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Capital controls and legal risks: major concern last year, ignored now

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In the months leading up to the June 2015 plan on moving the three banking estates out of capital controls minister of finance Bjarni Benediktsson was adamant about avoiding legal risk. Indeed, that plan was only announced once the creditors had agreed to a haircut on the estates’ króna assets. The new Act on the offshore króna raises some legal issues as two of the four funds holding the lion share of these assets have pointed out in a letter to Alþingi. Intriguingly and contrary to last year, Benediktsson and the Central Bank of Iceland now seem to be intensely relaxed about legal risk though this time, contrary to last year, it really is the state that is the counterparty.

There has been little debate in Iceland regarding the offshore ISK and measures to lift controls on its owners. Certainly, the numbers are fundamentally different from when these offshore ISK, i.e. owned by foreigners (individuals or entities registered abroad; can in theory be Icelandic and are in some cases) caused the introduction of capital controls in November 2008. At the time these assets amounted to 44% of Icelandic GDP; now they amount to 14% of GDP or ISK319bn.

The largest part of the offshore ISK is owned by a few large institutional investors, two of them being Autonomy Capital and Eaton Vance. The underlying assets are Icelandic sovereign bonds and T-bills, meaning that the counterparty here is the Icelandic state.

As with creditors last year there have been meetings between the large offshore ISK owners and Icelandic representatives of the ministry of finance and the CBI. Contrary to last year, when nothing was done until it had been negotiated with the creditors of the estates, no agreement was reached before the new Act was passed in parliament this weekend.

Officials met with representatives of offshore ISK holders yesterday in New York to inform them of the new measures.

The state sure will pay its debt or… maybe not

Last year, creditors to the estates agreed to roughly a 75% haircut on the estates’ ISK assets. This outcome came as no surprise but had been more or less foreseen for the last several years, based on the Icelandic current account: this is what Iceland could manage without upsetting financial stability.

Hawkes among Icelandic officials have been adamant that offshore ISK owners should endure a similar fate. That however goes against the rule that a state pays its debt in full. At a hearing in the parliament’s economy and trade committee a CBI official underlined this fact: the sovereign will pay its debt.

This is clearly what the funds owning the offshore ISK have literally been banking on: the state is its counterparty and a state pays its debt.

Two options: ISK220 for a euro or deposit at negative rate

The new Act (English translation of the Bill) stipulates that offshore ISK holders can participate in an auction where the reference exchange rate will be ISK220 for the euro, more than a third higher than the present onshore rate of ISK140.

There was a meeting in New York yesterday, where the measures were explained. Clearly, a higher participation in the auction would lead to a better price (creating a version of “prisoner’s dilemma”…) but the funds might also calculate that they were better off heading to court.

If an auction doesn’t tempt them the assets will be turned into a “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.” This debt instrument has no maturity, interest rates are set at 0.5% but will be reviewed annually. Needless to say, 0.5% in Iceland is negative interest rates, well below inflation.

Effectively, the offer is either a haircut of more than a third of the assets or a lock-in at negative interest rates for unspecified time.

If the haircut was meant as a carrot compared to the lock-in stick, offshore ISK owners might well keep in mind the CBI official’s words that the sovereign was of course going to pay its debt in full – and simply head for the courts.

Property rights and human rights

Over the weekend, Eaton Vance and Autonomy sent a clarification of their stance to parliament (here, in Icelandic). The funds protest the Bill defines all offshore ISK as being “potentially more volatile than other króna-denominated assets, as the latter are subject to a home bias.” This does not at all apply to the funds, they claim since they have already shown a preference to being long-term investors in Iceland, i.e. they are willing to buy Icelandic bonds and T-bills.

In addition, they point out that considering growth and good state of the Icelandic economy, the present offer can’t be justified by hardship, as emergency measures following the banking collapse in October 2008.

Furthermore, the funds see their position as being strong since a partial payment would amount to a credit event, thus putting the state into default, with all the unpleasant consequences involved – a potentially expensive experience for Iceland, both the state, public institutions and companies.

