Sierra Club | 16 December 2016
When you thought trade deals could not get any worse — enter Wall Street
By Paul Keenlyside
What connects two proposed gold mines, one in the high-altitude wetlands of Colombia and one in the Carpathian Mountains of Romania?
Both mines would require huge quantities of cyanide and threaten watersheds used by millions of people for drinking water. One would damage a unique, legally protected ecosystem and the other would destroy an ancient, UNESCO-nominated settlement. Both have been opposed by scientific bodies, protested by tens of thousands of people, and restricted by domestic courts.
And in both cases, the Canadian mining corporations behind the projects (Eco Oro in Colombia and Gabriel Resources in Romania) have responded to the mining denials by using trade and investment deals to sue the governments in private tribunals. In fact, Eco Oro just launched its case last week. Using this backdoor process called "investor-state dispute settlement" (ISDS), the corporations can demand up to billions of dollars from the taxpayers in both countries. These ISDS claims are possible due to far-reaching rights that trade and investment deals grant to corporations.
But there is another common element driving both cases: big money from Wall Street.
Both ISDS claims are being funded by the same Wall Street hedge fund — Tenor Capital Management. Tenor helps cover the companies’ legal costs in exchange for a cut of any award. These speculative ISDS bets have already paid off for Tenor. The hedge fund won big in April 2016 when it secured 35 percent of a $1.4 billion ISDS ruling against Venezuela, a return of over 1,000 percent on the $36 million that Tenor had provided for the legal costs of the company that brought the case.
The risks of such arrangements, known as “third-party funding," are clear: When Wall Street speculates on the outcome of ISDS cases, it inflates the number of corporate suits against governments, leading to higher costs for taxpayers and higher risks for policymakers that challenge harmful investments.
Indeed, to maximize their profits, Wall Street firms have an incentive to "invest" in a large number of ISDS cases, given each case’s relatively low probability of a massive payout. And if this sounds like casino-style investing, recall that the biased nature of ISDS tribunals ensures that the odds are rigged in the third-party investors’ favor. As Chris Hamby’s investigation into ISDS for BuzzFeed News recently revealed, financiers already have created a sophisticated marketplace around ISDS cases, and insiders expect that Wall Street firms will soon be trading ISDS cases “on an industrial scale.”
Because only corporations, not governments, can launch ISDS cases, governments have no equivalent funding sources, as they have no potential winnings to leverage. In Costa Rica — which is also on the receiving end of a third-party-funded ISDS case relating to an environmentally destructive gold mine — the Attorney General’s office has an annual budget of only $17 million. In Bolivia — one of the poorest countries in the Western Hemisphere, which faces a third-party-funded ISDS case relating to a silver mine — the Attorney General’s office has a budget of $12 million.
By contrast, Tenor recently raised $170 million for its international arbitration fund. Another third-party funder, London-based Calunius Funds claims that “no case is too large” for the firm. Burford Capital, another major player, invested $700 million in third-party claims between 2009 and 2015, boasting a 70 percent return on invested capital in 2015.
When such deep-pocketed financiers back corporate suits against cash-strapped governments, it increases the likelihood that the government will cave and roll back the policies challenged by the corporations. Even if governments "win" an ISDS case, they can still be made to pay their legal fees, which average $8 million per case and can exceed $30 million. Facing such costs, and third-party-funded corporations that can afford drawn-out legal fights, governments may find that degrading environmental regulations is more financially prudent than trying to defend them.
Third-party funding of legal claims has also generated significant unease beyond the world of ISDS, with concerns that it encourages frivolous lawsuits and creates conflicts of interest when the funders seek to influence the handling of cases. Indeed, Tenor’s influence in the mining cases against Colombia and Romania is evident – Tenor has become a significant shareholder in Eco Oro and Gabriel Resources, and a Tenor employee sits on the board of directors of both firms. Eco Oro’s arrangement with Tenor has even been attacked by Eco Oro’s own shareholders as “coercive and abusive," made for the benefit of key company insiders.
Of course, lack of funds should not serve as a barrier to justice, and judicial systems should be designed such that bringing a valid claim is affordable. But the financialization of claims via Wall Street is the worst possible funding model. This is particularly true for ISDS, where financial firms are ultimately speculating on huge payouts from public coffers.
At a time when governments should be ramping up action to tackle climate change and protect clean air and water, third-party funding adds another predatory layer to an ISDS system that already undermines the ability of governments to act in the public interest.
This threat is all too real for the two million inhabitants of Bucaramanga, Colombia who are struggling to halt a mine that threatens their drinking water, and the people of Romania who hope to protect their waterways from another massive cyanide spill. That means getting tangled up in hedge fund-backed suits facilitated by bad trade and investment deals, is another indication of the need for a new approach to trade, grounded in the sovereign right of governments to protect their natural resources.
Paul Keenlyside is a Trade Researcher for the Sierra Club Responsible Trade Program
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