The governments of Channel Islands Guernsey and Jersey are to legislate to restrict vulture funds from accessing the islands' courts.
The practice involves fund managers suing poor countries to recover bad debt.
'Vulture funds' operate in a market known as 'distressed debt' by investors. They buy the debts of poor countries at a low rate and then use courts in tax havens like Guernsey and Jersey to sue the developing countr y for amounts up to 100 times the debt value.
The vulture funds use aggressive tactics, including chasing companies who transact with the government of the indebted country and then forcing them to pay their money into the vulture fund instead of into the country.
The funds are criticised by charities and NGOs for holding poor and developing nations to ransom, ensuring that they remain in poverty.
Chief Minister of Guernsey Peter Harwood says the new Guernsey law would limit that amount that could be recovered via the Guernsey court system from developing countries.
"The purpose of the legislation is to limit the amount so-called vulture funds can recover or enforce through the Guernsey courts in line with debt reductions agreed internationally," he said.
The Draft Debt Relief (Developing Countries) (Jersey) Law was presented to the Jersey Senate on 1 October 2012. The law is designed to demonstrate Jersey's commitment to support debt relief to some of the world's poorest countries.
"This law will send a clear and positive message that Jersey is committed to supporting international debt relief efforts and that ours is a well-regulated, co-operative and transparent jurisdiction," said Senator Ian Gorst, the Chief Minister of Jersey.
The UK was one of the first countries to legislate against the practice, initiating the Debt Relief (Developing Countries) Act 2010, which limits the amount that vulture funds can recover in UK courts.
Liberia was in debt to the tune of £20m prior to the enactment of the legislation and then, following the enactment of the law, was only liable to pay £1m to the vulture fund.
Guernsey government targets 'vulture funds' (BBC News)