There is a “Provisions of the Constitution and the European Human Rights Convention” in the Bill, stating that the “recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination.” – The funds clearly disagree and consider these provisions to be inadequate.

A legal risk but so what…

One view heard from one of those involved on the Icelandic side is that the measures are clearly close to the margin of the possible and postulate a clear legal risk. However, there was no need for Icelandic authorities to pay any special attention to problems the offshore ISK holders might identify, according to this source. Yes, the offshore ISK owners could now decide to challenge the Act but perhaps they had already had enough of wrangling with Icelandic authorities and might just be ready to call it a day. And anyway, an Icelandic court is unlikely to rule against the parliament, states the source.

That is certainly one way of seeing the situation. What I find difficult to explain is why the minister of finance and other officials were so adamant last year about avoiding all possible legal risks, by beforehand securing the creditors’ support to the plan to lift controls for the estates – but are now apparently intensely relaxed about possible legal risks and the pretty obvious invitation to a legal challenge.

All the more surprising since the creditors to the estates had known for a long time that they would only get part of their ISK assets whereas the offshore ISK owners are certainly counting on the state paying back and in full.

Could the Act be only a stick (as was the “stability tax” last year), are talks still going on? That’s one version and an Act of law can certainly be changed. That said, I still find the Act looking surprisingly like a final act if the intention is to explore further avenues with offshore ISK holders.

Reputation risk and “those in the cage”

At a public meeting on the offshore ISK in 2013, some of those present argued that the solution to the Icelandic current account problem was just to cage in the foreign-owned assets so capital controls could be lifted on the domestic part of the economy. Present at the meeting was CBI governor Már Guðmundsson who pointed that when new investors would then arrive in Iceland they would see the cage and ask who was in it. “The investors who invested in Iceland last time around.”

This doesn’t seem to be the most alluring introduction to Iceland but that is none the less what seems about to happen: offshore ISK holders are being offered a cage, unless they prefer fleecing.

Icelandic officials will clearly have Icelandic interests at heart. Last year, it seemed that these interests were best safeguarded by negotiating an outcome with creditors so as to secure a full harmony in the outcome and execution. With the offshore ISK the same officials seem to act in the certain belief that the state can dictate an outcome it wishes, with no need to pay any special attention to those who lent money to the state and who are also willing to continue lending. It will take some time before it’s clear if this is a sound judgement and what the possible reputation risk will be.

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Written by Sigrún Davídsdóttir

May 24th, 2016 at 10:30 am

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Where but in Iceland…

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Last year, Kaupthing’s second largest shareholder Ólafur Ólafsson was sentenced in February 2015 to 4 1/2 years in prison in the so-called al Thani case. After a change in the law on imprisonment shortened the time prisoners have to spend in prison under certain circumstances, Ólafsson was recently released to a half-way house in Reykjavík. He is now electronically tagged but can go to work – he is still one of the wealthiest men in Iceland and owns inter alia a large shipping company, Samskip.

Yesterday, a helicopter accident drew some attention to Ólafsson: it turned out he was on a sightseeing flight together with three foreign business partners and a pilot when the helicopter came down. All on board were injured but none of them suffered life-threatening injuries.

The helicopter, owned by Ólafsson and registered in Switzerland, according the Stundin, though a Danish and a Swiss company. Allegedly, the helicopter has been used a lot lately, allegedly twice turning off the device that allows the helicopter to be tracked.

According to Stundin a group of hikers saw a helicopter eight hours before the crash, flying in a dangerously daring way, close to the scene of the accident. It’s not been confirmed if the helicopter observed was the one owned by Ólafsson.

The accident has also drawn the attention of authorities to the fact that tagged prisoners can in theory travel abroad – it’s not banned – as long as they are back at 9pm. The reason foreign travel isn’t forbidden is only because it’s not until now that there have been prisoners wealthy enough to own their own planes. This will now be taken up.

