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

from the it's-bad-news dept

A few weeks ago, we wrote about a really great and detailed look by BuzzFeed's Chris Hamby into "investor state dispute settlement" (ISDS) provisions in international trade agreements -- something we refer to as corporate sovereignty, because it enables companies to effectively force countries away from certain regulations. Hamby's piece was about how rich corporate execs were using corporate sovereignty provisions to get out of criminal prosecutions. That was only part I of his investigation. Part II of the series may have been the most useful, because it detailed how the mere threat of an ISDS case could pressure countries into changing regulations. This is super important, because one of the key talking points from defenders of corporate sovereignty provisions is to point to stats on actual cases. But if the threats are really effective, the stats on cases really is only showing a portion of what ISDS is doing.
“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 article quotes ISDS defenders saying "where's the proof" of such problems -- which most people can't show, since it all happens behind closed doors and no one wants to talk about it. But then it goes on to show clear examples of it happening, and it's somewhat frightening, where mere threats basically wiped out important regulatory policies.

Part III of Hamby's report goes on to detail how some giant Wall St banks basically bled Sri Lanka dry, selling it complicated derivatives, and then going ballistic -- via ISDS corporate sovereignty provisions -- when the government stepped in to investigate the deals and whether they were legit or just a scam. Basically, the banks sold Sri Lanka derivatives that were a bet on the price of oil (just like a lot of the housing bubble was driven by bets on the prices of mortgages, where people were basically buying "insurance" on assets they didn't own), and the bet went way, way bad. But, the banks didn't want the government sniffing around to see if the sale of these derivatives had been legit:
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.
As you can see from the quote above, the corporate sovereignty case over Sri Lankan derivatives lit up a bunch of lightbulbs in law firms. And it's why they're so adamant that ISDS is necessary today, even in things like TTIP. If you understood the reasons given for ISDS originally, this makes no sense. The point of these tribunals was to allow recourse in unstable countries where the fear was some tinpot dictator would show up and take all of the investment that, say, an Exxon put in to build up its presence in a country. Under that belief, an ISDS provision acts as a form of insurance for big investors, encouraging them to invest in less stable parts of the world. So that's semi-reasonable. But why the hell would you need that between the US and the EU? Or the US and Australia or Japan? You're not dealing with unstable governments (mostly!) in those countries.

The real reason is because it's really got nothing to do with that any more. Now it's just a way for companies and lawyers to profit through threats on just about any regulatory change. And even the story about it protecting investment in less developed nations is not really true any more either. Now it's used for shaking them down:
ISDS gives particular leverage to traders and speculators who chase outsize profits in the developing world. They can buy into local disputes that they have no connection to, then turn the disputes into costly international showdowns. Standard Chartered, for example, bought the debt of a Tanzanian company that was in dire financial straits and racked by scandal; now, the bank has filed an ISDS claim demanding that the nation’s taxpayers hand over the full amount that the private company owed — more than $100 million. Asked to comment, Standard Chartered said its claim is “valid.”

This tactic is especially damaging to nations battling an economic crisis or struggling to lift their people from endemic poverty. Companies in crisis can declare bankruptcy, forcing the debt collectors to back off, but countries can’t do this, which can lead to a feeding frenzy
The final piece of Hamby's reporting is also really important. A key point that the White House has used in defending ISDS is that the US has never lost an ISDS case. As we've pointed out, that's kind of meaningless for a variety of reasons, in part because TPP and TTIP would massively expand the opportunities for companies to use corporate sovereignty claims in the US. On top of that, since using these to shake down countries is growing increasingly common, it's crazy to think more lawyers won't start targeting the US. In fact, Hamby's final piece in the series points out that the folks who drafted NAFTA were taken completely by surprise in a big ISDS case that was filed under it in response to a weird dispute between Mississippi funeral homes.

To keep a long and complicated story short, there was a dispute that went to court, and in court, the lawyer for one funeral home played up the fact that the owner of the other was Canadian and won a huge monetary settlement. The owner of the losing side (the Canadian) then invoked ISDS, claiming that NAFTA guarantees no discrimination against foreign businesses -- and this trial showed there was discrimination. Apparently, the US gov't (which had supported ISDS strongly) freaked completely the fuck out:
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.”
And, what's amazing is that even though US officials started waking up, they're now still pushing ISDS:
“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.”
Also, in case you're wondering: the case was dropped because the Canadian company went bankrupt and was bought up by American investors. But, Hamby discovered, the US would have lost and would have lost big, according to one of the members on the tribunal overseeing the case. So the claim that the US hasn't yet lost an ISDS case may be true, but it's based on a massive technicality.

