BUILDING PROSPERITY IN LATIN AMERICA:

INVESTOR CONFIDENCE IN THE RULE OF LAW

HEARING
BEFORE THE

SUBCOMMITTEE ON
THE WESTERN HEMISPHERE
OF THE

COMMITTEE ON FOREIGN AFFAIRS

HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION

JULY 30, 2014

Serial No. 113212

Printed for the use of the Committee on Foreign Affairs

(
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COMMITTEE ON FOREIGN AFFAIRS

EDWARD R. ROYCE,
CHRISTOPHER H. SMITH, New Jersey
ILEANA ROS-LEHTINEN, Florida
DANA ROHRABACHER, California
STEVE CHABOT, Ohio
JOE WILSON, South Carolina
MICHAEL T. MCCAUL, Texas
TED POE, Texas
MATT SALMON, Arizona
TOM MARINO, Pennsylvania
JEFF DUNCAN, South Carolina
ADAM KINZINGER, Illinois
MO BROOKS, Alabama
TOM COTTON, Arkansas
PAUL COOK, California
GEORGE HOLDING, North Carolina
RANDY K. WEBER SR., Texas
SCOTT PERRY, Pennsylvania
STEVE STOCKMAN, Texas
RON DESANTIS, Florida
DOUG COLLINS, Georgia
MARK MEADOWS, North Carolina
TED S. YOHO, Florida
SEAN DUFFY, Wisconsin
CURT CLAWSON, Florida

California, Chairman
ELIOT L. ENGEL, New York
ENI F.H. FALEOMAVAEGA, American
Samoa
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
ALBIO SIRES, New Jersey
GERALD E. CONNOLLY, Virginia
THEODORE E. DEUTCH, Florida
BRIAN HIGGINS, New York
KAREN BASS, California
WILLIAM KEATING, Massachusetts
DAVID CICILLINE, Rhode Island
ALAN GRAYSON, Florida
JUAN VARGAS, California
BRADLEY S. SCHNEIDER, Illinois
JOSEPH P. KENNEDY III, Massachusetts
AMI BERA, California
ALAN S. LOWENTHAL, California
GRACE MENG, New York
LOIS FRANKEL, Florida
TULSI GABBARD, Hawaii
JOAQUIN CASTRO, Texas

THOMAS SHEEHY, Staff Director

AMY PORTER, Chief of Staff
JASON STEINBAUM, Democratic Staff Director

SUBCOMMITTEE

ON THE

WESTERN HEMISPHERE

MATT SALMON, Arizona, Chairman

ALBIO SIRES, New Jersey
CHRISTOPHER H. SMITH, New Jersey
GREGORY W. MEEKS, New York
ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American
MICHAEL T. MCCAUL, Texas
JEFF DUNCAN, South Carolina
Samoa
RON DESANTIS, Florida
THEODORE E. DEUTCH, Florida
SEAN DUFFY, Wisconsin
ALAN GRAYSON, Florida

(II)

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CONTENTS
Page

WITNESSES
The Honorable James K. Glassman, visiting fellow, American Enterprise Institute (former Under Secretary for Public Diplomacy and Public Affairs,
U.S. Department of State) ...................................................................................
Mr. Paul M. Barrett, author ...................................................................................
The Honorable Jose W. Fernandez, partner, Gibson, Dunn, & Crutcher LLP
(former Assistant Secretary, Bureau of Economic, Energy and Business
Affairs, U.S. Department of State) .....................................................................

6
27
33

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable James K. Glassman: Prepared statement ...................................
Mr. Paul M. Barrett: Prepared statement .............................................................
The Honorable Jose W. Fernandez: Prepared statement .....................................

9
29
35

APPENDIX
Hearing notice ..........................................................................................................
Hearing minutes ......................................................................................................
The Honorable Theodore E. Deutch, a Representative in Congress from the
State of Florida: Material submitted for the record ..........................................

(III)

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BUILDING PROSPERITY IN LATIN AMERICA:

INVESTOR CONFIDENCE IN THE
RULE OF LAW
WEDNESDAY, JULY 30, 2014

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON THE WESTERN HEMISPHERE,
COMMITTEE ON FOREIGN AFFAIRS,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:05 p.m., in room
2200 Rayburn House Office Building, Hon. Matt Salmon (chairman
of the subcommittee) presiding.
Mr. SALMON. A quorum being present, the subcommittee will
come to order. I will start by recognizing myself and the acting
ranking member today, Mr. Connolly, is acting as the ranking
member. Mr. Sires took ill today and we miss him, but we are
thrilled to have Mr. Connolly here today. And without objection,
the members of the subcommittee can present brief remarks if they
choose or they can submit them for the record. And now I will yield
myself as much time as I may consume to present my opening remarks.
Good afternoon and welcome to this hearing on Investor Confidence in the Rule of Law in the Western Hemisphere. This hearing is really just a confirmation of our subcommittees effort to be
at the forefront of the discussion of how to bring greater growth
and prosperity to our hemisphere. And as I have said countless
times before, the United States should be unapologetic in promoting the principles of entrepreneurship, economic freedom, and
free trade. Indeed, the promotion of these principles is a powerful
foreign policy tool that can bring freedom and democracy to people
all over the world. The crucial element to all of this though is the
rule of law. Unless there is transparency, predictability, and the
clear laws that are not subject to the whim of the executive, investors will lose confidence and entrepreneurs will look for better markets in which to launch their innovations and create jobs.
The humanitarian crisis along our border underscores the importance of policies to promote economic freedom and the rule of law
to bring about opportunity, peace, and prosperity. We are seeing
thousands of children taking a treacherous journey at the mercy of
human smugglers from Central America up to the United States.
It is true that the Presidents statements undermining our immigration laws have increased and encouraged this mass migration
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2
havoc but these children are desperately trying to get away from
countries that lack rule of law and economic opportunity.
Elsewhere in the region, we have seen leftist populist leaders
systematically undermine the rule of law, while enacting policies
that have all but destroyed their economies. Venezuela, a nation
rich in resources continues to face record inflation, scarcity, and insecurity. An economist at Goldman Sachs recently said that the
level of macro economic dysfunction in Venezuela is so deep that
the story is no longer just about oil prices. Meanwhile, Heritage
Foundations index of economic freedom described Venezuela as
having perfected the art of the 21st century corruption where government leaders act with complete impunity where their entire formal economy now operates on a black market.
President Maduro combines gross mismanagement of Venezuelas
economy with undemocratic and heavy-handed tactics to silence his
critics, from the violent crackdown of protesters to the arrest and
imprisonment of opposition leader Leopoldo Lopez, Venezuela continues to be an embarrassment to our hemispheres democratic sensibilities. I must say, I am extremely disappointed with the Obama
administrations lack of leadership all over the world, including
right here in our own hemisphere. Every day, we see the results
of American disengagement. And of a President more interested in
apologizing for our country than defending our values.
The very clear result is that our friends and allies no longer trust
us and our adversaries no longer fear us. In the Americas, President Obamas perceived weakness has cleared the way for Russia,
China, and Iran to establish economic and diplomatic influence
right at our doorstep. This reality should give us all great pause.
Just this past week, a Venezuelan general, a close ally of the late
President Hugo Chavez, and known associate of FARC narcotics
traffickers, was arrested on U.S. drug charges on the Dutch island
Aruba. Astonishingly, The Netherlands chose to acquiesce to Venezuelan pressure, releasing General Carvajal to return to Venezuela for a heros welcome on grounds that he had diplomatic immunity on the island. The sad fact is that U.S. credibility worldwide has been so damaged that a Venezuelan who had been
blacklisted by Treasury for aiding FARC terrorists in
narcotrafficking, was released by our Dutch allies under Venezuelan pressure. Recall that this body passed a Venezuela sanctions bill in May after President Maduros continued violent aggression and repression of protesters. And we have been pressing the
administration to move forward with some form of punitive measure to show the Venezuelan Government and the world that we are
not going to stand by as the rights of freedom seekers are trampled
by undemocratic dictators.
I was gratified to receive a phone call from Assistant Secretary
Jacobson yesterday letting me know that the administration would
announce today that visa denials and prohibitions over 20 Venezuelan Government officials complicit in violent repression of protesters in opposition. This action on the part of the administration
is so long overdue and merely a step in the right direction. The administration must be unrelenting in reaffirming our commitment to
protecting basic democratic rights worldwide.

