May the DRC assign its potential investment claim against Switzerland to re-pay its debt with Taiwan

The Democratic Republic of Congo (DRC) is currently negotiating the rescheduling of a 57-million-dollar loan from Taiwan which dates back to the presidency of Mr. Mobutu. Could the DRC assign a potential investment claim against Switzerland to Taiwan to re-pay this 30-year-old loan?

Loan dispute: Taiwan vs DRC

In 1991 the Ex-Im Bank of the Republic of China (the Export-Import Bank of Taiwan) granted a 20-million-dollar loan to the Republic of Zaire (the name of the DRC at the time), headed by President Mobutu Sese Seko. Mr. Mobutu ruled over the African country from 1965 until he was forced into exile in May 1997 in Morocco, where he died three months later.

In exchange of Zaire’s refusal to recognize the People's Republic of China (PRC) as the successor of the Republic of China (Taiwan), Zaire received financial aid from Taiwan during the Mobutu’s dictatorship, as part of Taiwanese “dollar diplomacy.” Since the deposition of Mobutu, the DRC has gradually realigned its international policy with the PRC, who is now its main business partner.

In 2010 a joint World Bank-IMF decision allowed to write off US$12.3bn of DRC's debt owed to multilateral and bilateral creditors, corresponding to sums accumulated during the 32-year dictatorship of Mobutu, some of which were kept in Swiss bank accounts. However, Taiwan is not a full member of the World Bank, nor of the IMF, so the debt write-off did not affect the outstanding debt the DRC owns to Taiwan.

As of 2016, in light of the fiasco of its “dollar diplomacy,” Taiwan has become determined to recover its money from former debtors who have switched allegiance to the PRC. Taiwanese Export-Import Bank has brought legal proceedings for unpaid loans before the United States District Court for the Southern District of New York (designated as one of several non-exclusive fora under the loan agreements) against several African countries, including the DRC.

Since Taiwan disbursed the loan in 1991, the DRC has not paid back any instalment to the island of Formosa. Consequently, in 2017, the DRC was ordered in absentia by the Southern District Court to pay back the loan, whose original sum of US$20 million – after interest accumulated over three decades and late payment penalties – now amounts to US$57.3 million.

Despite the adverse court's ruling, Ms. Benita Sarr-Kindongo (co-founder of the law firm Hannoun & Banking) successfully persuaded, on behalf of the DRC, the Taiwanese Bank to negotiate a rescheduling of the debt, with the intention of finding a viable solution for both parties. Currently, the settlement negotiations are pending.

Potential investment dispute: DRC vs Switzerland

After Mobutu was overthrown in May 1997, the new Congolese government in power launched immediately an international investigation to search and recover the governmental funds hidden abroad.

Especially, Switzerland received many millions of dollars in misappropriated funds from Mobutu over his 32 years in power. According to the DRC’s Government, by the 1997 former President Mobutu had siphoned from his country and deposited in Switzerland approximately US$8 billion. Astonishingly, after a survey over 406 Swiss banks asked by the Swiss Government – upon the request of the DRC – only US$3.4 million were found belonging to the ousted Zairean President.

Criticisms were promptly advanced as to the completeness and accuracy of the survey, as it was hard to believe that such a small amount was found. For instance, the bulk of the US$3.4 million was found in a single bank, which at first declared having nearly nothing. Notably, also the initial search in Switzerland for the funds of another dictator (Ferdinand E. Marcos, former Philippines dictator) also turned out to be very little at the beginning, just to find later some US$500 million.

Switzerland froze the assets of the dictator and his family (including a US$5.5 million mansion in Lausanne) up to 2008 to allow the Congolese representatives to mount a case to recover the money, which according to the DRC government was stolen. Professor Mark Pieth submitted an appeal to extend the freeze of the funds to enable the DRC government to present its case by gaining access to the relevant files, which were kept secret. However, the appeal was rejected by the Swiss courts, who returned US$6.68 million to the former Zairean dictator's heirs. Switzerland's court decision was widely condemned in that the DRC was never ever given a chance to be in a position to present its case. Consequently, the ruling has been regarded as furthering Switzerland’s reputation as a safe haven for ill-gotten dictators' assets.