After reading all of these, it's difficult to see how anyone can still support corporate sovereignty in any shape or form. It's unnecessary, it's damaging and it's given way to a massive industry of companies and lawyers that abuse the system for profit.

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  • icon
    That One Guy (profile), 13 Sep 2016 @ 2:33pm

    Not really

    After reading all of these, it's difficult to see how anyone can still support corporate sovereignty in any shape or form. It's unnecessary, it's damaging and it's given way to a massive industry of companies and lawyers that abuse the system for profit.

    The ones who stand to benefit from it the most(large companies, lawyers and so on) also tend to be the biggest supporters of corporate soverignty, and you don't have to spend more than a few seconds to figure out why.

    As for politicians, between threats('If you don't have our back, we don't have yours') from those that stand to gain, promises of great benefits/bribes('You support us here, we'll support you come next election, perhaps even a job once you leave politics'), and flat out stupidity in the search for PR they can use('It promotes jobs and helps the economy!'), figuring out why they support it isn't hard either.

    It's actually harder not to see why the supporters of corporate soverignty are for it, you just need to ignore what they say, assume that they're not all complete and utter idiots, and then look at what they stand to personally gain. Once you do that it becomes very clear, very quickly.

    reply to this | link to this | view in chronology ]

    • identicon
      Wendy Cockcroft, 15 Sep 2016 @ 5:54am

      Re: Not really

      Actually you will find that supporters such as Norway's Cristofer Fjellner MEP, etc., are in favour of ISDS because "Dem's da roolz." I'm not even joking, that's what they're saying. "We must uphold the rule of law," they declare, merrily hand-waving our objections away and accusing us of being anti-trade.

      Heck, I've even seen some Libertarians saying the exact same thing, and they're supposed to be on our side where this stuff is concerned.

      reply to this | link to this | view in chronology ]

  • icon
    testcore (profile), 13 Sep 2016 @ 2:56pm

    Another angle on ISDS...

    While I am by no means a supporter of ISDS, there could be a silver lining to this shit cloud:

    - Twitter could sue Turkey for full-site blocking
    - Ditto for Youtube in Pakistan
    - Google could sue China for censorship
    - (Irish) Apple could sue the US for forcing encryption backdoors

    Not that ISDS is really an ideal approach to any of these situations, but it could make for strange bedfellows.

    reply to this | link to this | view in chronology ]

    • icon
      Roger Strong (profile), 13 Sep 2016 @ 3:08pm

      Re: Another angle on ISDS...

      - Russia could sue the US for making offshore management of electronic voting systems unreasonably difficult.

      reply to this | link to this | view in chronology ]

    • icon
      NeghVar (profile), 13 Sep 2016 @ 3:20pm

      Re: Another angle on ISDS...

      Big Media sues contries which do not extend their copyright terms

      reply to this | link to this | view in chronology ]

    • icon
      Craig Welch (profile), 13 Sep 2016 @ 5:34pm

      Re: Another angle on ISDS...

      - Twitter could sue Turkey for full-site blocking

      Is Twitter an investor in Turkey?

      - Ditto for Youtube in Pakistan


      Is YouTube an investor in Pakistan?

      - Google could sue China for censorship


      Which article of which treaty has China breached in imposing its censorship?

      - (Irish) Apple could sue the US for forcing encryption backdoors


      Apple is a US company.

      reply to this | link to this | view in chronology ]

      • icon
        testcore (profile), 13 Sep 2016 @ 8:16pm

        Re: Re: Another angle on ISDS...

        Think you're missing the point... if you can't beat 'em, join 'em. Make the most of a bad situation. Two can play at that game. Anything you can do I can do better.

        And obviously, my specifics are not backed by signed treaties. But it's not out of the realm of possibility for a tech company to claim it's being denied business - profit - due to censorious (or whatever) policies. And clearly the actual terms of any agreement would dictate reality, but again, if ISDS crap gets ratified, it could make for interesting tactics from non-traditional players.

        Oh, and Apple may have been founded in - and has hq here - it most definitely is not a US company. They practically invented the "double irish" model. For more reading, start here: https://www.theguardian.com/business/2016/aug/30/apple-pay-back-taxes-eu-ruling-ireland-state-aid

        reply to this | link to this | view in chronology ]

        • icon
          JoeCool (profile), 14 Sep 2016 @ 4:08pm

          Re: Re: Re: Another angle on ISDS...