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3
Blatant disregard for democratic values and the rule of law have
affected Argentinas economic outlook. Another country rich in natural resources and human capital, Argentina has been under the
stranglehold to the leftist populist policies of Cristina Kirchner and
her late husband, Nestor, before her. Plagued by corruption and a
stated policy that flouts the rule of law, Argentina is an economic
basket case. In fact, unless drastic, last minute measures are
taken, Argentina is scheduled to default on billions of dollars to
bond holders today. The consequences of a second default in 13
years will be dire for the Argentinian people and their economy.
I am looking forward to hearing witnesses analysis of this looming default and what long-term impacts will be for Argentina and
for the region.
Ecuador poses another challenge in the region. Insulated to some
degree by a dollarized economy, Correas authoritarian approach to
both the economy and governance in general places Ecuador among
the least democratic nations in the Americas. Arbitrary regulations
and media laws that stifled dissent are disappointing, the hallmark
of the Andean country. More important, President Correa has consistently coupled his attacks against democracy and free trade with
open antipathy to the United States and her interests. Meanwhile,
the Obama administration has failed to come up with a strategy to
deal with the ALBA bloc countries, Ecuador, Bolivia, Venezuela,
Cuba, Nicaragua and encourage more market friendly and democratic values in our region.
It seems clear to me that a commitment to the rule of law coupled with free trade and economic liberty will lead to stronger and
more vibrant democracies. We should all be encouraged by the exciting free trade bloc known as the Pacific Alliance, as well as the
prospect that energy reforms in Mexico, could bring about greater
North American energy independence and security.
The Western Hemisphere is commercially and culturally vibrant
and the United States should do more to encourage the opening of
markets and opportunity to nations currently strangled by populism. This will do much to empower citizens to make them less dependent on government, thereby making governments less powerful
and less authoritarian. But to realize these goals of a more prosperous and free Western Hemisphere, the U.S. has got to do the
leading.
As we are seeing around the globe today, the unraveling of U.S.
leadership is not just embarrassing, it threatens peace and stability. You cannot turn on the news on any station without seeing
our failed leadership completely across the globe. Now it is time to
turn the tide and reengage to inspire regional laborers to seek freedom and economic prosperity through open markets that are protected by the rule of law. And I am eager to hear from witnesses
about how the United States can work constructively to improve
transparency in the rule of law in our hemisphere.
And I would now recognize Mr. Connolly.
Mr. CONNOLLY. Mr. Chairman, thank you, and thank you on behalf of our mutual friend, Albio Sires, who is under the weather
and cannot be here. He has asked me to read his statement into
the record. If I may, and before I do that, I am taking advantage
of your graciousness and hospitality. I could not disagree with you

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4
more and I completely disassociate myself from most of what you
just said.
The rhetoric coming out of my friend on the other side of the
aisle
Mr. DUFFY. I am glad the record notes that.
Mr. CONNOLLY. Thank you. I know it will come as a shock to you,
but this notion that we are retreating from leadership and oh, my
God, any problem in the world is somehow the fault of this President, we might as well blame him for hurricanes in the Caribbean,
too. The unraveling if there was such of American leadership traces
directly to the cowboy diplomacy, go it alone policies of the previous
administration, George W. Bush, who did incalculable damage to
the standing of the United States, all over the world.
And I can tell you that someone who has been in foreign policy
for a long time, the notion that somehow people are worried about
us retreating, they may be worried about whether you are going to
stay, but they are not worried about our retreating. In fact, the demands on us continue to grow and that is why things like the
Trans-Pacific Partnership are so important and why there is so
much excitement about it in the region that once again the United
States is exercising leadership and providing a counterbalance with
China, but that is just an editorial comment.
Mr. SALMON. That is welcome.
Mr. CONNOLLY. Thank you, Mr. Chairman. I thank you. Now on
behalf of Mr. Sires:
Thank you, Mr. Chairman. This hearing comes at a
time when the United States and its closest neighbors face
the daunting task of addressing the needs of thousands of
Central American child migrants escaping one of the most
impoverished and violent regions of the world. Elsewhere,
we see the benefits of decades long democratic consolidation and economic prosperity in Brazil, Mexico, and Colombia, for example, alongside political and social unrest in
Venezuela, as you said, Mr. Chairman, and economic uncertainty in Argentina.
We have also borne witness to a dictatorship in Cuba
that after 50 years continues to act with impunity restricting basic human rights, freedoms of expression, and economic opportunity. Indeed, the road to democracy in our
hemisphere has been long and fraught and challenging.
The lack of inclusive participation by all members of society and the growing economic prosperity of the region has
made the Americas vulnerable to anti-democratic forces.
Additionally, weak state presence and corrupt governance
has allowed drug traffickers to act within impunity in
many of these countries while economic and fiscal insecurity has hampered sustainable progress and further encouraged immigration aborad. Without a doubt, respect for
and application of the rule of law of today is central to the
stability and economic prosperity of our neighbors.
While all nations in the hemisphere other than Cuba
are now ruled by elected leaders, democratic progress has
been beset by the inability to ensure political accountability, public goods and safety and uphold the rule of law.

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5
In Mexico and Central America, drug-related crime and violence have set back democracy and public security. While
in Venezuela, Bolivia, Ecuador, and Nicaragua, elected
leaders have abused executive office to consolidate power,
limit the rights of freedoms of political dissent, and dismantle institutional checks and balances. We have learned
that elections do not make a democracy alone, nor do they
guarantee legitimacy. In the same vein, a countrys laws
mean little if they are arbitrarily imposed, inefficient, corrupt, or unenforced. In part, these points reinforce the importance of the rule of law.
The rule of law ensures political rights, civil rights, civil
liberties, mechanisms of accountability. They, in turn, affirm political equality of citizens and constrain potential
abuses of the state. In this fashion, the rule of law works
in tandem with other pillars of democracy. Without a robust rule of law, defended by an independent judiciary,
rights are not safe, and equality and dignity of all citizens
at risk. In fact, for some time now, we have witnessed a
breakdown of the judicial system in some countries in the
region, whereby Supreme Courts have been dismissed and
Judges are being appointed heavily in favor of one party
over another.
With respect to economic prosperity, a rule of law
framework that encompasses government effectiveness,
regulatory and judicial accountability, and anti-corruption,
has been shown to have a significant impact in making
countries more attractive to foreign investment. On the
one hand, while the rule of law provides the institutional
framework to protect basic political and human rights, it
also on the other provides the private sector the confidence
it needs to operate within a formal economy and contribute
to the countrys economic growth.
A business owner or a corporation is more likely to succeed in an environment whereby laws are public, transparent, and applied neutrally without prejudice. Additionally, a rule of law framework that provides clear and consistent legal rules for the formation and preservation of
contracts, investments, and settlement disputes, encourages competitiveness and provides assurances to firms that
contracts will, in fact, be upheld and honored in a rule of
law.
Whether or not the rule of law is a prerequisite for economic growth or vice versa is maybe a matter of debate.
The economic success of China comes to mind in that regard. What is not uncertain is the vital role that the rule
of law ultimately plays in fostering sustained economic
growth and development.
I look forward to hearing from our panelists regarding
the rule of law in Latin America and how it has impacted
economic growth and investor confidence and welcome our
witnesses here today. Thank you, Mr. Chairman, for your
graciousness.

