It wasn’t until a decade later that investors got that right, in Italy’s bilateral investment treaty with Chad. And it wasn’t until 1993 that a majority of developing countries had even one IIAs with strong investor-state procedural protections, and Germany didn’t begin transitioning its treaties to this model until 1988 (Yackee, 2007: 31-35). Meanwhile, the first award rendered under an IIA came only in 1990, in a challenge by a UK investor against Sri Lanka (Parra, 2012: 183).

That said, marrying the substantive and procedural rights of IIAs are not some latterly innovation. In 1958, a commission led by Deutsche Bank chairman

Abs meets Nehru.

Hermann Abs and former UK Attorney General Hartley Shawcross proposed a draft international convention that gave investors both.

A quick perusal of the text reveals the following article:

Article VII

1. Any dispute as to the interpretation or application of the present Convention may, with the consent of the interested Parties, be submitted to an Arbitral Tribunal set up in accordance with the provisions of the Annex to this Convention. Such consent may take the form of specific agreements or of unilateral declarations. In the absence of such consent or of agreement for settlement by other specific means, the dispute may be submitted by either Party to the International Court of Justice.

2. A national of one of the Parties claiming that he has been injured by measures in breach of this Convention may institute proceedings against the Party responsible for such measures before the Arbitral Tribunal referred to in paragraph 1 of this Article, provided that the Party against which the claim is made has declared that it accepts the jurisdiction of the said Arbitral Tribunal in respect of claims by nationals of one or more Parties, including the Party concerned.

“in some countries there has been a tendency to disregard them… However, international trade and commerce cannot thrive and prosper in an atmosphere of doubt and uncertainty. The need, therefore, arises of restating rules of mutual conduct of states in a convention which will assure to the nationals of the participating countries such measure of security and protection of their property, rights, and interests as is indispensable to encourage the flow of foreign investments.”

“The result is a curiously incoherent doctrine which is ad hoc and survives only because it is such… To avoid utopianism, we must establish the law’s content so that it corresponds to concrete State practice, will and interest. But to avoid apologism, we must argue that it binds the State regardless of its behaviour, will or interest. Neither concreteness nor normativity can be consistently preferred… international law is singularly useless as a means for justifying or criticizing international behavior.  Because it is based on contradictory premises it remains both over- and underlegitimizing: it is overlegitimizing as it can be ultimately invoked to justify any behavior (apologism), it is underlegitimizing because  incapable of providing a convincing arument on the legitimacy of any practices (utopianism)…” (at 63-67)

“It has, moreover, been felt to be important to make some provision enabling the private investor himself to pursue an international remedy. The notion that an individual may enjoy a right of access directly to an international tribunal is not new. Procedural capacity of this character was enjoyed by individuals in relation to the Central American Court of Justice and certain mixed arbitral tribunals, and is enjoyed by them today in relation to such diverse bodies as the Court of the European Community, the European Commission of Human Rights, and the administrative tribunals of the international organisations. It is, therefore, no real departure from legal tradition to suggest that similar rights be conferred on individuals in connection with investment matters.”

“The concession agreements between Arab states and Western MNCs that were the subject of the disputes contained arbitration clauses that provided, in the event of a dispute, for the resolution of the dispute by an arbitral tribunal that was to be established in the manner provided for in the clause. It was uncontested that in usual circumstances, the agreements would be governed by the laws of the host state. Thus, in the words of the arbitrator, Lord Asquith of Bishopstone, in the [1951] Ruler of Abu Dhabi Case: “What is the ‘Proper Law’ applicable in construing this contract? This is a contract made in Abu Dhabi and wholly to be performed in that country. If any municipal system of law were applicable, it would prima facie be that of Abu Dhabi.”

This position, which is no more than a restatement of the classic principles of international law, was, however, rejected by Lord Asquith,
who magisterially pronounced that the domestic law of Abu Dhabi was inapplicable because no such law can reasonably be said to exist: “The Sheikh administers a purely discretionary justice with the assistance of the Koran; and it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial contracts.” ” (at p. 226-227)

They find that 2012 was another record year for the system: more cases were launched than ever before (62), and more decided that in past years (42). Of the 17 finalized merits cases, governments lost more than has been true in the past (over 70 percent).

