U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

88–918PDF 2014

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. 113–212

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/ or

http://www.gpo.gov/fdsys/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

EDWARD R. ROYCE, California, Chairman 

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 

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

AMY PORTER, Chief of Staff THOMAS SHEEHY, Staff Director

JASON STEINBAUM, Democratic Staff Director 

SUBCOMMITTEE ON THE WESTERN HEMISPHERE

MATT SALMON, Arizona, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

MICHAEL T. MCCAUL, Texas 

JEFF DUNCAN, South Carolina 

RON DESANTIS, Florida 

SEAN DUFFY, Wisconsin 

ALBIO SIRES, New Jersey 

GREGORY W. MEEKS, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

THEODORE E. DEUTCH, Florida 

ALAN GRAYSON, Florida 

(III)

C O N T E N T S 

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) ................................................................................... 6

Mr. Paul M. Barrett, author ................................................................................... 27

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) ..................................................................... 33

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable James K. Glassman: Prepared statement ................................... 9

Mr. Paul M. Barrett: Prepared statement ............................................................. 29

The Honorable Jose W. Fernandez: Prepared statement ..................................... 35

APPENDIX 

Hearing notice .......................................................................................................... 54

Hearing minutes ...................................................................................................... 55

The Honorable Theodore E. Deutch, a Representative in Congress from the 

State of Florida: Material submitted for the record .......................................... 56

(1)

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 subcommittee’s 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 President’s statements undermining our immigration laws have increased and encouraged this mass migration 

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 

Foundation’s 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 Venezuela’s 

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 hemisphere’s democratic sensibilities. I must say, I am extremely disappointed with the Obama 

administration’s 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 Obama’s 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 hero’s 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 Maduro’s 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. 

3

Blatant disregard for democratic values and the rule of law have 

affected Argentina’s 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, Correa’s 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 

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. 

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 country’s 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 country’s 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.’’

6

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 firm’s Latin America Practice Group. He served 

as the Assistant Secretary of State for Economic, Energy and Business Affairs as well as the State Department’s 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 

7

past. In 1908, it was the seventh wealthiest country in the world. 

Today, it is 55th. 

This very day, the grace period in Argentina’s 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. 

Argentina’s 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 Argentina’s. 

Now, it is the turn of Puerto Rico, a U.S. territory since 1898. 

Puerto Rico’s 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 island’s 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 Government’s 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 Rico’s 

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. 

8

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:]

9


88918a-1.eps
10


88918a-2.eps
11


88918a-3.eps
12


88918a-4.eps
13


88918a-5.eps
14


88918a-6.eps
15


88918a-7.eps
16


88918a-8.eps
17


88918a-9.eps
18


88918a-10.eps
19


88918a-11.eps
20


88918a-12.eps
21


88918a-13.eps
22


88918a-14.eps
23


88918a-15.eps
24


88918a-16.eps
25


88918a-17.eps
26


88918a-18.eps
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 31⁄2 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 Ecuador’s 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 Texaco’s 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. 

28

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 

expert’s submissions to the court. 

Ultimately, according to the March 4, 2014 opinion of U.S. District Judge Lewis Kaplin, Donziger’s team ‘‘wrote the Lago Agrio 

court’s 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:]

29


88918b-1.eps
30


88918b-2.eps
31


88918b-3.eps
32


88918b-4.eps
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 ABA’s—

American Bar Association—Latin 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 Justice’s 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 doesn’t 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 

investor’s 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 

34

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 wouldn’t 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 USAID’s 

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:]

35


88918c-1.eps
36


88918c-2.eps
37


88918c-3.eps
38


88918c-4.eps
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 don’t 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 today’s 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 Ecuador’s 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 

40

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 can’t 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 couldn’t 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 don’t like to get into even 

if some sides do it, they say two wrongs don’t make a right, 

etcetera. I get upset if somebody is name calling the United States. 

I don’t 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 country’s history and 

how proud those individuals are of their President, I don’t think 

that—I know even when we don’t like our President, whoever that 

President is, to be name called by anyone else and I don’t 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 

41

recently many of the people that were impoverished and indigenous 

and others had no access to government at all. I mean that’s why 

some people who are elected is because of the fact that poorest of 

the poor in these communities didn’t, couldn’t access government 

and didn’t 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 

Mexico’s 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 don’t 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 

42

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 ABA’s 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 didn’t 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. 

43

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 don’t 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 percent—has 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 doesn’t 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 Rico’s 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? 

44

Ambassador GLASSMAN. I think it is a good idea. I don’t 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 prepara- tions 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 don’t know the answer to that. The 

last time I looked there was——

Mr. DUNCAN. Is there a requirement in their constitution? 

Ambassador GLASSMAN. I don’t 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 

45

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 didn’t 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 doesn’t 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 don’t 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 Lincoln’s 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, 

46

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 weren’t 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. 

47

Mr. SALMON. Either way. I mean given your experience don’t 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 can’t 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 don’t 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. 

48

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 don’t 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 

Ambassador’s 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, 

wouldn’t 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 can’t 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 don’t 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 don’t 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 Rico’s tax collections 

are running 27 percent behind budget. And nearly all that shortfall 

comes from corporate income taxes. So we don’t know for sure if 

that is because corporations are saying oh, I don’t want to overpay 

because I will get in the same kind of fix that Doral—and by the 

way, other companies have gotten into. But at any rate, there is 

this vast shortfall in corporate income taxes. And when people 

49

don’t pay their taxes, and businesses don’t 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 investor’s 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 

don’t follow the U.S.’s example of printing money in QE1, QE2, 

QE3, QE4, wherever we are at in the QE ratios because I don’t 

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 can—that 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 can’t fall back on our old parental statement of just do it because I said so? 

Mr. DUNCAN. No, I don’t 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 

corporations—our 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 don’t see how—that 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 

50

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 

corporate—the 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 wouldn’t 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 don’t 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 people’s 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 can’t 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 doesn’t have that extra layer of taxation. But ultimately, we don’t 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 

51

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 don’t 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 wouldn’t have this crisis. They wouldn’t. 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 children’s 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 today’s 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 

52

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 don’t 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.] 

(53)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE RECORD

54

f


88918n.eps
55

f


88918m.eps
56

MATERIAL SUBMITTED FOR THE RECORD BY THE HONORABLE THEODORE E. DEUTCH, 

A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA


88918d-1.eps
57


88918d-2.eps
58


88918e-1.eps
59


88918e-2.eps
60


88918e-3.eps
61


88918f-1.eps
62


88918f-2.eps
63


88918g-1.eps
64


88918g-2.eps
65


88918g-3.eps
66


88918g-4.eps
67


88918h-1.eps
68

Æ


88918h-2.eps