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Mr. SALMON. I thank the gentleman. Pursuant to Committee
Rule 7, the members of the subcommittee will be permitted to submit written statements to be included in the official hearing record.
Without objection, the hearing record will be open for 7 days to
allow statements, questions, and extraneous materials for the
record, subject to the length limitation in the rules.
I would like to introduce the panel now. First, we would like to
introduce Ambassador Glassman. James K. Glassman served as
the U.S. Undersecretary of State for Public Diplomacy and Public
Affairs and chairman for the Broadcasting Board of Governors.
Currently, he is a Visiting Fellow at the American Enterprise Institute. He holds a B.A. degree from Harvard University.
Mr. Paul Barrett is the author of Law of the Jungle. That has
got to be about Congress. I feel like I am living in the jungle or
a jungle book. A book that describes his findings of the Chevron
case in Ecuador and is scheduled to be published in September. He
is a graduate of Harvard Law School and is also an adjunct professor at New York University Law School.
And then finally, Mr. Jose Fernandez. Mr. Fernandez is a corporate partner in the New York Office of Gibson, Dunn & Crutcher,
and co-chair of the firms Latin America Practice Group. He served
as the Assistant Secretary of State for Economic, Energy and Business Affairs as well as the State Departments principal representative in the Committee on Foreign Investment in the United
States. He received his B.A. in History from Dartmouth College
and holds a J.D. from Columbia University School of Law.
You all understand the lighting system. It is green for the first
4 minutes and when it turns amber, you have got time to wrap up.
And at the end the red light comes on and it is time to be done.
After, we are going to have a series of questions for the panelists.
So let us begin. Mr. Glassman, I would like to recognize you first.
Thank you.
STATEMENT OF THE HONORABLE JAMES K. GLASSMAN, VISITING
FELLOW,
AMERICAN
ENTERPRISE
INSTITUTE
(FORMER UNDER SECRETARY FOR PUBLIC DIPLOMACY AND
PUBLIC AFFAIRS, U.S. DEPARTMENT OF STATE)

Ambassador GLASSMAN. Thank you, Mr. Chairman, members of

the subcommittee. Mr. Chairman, as you said, the recent surge of
undocumented children is just the latest reminder of the absolute
fact that a stable and prosperous Latin America is critical, not just
to Latin Americans themselves, but to all of us here in the United
States.
Many Latin American countries have made significant economic
progress in recent years, among them, Chile, Colombia, Costa Rica,
Uruguay, Peru, and Mexico. But the performance of Bolivia, Ecuador, and lately Brazil is disappointing. Their economies suffer in
various degrees from a lack of respect for the rule of law, crucial
to attracting the capital investment that fuels growth.
Aside from the sad cases of Cuba and Venezuela, the worst offender in this regard is Argentina. It ranks 166 out of 178 countries on the index of economic freedom. Argentina has abundant
natural resources and a workforce that has proven itself in the

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past. In 1908, it was the seventh wealthiest country in the world.
Today, it is 55th.
This very day, the grace period in Argentinas court-ordered debt
repayments runs out and we shall soon know if it has defaulted for
the eighth time in its history. But default or not, Argentina has
done enormous damage by setting an example for other irresponsible countries to follow. After Argentina missed payments on $100
billion in bonds in 2001, the country bullied creditors into settling
at pennies on the dollar, doctored its economic statistics, expropriated a Spanish energy company, and defied 100 court judgments.
Through it all, the U.S. largely stood on the sidelines. Argentina
even remains a member of the prestigious G20, the group of nations charged with keeping the world economy stable.
Argentinas success at flouting the financial world order inspired
Ecuador which defaulted in 2008 and Belize, which threatened
creditors with a restructuring offer even worse than Argentinas.
Now, it is the turn of Puerto Rico, a U.S. territory since 1898.
Puerto Ricos economy is in shambles. In the eighth year of recession, its workforce has declined by one third. Meanwhile, the island
has piled up debt of $73 billion. If it were a state, Puerto Rico, population 3.7 million would rank behind only California and New
York as the third most indebted.
Rather than trying to reform a sick economy with a bloated public sector and high taxes, the Governor of Puerto Rico, Governor
Alejandro Padilla has chosen the Argentine way.
On June 25th, apparently preparing for default, Puerto Rico
passed a law called the Recovery Act that strips basic rights from
creditors who own about one third of the islands bonds, including,
I note, many unsuspecting U.S. investors with money in mutual
funds, while protecting other bond holders, many of them hedge
funds. But this Argentine-style ploy does not seem to be making
credit rating agencies wary of what Puerto Rico might do next
quickly downgraded both types of bonds well below the threshold
of junk status. And now Puerto Rico is facing lawsuits from U.S.
investors that could drag on for years.
Also, reminiscent of Argentina is Puerto Rican Governments disregard for the rule of law in dealing with businesses. One visible
case involves a bank called Doral which overpaid its taxes a decade
ago and then entered into a series of agreements with Puerto Ricos
Treasury Department for refunds. Suddenly, in May, the government declared that deal null and void. Rather than imitating Argentina, Puerto Rico needs to cut its budget, reduce taxes, institute
economic policies that encourage investment, rescind its Recovery
Act, restore the rule of law and negotiate faithfully with creditors.
For the protection of our own taxpayers in the United States who
could end up holding the bag, the U.S. should perform a full audit
and set up a financial control board with authority over borrowing,
hiring, firing, and contracts such as the boards that succeeded in
New York and the District of Columbia. If the United States and
other countries had been tougher with Argentina, its dangerously
seductive model would have been rendered unattractive. Now the
U.S. has a chance to rectify matters by guiding Puerto Rico to the
prosperity that its people deserve.

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Mr. Chairman, when it comes to promoting prosperity and stability in Latin America by encouraging strict adherence to a just
legal system, the United States should not stand by. We must take
the lead. Our own security and prosperity demand it. Thank you.
[The prepared statement of Ambassador Glassman follows:]

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26

27
Mr. SALMON. Thank you, Mr. Glassman. And now I turn to our
next witness, Mr. Barrett.
STATEMENT OF MR. PAUL M. BARRETT, AUTHOR

Mr. BARRETT. Thank you, Mr. Chairman. Thank you for your interest in my forthcoming book, Law of the Jungle, which describes
the epic legal war over oil pollution in the rain forest in Ecuador.
The events I have reported on for the past 312 years raise troubling
questions about the rule of law in Ecuador. These events deserve
your attention not only because of the threat they suggest to investor confidence in that country, but also the dangers they pose to
the health and welfare of Ecuadors citizens.
Portrayals of this controversy typically resemble a morality play
or a fable: Indigenous tribe members fighting an evil, all powerful
American oil company. A passive Latin American nation exploited
by a mighty, industrial menace. David versus Goliath.
In fact, the story is more complicated, as suggested by two clashing judgments from the Ecuadorian and American court systems.
In February 2011, an Ecuadorian judge in the small city of Lago
Agrio ruled that Chevron Corporation bears responsibility for severe environmental damage dating to the 1970s. The judge imposed
an historic $19 billion verdict against the company. Three years
later, in response to a civil racketeering suit filed by Chevron, a
Federal judge in New York ruled that the Ecuadorian judgment
was a complete fraud: The culmination of an elaborate extortion
scheme orchestrated by an American plaintiffs attorney and aided
and abetted by corrupt Ecuadorian lawyers and judicial officials.
To understand the Chevron case, it is best to begin at the beginning. In the 1960s, Ecuador sought outside investment to take advantage of oil reserves in the Amazon region east of the Andes.
Texaco, later acquired by Chevron, signed a series of agreements
with the Ecuadorian Government resulting in production and export of oil via a pipeline over the Andes. The oil industry became
the backbone of the Ecuadorian economy, raising the aggregate
standard of living and contributing to improved social conditions as
measured by such markers as decreased infant mortality and increased life expectancy.
Unfortunately, while Ecuador became wealthier overall, economic
inequality worsened. And people living near oil operations suffered
from the side effects of unregulated industrial activity.
Texaco, it should be emphasized, could have done a much better
job of protecting the environment. It dug hundreds of unlined,
open-air waste oil pits. It discharged into rain forest streams and
rivers billions of gallons of tainted water. Texaco considered but rejected spending modest sums to reduce ecological harm.
The human toll from Texacos pollution was exacerbated, however, by Ecuadorian Government policies. While some of the rain
forest residents affected by the contamination were members of
tribes indigenous to the region, far more were farmers encouraged
by the Government to move to the oil region under an official policy
known as colonization.
Both Ecuador and Texaco profited from oil production. Some 90
percent of the roughly $25 billion produced by oil activities in the
1970s and 1980s remained in Ecuador.

