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Should Swiss Banks Be Liable For Lending To South Africa's Apartheid Government?


Wednesday, Jul. 03, 2002

The plaintiffs in the case are 80 black South Africans whose rights were violated by South Africa's former apartheid regime. (One plaintiff is an anti-apartheid activist and the father of twin boys who were gunned down by a death squad in their sleep in October 1993, together with three of their friends.) They allege that, through their lending activities, the three banks aiding and abetted the regime's crimes.

The suit is being brought under the federal Alien Tort Claims Act, a 1798 statute that allows foreign plaintiffs (referred to as "aliens") to sue for torts that also constitute violations of the "law of nations" (international law). This Act has been used by human rights victims to bring suit against torturers and war criminals. More recently, it has been used to bring suit against corporations and banks for their alleged involvement in egregious human rights violations.

If the recent apartheid lawsuit against the banks succeeds, its implications are broad indeed. It will send a message to any bank that has historically made loans to repressive regimes, and any corporation that has invested in a country with problematic human rights records, that they may be liable for aiding and abetting through their investment and lending activity.

Earlier, Similar Cases Against Swiss Banks

This is not the first such lawsuit. Over the past several years, Swiss banks have been hauled into federal court in the United States to defend themselves against allegations of complicity in historical human rights violations - with the claims generally brought under the Alien Tort Claims Act.

In the late 1990s, several major banks were sued in the United States for their actions with respect to the dormant bank accounts of Holocaust victims and their heirs. Plaintiffs alleged the Swiss banks had facilitated the Nazis' looting and retention of wealth that found its way out of Germany and into Swiss vaults. The banks were portrayed as "fences" for the Nazi regime: repositories and places where the Nazis could hide or convert their ill-gotten and blood-tainted gains. (Fagan was also involved in these cases).

Meanwhile, in a human rights lawsuit brought against the late dictator Ferdinand Marcos, U.S. branches of Swiss banks were added as parties, based on claims that they had acted as agents of the Marcos regime, allowing the dictator to stash plunder stolen from the Philippines national treasury.

The Claim: Aiding and Abetting Apartheid Through Lending Activity

In the recent apartheid lawsuit, the plaintiffs allege that the defendant banks provided funds to the apartheid government between 1985 and 1993. (Apartheid lasted from 1948-94, ending with Nelson Mandela's election). That was the very time, they say, when the government was running short of cash because of United Nations sanctions, and the very time when other banks and companies were withdrawing their investment and business activity. Accordingly, the plaintiffs claim that but for the loans, the regime would not have survived for as long as it did.

The Truth and Reconciliation Commission's Finding on the Same Issue

South Africa's Truth and Reconciliation Commission ("TRC") also examined this issue, in 1997. Its final report concluded that corporations had been "willing collaborators" with the apartheid regime since the early 1960s.

It said certain corporations had had a "a direct interest m maintaining the status quo." They bypassed attempts to impose sanctions by "forming partnerships with South African parastatal organizations." In two dozen submissions, corporations and business associations apologized for their errors of commission and omission with respect to ending apartheid.

The TRC report proposed a series of taxes on business corporations to offset apartheid's legacy of poverty, and also recommended a wealth tax. It also proposed that "each company listed on the Johannesburg Stock Exchange ... make a once-off donation of one percent of its market capitalization," and that the government impose "a retrospective surcharge on corporate profits extending back to a date to be suggested."

These suggestions offer creative alternatives to litigation for situations where private enterprise has historically benefited from a repressive or violent political regime. However, in the U.S., they have no effect on plaintiffs' ability to pursue their suit against the banks.

A Tale of Two Bankers: Nuremberg Defendants' Fates May Be Significant

Will the plaintiffs succeed in their suit? Or, put another way, does liability arise when a bank or commercial actor provides financing to a repressive regime? At present, the answer is not clear.

The recent Holocaust-era bank cases were eventually settled. In the Marcos case, the American bank branches were deemed to be separate and distinct from The Swiss parents for purpose of execution of a judgment, and thus became irrelevant to the trial. Thus, there is no recent precedent that grapples with the liability of a financial institution for aiding and abetting human rights violations.

There is, however, one related precedent that may be very influential. After the Second World War, the United States Military Tribunal ("USMT") at Nuremberg prosecuted two bankers, Karl Rasche and Emil Puhl, for their role in the crimes perpetrated by the Nazi regime.

Rasche - the Chairman of Dresdner Bank, a private bank in Germany that served, in many respects, as the bank for the Third Reich - was the only private banker to be tried under the Nuremberg Charter. He was convicted of looting and of membership in the SS. He was acquitted, however, of charges that he had played a role in providing loans for the construction of Auschwitz.

The USMT noted that, as a board member of Dresdner, Rasche was intimately involved in loaning "large sums of money to various SS enterprises which employed large numbers of inmates of concentration camps, and also to Reich enterprises and agencies engaged in the so-called resettlement programs." And it concluded that Rasche had actual knowledge as to the purposes for which loans were sought.

But the USMT also concluded that Rasche's granting of loans was not a violation of international law. Why? The Tribunal justified its conclusion as follows:

The real question is, is it a crime to make a loan, knowing or having good reason to believe that the borrower will use the funds in financing enterprises which are employed in using labor in violation of either national or international law? Does [Rasche] stand in any different position than one who sells supplies or raw materials to a builder building a house, knowing that the structure will be used for an unlawful purpose? A bank sells money or credit in the same manner as the merchandiser of any other commodity. It does not become a partner in enterprise, and the interest charged is merely the gross profit, which the bank realizes from the transaction, out of which it must deduct its business costs, and from which it hopes to realize a net profit. Loans or sale of commodities to be used in an unlawful enterprise may well be condemned from a moral standpoint and reflect no credit on the part of the lender or seller in either case, but the transaction can hardly be said to be a crime. Our duty is to try and punish those guilty of violating international law, and we are not prepared to state that such loans constitute a violation of that law, nor has our attention been drawn to any ruling to the contrary.