The total number of known cases has now topped 500 – almost half of which have been concluded.

Check out the summary – a nice concise summary of the year in corporate claims.

As the Administrator of the Office of Information and Regulatory Affairs (known as “OIRA”) within the Office of Management and Budget, Sunstein oversaw the regulatory output of the many agencies of the executive branch. Rules on worker health, environmental protection, food safety, health care, consumer protection, and more all passed through Sunstein’s inbox.

Some never left…

In his revealing book, Sunstein tells us why: It is because he, Sunstein, had the authority to “say no to members of the president’s Cabinet”; to deposit “highly touted rules, beloved by regulators, onto the shit list“; to ensure that some rules “never saw the light of day”; to impose cost-benefit analysis “wherever the law allowed”; and to “transform cost-benefit analysis from an analytical tool into a “rule of decision,” meaning that “[a]gencies could not go forward” if their rules flunked OIRA’s cost-benefit test.

Lisa argues that Sunstein’s tactics were legally or politically suspect, and at the end of the day diminished government accountability. She definitely has an axe to grind (but also valuable first hand information), as someone whose proposed regulations were sidelined. A fascinating read.

Sunstein deserves applause for attempting to integrate insights from behavioral economics into the study of judging and regulation. But as I’ve written elsewhere, he has a blindspot when it comes to the power that he and other “behaviorally enlightened” elites play in the policy processes they themselves are trying to rationalize. Behavioral economics’ focus on the brain tends to ignore power distribution in the world outside the brain. This is something that behavioralism’s founding father Herbert Simon understood, but that a lot of his followers did not. (In his 1996 book, Simon writes that, “the evolution of firms and of economies does not lead to any predictable equilibrium, much less an optimum, but is a complex process, probably continuing indefinitely, that is probably best understood through an examination of its history.” page 48).

In its extreme versions, law by behavioral economics and cost-benefit analysis is fairly undemocratic. Sunstein’s government of ideas going to the toilet has some kinship with Grover Norquist’s idea of shrinking government to the size of the bathtub. Both seem to be designed to diminish people’s faith in government as a change agent, as Thomas Frank detailed in his book The Wrecking Crew.

Which raises the truly important question: what happens to small government activists in the bathroom to provoke such negative associations? They might want to use some of that ObamaCare to get that checked out…

As the NYT reports,

Under the plan, savings under 100,000 euros would not be touched — a rollback after a controversial plan last week to tax insured deposits was rejected by Cyprus’s Parliament, amid outrage among ordinary savers and widespread concern that a precedent had been set for governments anywhere to tap insured bank savings in times of a national emergency….

The finance ministers and the troika on Saturday were still calculating how much money those deposit-tax alternatives would raise for the government.

“The good news is that banks were shut last week, and so depositors couldn’t cut up their money into smaller accounts to avoid any tax,” said one European Union official, who spoke on the condition of anonymity. “But it’s sure that depositors did do this before, so this needs to be assessed.”

At the insistence of the central bank, lawmakers also voted on Friday to impose capital controls to limit withdrawals and bank account closings once Cyprus’s banks reopen. The current plan is to reopen them on Tuesday morning, after a nine-day emergency holiday meant to prevent a classic run on the banks.

As the passage makes clear, it seems that “ordinary savers” were spared the tax, while high value deposits will be taxed. This almost certainly means that Russians and other foreign savers will be hurt, while Cypriots will not be.

(Or at least not in the same way. They will be of course hurt by the fact that their country is collapsing. But they will not be hurt by the policy measure, which is what an investor-state panel would look at. And, for reasons I’ve mentioned elsewhere, judges within Europe are likely to look to the totality of who is hurt and harmed by a financial crisis, while broader investment lawyers might look more at the  challenged measure exclusively.)