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In the early 1990s, the Ecuadorian Government nationalized its
oil industry and sent Texaco packing. Back in the United States,
Texaco faced an unfriendly welcome home. A group of American
plaintiffs attorneys filed a class-action suit in New York in 1993,
accusing the company of environmental negligence. The courtroom
war had begun.
In Ecuador, Texaco negotiated a cleanup plan with the government under which Texaco assumed responsibility for remediating
one third of an agreed-upon list of contaminated sites. Ecuador
took responsibility for the rest and gave the company a formal release from further liability. Three years later, right around the
time Chevron was acquiring Texaco, the Federal courts in New
York sided with the oil companies and told the plaintiffs, in essence, take your complaints to Ecuador.
Chevron then learned the wisdom of the old adage be careful
what you wish for. Sure enough, the lawsuit against Chevron restarted in the provincial courthouse in Lago Agrio in 2003. Both
sides employed tactics that would not pass muster in the United
States. The plaintiffs team, now headed by a brash, New York attorney named Steven Donziger, however, thoroughly outflanked
Chevron when it came to unconventional legal tactics. Donziger cajoled and bullied Ecuadorian judges in private meetings and communications. He manipulated a supposedly neutral court-appointed
expert, going so far as to arrange for the secret ghostwriting of the
experts submissions to the court.
Ultimately, according to the March 4, 2014 opinion of U.S. District Judge Lewis Kaplin, Donzigers team wrote the Lago Agrio
courts judgment themselves and promised $500,000 to the Ecuadorian judge to rule in their favor and signed the judgment.
Donziger received ample cooperation from Ecuadorian judges eager
to sell their influence to the highest bidder. Four out of the six
judges who at one time or another presided over the Lago Agrio
case were removed from office for misconduct during the course of
that case. The course of this lawsuit in Ecuador and the litigation
that underlay the $19 billion verdict which is now being contested,
was shot through with fraud and raised very serious questions
about whether the Ecuadorian courts can handle a case like this
and I would be pleased to answer more specific questions if you
have them.
[The prepared statement of Mr. Barrett follows:]

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32

33
STATEMENT OF THE HONORABLE JOSE W. FERNANDEZ, PARTNER, GIBSON, DUNN, & CRUTCHER LLP (FORMER ASSISTANT
SECRETARY, BUREAU OF ECONOMIC, ENERGY AND BUSINESS AFFAIRS, U.S. DEPARTMENT OF STATE)

Mr. FERNANDEZ. Thank you, Mr. Chairman. Thank you for holding this hearing and this is an issue I commend this subcommittee
for talking about.
I first came across the issue of rule of law in Latin America as
a young lawyer in 1985. I had been named the head of the ABAs
American Bar AssociationLatin American Law Committee and I
decided to go down to Central America that was undergoing the
civil wars of the 1980s. I remember going to the Supreme Court Library with the head of the Supreme Court of El Salvador and asking him where he had his law books. And he looked at me sort of
funny and he showed me the library and it turned out the library
had no new books since 1968. And yet, every day they were deciding cases.
I mentioned this incident not to illustrate the challenges of the
rule of law, that the challenges of the rule of law are something
that is odd. I mention it to illustrate that the challenges of the rule
of law are not new. They are long standing and will take a long
time to fix. And while we can help, these challenges will only be
overcome with domestic support and local buy-in from local governments, lawyers, private enterprise and civil society. But until they
are addressed, these challenges will continue to hinder all commercial activity in Latin America, be it from domestic investors or foreign investors.
To be sure, we have a number of bright spots in the Latin American rule of law firmament according to the World Justices Project
Rule of Law Index for 2014 which ranks 99 countries based on indicators such as constraints in governmental powers, absence of corruption, open government, regulatory enforcement and the like.
You have got countries such as Uruguay, Chile, and sometimes
Costa Rica that actually do quite well in these rankings and sometimes they even outrank the United States. But for the most part,
overall, the region falls to the bottom third in most of the factors
used by the WJP.
And why doesnt the U.S. investor decide to put his money in a
country? And in 30 years of practice, I have come to the conclusion
that in part, it is about the opportunity, but it is also based on that
investors perception of whether the legal system is transparent,
stable, and free from bias and corruption, where the property
rights are enforced and whether fundamental personal rights are
also respected. And in all of these scores, Latin America certainly
is doing better than it did 20, 25 years ago, but it still has a long
way to go.
According to Transparency International, their corruption perception index which ranks the perceived levels of public sector corruption in the 177 countries around the world, over two thirds of
the nations in the Americas scored less than 50 which indicates a
serious corruption problem. Venezuela, which has been mentioned
here several times, was 160th out of 177 countries in the Transparency International corruption index. And when Transparency
asked people in Latin America whether they thought that high

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ranking government official exposed for taking government money
was likely to be prosecuted or punished, less than 30 percent of
Latin Americans answered yes. That is the lowest percentage of
any region in the world.
Another indicator is Latin America does not do much better. Central America, Venezuela, and several other countries rank among
the most dangerous countries in the world and yet the conviction
rates in Latin America are abysmal. In Panama, only 12 percent
of burglars are captured, prosecuted, and punished. And that 12
percent is the highest percentage in all of Latin America. In Venezuela, that number is 1 percent.
For murder cases, for homicides, Honduras has seen a 250 percent increase in homicides in the last few years. But the impunity
rate in Honduras is 90 percent. Even Mexico, a study last year
showed that 80 percent of homicides go unpunished without conviction or even trial.
I experienced the consequences of a failing rule of law system
when I led the team that negotiated the Partnership for Growth
agreement between El Salvador and the U.S. last year. And one of
the things that I learned there is that when you talk to businesses
who were not investing in El Salvador and asked them why, they
said it is crime and it is insecurity. You even had circumstances
where employers agreed with employees that they would pay them
on random weeks. They would pay them on one week and then
they wouldnt pay them for another month. Then they would pay
them the next day. And why was that? Because if they paid them
on a regular schedule, those employees would be robbed and assaulted in their buses on the way home. Just imagine investing in
that kind of a scenario.
But there are a number of ways that the U.S. can help here and
I would like to be able to talk about that during the discussion. Obviously, the MCC is helping. Obviously, programs such as USAIDs
programs to support the administration of justice in Latin America.
It seems to me that as we negotiate free trade agreements, bilateral investment treaties and the like, we ought to make sure that
investor-state arbitration provisions are included and we ought to
be negotiating even more free trade agreements with our partners
in Latin America.
At the end of the day, the U.S. is blessed with a legal system
that is admired throughout the world and we can help Latin America improve its rule of law system, not really by grafting our traditions on to these other countries, but by partnering with them as
they seek our support to improve their judicial and enforcement institutions. Thank you.
[The prepared statement of Mr. Fernandez follows:]

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39
Mr. SALMON. Thank you, Mr. Fernandez. That concludes the
opening statements and I would like to yield myself 5 minutes to
ask questions and then I will yield to the ranking member.
Ambassador Glassman, to what extent does the diminished U.S.
diplomatic presences in Bolivia and Ecuador hinder the U.S.s ability to support U.S. companies and investors in those countries?
And what resources or recourse does U.S. investors have if they encounter difficulties with governments such as Bolivia that have revoked bilateral investment treaties and eschewed participation in
international dispute resolution mechanisms?
Ambassador GLASSMAN. Well, the quick answer to that is very
little. It is a major problem, not just for American investors, but
I would say for those countries themselves because they are the
ones who are being denied the kind of prosperity that they should
have through a sound rule of law. But I do think that in many
ways, the U.S. should become much more concerned and engaged
in Latin America countries, both those that are not abiding by the
rule of law and those that are who really need encouragement. I
am sad to say that I dont think we have been doing that.
Mr. SALMON. I would agree with you. I guess on another front
Ecuador has shown little regard for property rights, particularly intellectual property rights. In fact, this year, USTR again placed Ecuador on the specialty 301 Watch List due to failure to adequately
protect U.S. intellectual property. And these anti-innovation policies, they do harm the U.S., but they also harm Ecuador which is
locking her people out of todays knowledge-intensive economy.
What tools do we have in our arsenal to encourage Ecuador to
adequately respect property rights, both tangible and intangible?
Ambassador GLASSMAN. I really think that one of the major tools
that we have is the bully pulpit. The State Department does issue
a report every year that covers the economic climate in countries
like Ecuador. My written statement does refer to that. I just want
to quote one sentence from it. This is about Ecuador:
Frequent changes in Ecuadors tax code make business
planning difficult, in general, the legal complexity resulting from the inconsistent application and interpretation of
existing laws complicates enforcement of contracts and increases the risks and cost of doing business in Ecuador.
We have the means through what the Secretary of State says,
what the President might say to affect the policies of Ecuador. And
I think that we should be talking about it.
Mr. SALMON. Mr. Fernandez, to what extent is corruption an impediment to a healthy investment climate? And do you know to
what extent does the United States support anti-corruption initiatives in Latin America? Which countries have improved their anticorruption capabilities as a result of such assistance?
Mr. FERNANDEZ. Corruption is an issue in Latin America in a
number of countries and it is an issue for U.S. investors in large
part because we are constrained, they are constrained by the Foreign Corrupt Practices Act. And that is something that will have
repercussions back at home.
I have found that it differs depending on the country. You look
at countries such as Chile, as Uruguay, or you and I would go into

