The Billion-Dollar Ultimatum

In a remote tropical forest in Indonesia’s Spice Islands, villagers planned their last stand.

A foreign gold-mining company was preparing to gouge out a massive pit from the mountain that had sustained these farmers and fishermen for generations. To protect their way of life, the villagers planned to hike to the summit and refuse to leave.

Newcrest Mining had won the right to explore this mineral-rich area during the 30-year rule of Suharto, Indonesia’s military dictator. But when mass protests swept Suharto from power, the new parliament outlawed the environmentally devastating open-pit mining method in certain areas like this one, where it could endanger the water supply.

Newcrest, however, was proceeding as if the new law didn’t apply — because, effectively, it didn’t. The Australian company had found a way to trap Indonesia in the deals of the deposed dictator and, in the process, reap huge profits.

The weapon that Newcrest and other powerful foreign mining companies wielded was a threat. A highly specialized legal threat: They warned they might haul Indonesia before a sort of private global super court. Though most people have never heard of it, this justice system has the power to make entire nations fork over hundreds of millions or even billions of dollars to companies that say their business was unfairly hampered.

Known as investor-state dispute settlement, or ISDS, this legal system is written into a vast network of treaties that set the rules for international trade and investment. It is as striking for its power as for its secrecy, with its proceedings — and in many cases its decisions — kept from public view. Of all the ways in which ISDS is used, the most deeply hidden are the threats, uttered in private meetings or ominous letters, that invoke those courts. The threats are so powerful they often eliminate the need to actually bring a lawsuit. Just the knowledge that it could happen is enough.

The threats are so powerful they often eliminate the need to actually bring a lawsuit. Just the knowledge that it could happen is enough.

An 18-month BuzzFeed News investigation into ISDS for the first time casts a bright light on the use of these threats. Based on reporting from Asia, Africa, Central America, and the US; interviews with more than 200 people; and inspection of tens of thousands of pages of documents, many of which have never before been made public, the series has already exposed how executives accused or convicted of crimes have turned to ISDS to help them get off the hook. Stories later this week will show how some financial firms have used ISDS to protect their most controversial and speculative practices and how the US, a major booster of the system, is surprisingly vulnerable to ISDS suits. Today’s story reveals how corporations have turned the threat of ISDS legal action into a fearsome weapon, one that all but forces some of the countries where these corporations operate to give in to their demands.

ISDS was originally devised as a forum in which to resolve conflicts between countries and the foreign companies that do business within their borders. But the system puts countries at a striking disadvantage.

Only companies can bring suit. A country can only defend itself; it cannot sue a company. Arbitrators who decide the cases are often drawn from the ranks of the same highly paid corporate lawyers who argue ISDS cases. These arbitrators have broad authority to interpret the rules however they want, without regard to precedent and with almost no public oversight. Their decisions carry extraordinary power. Often, countries are obligated to obey ISDS judgments as if they came from their own highest courts. And there is no meaningful appeal.

ISDS is so tilted and unpredictable, and the fines the arbitrators can impose are so catastrophically large, that bowing to a company’s demands, however extreme they may be, can look like the prudent choice. Especially for nations struggling to emerge from corrupt dictatorships or to lift their people from decades of poverty, the mere threat of an ISDS claim triggers alarm. A single decision by a panel of three unaccountable, private lawyers, meeting in a conference room on some other continent, could gut national budgets and shake economies to the core.

ISDS was once an obscure quirk of international law, but it has exploded in recent years, as elite law firms have devised new and creative ways to deploy it. They have used ISDS to punish nations for limiting profits during economic crises, reforming tax and environmental regulations, or prosecuting executives accused of crimes.

But those are cases that actually proceeded all the way to arbitration. Often, say lawyers who are involved in the system, the mere threat of an ISDS claim is enough to achieve the same results. It’s like flashing a gun at a tense negotiation — better not to use it, but the guys across the table know it’s there.

“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.”

Jan Paulsson

Danilo Agutoli for BuzzFeed News

The power of such threats is at the heart of political debates over ISDS. Academics and activists argue that, behind closed doors, businesses can brandish the threat of ISDS to halt or roll back legitimate public-interest laws. These threats, they argue, are a much greater danger than the sliver of cases that go to arbitration and make it into public view. Supporters of ISDS shoot back, where's the proof?

It's hard to come by. In fact, a recent study for the Dutch government called finding such proof “nearly impossible.” The lawyers involved almost always have pledged confidentiality to their clients, and the threatened governments — afraid of appearing weak or sparking a public backlash — are loath to admit they capitulated. In fact, many ISDS supporters flatly say it never happens.

“Some people say states are always getting screwed or their public policy initiatives are being frozen because they’re scared of investment arbitration,” said Jan Paulsson, a legend in ISDS circles who has worked as a lawyer or arbitrator in dozens of cases. “I’d like somebody to show that to me. I’d really like somebody to show me an example where that happened.”

In government and corporate offices in Jakarta and the tropical forests of the Spice Islands, BuzzFeed News found that not only can it happen, it did. With grave consequences. This is how.

Rupert Smissen for BuzzFeed News

For decades, Suharto and big mining companies had a good thing going. The general turned dictator didn’t worry much about the environment or indigenous people, and the mining industry’s spoils helped fill his regime’s coffers.

To keep it all running smoothly, his government had created a kind of one-stop shop to award lucrative contracts: favorable terms, few hassles. “If you have a problem,” such as uncooperative locals, recalled Ketut Wirabudi, who worked in the mining industry during that era, “you give a donation to the military, and they solve the problem.”

