Sept 07, 2016 (LBO) – Big banks have turned to the powerful worldwide legal system and commandeered it for profit, exploiting countries like Sri Lanka in the process, according to a Buzzfeed probe.
In 2006, big international banks presented officials who ran Sri Lanka’s state oil venture with a way to hedge against further price hikes. As Sri Lanka’s Ceylon Petroleum Corporation didn’t have good enough advisors, the deals went through.
“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,” the report states.
When the price of oil crashed, CPC found itself forced to pay the banks millions of dollars.
Even though Sri Lanka’s Supreme Court ordered a temporary freeze of payments while authorities scrutinized the deals, Deutsche Bank’s response was swift. Although it had made 6 million dollars on the deal, it demanded more than 60 million dollars, 24 times more than the bank could have lost on the deal.
After 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.
“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. 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.”
An 18-month BuzzFeed News investigation says it shows 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.
“Indeed, financiers and ISDS (investor-state dispute settlement) 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.”
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.
In Sri Lanka, the head of CPC was whisked away on trips around 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 his family at a conference in a beach-resort city in India, and the bank later gave his daughter an internship.
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.
The full BuzzFeed article can be read here