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court there and feel that we can get a good hearing. In other countries, it is a problem and it is many, many countries where what
we have tried to do in government was to support transparency efforts, to work with the American Bar Association, to work with others to support anti-corruption measures.
Ultimately though, we have got to be able to get the support of
the local population because they are the ones that ultimately are
hurt by corruption. Corruption hurts for the most part poor people,
people who cant pay. And I think that is part of what we need to
do more of over the years.
Mr. SALMON. Well, Peru is maybe a more positive example, they
are experiencing growth somewhere between 4 and 5 percent and
they will be probably for the next 4 or 5 years. What are they doing
different compared to its counterparts such as Venezuela and other
countries to create jobs and effect domestic investment?
Mr. FERNANDEZ. Mr. Chairman, I actually represented Peru
when they privatized their phone company 20 years ago and I
would like to take credit for a little bit of their growth. One of the
things that they did is they did away with a lot of the government
bureaucracy. It became a lot easier to get permits in Peru in order
to do business. The more red tape that you have in these countries,
the easier it is for somebody to get paid. So that is something that
they did. They also provided a number of guarantees for investors
and they also made very specific statements that they were going
to welcome foreign investment. That, I should say, in many cases
has not made the ruling Presidents quite popular. They have had
to buck a lot of political pressure. But overall, if you look at the
macro growth in Peru, a lot of it is due to the fact that they made
it very clear for the last couple of decades since they did away with
the shining path, that they are going to support foreign investments and that they are going to do anything that they can in
order to attract and keep the foreign investor.
Mr. SALMON. Thank you. My time has expired. Mr. Meeks?
Mr. MEEKS. Thank you, Mr. Chairman. And I have to first want
to associate myself with Mr. Connolly in regards to the opening remarks. I couldnt disagree with you more in reference to your opening statement. I just wanted that to be clear for the record because
I think it is important as we discuss the prosperity, building prosperity in Latin America that oftentimes I dont like to get into even
if some sides do it, they say two wrongs dont make a right,
etcetera. I get upset if somebody is name calling the United States.
I dont think we should go back and name calling them and back
and forth with Presidents, particularly when I have had the opportunity to travel to certain places.
And when I look at say the President of Bolivia, for example,
who is the first indigenous President in the countrys history and
how proud those individuals are of their President, I dont think
thatI know even when we dont like our President, whoever that
President is, to be name called by anyone else and I dont think
that we should do it with them.
When I think about some of the countries that we are talking
about and I really appreciate the testimony of all of the witnesses
here, I think they were extremely important, but when I think
about governance and access to government to a large part until

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recently many of the people that were impoverished and indigenous
and others had no access to government at all. I mean thats why
some people who are elected is because of the fact that poorest of
the poor in these communities didnt, couldnt access government
and didnt vote in elections.
It reminded me as we celebrate the 50th anniversary of the Voting Rights bill here in the United States of America. Just 50 years
ago, a lot of folks could not vote in the United States of America.
We have come a long way and sometimes it is difficult to expect
somebody else to make the same kind of progress that we made in
almost 240 years, we are asking them to make in a smaller period
of time. But when I look at it, the American economic ties to Latin
America continues to deepen in many places like Chile, Peru, and
Mexicos participation in TPP negotiations represents a great step
forward in multi-lateral collaboration on trade and despite actually
sometimes what we hear, Bolivia, believe it or not for some has
nearly tripled its per capita income since the early 2000s and attracted a record $2 billion in foreign direct investment last year.
So clearly Bolivia is open for business. Ecuador has taken steps to
foster small business development and to improve market access.
And its economy has averaged more than 5 percent growth annually since 2010. It is obvious that Americans are doing business
there and still investing in Latin America even where there are
challenges because I am not saying that there are not challenges.
There are very big challenges that we still have got to confront.
And I think that you have indicated what some of those challenges
are in your testimony.
But my thing is just imagine how many more opportunities there
would be if we could tackle some of the toughest challenges facing
American businessmen and women. I believe as you have indicated,
we have to have strong rule of law, respect for intellectual property
rights, and a fair and independent judiciary are absolutely essential for fostering an environment conducive to doing business. In
fact, it is one of the main reasons why I support free trade agreements because I believe that we can lift up the standards, but not
bring down the standards as some say. So we need to lift up the
standards. That is why I also support trade capacity building.
When I voted for CAFTA, one of the few Democrats that did so. I
thought trade capacity building was absolutely essential if we were
going to pass that bill so that they would have the capacity to grow
and trade and improve their institutions. That is tremendous. So
I believe the free movement of goods and services is at the heart
of all stable democracies, as long as everybody has the chance to
participate.
I am a strong supporter of Colombia. Yet, I had some Colombians
that came in that were from the Pacific Coast who wanted to make
sure that they were included in the trade agreement because we
could have disparity if they are not and if they dont develop that
capacity.
So my question after going through my little statements there is
this. I will ask Mr. Fernandez because the other thing is I do believe in doing things multilaterally and I want to talk about how
we can help. Does the Inter-American Development Bank or any
other regional multilateral institutions have any programs in place

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to improve the climate for investment in Latin America and Caribbean countries which we see that there is some problems? Is there
anything that you know of that nature?
Mr. FERNANDEZ. Well, my information is a little bit dated now,
I have been out of government for a few months, but USAID has
very strong programs in Latin America to improve the rule of law.
They fund organizations such as the American Bar Association,
MCC, the IDB as well. I think you have a number of programs and
you have a number of organizations in the U.S. that help. I think
we need to support them. One of the problems that we found when
I ran the ABAs rule of law initiative for Latin America is that
sometimes the programs were cut. And I remember writing and
drafting an arbitration, commercial arbitration law for Central
America in order to make sure that U.S. investors didnt have to
go to the Salvadoran Supreme Court in order to get their disputes
heard. And just as we were done our funding was cut simply because of the civil strike in Central America stopped and therefore
the interest stopped.
I think we need to realize that in places like Venezuela corruption was there before the current administration. These things
have been going on for a long, long time. And I think, not to by
the way in any case minimize what is going on there, which is a
tragedy both human and otherwise, but I think it is going to take
us a while. I think we have to make sure that we support them
and that we are steadfast be it a Republican administration or a
Democratic administration. Thank you.
Mr. MEEKS. Thank you. Mr. Glassman, do you want to add anything?
Ambassador GLASSMAN. First of all, I would just like to say that
I have been an admirer of your support for free trade for a long
time. And I think that ultimately is one of the most important
ways that we can help in the United States. So I certainly hope
that TPP does go through.
I would just say that as far as Bolivia and Ecuador are concerned, Bolivia ranks 158th on the Economic Freedom Index and
Ecuador is 159th. They have a long way to go. In general though,
I would associate myself with your comments about the progress
that Latin America has made and from a very, very difficult past.
But there is, I think, wide disparities as I said in my testimony between some countries and other countries and it is not ideological.
I mean Peru is actually a good example of a country which you
might say has a kind of a left of center government where it is very
clear that the administration understands that in order to attract
the kind of business that will lift everybody up, it needs to be much
more friendly to business and abide much more by the rule of law.
Mr. MEEKS. Thank you.
Mr. SALMON. Thank you. The Chair recognizes Mr. Duncan.
Mr. DUNCAN. Thank you, Mr. Chairman. It is difficult for a nation which is in debt to the tune of almost $18 trillion to discuss
or preach to other nations about their looming debt crises, but having said that let me just say that I am deeply concerned about the
direction of Argentina and its ability to influence other Latin American countries in following its poor example.

