In the week of Dec. 7, the Brookings Institution will release a policy paper written by Professor Richard E. Feinberg about upcoming U.S.-Cuba claims talks. As with these talks, Feinberg’s paper deals with certified claims of U.S. citizens and corporations, not with Cuban-American claims. In the 56-page paper — titled “Reconciling U.S. Property Claims in Cuba: Transforming Trauma into Opportunity” — Feinberg suggests a two-tier settlement strategy that includes lump-sum settlements for the bulk of smaller, individual claims and a menu of options for corporate claimants that will allow for U.S. investments, ranging from debt-equity swap vouchers, to “rights to operate”, final project authorizations at the Mariel Special Development Zone, “preferred acquisition rights”, and payment through sovereign bonds, rather than actual restitution of seized property. He also suggests a variety of sources for compensation funds that could be used in the settlement process. Following is Feinberg’s discussion of lump-sum settlements, which he believes are likely to form the foundation of a U.S. accord with Cuba.
By Richard E. Feinberg
Since World War II, lump-sum settlements have been the preferred mechanism – for the United States and other developed nations – to settle bulk nationalizations of alien properties. In a lump-sum settlement, the two governments negotiate a total amount of financial compensation that is transferred in a lump-sum or global indemnity to the plaintiff government which in turn assumes the responsibility to distribute the transferred monies among its national claimants. For the demandeur, such arrangements commend themselves for several weighty reasons: greater efficiency in coping with large numbers of claims; enhanced consistency in the administration and adjudication of claims; promoting fairness among claimants in setting criteria for evaluating claims and distributing awards; and upholding professionalism and integrity in the national claims commission (in the case of the United States, the Foreign Claims Settlement Commission, FCSC). National commissions and the associated lump-sum settlements may also provide the demandeur with greater leverage over the defendant, and make it more difficult for the defendant government to adopt a “divide and conquer” strategy. Perhaps even more importantly if sometimes less visibly, lump-sum negotiations allow the two governments to address other matters, such as broader investment and trade relations; in some cases, the lump-sum settlement may even be wrapped into a strategic deal, such as the normalization of bilateral relations.
Morally, lump-sum settlements avoid any admission of wrong-doing. Neither state is called upon to admit, at least not explicitly, the validity of the accusations of the other state, nor to make politically painful apologies. The final accord is published, but the internal calculations, the trade-offs across claims and counter-claims, are not revealed to the public, and may not even be fully apparent to the negotiators themselves.
As a rule, lump-sum settlements have found that “adequate” payment, as called for in the formula enunciated by FDR’s Secretary of State, Cordell Hull, amounted to less-than-full compensation. A seminal study of 69 lump-sum settlement agreements among nations found that partial payment of principal has been the rule, often without interest (In their book International Claims, Weston Burns, Richard Lillich and David Bederman cautioned, however, that lump sum settlements have often been linked together with quid pro quos “which are well-nigh impossible to assess.”). The Commission’s standard policy of adding interest charges derives not from Congressional authority but rather from its own judgment, as the Commission noted in its report on its Cuba Claims Program: “Although Title V of the (Foreign Claims Settlement) Act did not expressly provide for the inclusion of interest on the amount allowed, the Commission concluded that interest should be added in a certifiable loss in conformity with principles of international law, justice and equity, and should be computed from the date of loss to the date of any future settlement.”
The FCSC has adjudicated a wide variety of claims that can be broken into four broad categories: Eastern Europe, the Communist Giants (the Soviet Union, China), oil exporters, and select others (Vietnam, Germany). After World War II, and drawing upon blocked financial assets, funds were established to compensate claimants for losses in Eastern Europe; for claims in Poland, Bulgaria, Hungary and Romania, pro rata payments covered an (unweighted) average of 45% of the FCSC-adjudicated claims awards, without interest, according to FCSC annual reports.
From the perspective of the claimants, settlements with the two Communist giants, the Soviet Union and China, were even less successful, as broader geopolitical interests seemingly out-weighed the interests of individual property claimants: frozen assets of the Soviet Union allowed for pro rata payments of merely 9.7%; in 1979 the People’s Republic of China agreed to pay $80.5 million into a China Claims Fund (with an initial payment followed by five annual payments) which allowed for pro rata payments to U.S. claimants of 39% of the value of their claims as certified by the FCSC. In contrast, settlements with oil exporters Iran and Libya have allowed for full payment of principal and some interest.
In the sui generis cases of Vietnam and Germany, Vietnam in 1995 agreed to apply its assets frozen by the U.S. government to pay claimants 100% of principal and 80% of interest. As fortune would have it, the Vietnamese financial assets in the custody of the U.S. government were sufficient to fully cover those payments, so from the Vietnamese perspective the transaction was a wash. The German agreement in 1992, to pay up to $190 million, which covered 100% of principal and approximately 50% of interest, was pertinent in two respects. First, U.S. negotiators accepted less than the full 6% interest, as the German negotiators balked at adding interest charges to compensation, just as the German government had refused to do in resolving property claims in East Germany following reunification. As an official of the German government told the author, “we avoided the ‘fictional calculations’ of what properties might have earned, had there been no World War II, no German Democratic Republic.” Also of note, in determining its interest awards on German claims, the FCSC made explicit that interest was to be simple, not compound interest, in accordance with previous Commission decisions.
A common criticism of lump sum settlements negotiated by the State Department is that they give too much weight to diplomatic interests, resulting in the claimants receiving considerably less than the values of their lost properties. However, from the claimant perspective, the recent settlements with Vietnam and Germany and with the oil exporters are more heartening. These more favorable settlements reflect the debtor nation’s capacities to pay (in the Vietnam case, the existence of frozen assets), and certainly in the Vietnam and German cases, favorable diplomatic contexts.