Accusations are already flying that the bailout is anti-Russian. Given the exemption for small deposits, concerns could arise that Cyprus violated the national treatment portion of the Cyprus-Russia investment treaty, which reads:

Article 3

Treatment of Investments

1. Each Contracting Party shall ensure in its territory for the investments made by investors of the other Contracting Party and for the activities in connection with such investments, fair and equitable treatment which would exclude the use of discriminatory measures that might hinder management, maintenance, use, enjoyment or disposal of the investments.

2. The treatment referred to in paragraph 1 of this Article shall not be less favourable than that granted with regard to investments and activities in connection with investments by its own investors or investors of any third state.

3. Each Contracting Party shall reserve the right to make or maintain exceptions in accordance with its own legislation from the national treatment granted in accordance with paragraph 2 of this Article.

4. The most favoured nation treatment granted in accordance with paragraph 2 of this Article shall not apply to benefits that the Contracting Party is providing or will provide in the future:

- as a result of a common market, a free trade zone, a customs or economic union;

- under the agreements between the Russian Federation and the states, which had earlier formed the Union of Soviet Socialist Republics;

- on the basis of an agreement to avoid double taxation or other arrangements relating to taxation issues.

This is a slightly different formulation than other treaties, in some ways more forgiving; in other ways less so.

On the one hand,this treaty is less flexible in that U.S. treaties tend to only require national treatment for investors “in like circumstances.” This gives a whole lotta wiggle room to respondent governments to make cases why not all depositors are alike. Here, national treatment is broadly required.

On the other, this treaty is more flexible than others in that it preserves a right to make and maintain exceptions that have discriminatory effects. In fact, EU depositors can be treated better than non-EU depositors, and there is a broad taxation carve-out from most-favored nation rules. Exactly how broad these exceptions are, and whether they can be interpreted so broadly so as to make the obligation essentially meaningless, would be contested by the parties to a dispute.

CORRECTION AND CLARIFICATION on 3/27: The Russia-Cyprus treaty was signed but did not enter into force. So, Russians wanting to go after Cyprus will have to claim a nationality from a treaty that is in force… like the Cyprus-Greece treaty, which IAReporter says is already being used for a similar purpose!

The New York Times is reporting that Cyprus has approved parts of a bank bailout package.  Cyprus lawmakers will decide later this weekend whether to go forward with a 25 percent tax on uninsured bank deposits, which Germany and other power players have deemed the best route for financing the package. If the tax doesn’t pass, Cyprus may impose strict capital controls – as Iceland did several years ago.

Either route will be bad news for Russian depositors, who have an estimated four percent of their national income stashed in Cypriot financial institutions. And some commentators are calling for blood, and for the Russian government to pick up the tab.

But Russians aren’t helpless in the matter. In 1997, the Russian Federation signed an investment treaty with Cyprus that allows investors from one country to sue the government of the other country. Both countries are also party to the Energy Charter Treaty, which has a similar procedure.

Yukos shareholders incorporated in Cyprus have used these pacts to challenge Russia’s infamous treatment of that energy company. Cyprus investors have also successfully sued other governments under similar treaties.

The investment treaty requires that any expropriation by Cyprus of Russian investments be promptly compensated, and that the “amount of compensation should correspond to the real value, which the expropriated investments had, immediately before the time when official information was obtained concerning actual or impeding expropriation. Compensation shall be paid without undue delay in convertible currency” (Article 4). Investments are defined to include “financial assets as well as shares, deposits and other forms of participation…” (Article 1) The deal also guarantees that Cyprus will allow Russian investors “free transfer abroad of payments in connection with their investments” including revenues, “after they have paid appropriate taxes and charges” (Article 6)

If Russians were to challenge the Cyprus tax, they could argue that it constituted an expropriation or a restriction on free transfers. If they did the former, they would have to convince arbitrators that a 25 percent reduction in the value of their deposits rose to a level of expropriation. If they did the latter, they would have to show how the tax was somehow not an “appropriate” tax or charge.