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I agree with you, Mr. Chairman, that we should be doing all that
we can to laud the positive examples of countries such as Mexico,
Chile, Colombia, Uruguay, Peru, Barbados, St. Lucia, Costa Rica,
because they have all shown great promise in taking actions that
value economic freedom and growth.
I think we do, however, have a responsibility to discuss the rule
of law. In fact, the U.S. bond holders who might face significant
risk and U.S. taxpayers who in the case of Puerto Rico might be
on the hook should there be some sort bail out there. I am concerned when government tears up an agreement as we saw with
Doral and thus weakens the rule of law.
So I would like to address a few questions to Ambassador Glassman first. Do you believe Puerto Rico is at risk of defaulting on its
debt?
Ambassador GLASSMAN. I do. And probably more important so do
very, very close observers of Puerto Rico at places like Nuveen and
other bond houses that really watch these things. Barclays. Thomas Weyl at Barclays is probably the most closest observer of what
is going on in Puerto Rico among finance people, says that Puerto
Rico is very close certainly.
Mr. DUNCAN. Just as a side note, Morningstar reported that 67
percent of all United States municipal bond funds have exposure
to Puerto Rico, general obligation to that agency debt. Because
Puerto Rico is a U.S. territory rather than an independent nation,
would you say, Ambassador, that U.S. taxpayers are responsible for
bailing out Puerto Rico if it defaults on its debts?
Ambassador GLASSMAN. I dont know the answer to that question, but my guess is that if worse comes to worse that we will be
on the hook. And I think that the U.S. Congress should be extremely vigilant about what is happening in Puerto Rico right now.
So it may turn out that we have no legal obligation, but I kind of
doubt that. And we need to watch it.
Just your reference to bond mutual funds, in my written testimony I talk about the fact that many state bond municipal funds,
mutual funds have very heavy reliance on Puerto Rican bonds and
that will come as a shock I think to many small investors. For example, I point out that in its most recent report, Oppenheimer
Rochester Maryland Municipal Bond Fund owns about 25 percenthas about 25 percent of its assets in Puerto Rican bonds because they are triple tax free.
One of the problems that has developed in Puerto Rico is that
borrowing has been quite easy because its bonds are so attractive.
They are triple tax free. It doesnt matter what state you live in,
the interest is exempt from federal, state, and local tax.
Mr. DUNCAN. And I would say that there is probably a lot of pension funds which are struggling financially anyway that are heavily
invested. Let me shift gears because I read an article in the Washington Post by Mike Debonis back in January 2011 he was talking
about the Financial Control Board here in DC. So in your testimony, you mention the U.S. could consider a federally appointed
Financial Control Board to help manage Puerto Ricos financial situation. What would that look like and what would be the impact
of such an entity? And do you think that is the right idea?

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Ambassador GLASSMAN. I think it is a good idea. I dont know
whether we are there yet, but I think it is time to start looking at
it and the Financial Control Boards both in New York and Washington, DC, were very effective. So the Washington Control Board
went into effect in 1995 and was disbanded in 2001. It had very
broad powers, including the powers to approve any bond issues,
hiring, firing. It had a distinguished board that included Alice
Rivlin, the former Vice Chair of the Fed. And it worked very effectively, so I think that U.S. Congress should take a look at the possibility right now of a Financial Control Board.
I am not saying it should be instituted now, but I think preparations ought to be made. We are talking about $73 billion in debt.
That is a lot of debt for a U.S. territory with a population of 3.7
million. And with some very poor institutions like the Puerto Rican
Electric Power Authority. A majority of its generating capacity
comes from oil which is very expensive and needs much more capital investment to get to natural gas and some of the other better
fuels. So I do think now is the time to start looking at it, that is
for sure.
Mr. DUNCAN. My time is about up, but with no more participation, let me just ask you does Puerto Rico have a balanced budget
amendment?
Ambassador GLASSMAN. I dont know the answer to that. The
last time I looked there was
Mr. DUNCAN. Is there a requirement in their constitution?
Ambassador GLASSMAN. I dont know the answer to that.
Mr. DUNCAN. They should and we should, Ambassador. And that
is the point I wanted to make.
Ambassador GLASSMAN. Right. Thank you.
Mr. DUNCAN. They should and we should. Thank you. I yield
back.
Mr. SALMON. Thank you, Mr. Duffy. Oh, he is gone. Mr.
DeSantis.
Mr. DESANTIS. Thank you, Mr. Chairman. Thanks to the witnesses.
Mr. Glassman, I just wanted to touch on a couple of things domestically because I have really respected your writing and I think
you have always been a supporter of pro-growth policies here. And
specifically with the rule of law, I know that you had written about
the problems with the Chrysler and GM bankruptcies at the onset
of this administration. I look back at that from the beginning to
even use TARP funds which was first done by Bush, then by
Obama. The law did not provide for that. And then, of course, the
problems with the actual bankruptcy where the creditors were basically pushed out in favor of the unions. So I guess my question
is, is that whole enterprise, do you think that that has left some
lasting damage?
Ambassador GLASSMAN. I do. I think that the treatment of the
bond holders of GM and Chrysler who were, as you say, shunted
aside for what I would say were political reasons or certainly were
not treated the way they should have been treated, has left some
lasting damage.
This is a hearing about rule of law and the United States, as several members have already said, it has not been perfect. One of the

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things that disregard for the rule of law does is it raises the cost
of capital for corporations, for governments and I think that the behavior of the government during that period I think was damaging
going forward, yes.
Mr. DESANTIS. And I am concerned, too, if you look at how the
healthcare has worked. There was a problem when the law kicked
in last year. People started getting their plans canceled. We did
some in the House. They didnt want it reopened in the Senate, so
the administration said okay well, just keep your plan. So now I
have constituents who will call me and say look, my plan was canceled. They said I could keep it, can I keep it next year? I am like
well, the law of the books says it is illegal, but they say they are
not going to enforce it and so you end up in the situation, I have
businesses saying okay, is this employer mandate going to apply?
Now they say if I have 87 employees I am in a different zone even
though the statute doesnt say anything. And of course, our Oversight Committee just put out a report where the administration
and the insurance companies are going back and forth and they are
trying to kind of figure out ooh, maybe we can take this money for
the reinsurance and risk corridors and all that.
So I guess what I am seeing is kind of the administration arm
of government working with really big institutions in the private
sector divising rules as they go along. I dont think that is conducive to a really solid pro-growth future here. What are your
thoughts on that? Am I right to be concerned?
Ambassador GLASSMAN. I do think you are right to be concerned.
I just read that quote from the State Department about Ecuador
which talked about how they keep changing their tax laws, keep
changing all sorts of laws. And that has discouraged investment.
There is no doubt what investors want is stability, confidence in
the rule of law and the United States stands pretty high up on the
charts, but we are far from being perfect. And when we neglect the
rule of law, when we neglect consistency, it hurts prosperity ultimately.
Mr. DESANTIS. Without question. I think Lincolns first big
speech was 1838 and he said, Founding Fathers have passed and
the memory of the Revolution is gone. The rule of law, we all have
to rally around that and really respect our institutions and respect
what that does for our freedoms. I think what he said then is true
today.
Let me ask you about, now getting back to the rule of law in
Latin America. The courts, how would you rate the courts in places
like Bolivia, Ecuador, and Argentina? It seems like what I read is
they are generally very negative, particularly with corruption, so if
the witnesses would like to express their views, I would appreciate
that.
Mr. FERNANDEZ. They vary. I have been involved in a number of
countries where it has been fine for my clients to go to the courts
in those jurisdictions, as I mentioned, Chile, Uruguay. For the most
part though I think you have a much more slower court system in
Latin America, much more paper intensive. The quality of the
judges differs. For the most part, I think foreign investors in these
countries would prefer to go into international arbitration. And
that is why if you look at the trade agreements that are out there,

