in a statement to BuzzFeed News, “because the United States welcomes foreign investment and acts in accordance with our obligations under U.S. and international law, and because our investment agreements contain important substantive and procedural safeguards.”
It also said that the US “has been at the forefront of upgrading, improving, and reforming international investment agreements.” It cited provisions in recent treaties meant to curb overly broad interpretations by arbitrators, increase the system’s transparency, shield public-interest regulations from ISDS challenges, and weed out frivolous claims.
For some ISDS lawyers, a US loss would be the ultimate trophy, a way to become the real giant killer.
The Trans-Pacific Partnership contains further safeguards, the trade representative said. But critics and some experts who have analyzed the deal say the changes amount to little more than tweaks at the margins, leaving intact the most troubling parts of a flawed system — and rendering the United States vulnerable.
Some nations, such as South Africa and Indonesia, have gone much further, drastically reining in ISDS or even purging it from their treaties altogether. The Obama administration is currently pushing to conclude a massive trade deal with EU nations, but the European Commission has proposed turning ISDS into a court system with a roster of judges and an actual appeals body. Asked directly if the the US would support that approach, the trade representative did not answer, saying only, “The EU has proposed one approach to this issue, and we have our own approach.”
Among the ISDS lawyers and arbitrators sometimes known as “The Club,” there seems to be little debate: The question is not if the US will lose, but when. “It’s almost inevitable,” longtime arbitrator Charles Brower said.
For some ISDS lawyers, a US loss would be the ultimate trophy, a way to become the real giant killer. At a panel discussion last year at Georgetown University, State Department attorney David Bigge recounted a conversation he’d had with an ISDS lawyer about a recently filed case against the US: “He said, ‘I wish I had brought that one. The US is going to lose one, and this is going to be it. I wanted to be the one to do it.’” ●