          Sorry, but this is actually one thing Microsoft DID invent rather than copy from Apple. :)

          MS has been in Ireland since 1985 by their own admission, and play that game better than anyone.

          reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 13 Sep 2016 @ 3:19pm

    Re: Another angle on ISDS...

    Could Google sue countries for not creating anti-adblocker legislation due to loss of earnings?

    (genuinely curious, as they support the ISDS)

    reply to this | link to this | view in chronology ]

    • icon
      Roger Strong (profile), 13 Sep 2016 @ 4:40pm

      Re: Re: Another angle on ISDS...

      As I understand it a government leaving things as they were before the ISDS treaty was signed is generally safe. One making changes - new safety or environmental regulations for example - faces lawsuits over how those changes unfairly harm a foreign investor.

      It's worth mentioning that ISDS lawsuits won't necessarily come from *foreign* investors. The Canadian mining company Lone Star Pine sued the Canadian government for $250 million after the province of Quebec banned fracking. They were able to do so under NAFTA’s ISDS rules, using their Delaware-registered subsidiary.

      Woe betide America when its own corporations discover this trick.

      reply to this | link to this | view in chronology ]

      • icon
        That One Guy (profile), 13 Sep 2016 @ 5:11pm

        Re: Re: Re: Another angle on ISDS...

        As I understand it a government leaving things as they were before the ISDS treaty was signed is generally safe.

        Generally, but not always. A few years back there was an article or two talking about how a drug company, Eli Lilly sued the Canadian government for simply upholding the current laws with regards to patents, demanding $100 and then $500 million in 'lost profits' when some of their patent requests were denied as not actually being anything new(attempted evergreening basically).

        It even reached the point where they outed 32 members of congress as shills for the company by having them demand that the joke that is the USTR put Canada on the 301 'naughty list' for daring to refuse to hand over all the profits they clearly deserved by granting the patents.

        reply to this | link to this | view in chronology ]

      • icon
        Craig Welch (profile), 13 Sep 2016 @ 5:30pm

        Re: Re: Re: Another angle on ISDS...

        It's worth mentioning that ISDS lawsuits won't necessarily come from *foreign* investors. The Canadian mining company Lone Star Pine sued the Canadian government for $250 million after the province of Quebec banned fracking. They were able to do so under NAFTA’s ISDS rules, using their Delaware-registered subsidiary.


        Lone Pine Resources Inc is a US company, which has a Canadian subsidiary - Lone Pine Resources Canada Ltd.

        reply to this | link to this | view in chronology ]

        • icon
          Roger Strong (profile), 14 Sep 2016 @ 7:47am

          Re: Re: Re: Re: Another angle on ISDS...

          On paper, perhaps.

          As the Lone Pine Resources Inc. - NOT Lone Pine Resources Canada - reported to the US government upon creation
          We are an independent oil and gas exploration, development, and production company with operations in Canada within the provinces of Alberta, British Columbia, and Quebec and the Northwest Territories.
          [...]
          Our principal executive offices are located at Suite 2500, 645-7 Avenue SW, Calgary, Alberta, Canada T2P 4G8, and our registered office in the State of Delaware is 2711 Centreville Road, Suite 480, Wilmington, Delaware 19808.
          [...]
          We operate in one industry segment and our oil and gas exploration and production activities are exclusively within Canada.
          [...]
          Our principal executive office is located in Calgary, Alberta, Canada,
          [...]
          The costs and expenses of our operations are denominated in Canadian dollars.

          reply to this | link to this | view in chronology ]

  • identicon
    Kronomex, 13 Sep 2016 @ 4:57pm

    As long as politicians of all persuasions are prepared to fill their bank accounts with the corporate dollar then nothing will be done curb their power over effectively running governments as piggy banks to be broken into.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 13 Sep 2016 @ 7:47pm

    I find it reprehensible that anyone can think companies should be above domestic laws. It's all well and good when the company is exploiting some third world country, because hey, no-one cares about those, right?
    But let's see how you feel when your country is sued for trying to curb pollution, improve workers' right or something else.

    My country was on the receiving end of an ISDS lawsuit over plain-packaging cigarettes. You can't imagine what it's like to have your country's sovereignty violated by an international company who just wants to exploit you for money.