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the Trans-Pacific Partnership, Bilateral Investment Treaty models,
in all of them we have put in international arbitration investor
state arbitration. Those are the kinds of cases that will give our investors the assurances that their rights will be enforced. And it
seems to me we ought to make sure that those are included in the
final version of anything that we sign.
Ambassador GLASSMAN. Can I just add to that? You know, we
were talking earlier about the Argentina case which may be resolved one way or another today and in order to sell those bonds
that it later defaulted on, in the 1990s, Argentina had to agree that
any case involving the bonds would be adjudicated in New York
Courts. That is the only way that American investors could rely on
Argentina. And I think that says a lot, as does the fact that international arbitration is a part of these treaties.
Mr. BARRETT. The Ecuadorian court system did not cover itself
in glory during the long pendency of the Chevron case. The record
shows clearly without any ambiguity that the judges involved in
that case basically made themselves available to sell their influence
to the highest bidder. This was explicit. They were going from one
party to the other party saying how much would you pay me, how
much would you pay me?
The judge who ultimately signed his name to the $19 billion verdict against Chevron, when called to testify under oath in Federal
Court in New York, and I was in the courtroom for his entire testimony, seemed entirely unfamiliar with his own work. He said that
he spoke and read only Spanish and when asked how then was the
case that he had made rather erudite references to American law,
French law, UK law, Australian law, he explained those were the
product of the research of one person, his 18-year-old typist who
had found these references in internet research.
Now having listened to all of this and being in a position of authority, Judge Kaplan concluded that this judge really had almost
nothing to do with this 188-page ruling that has had so much impact and then, in fact, other people wrote it and he was interested
in being paid a bribe for it. So sadly, in one of the biggest commercial cases ever in the country, the situation was just shot through
with fraud in Ecuador.
Mr. DESANTIS. Great. I really appreciate the testimony. I yield
back.
Mr. SALMON. I think we are going to have another round of questions. We have got some more time. Can you stay just for a few
other questions?
Mr. Barrett, your experience with Ecuador was pretty extensive,
given the Chevron case and your reference to the lack of real integrity for the judicial system there in Ecuador is frightening. If you
were general counsel for any large company in the United States,
and they were considering opening up shop in Ecuador, what advice would you give them right now?
Mr. BARRETT. You are asking me to practice law without a license?
Mr. SALMON. Okay, let us say you werent general counsel. Let
us say you are CFO. Now I am asking you to practice
Mr. BARRETT. It is getting worse and worse and more dangerous.

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Mr. SALMON. Either way. I mean given your experience dont you
think it is going to have a chilling effect on future investment?
Mr. BARRETT. Rather than putting myself in that position, let us
just make the observation that the oil industry remains the backbone of the Ecuadorian economy. At one time, the U.S. oil industry
was core to operating that. The U.S. oil industry saved the oil services companies which are still there is now completely gone and in
fact, the Chinese dominate the oil fields in Ecuador which I think
is troubling from the point of view of political influence in Ecuador.
Ecuador is very much in hock to China. And if one is concerned primarily about environmental issues, I think you would be concerned
about the Chinese operating the oil fields as opposed to American
companies today.
So I think in that industry in any event, the petroleum industry,
U.S. companies have voted with their feet and have left the country. So that would be one precedent I would look at.
Mr. SALMON. Absolutely. Ambassador Glassman, you mentioned,
I cant remember whether it was in the body of your initial testimony or in response to a question, but that the United States can
and should exert the bully pulpit to try to lead some of these other
countries. Do you think that currently our Government is doing everything that it can to try to lead these countries in the right direction? And if not, what more should be done?
Ambassador GLASSMAN. No, I dont think it is. And I think that
in my testimony I talk about, my written testimony, I talk about
the Argentina case which has now gone on for 13 years. And the
United States did some things that were good, absolutely, where
for example, it refused to vote yes on credits to Argentina from the
Inter-American Development Bank. But there was a lot more it
could have done. And one example of that is the G20. So Argentina
is a member of the Group of 20 which in itself is fantastic. Well,
it was very surprising, let us put it that way.
So about 2 years ago, I did a study with Alex Brill of the American Enterprise Institute and looked at the question who should be
a member of the G20? If you had objective criteria, what would
they be? And who would qualify and who would not? And without
going into all the details, Argentina ranked last among the current
members of the G20 and there were about 20 countries that should
have been on the list instead.
Well, the United States could easily have put pressure on Argentina through the G20 and told Argentina shape up or we will take
some action to expel you. It is almost a mockery of the whole financial system that it is still a member. So that is an example. I would
also say that there are things that the United States can do to encourage countries that are trying to do the right thing and one example in my testimony is is Mexico which has taken great strides,
its energy reform will be very important to the United States, and
NAFTA has been very important to Mexico and the United States.
And yet, we see the steel industry and the sugar industry in the
United States filing anti-dumping cases against Mexico, which I
think very much violate the spirit of NAFTA. And we have seen
very little in the way of government support for the kinds of things,
for encouragement of free trade from Mexico.

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So I think there are lots of things that can be done and we are
not seeing enough of those things.
Mr. SALMON. Well, I dont want to limit you just to the testimony
today. If you have other thoughts that our Government can and
should be doing, and you wanted to draft a memo for members of
this committee, I promise you we will put it to good use. And I
would really appreciate it.
Ambassador GLASSMAN. Thank you, Mr. Chairman.
Mr. SALMON. Thank you. Mr. Duncan.
Mr. DUNCAN. I just want to return real quickly to the rule of law
and what has gone on with Doral down in Puerto Rico and in the
Ambassadors written testimony in repudiating any of this debt to
Doral, Puerto Rico is sending the worst possible message to other
businesses, I agree. Who would want to continue to invest down
there with this sort of environment and then it goes on to say that
what company would want to overpay the government in light of
Doral? Better to under pay and have the government fight for the
money than to over pay and sitting there waiting on the government to repay you. The fact that they tore up an agreement for
Doral to basically withhold or underpay its tax liability going forward until it reclaimed or recouped all of its money was, I think,
a workable solution.
Ambassador, what possibility is there that Argentina will default
on its debt? What is the real possibility? They have got the money,
wouldnt you agree? From what I understand, they have got the
money. It is just a matter of principle now.
Ambassador GLASSMAN. Yes. They do have the money. I think
that there are elements of the government that are simply ideologically opposed to a settlement. But I also think that it is becoming
clear to Argentina that it cant join the international financial community unless it gets this done. Now over the last 13 years, partly
because of high commodity prices, it has been possible for Argentina to continue to have a half decent economy. But that has really
changed quite a bit in recent years.
So I mean I dont know the answer to that question. It is going
to happen probably in the next few hours.
Mr. DUNCAN. That is the G20. How can you allow a country to
remain in an organization that is supposed to work on economic
stability around the globe and they are defaulting on their debt?
Ambassador GLASSMAN. Right. It baffles me. I dont know the answer to that question. It really does not deserve, in my opinion, to
be in the G20, Argentina.
Could I just make one comment?
Mr. DUNCAN. Yes, sir.
Ambassador GLASSMAN. About what you said about Doral. I say
in my written testimony that the Doral case may also be a factor
in a distressing report by Reuters that Puerto Ricos tax collections
are running 27 percent behind budget. And nearly all that shortfall
comes from corporate income taxes. So we dont know for sure if
that is because corporations are saying oh, I dont want to overpay
because I will get in the same kind of fix that Doraland by the
way, other companies have gotten into. But at any rate, there is
this vast shortfall in corporate income taxes. And when people

