VZCZCXRO3350
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0209/01 0521501
ZNR UUUUU ZZH
O 211501Z FEB 07
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3963
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

UNCLAS SECTION 01 OF 02 LUSAKA 000209 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV KCOR ZA
SUBJECT: UK COURT RULES ON DONEGAL "VULTURE FUND" 
 
REF: 06 LUSAKA 985 
06 LUSAKA 280 
05 LUSAKA 603 
 
¶1. (SBU) SUMMARY.  On February 15 a UK judge ruled that the 
Government of Zambia is liable for a debt owed to Donegal, a British 
Virgin Islands-based investment fund that is partly owned by a U.S. 
company.  Although the ruling received much negative publicity in 
the international media, some Zambian Government officials viewed it 
positively, primarily because the ruling suggested that Zambia will 
not be liable for accrued interest on the outstanding debt.  They 
are also pleased that the case has exposed corruption surrounding 
the Donegal deal and has raised public awareness of--and aversion 
to-"vulture fund" practices.  END SUMMARY. 
 
---------- 
Background 
---------- 
 
¶2. (SBU) In 1979 the GRZ borrowed approximately USD 14 million to 
purchase Romanian tractors but subsequently failed to service the 
debt.  In December 1998, the GRZ negotiated an agreement with the 
Romanian government to liquidate the debt for USD 3 million.  Before 
this arrangement could be completed, Donegal International purchased 
the non-performing debt for USD 3.2 million (approximately 11 
percent of its face value).  There were allegations that the British 
Virgin Islands-based Donegal, which is partly owned by a U.S. 
company, Debt Advisory International, engaged in corrupt practices 
to secure the deal (Ref C). 
 
¶3. (SBU) In 1999, the value of the unpaid principle plus interest 
(accruing at an annual rate of 8 percent) was USD 29 million. 
According to a settlement agreement that the two parties reached in 
London in early 2004, Zambia agreed to pay Donegal USD 42 million, 
reflecting a balance of USD 29 million plus an additional USD 13 
million in accrued interest.  Allegedly the agreement also 
stipulated that in the event of a dispute, the matter would be 
litigated in UK courts. 
 
¶4. (SBU) However, in March 2004, after the Task Force on Corruption 
found evidence of fraud in Donegal's acquisition of the claim, the 
GRZ stopped servicing the debt (Ref B).   Donegal subsequently 
launched a civil case in the UK, suing the GRZ for the outstanding 
balance.  Donegal also applied to the UK courts for an injunction, 
freezing about USD 50 million in Zambian government assets. 
 
¶5. (SBU) The court case began in February 2006 in a UK civil court 
and ran through July 2006 (Ref A).  DLA Piper, the UK law firm 
representing the GRZ, built its defense on the contention that 
Donegal acquired the debt through fraud and therefore had no claim 
against the GRZ.  The legal team--led by William Blair (Prime 
Minister Tony Blair's brother)--provided evidence on a series of 
bribes, including one to former President Chiluba, that were used to 
acquire the debt as well as to facilitate Zambian payment on the 
debt. 
 
---------- 
The Ruling 
---------- 
 
¶6. (SBU) On February 15, a UK judge ruled against the GRZ's 
application to dismiss Donegal's claim.  The judge, Andrew Smith, 
reportedly found Donegal's actions to be "reprehensible but not 
illegal."  Nevertheless, he proposed to end a freeze of Zambia's 
assets secured by the fund, and indicated that Zambia would not be 
liable for the entire outstanding amount (which by 2007 had reached 
USD 55 million, according to Donegal's calculations), but rather 
would be required to compensate Donegal for the original debt (USD 
14 million) plus damages.  Embassy contacts estimate that "damages" 
will include some legal fees, less the USD 2.2 million that Zambia 
already paid to Donegal.  The total is likely to be between USD 10 
and 20 million. 
 
¶7. (SBU) The case will reconvene on March 9, and a final ruling on 
Zambia's liability is expected in April.  Embassy contacts point out 
that there is no precedent in UK courts and that it is possible that 
Judge Smith will further reduce Zambia's liability.  They also 
speculate that Judge Smith has little sympathy for Donegal, whose 
witnesses the Judge reportedly found to be "dishonest and 
deliberately evasive." 
 
¶8. (SBU) A representative from the Attorney General's office and 
other informed sources told P/E officer that they viewed the ruling 
positively because it has exposed the corruption behind the Donegal 
deal, and because it has raised public awareness of--and aversion 
to--so-called "vulture funds" (companies that buy debts of poor 
nations at reduced rates, and then sue for the full value of the 
debt plus interest).  They expressed relief that Zambia would not be 
liable for the unpaid interest, which by 2007 has dwarfed the 
original loan amount.  They also opined that the Donegal case was 
 
LUSAKA 00000209  002 OF 002 
 
 
the most challenging of the three high-profile Zambian cases before 
UK civil courts (Ref A). 
 
¶9. (SBU) A representative from the UK's Department for International 
Development (DFID), which has provided substantial budget support to 
the Task Force on Corruption, told P/E officer that DLA Piper 
attorneys were "delighted" by the ruling.  She also described as 
"ridiculous" media reports that attempt to link the Donegal ruling 
to debt relief.  (NOTE:  A local consultant to Oxfam has made this 
link, which has reverberated in international media.  END NOTE.) 
 
------- 
COMMENT 
------- 
 
¶10. (SBU) In 2006, Zambia benefited from almost USD 3.9 billion in 
debt relief.  Those who claim that Zambia's Donegal liability is 
somehow equal or comparable to 2006 debt relief are hugely mistaken. 
 The liability is perhaps more easily likened to Zambia's 
anticipated 2007 foreign debt service of USD 34 million (compared to 
a pre-debt relief figure of USD 373 million). 
 
¶11. (SBU) In many ways the ruling could be considered a small 
victory to the Task Force on Corruption, insofar as the Task Force 
succeeded in exposing the shady dealings behind the Donegal debt 
agreement, and inasmuch as its UK attorneys succeeded in reducing 
Zambia's liability.  Zambia's liability, however, is still likely to 
be larger than the amount that had been agreed upon with the 
Government of Romania in 1999.  Unfortunately, much of the local 
media coverage has lacked clarity and has focused on the liability, 
rather than the alleged corruption that surrounded the Donegal deal. 
 Attempts in the local and international media to make linkages to 
debt relief (an entirely unrelated matter) only muddy the waters 
further by making the issue about poverty rather than corruption. 
 
MARTINEZ