Neither argument is a shoe-in, but they’re also not nothing. In a case by Spanish investors in Yukos last year, an arbitral tribunal ruled that the pace of changes in Russian tax policy and the failure to negotiate with interested parties led to a violation of the Spain-Russia investment treaty (para. 127). The panel went on…

The notion that states have a considerable margin of discretion in enacting and enforcing tax laws should not lead to any confused idea that they have a discretion as to whether or not to comply with an international treaty. True enough, as Rosinvest put it, “States have wide latitude in imposing and enforcing taxation laws even if resulting in substantial deprivation without compensation”. Yet there is a world of difference between incidental detriment, even of a substantial nature, and purposeful disposession. It is no answer for a state to say that its courts have used the word “taxation” – any more than the word “bankruptcy” – in describing judgements by which they effect the disposession of foreign investors. If that were enough, investment protection through international law would likely become an illusion, as states would quickly learn to avoid responsibility by dressing up all adverse measures, perhaps expropriation first of all, as taxation. When agreeing to the jurisdiction of internatinoal tribunals, states perforce  accept that those jurisdictions will exercise their judgment, and not be stumped by the use of labels. (para 179)

Thanks to the Russia-Cyprus treaty, Cyprus has also agreed to allow arbitrators (that are paid by the case, picked in part by Russian investors, and not experts in banking or taxation) to second guess what its lawmakers are deciding this weekend. And more than just Russian investors may have recourse, as Cyprus has a few dozen investment treaties with various countries, many of whom may also have offshore deposits on the island.

This could be a costly weekend.

POSTSCRIPT added here.

CORRECTION AND CLARIFICATION on 3/27: The Russia-Cyprus treaty was signed but did not enter into force. So, Russians wanting to go after Cyprus will have to claim a nationality from a treaty that is in force… like the Cyprus-Greece treaty, which IAReporter says is already being used for a similar purpose!

Readers may remember the case of R. Allen Stanford,  a Texas financier found guilty last year of orchestrating a $7 billion Ponzi scheme. Through offshore accounts and the buying of political influence in tax haven countries, he was able to seduce retirees and investors around the world with the promise of higher-than-market returns.

In a series of filings from December 2012, nationals of Uruguay, Peru, Chile and various Central American countries who invested in Stanford’s group charge U.S. securities regulators of negligence in not investigating the Ponzi operator sooner. These investors claim that the U.S. has a positive obligation under international law to shut down and investigate Ponzi schemes in a timely manner. They point to supposedly ignored complaints made to the SEC by non-U.S. nationals over 1997-2009 as evidence for a pattern of disregard and discrimination. They’re demanding over $40 million total in compensation.

This is an interesting case, brought by the ever-creative Todd Weiler, a Canadian trade attorney who runs a site related to investment treaty disputes under NAFTA.

A few things jump out at me from a quick gander at the filings:

1. It is one thing to argue that specific actions that a state took can violate international treaties. But is a failure to pop a Ponzi scheme something that falls below the international minimum standard of justice, or a denial of full protection and security? This is what the investors claim. In the past, this full protection clause had more to do with state failure to protect foreign investors from the fallout of civil war. Arguably, all but the weakest states should be able to provide such minimal protection. But I have never seen an argument that a state has an obligation to be proactive at the highest levels of administrative law enforcement. Most countries would not have the regulatory apparatus to sort out such complex schemes, so it is unclear that state practice has actually established that anti-Ponzi regulation is part of the international legal floor. Or is this a special floor that corresponds only to the most sophisticated regulatory states?
2. It is unclear why Weiler did not advise his clients to bring some of these  claims under the financial services chapters of the U.S. agreements with Peru and Chile and Central America. It seems that this type of financial flow would fall under the special law (lex specialis) represented by those chapters, not the more general law of the investment chapter. By the way, there are not as many protections for financial assets as for other types of investments, so the case might be weaker under the financial services chapters. It will be interesting to see which chapter the arbitral tribunals look to.
3. Finally, since the deal with Chile has only been around since 2005, with Uruguay since 2006, the CAFTA since 2006-09, and with Peru since 2009, it is unclear that the alleged negligence and damage by U.S. authorities was caused during a relevant time frame. In other words, I doubt that a tribunal would have much if any temporal jurisdiction over the alleged wrongdoing.
4. It is also unclear if these Latin American investors would have standing to use U.S. courts for this alleged negligence. I don’t believe that failure to regulate on xenophobic grounds would be actionable in U.S. courts. If I am right, this could be an instance of international treaties giving greater rights to Stanford’s foreign victims than to his U.S. victims.