The companies “just did whatever they want,” said Rachmat Witoelar, a recent minister of environment.

Suharto

Danilo Agutoli for BuzzFeed News

So when the post-Suharto government enacted a forestry law that forbade open-pit mining in some areas, mining companies fought back, arguing that the law violated contracts they had signed under Suharto.

In a statement to BuzzFeed News, Newcrest at first said it “is not aware of any threats/ISDS action made in relation to the enforcement of the 1999 forestry law.” But ​Syahrir AB, who at the time was a Newcrest executive in Indonesia, was unequivocal: “My company, Newcrest​,​" made that threat​, he said in an interview in Jakarta.​

​He himself ​had ​delivered the company’s “message to the government” during a meeting with mining ministry officials, he recalled. “If we cannot mine in this area,” he remembered telling them, “we will wash our hands [of] Indonesia and go to international arbitration.” The message was clear: Indonesia would be sued, perhaps for hundreds of millions of dollars.

Told what Syahrir said, a Newcrest spokesman wrote that the company “is not aware” Syahrir had made the threat, adding that “it is not something that we would condone.”

Interviews with current and former officials from multiple government ministries, four mining companies, and the industry’s lobbying association, as well as thousands of pages of documents reviewed by BuzzFeed News show that other foreign mining giants privately made similar threats, warning that they would sue Indonesia for billions of dollars in damages if the country tried to make them follow the new environmental law.

Syahrir AB

Danilo Agutoli for BuzzFeed News

Their billion-dollar ultimatum was no idle threat. As the mining companies knew well, Indonesia was still reeling from another staggering judgment.

That case involved the Karaha Bodas Company, which had contracted with companies owned by Indonesia to build a geothermal power plant. The Asian currency crisis struck not long after the deal was signed, and the government put that and many other projects on hold.

But unlike most other affected companies, Karaha Bodas, primarily owned by two US energy firms, went to international arbitration. The tribunal awarded it $261 million, despite the fact that the company had not yet sunk even half that amount into the project. The bulk of the award was for the loss of future profits — potential future profits, which no one could prove would actually have accrued.

In other words, Indonesia owed a quarter-billion dollars to a private company for electricity it would never receive, from a power plant that hadn’t been built, all while it was battling a historic financial crisis. When the government resisted paying, Karaha Bodas filed to seize Indonesian assets around the world. The company did not respond to requests for comment.

The country stood to lose half its entire annual budget.

The mining companies brought up this painful episode in meetings, former government officials recalled. The government got the point. “Because of this bitter experience, we tend to find solutions,” said M.S. Kaban, who became minister of forestry in 2004.

And this time, the potential losses were much bigger — as much as $22.7 billion if some of the biggest mining companies sued, according to a government analysis obtained by BuzzFeed News. That was about half of the previous year’s budget for the entire government.

Stuart Gross, an American lawyer who advised local environmental groups, said he believed Indonesia could have beaten the mining companies in arbitration but still wasn’t sure what he would have done if he’d been in the president’s position.

“The liability that these mining companies were talking about was in the billions,” he said. “Indonesia just doesn’t have that kind of capital. It’s crippling. This threat had no legal merit, but because of the consequences and the way these cases are adjudicated — by a private panel without appeals — that threat is very effective.”

He added, “A country like Indonesia, unless it’s got a backbone of steel, when faced with one of these threats, is likely going to cave.”

Rupert Smissen for BuzzFeed News

Under cover of night, the villagers picked their way through the tropical forest in the Spice Islands, bound for the summit of the mountain Newcrest wanted to carve out.

The villagers had depended on that mountain, along with the forest and the waters surrounding it, for generations. It was where they cultivated coconut, cassava, jackfruit, and cocoa; hunted deer and wild pigs; drew water and harvested fish; and gathered the cloves and nutmeg that had first made this unforgiving territory a prize for colonial powers.

“Our elders told us to guard this location,” said Petrus Kakale, who had tended a plantation of clove trees on the mountain for 40 years.

Petrus Kakale

Danilo Agutoli for BuzzFeed News

But that night, in January 2004, someone else was guarding it: members of the Brimob, Indonesia’s infamous paramilitary police.

The villagers hoped to slip past the Brimob in the middle of the night by splitting into smaller groups that would converge on the summit. But, in the early morning hours, these plans dissolved, according to interviews with five people who participated in the demonstration and an investigation report, never before made public, by the Indonesian government’s independent human rights agency.

Dozens of villagers, led by a young farmer and protester named Fahri Yamin, had made it part of the way up the mountain when Brimob officers brandishing rifles told them to turn back. Fahri said he refused. “We only demand our rights,” he recalled telling the officers.

The Brimob ordered the villagers to the ground and beat them with heavy sticks and the butts of their rifles. The officers shoved Fahri, his hands bound and a few teeth knocked out, into the back of a vehicle and sped off toward Newcrest’s offices.

Another group of villagers, led by a farmer named Salmon Betek and village priest Pordenatus Sangadi, had made it farther up the mountain before encountering the Brimob. The officers herded the group to the summit — once a forest, now cleared in preparation for mining — and ordered them to lie on the ground. Here, too, the Brimob beat the villagers with heavy sticks and rifle butts, fracturing ribs and opening gashes on heads.

Fahri Yamin

Danilo Agutoli for BuzzFeed News