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dont pay their taxes, and businesses dont pay their taxes, that is
one of the best signs that a government does not have confidence.
Mr. DUNCAN. I think that is a great statement. Mr. Barrett, I
just ask you to chime in. It is a jungle out there. And you have
written about the jungle. If Argentina defaults on its debt and you
have got actions like Puerto Rico with Doral, what is the fix? From
your standpoint as an author looking in, if you are going to write
about this, what would you say the answer would be to the financial stability of these Latin American countries?
Mr. BARRETT. I am just going to have to be modest and not only
not practice law or be a CFO, but I think that is a little bit beyond
my level of credentials. I would want to inject just one thought
here from the investors point of view which is I think part of what
you are driving at, I think all of these events are going to cause
and ought to cause investors to be more cautious. And I think the
marketplace is going to respond to these events. And it will be
much more difficult to get large economic projects done in places
like Puerto Rico and Argentina as a result and the people who will
suffer will be the residents of those countries.
Mr. DUNCAN. Mr. Chairman, in their sense of time, I hope they
dont follow the U.S.s example of printing money in QE1, QE2,
QE3, QE4, wherever we are at in the QE ratios because I dont
think that is the answer. And I think having a balanced budget,
I think doing things responsibly, paying your creditors back, and
living within your means is a great start. That is an example that
we canthat is a message we can send to them, but that is a message we should follow as a nation as well.
Mr. SALMON. So we just cant fall back on our old parental statement of just do it because I said so?
Mr. DUNCAN. No, I dont think that is fair and I yield back.
Mr. SALMON. Mr. DeSantis.
Mr. DESANTIS. Thank you, Mr. Chairman. Mr. Glassman, just
turning to trade and particularly the issue that has come up where
corporationsour tax system is so bad here that they actually can
go incorporate overseas, acquiring an overseas company, move the
headquarters, and then they are paying much less in terms of a
corporate tax rate. I think the President is basically saying he
wants to just chain companies here. I dont see howthat may
even make it worse. So what would you recommend we do in order
to attract capital here so that people are going to want to have
businesses here, expand them, and not be driven away by our own
policies?
Ambassador GLASSMAN. Well, I think there is little doubt what
we need to do and I think there is something close to a consensus,
but there are differences on some points. And that is lower our corporate tax, marginal corporate tax rate so that it is more in line
with the rest of the world. So right now, it is 35 percent, 40 percent
including state taxes, versus 24 percent for the average OECD developed country, so we are way, way out of line. Everybody has
been cutting them for the obvious reason of attracting business. We
have not.
Second, go to a territorial system which is almost what the rest
of the world has, so you pay taxes where you do business. And
third, close loopholes. I think the closing of the loopholes and the

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increased business would mean you would get at least as much revenue as you are getting right now for the corporate tax which is
very low. So what a normal corporation does or many corporations
do is they pay the tax abroad. Let us say it is 20 percent. And then
rather than bringing the money back to the United States and paying an additional 15 percent, they leave it abroad. So they have got
$2 trillion abroad.
In 2004, Congress closed what I think was a major loophole
which was businesses were just opening a PO Box in the Cayman
Islands and shifting all their assets there. And instead, defined
very closely what an inversion is. And frankly, I think that law is
perfectly fine. But no company would want to invert if we had a
corporatethe kind of corporate tax reform that I just outlined and
I think most Members of Congress want. So that is the imperative.
That is the thing that is necessary. And in a way, maybe it is ironic
but this inversion controversy which by the way only really involves a handful of companies, I think may finally drive corporate
tax reform which I would love to see happen before the end of this
year.
Mr. DESANTIS. One of the things that frustrates me just as a
first termer is the way kind of Washington will score proposals. So
for example, we were talking about you have all this money parked
overseas as you said. Let us let people bring it back on a holiday
very reduced rate, maybe like 5 percent. It could help for the Highway Fund or do other things if people want to do that. That would
actually be scored as the government is losing money. Even
though they wouldnt bring it back under current rates, if you are
lowering the rates, the way they will analyze it is saying oh, well,
the government is going to lose all this money. So do you think
there is a problem with the scoring conventions here? Because it
seems to me that they dont account for behavioral changes when
policy makers are changing incentives.
Ambassador GLASSMAN. Absolutely. There is just no doubt about
that. We need some kind of dynamic scoring. There is a problem
though, of course, because there may be a lack of objectivity involved in dynamic scoring, but I think we all know that if tax rates
dropped to zero or very low or their tax changes, that it does
change peoples behavior. There is just no doubt about that.
Let me just also say that a company that does one of these inversions, so called, I prefer to call them foreign tax relocations because
I think inversions have kind of a negative quality. A company, first
of all, has to buy a very large company abroad. It has to be the
main reason that they are doing the merger. It cant be just for tax
reasons. And after that is done, you have the very strong possibility and likelihood of money that is earned abroad coming back
to the United States because it doesnt have that extra layer of taxation. But ultimately, we dont want to rely on these inversions of
a few companies.
What we really need, what would really liberate the U.S. economy is to have the same kind of corporate tax system the rest of
the world has and then the imagination and ingenuity, energetic
nature of the American people will show that we can compete and
beat anybody. But right now, we are just hobbling ourselves with

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this corporate tax system. And by the way, not raking in very much
in the way of tax revenue.
Mr. DESANTIS. I appreciate that. And part of the frustration we
have is that we seem to shoot ourselves in the foot with some of
these things with the economy. If our tax policies were competitive,
people would flock here. This is a good place to be in spite of some
of the problems that we discussed, we are still better off, but man,
when you are creating these huge disincentives, capital is mobile
and in this world-wide economy, it is going to move or it is going
to stay offshore.
Mr. DESANTIS. Thanks, Mr. Chairman. I yield back.
Mr. SALMON. Ambassador Glassman, I would submit that if we
put this proposal right now for a vote with this panel, that it would
be unanimous. We would all vote to lower the corporate taxes down
to a rate that is reasonable with the rest of the Western world and
bring our companies back to the United States and let them repatriate without the penalties. And common sense tells you that the
revenues would skyrocket if that happens, besides the fact that
something is better than nothing which to me even an idiot can understand that. The other piece of it is that it does influence behavior and investment and jobs growth and it makes all the sense in
the world.
Our motive today in this hearing was not to simply just cast aspersions and beat people over the head, countries that dont necessarily agree with our democratic values or even agree with us on
rule of law issues. It is not just to brow beat. Our goal is to use
the bully pulpit, as you said, Mr. Glassman. It is to try to encourage other countries of the world to try to employ more free market
solutions because that rising tide does lift all boats and it creates
jobs and it helps their economies and it helps their people.
And as we started by saying that just by seeing this great spillover of people coming from Central America, the truth is that if
they had other things driving their economy other than
narcotrafficking, and they do, but I mean narcotrafficking has become such a big part of what is happening in Central America
right now that the gang violence, the cartel violence, it has just
gotten out of control and if they had security and economic stability, they wouldnt have this crisis. They wouldnt. And we all recognize that.
And so what we are suggesting today for Bolivia, for Argentina,
for Ecuador, for Venezuela is that we want to see them succeed.
We truly do. We want their people to feel like they are not oppressed. We want their people to feel like they can succeed and
they can cover their childrens education, that they can put food on
the table and that they can have a positive environment to raise
their families like we want to have. We are not trying to just humiliate. We are trying to help and edify and that was the purpose
of todays hearing was and we hope that it is seen as constructive.
I think the panel did a phenomenal job outlining some of the things
that can make those countries even better.
Mr. DUNCAN. Will the gentleman, yield?
Mr. SALMON. Absolutely.
Mr. DUNCAN. Let me just say for the record, I am not personally
bashing Argentina. I love the country. I love the people. I think

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them settling with their creditors would help the economy, it would
help their bond rating, and it would give them the ability to actually attract investments. So it is just the suggestion of how to do
things, in our humble opinion, better. I dont want that to be misconstrued because I want to see the best for the country. I would
love to see them back in that top seven, Ambassador, as economic
viability.
Mr. SALMON. Besides the Pope is from there, and you want to get
to heaven.
Mr. DUNCAN. I would love to go shoot doves. I yield back.
Mr. SALMON. Thank you very much and this hearing is now adjourned.
[Whereupon, at 3:23 p.m., the subcommittee was adjourned.]

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APPENDIX

MATERIAL SUBMITTED

FOR THE

RECORD

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SUBMITTED FOR THE RECORD BY THE HONORABLE THEODORE E.

A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA

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