All that said, this is a fascinating case. I’ve often argued that investment treaties could be used to chill the exercise of regulation. If the Weiler cases advance, states might be pressured into more effective regulation.

In that book chapter, I examine possible concerns that World Trade Organization (WTO) rules might pose for financial regulation. But, that pact went into effect in 1995, and, quite simply, has not been used that much to attack financial regulations. For many busy observers, that is reason enough to stop paying attention.

(The exceptions are a Panama case against Argentina (which is not yet resolved), and a US case against China last year, which is not a great example because the challenged policy was more of a service infant industry protection, from what I can tell.)

This raises an interesting question: how long does one have to wait to see an observable implication of a theoretical concern?

Let’s look at the investment treaty context. As Antonio Parra documents in his history of the topic, the first treaty was signed in 1959, between West Germany and Pakistan. Other countries soon followed with their own treaty programs. However, the first lawsuit under the system wasn’t resolved until 1990, in a case between a UK investor and Sri Lanka. Over the course of the 1990s, only five additional IIA awards were made. This changed abruptly in 2000, when seven awards were made. The upward trend continued in the years since, culminating in over 450 known cases today.

In other words, that’s a 31-year gap between the first investment treaty and the first dispute, and a 41-year gap before the caseload took off, and 50 years before there was any major caseload.

If past is any precedent, it could be 2025 or 2045 before there we really see many WTO challenges of financial services rules. I’m guessing that a lot of the public will be surprised that anything like this existed. But, for many insiders, it will seem like very old news.

I guess that’s the challenge with signing complicated international pacts that are not adequately understood or vetted with the public: they take a long time for business interests to use them and for their implications for governance to be appreciated. And, because they are international treaties with no expiration date, they tend to stay around for a long time.

The report, Capital Account Regulations and the Trading System: a Compatibility Review, released by the Global Development and Environment Institute at Tufts University, the Center for the Study of State and Society in Buenos Aires and Boston University’s Pardee Centre, reveals that US trade and investment treaties are the most constraining in terms of granting nations the policy space to regulate cross-border finance, and suggests that nations should refrain from taking on new commitments without the proper safeguards to put strong regulation in place.

One of the chapters of the report is written by Gates Cambridge Scholar Todd Tucker [2012], who is doing PhD in Development Studies.

The report is the second publication of Boston University’s Pardee Center Task Force on Regulating Capital Flows for Long-Run Development, and builds on the Task Force’s first report published in March 2012. The new report is the outcome of a workshop co-sponsored last June in Buenos Aires, Argentina with the Centre for the Study of State and Society (CEDES) in Argentina and GDAE.  The Task Force, which is co-chaired by GDAE’s Kevin P. Gallagher and Leonardo E. Stanley of the Center for the Study of State and Society in Buenos Aires, consists of former and current Central Bank officials, IMF and WTO staff, members of the Chinese Academy of Social Sciences, as well as scholars and members of civil society.

It was initially convened in September 2011 as consensus was emerging that the global financial crisis had re-confirmed the need to regulate cross-border finance. The first report argues that international financial institutions – and in particular the International Monetary Fund – need to support measures that would allow capital account regulations (CARs) to become a standard part of economic policy. However, it states that some policymakers and academics have expressed concern that many nations — and especially developing countries — may not have the flexibility to adequately deploy such regulations because of the trade and investment treaties they are party to.

Todd, who was research director at Public Citizen focusing on trade and investment issues, says: “These agreements were written by a handful of financial sector lobbyists and bureaucrats in the 1990s, before we really understood the perils of deregulation. Our task force will be traveling to Geneva, DC, Beijing and beyond to advise policymakers on how to upgrade 20th century trade rules for 21st century financial realities.”

Amidst the eulogies, I’ve been having my own reflections on the man and his movement.

Between 2002 and 2004, I had the pleasure/frustration of researching diverse aspects of US-Venezuela relations. I was also active in briefings, sign-on letters, research, lobby visits and more, in an attempt to dial down US-Venezuela antagonisms in the wake of the US-supported coup in Venezuela.