DRC’s potential investment claim against Switzerland

Nearly all bilateral investment treaties (BITs) contain provisions according fair and equitable treatment (FET), compensation for expropriation, and guaranteeing the free transfer of funds, obliging host-States to permit the inward transfers, conversion and repatriation of funds in relation to investments. The 1972 Switzerland-DRC BIT is no exception, and indeed its Articles 2, 3 and 4 provide for such obligations. This BIT also provides for a State-to-State arbitration concerning the interpretation or execution of this international agreement, preceded by six-months of diplomatic consultations.

The DRC may argue that Mr. Mobutu transferred the US$ 8 billion in Switzerland in his capacity (or because of his capacity) as Zairean President, acting de facto as the head of an early sui generis sovereign wealth fund, which managed Zairean national savings for the purposes of investment. Therefore, such deposits in Swiss banks could effectively constitute an investment in Switzerland for the Zairean State on behalf of its citizens. Such type of investment would receive legal protection according to Article 1 of the applicable BIT, which defines the term "investments" as contributions in cash or in kind made by nationals of one of the Contracting-Parties in the territory of the other.

By failing to conduct a thorough and transparent investigation over Mobutu’s numerous bank accounts, and by failing to give the DRC representatives access to the case files on such investigation, Switzerland may have breached the FET standard. Under Article 2 of the applicable BIT, Switzerland was required to conduct a more accurate investigation (instead of a mere survey) over Mobutu’s assets and the DRC may indeed have expected full cooperation with Swiss authorities to reclaim its governmental funds, instead of a resistance to disclosing Mobutu’s bank funds.

By ordering the release of DRC’s governmental funds to Mobutu’s heirs instead of the DRC, Swiss courts – and, accordingly, the Swiss State under Article 4 of the Articles on State Responsibility – may have breached the obligation under Article 3 of the Switzerland-DRC BIT to repatriate these funds relating to the bank deposits, that may be qualified as DRC’s State protected investments in Switzerland. According to a well-established principle of law, the payment to the falsus creditor frees the debtor of its obligations only if the debtor was in good faith on the basis of univocal circumstances. In the case at hand, circumstances were not univocal, nor Switzerland could have been in good faith – meaning unaware of the circumstances – as those funds were claimed by DRC representatives before Swiss courts and authorities.

Further, in light of the relevant circumstances, the billions accumulated by the former Zairean President in Swiss banks – if regarded as a personal wealth fund transmittable as such to his heirs, and not as State wealth fund – may well hint at alleged ill-gotten wealth of a public officer. As such, Switzerland may have perpetuated the embezzlement of an entire country's governmental fund by not cooperating fully with the disclosure of relevant bank information to find the large reminder of such wealth and by illegitimately giving a portion of this wealth to Mobutu’s family members. These composite acts may be regarded as an unlawful indirect expropriation at the expenses of the DRC’s government and its citizens violating Article 4 of the applicable BIT, thus prompting for a full compensation.

Possible amicable solution for the DRC and Taiwan to the loan dispute: Taiwan vs Switzerland

The DRC may assign its investment claims against Switzerland to the Taiwanese Bank and share with Taipei the financial proceeds of the arbitral award up to the US$57 million dollar, that the African State owes to the island of Formosa. Taipei – who has the financial strength to pursue this claim – may in turn have an interest in accepting the assignment of this investment claim as Switzerland is one of the most creditworthy countries in the world, hence, with probably more liquidity than the DRC.

Further, the Taiwanese Bank may have the required expertise to tap into this opportunity, as already in the recent past – assisted by law firm Sullivan & Worcester – Taiwan sought to capitalize on the outcome of an ICSID arbitration. The Taiwanese bank sought an order of attachment against Grenada – who had defaulted on four loans totalling US$ 20,000,000 made by the Taiwanese bank over the 90’s – to attach the proceeds of an order entered in 2011 in favour of Grenada (amounting to US$ 300,000) following the ICSID arbitration against RSM.

Conclusion

Countries who have been victims of dictatorial and corrupted regimes – that have diverted public funds abroad – may recover these conspicuous sums from tax-heaven countries, where these fortunes are often stashed to mysteriously disappear or being egregiously downsized upon the deposition or death of a dictator, to the detriment of the newly established government. Failing a settlement with the tax-heaven country to repatriate these funds, a country – who was stolen of its sovereign wealth – may avail itself of the BITs’ protection to claim the return of its national funds, without the assistance of a non-cooperative tax-heaven country and through the tools and guarantees provided by an international arbitration (chiefly, a thorough discovery and an impartial assessment of the evidence).