    ISDS needs to be stopped before it gets any bigger.

    reply to this | link to this | view in chronology ]

    • icon
      Craig Welch (profile), 14 Sep 2016 @ 2:06am

      Re:

      My country was on the receiving end of an ISDS lawsuit over plain-packaging cigarettes. You can't imagine what it's like to have your country's sovereignty violated by an international company who just wants to exploit you for money.


      And your country prevailed. How was your country's sovereignty violated? Your country signed up to a treaty that had arbitration provisions, and an investor took advantage of them to initiate a dispute, which it lost.

      reply to this | link to this | view in chronology ]

  • identicon
    Iago Montoya, 13 Sep 2016 @ 8:29pm

    none of this matters

    the 700 or so people that will primarily benefit from this have tons of quislings to drone strike or strangle, or murder on the street anyone that is considered a threat

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 14 Sep 2016 @ 12:16am

    The point of these tribunals was to allow recourse in unstable countries where the fear was some tinpot dictator would show up and take all of the investment

    The same dictators who will say all treaties are invalid, and who run countries that could nor pay the awards... why do I suspect that is political spin to get leverage over well run countries.

    reply to this | link to this | view in chronology ]

  • icon
    Whatever (profile), 14 Sep 2016 @ 1:39am

    Of course, countries passing laws or adding restrictions on companies to protect local companies from multinationals is an ongoing story here at Techdirt. The whole "EU is being bad to Google" story seems to come up fairly regularly.

    If you look at the exceptional cases, you will always find bad. In the same manner that trademarks, copyright, and patents generally work well in most cases, there are extreme cases that do in fact break the system, or twist it to evil ends. You can always find bad, and if you are willing to work from that and that alone, you become the Matt Drudge of tech.

    reply to this | link to this | view in chronology ]

  • identicon
    David, 14 Sep 2016 @ 1:40am

    Uh, new to capitalism?

    After reading all of these, it's difficult to see how anyone can still support corporate sovereignty in any shape or form. It's unnecessary, it's damaging and it's given way to a massive industry of companies and lawyers that abuse the system for profit.

    Which is exactly why a few still support corporate sovereignty. And those few are willing to invest enough in the corrupt ruling class to keep the money redistribution to the top going.

    What the hoi polloi stick in the ballot boxes matters very little compared to what the scum sticks in the politicians' pockets as their percentage of the organized robbery of which such trade agreements are a part.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 14 Sep 2016 @ 2:12am

    "The point of these tribunals was to allow recourse in unstable countries where the fear was some tinpot dictator would show up and take all of the investment that, say, an Exxon put in to build up its presence in a country."

    And what was the point of the corporation again? Minimize risk to an individual? If you don't like how exxon is using your money, sell your stock or risk losing it all. If you own more than 50% shares, you have the ability to steer the company in your direction.
    Generally, the riskier the venture, the more profit to be made. This is just the rich wanting more. Next they will publish financial statements twenty years out and will insist on having that income being guaranfuckingteed.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 14 Sep 2016 @ 6:03am

    Sadly...

    Trump is the ONLY candidate standing against this piece of shit. None of the Independents are against it, they love it. Just goes to show how fucked up the entire cast of presidential candidates have been this cycle.

    I was considering voting for Gary instead of Drumpf, but not now.

    reply to this | link to this | view in chronology ]

  • identicon
    Paul keating, 14 Sep 2016 @ 9:31am

    ISSA. APPLE. IRELAND

    So I wonder if Apple isn't planning an ISDA claim to recover the billions it must pay in taxes?????

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 14 Sep 2016 @ 11:54am

    US "hasn't lost"

    So the claim that the US hasn't yet lost an ISDS case may be true, but it's based on a massive technicality.
    Even if they lose, will it matter? They'll just ignore it.

    reply to this | link to this | view in chronology ]

    • icon
      That One Guy (profile), 15 Sep 2016 @ 12:04am

      Re: US "hasn't lost"

      Ah, but you can bet that there would be a great many companies pressuring politicians to in turn pressure the USG to 'honor our obligations', as if the USG starts blatantly ignoring corporate sovereignty rulings then other countries might start to think that they can do the same, and that would drastically reduce it's effectiveness as a threat to be used against countries for doing things that companies don't like.

      reply to this | link to this | view in chronology ]

    • icon
      Craig Welch (profile), 15 Sep 2016 @ 2:47pm

      Re: US "hasn't lost"

      The US is a signatory to the New York Conventions, and has therefore affirmed that it will respect arbitral decisions.

      Were it not to do so, there are mechanisms to use domestic courts in other countries to seize US assets.

      reply to this | link to this | view in chronology ]


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