Democracy preservation did not seem like it would have been controversial. Boy, was I wrong.

First of all, it was difficult to get the Hill to pay attention, beyond the Dennis Kucinich and Ron Paul types. This got harder with every unhelpful thing Chavez said, which of course only seemed to help him more in building a movement in Venezuela.

Second, much of the traditional left in DC wasn’t into it. Here was a military man running a state – hardly the politically correct model of social change in an era when the left idolized non-state social movements like the Zapatistas. (I remember a conversation between a Venezuelan colleague and a bunch of global justice student activists. The former  lectured us that American progressives were too afraid to seek state power so as to be able to actually test our ideas. That’s probably changed a bit with the Obama generation, although I’m not sure that there are so many ideas to test now. Unhappily, merely holding together the threads of government seems to be the main task of progressives nowadays.)

Third, there was all sorts of overt and covert ways that people were discouraged from doing work on Venezuela. The newspapers weren’t going to acknowledge you, so-called “progressive” magazines would make fun of you, foundations were not going to fund the work, future employers would be turned off by it, and – if you were unlucky – you got stalked by Venezuelan opposition activists who would leak your home address on the Internets.

And this is for the people that weren’t even necessarily saying that Chavez was a wise or good government leader!

US-Venezuela relations never got great (although pro-Bolivarian activists seem to have gotten the movement more institutionalized respect on the left), and I moved on to work on other interests. But I learned a lot during that period of activism.

For better or worse, the Latin American left movement of the 2000s (the move away from armed revolution and towards governing) would probably never have happened without a colorful leader who the world (and I) couldn’t help but watch. He didn’t get a lot of thanks for that, but it’s probably done more for regional stability than the mainstream acknowledges.

RIP, Hugo.

We would like to draw the attention of the DSB to certain matters expressed by the United States in its statement at the DSB [Dispute Settlement Body] meeting on 28th January. These statements, taken in the context of the US continued non-compliance, now assume alarming proportions. In its statement, the United States said: “if Antigua does proceed with a plan for its government to authorize the theft of intellectual property, it would only serve to hurt Antigua’s own interests. Government-authorized piracy would undermine chances for a settlement that would provide real benefits to Antigua. It also would serve as a major impediment to foreign investment in the Antiguan economy, particularly in high-tech industries.”

We are left to ask ourselves why the United States delegation would employ terms such as “theft of intellectual property” and “Government-authorized piracy” relating to the lawful and expressly authorised use of trade remedies provided for in the WTO agreements. We believe that the intemperate and dismissive language used in this very forum by the delegation of the United States, where the lawful judgment of the Dispute Settlement Board was characterized as theft and its rulings called piracy, is a fundamental challenge to the WTO by its most powerful member. If we were in a different setting, Mr. Chairman, this would be contempt of court.

I don’t know if the Antigua legal team has any critical legal studies students on its staff, but this certainly makes it seem so.

First, there’s the dueling rhetorical battles over what can constitute property and theft. First, the U.S. deems intellectual creations as “property”, even though the notion only exists because of a massive government intervention in the free market. Second, having defined property thusly, the US argues that breaking copyrights is theft. Finally, Antigua rebuts that something can’t be theft if a governance body has authorized it. At the risk of sounding like a grad student (ahem), I will note that this exchange perfectly captures the nature of property as a social construction, which can be and is contested socially.

Second, there’s the debate over the intersection of law and power. The US participated in the 2003-05 case brought by Antigua, presumably because it wants developing countries to consider the WTO dispute settlement process as a type of binding law. But, then, the US doesn’t follow the law. (Let’s set aside for a moment that it’s very odd to have trade tribunals ordering a country’s executive branch to eliminate non-trade regulations approved and defended by the legislative branch.) Antigua then attempts to defend its legal rights, and the US responds with a not-too-subtle extra-legal coercive threat to block investment in Antigua. Antigua cleverly calls the US out on this rhetorical gambit, calling it “a fundamental challenge to the WTO by its most powerful member.”

So is this a law game, or a politics game? Antigua to US: your move.