By Chris Hamby, BuzzFeed, September 1, 2016
Imagine a private, global super court 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 TransPacific 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.
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.
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.
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 postrevolution 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….To be continued.
Our Comment
Speaking of labels, as we do elsewhere in this issue, I must confess, one has occurred to me in this connection – “Kangaroo Court.”
Investor-State Dispute Settlement (ISDS), is one of many provisions that should be featured when “free trade” is inducted into history’s ‘Hall of Shame.”
Élan