The USMT, thus, saw a distinction between providing capital and actively participating in Nazi looting efforts. But a U.S. court might well hold otherwise today.

Consider, for instance, that the U.S. government has recently cracked down on corporate entities and charities that are alleged to have financed terrorist activities. As this development reflects, international law and criminal law may have evolved to a point where knowingly financing grave breaches of international law may give rise to liability.

Puhl's Case: A Role Beyond A Businessman's Leads to A Conviction

Puhl, the second Nuremberg banker defendant, was deputy to the President of the German Reich bank (central bank, which engaged in the systematic plundering of the nations it occupied and took valuable items from Jewish victims.

Puhl's job was to arrange for gold, jewelry, and foreign currency from Nazi victims to be deposited at the Reichsbank. He also arranged for gold teeth and crowns from concentration camp victims to be recast into gold ingots.

Puhl was prosecuted and convicted, and sentenced to five years imprisonment, for his "role in arranging for the receipt, classification, deposit, conversion and disposal of properties taken by the SS from victims exterminated in concentration camps." Unlike with Rasche, the tribunal noted:"[Puhl's] part in this transaction was not that of mere messenger or businessman. He went beyond the ordinary range of his duties to give directions that the matter be handled secretly by the appropriate departments of the bank."

Drawing Lines: When Does a Bank Become An Accomplice?

The Rasche acquittal and Puhl conviction create an uncertain precedent with respect to the key question of when banks or bankers will be liable for aiding and abetting human rights violations.

This issue is highly relevant today, and not just in the context of the apartheid lawsuit. For example, the prosecutors' office at the International War Crimes Tribunal for the Former Yugoslavia recently released a report showing that Slobodan Milosevic managed to transfer a great deal of funds illegally to offshore bank accounts. What about the banks? Should they be liable?

Joint Venture Activity Between Corporation and Government Can Justify Liability

I believe (and have argued elsewhere) that Swiss banks should potentially bear responsibility if they knowingly aided and abetted individual perpetrators who had committed grave breaches of international law - by secreting their wealth. I noted the need for an international convention or treaty, however, that would more properly describe the crime that would define such responsibility, and its limits; and that would provide mechanisms or remedies to allow victims to obtain redress.

I also believe (and have argued elsewhere) that under certain narrow circumstances, multinational corporations might be liable as accomplices for aiding and abetting serious violations of certain peremptory norms of international law - such as genocide or enslavement committed by host governments with which they engage in joint venture activities.

To take another example, Unocal is currently being sued based on allegations that its joint venture activity in Burma, where it is building an oil pipeline, caused human rights harms. If the allegations are well-founded, I believe the suit is proper. The Burmese government has forced Burmese citizens to work without pay to build infrastructure such a roads and helipads for the pipeline project. Unocal is alleged to have knowingly partnered with the government and contracted with the military to provide project-related security and services. By hiring the military, Unocal is claimed to have facilitated slavery.

But in all these circumstances, the allegations say that the corporation has a direct business venture with the government, in which they are collaborating as joint venturers, and the violence perpetrated by the government relates directly to the joint venture project itself. What about cases where a bank or corporation is not alleged to be a joint venturer in the human rights violations its activities nevertheless end up fostering?

How Broadly Should the Accomplices Net Be Cast?

As the first accounts of the apartheid lawsuit emerge, what seems to be missing is any direct connection between the banks' loans and the violence of the apartheid regime - any collection, that is, more direct than the allegation that without the loans, the violence could not have continued. Even a bank's acceptance of funds from a war criminal may be a more direct connection that the one the apartheid plaintiffs allege.

Yet it may make sense for the law to require a more direct connection that this "but for" logic between a given investment or activity and a given human rights violation. Indeed, it may even be right to require that in order for a person (or entity) to be liable for aiding and abetting, they need to share the same criminal intent as the person who actually commits the crime.

The Treaty Alternative, and The Need For Redress From Apartheid-Supporting Banks

In the end, I find myself conflicted about where the liability line should be drawn - and ready to change my mind, perhaps, as more facts emerge in the apartheid lawsuit. I understand the need for redress and I also agree that commercial entities did sustain the apartheid regime. But perhaps - at least in the future - treaty-based solutions will prove to be better than litigation at addressing situations like this.

The United Nations Global Compact, by comparison, has focused on how multinational corporations need to avoid being complicit in human rights abuses in a host nation. The international community needs to similarly focus and create rules of the game for how banks should interact with repressive regimes as well. These rules, moreover, should be binding, not aspirational.

Irrespective of the outcome of the current apartheid lawsuit, there is no doubt that the loans of the past still have an impact on South Africa today. Nonetheless, the new democratic government has continued to honor the repayment of debts created during the apartheid era. Today, debt servicing takes up a large chunk of national income.

The international community needs to understand that banks do have a role to play, with respect to promoting and protecting international human rights. Thus, the current apartheid lawsuit, while certainly fraught with problems, is nonetheless of historical importance for its attempt to show the connection between commerce and political violence.

Anita Ramasastry is an Assistant Professor of Law at the University of Washington School of Law in Seattle and the Associate Director of the Shidler Center for Law, Commerce & Technology.

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