Johann Hari: We must stop the 'vulture funds' that feed on the world's poor

Would you ever march up to a destitute African who is shivering with Aids and demand he "pay back" tens of thousands of pounds he didn't borrow – with interest? I only ask because this is in effect happening, here, in British and American courts, time after time. Some of the richest people in the world are making profit margins of 500 per cent by shaking money out of the poorest people in the world – for debt they did not incur.

Here's how it works. In the mid-1990s, a Republican businessman called Paul Singer invented a new type of hedge fund, quickly dubbed a "vulture fund." They buy debts racked up years ago by the poorest countries on earth, almost always when they were run by kleptocratic dictators, before most of the current population was born. They buy it for small sums – as little as 10 per cent of its paper value – from the original holder and then take the poor country to court in Britain or the US to demand 100 per cent of the debt is repaid immediately, plus interest built up over years, and court costs.

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If they can't pay, the vulture fund goes after anybody who is paying the poor country money, trying to force them to give it to them instead. In one instance, a fund tried to get a court order freezing Belgian aid payments to the Congo, saying it should go into their bank account.

Let's look at an example. In 1979 – the year I was born – the dictator of Zambia, Kenneth Kaunda, took out a loan for $15m from the dictator of Romania to buy some tractors. Most didn't work. But after 20 years of non-repayment, the new democratically elected government of Zambia said it had no way to pay the loan, and negotiations began to cancel it. But a multi-millionaire called Michael Francis Sheehan, whose company Donegal International is based in a British tax haven, had spotted a chance. He bought the debt from Romania for $3m, and took Zambia to court in Britain for the full amount – which had now piled up to $55m.

The Zambian government explained that they don't have the money. A fifth of their people are HIV positive, and there are only 600 doctors covering more than 12m people. Most people are dead before their 38th birthday. The Zambian President's adviser, Martin Kalunga-Banda, explained – and aid groups verified – that if the government had to pay out for the dead dictator's bills, "medicines that would have been available to in excess of 100,000 people in the country will not be available.... [and] in excess of 300,000 children will be prevented from going to school." The people who will go sick or uneducated were not alive when the loan was taken out.

The British judge who heard the case was clearly appalled, but he said the law gave him no choice but to require Zambia to pay $15m, a third of what had been demanded. Virtually all the debt relief the country had received that year – as a result of Jubilee 2000 and Make Poverty History – was wiped out.

What happens to the money once it is redirected? Sheehan – who likes to be known as "Goldfinger" – is fond of vintage Cadillacs, and lives in a mansion in Virginia. Singer used the cash he took to become the biggest donor in New York to George W Bush's 2000 Presidential campaign, and then went on to bankroll Rudy Giuliani's bid in 2008.

In the 1990s and Noughties, there was an extraordinary campaign by ordinary Westerners demanding that Africa's debt be dropped. It had a huge effect: $88bn was cancelled. Malawi – to name just one – went from having to pay $95m a year to $5m. But these vulture funds are unpicking this progress with their long beaks, by grabbing the final threads of debt, and demanding they are all paid at once. Vulture funds have been demanding $130m from Liberia – a fifth of its entire GDP.

I have been to two of the countries most aggressively targeted by the vulture funds – Peru, and the Democratic Republic of Congo. I spent a week in a gargantuan rubbish dump in Peru 35 miles north of Lima. It is home to more than 5,000 children. Among them I found Adelina, a little eight-year old smudge, living there in a nest she had built from trash. She spends all day searching for something – anything – she can sell. The vulture funds managed to get $58m out of Peru, on a debt they paid $11m for.

An hour's drive from Kinshasa, the capital of Congo, I found an orphanage filled with emaciated children. Since six million people have died in the war in Congo, these are the lucky ones: at least they have a roof. The vulture funds demanded $100m from this country. When the government couldn't – on a week's notice – produce an inventory of everything they own for a US court, they began to rack up fines of $80,000 a week.

Most people, when they hear about this, ask – why is this lawful? Of course it's important for countries to repay their debts when possible so they can continue to borrow for investment where necessary – but not if the debts were taken out by thieving dictators generations ago, and not at a loan- shark profit rate of 500 per cent.

As long ago as 2002, Gordon Brown said these funds were "morally outrageous", but only now are there tentative moves on both sides of the Atlantic against them. In the US, the Democratic Representative Maxine Waters has introduced a draft bill called the Stop Vultures Act. It would ban vulture funds from seeking "usurious" payments – defined as anything more than the purchase price of the debt plus six per cent a year interest. In Britain, the Labour MP Sally Keeble introduced a 10-Minute Rule Bill with similar proposals.

This pressed Brown to finally move. He says the British government will give a "debt relief discount" of 90 per cent for any country in the Highly Indebted Poor Country (HIPC) programme. This would kill the vulture fund business model. It's good – but it doesn't go far enough. They are lots of poor countries that don't fall into the specific HIPC category, and they will still be carrion under these proposals.

The energy that drove Jubilee 2000 needs to be summoned again to pressure both governments hard. Any measures in Britain will have to be introduced very soon because the Conservative Party is in practice defending the vulture funds. Nick Dearden, the director of the Jubilee Debt Campaign: "At first, we had some Conservative MPs who supported us, but they were quickly silenced by Central Office. They have been saying action against vulture funds isn't worth taking." Ah, the sweet scent of compassionate conservatism.

Is this who we want to be? Do we want to be a society that allows billionaires to sue the starving, the sick, and the stunted for pennies borrowed by somebody else, long ago? If not, we have to shut these funds – now.

j.hari@independent.co.uk

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