The Icelandic magasine Séð og heart has now pointed at a weird coincidence. Ólafsson has a very close business partner, Hjörleifur Jakobsson, who like Ólafsson moved to Switzerland, has in general been closely involved in Ólafsson’s business ventures for decades and has often been called Ólafsson’s right hand in Icelandic media.

It turns out that as the Icelandic Prison Service is starved for funds it has outsourced the electronic tagging and the surveillance involved to a company called “Öryggismiðstöðin,” which is owned by no  other than Ólafsson’s right hand man, Jakobsson. The magasine is not alleging that Jakobson’s company is granting Ólafsson any favours, merely pointing out that such coincidences can happen in little Iceland.

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Written by Sigrún Davídsdóttir

May 23rd, 2016 at 9:45 pm

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Getting rid of the offshore ISK: plenty of sticks, carrots uncertain

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After markets closed May 20, minister of finance Bjarni Benediktsson introduced a new Bill (text in English) on offshore ISK, now amounting to ISK319bn, around 14% of Icelandic GDP.

As expected, offshore ISK owners are will be offered  to participate in an auction. Those who don’t accept the offer will see their funds put into so-called “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.”

The restrictions are special indeed: the debt instrument will only carry interest of 0.5%, to be reviewed every year. In addition, this debt instrument does not have a specified maturity. As interest rates in Iceland are well above 0.5% and not likely to be near this rate any time soon, the offer is to participate in an auction or have the funds locked in at negative interest rates forever and a day, i.e. well below market rates in Iceland.

If the word “expropriation” comes to mind the 4.1 Chapter is on “Provisions of the Constitution and the European Human Rights Convention”:

The recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination. Failure to adhere to these principles could create liability for compensatory damages on the basis of Article 72, Paragraph 1 of the Constitution, cf. also the protection of ownership rights according to the European Human Rights Convention, or could constitute illegal discrimination, which would be in violation of the non-discrimination rule contained in Article 65 of the Constitution, cf. also the prohibition of discrimination on the basis of subjective considerations, according to the European Human Rights Convention and the EEA Agreement.

It is clear that the beneficial owners of offshore króna assets are residents and non-residents and that disposal of offshore króna assets has been subject to restrictions ever since the capital controls were imposed. The extraordinary circumstances currently prevailing are considered to justify the transfer of offshore króna assets in the form of electronically registered securities to administrative accounts with the Central Bank of Iceland and the transfer of deposit balances to accounts that will be subject to the special restrictions provided for in the bill of legislation. The same principles lie behind the recommendation that payments due to other offshore króna assets be subjected to comparable restrictions.

It is appropriate to emphasise that the bill of legislation does not represent a transfer of ownership rights. Furthermore, changes in the custody of króna-denominated assets are not conducive to eroding their value, with reference to the fact that the authorisations for disposal will be either unchanged or more liberal. Nevertheless, it can be said that, by stipulating changes in administration of custody, owners’ right of disposal are being restricted as regards the selection of an administrator.

The Central Bank is authorised to charge administrative fees on offshore króna assets, but these fees shall not exceed the Bank’s actual incurred expense. The restrictions in the bill of legislation centre mainly on owners’ right to decide where their assets are held in custody.

The restrictions provided for in the bill are an element in the vital task of reducing the risk attached to the aforementioned offshore króna assets. The conditions prevailing at the time this bill of legislation is presented – i.e., the imposition of capital controls following the financial crisis in autumn 2008, the steps taken since then, and the damage that protracted capital controls do to the domestic economy – are discussed in detail in Section 2. Furthermore, reference is made to the discussion in that section concerning the necessary scope of the measures provided for in the bill of legislation.

The continued restrictions on the right to dispose of offshore króna assets are based on vital public interest considerations. These restrictions are a necessary element of measures to release the pressure that offshore króna assets could put on the exchange rate of the Icelandic króna, other things being equal, and they are also a way to give the owners of the assets the option of releasing them without jeopardising exchange rate stability. The objective of the bill is to enable the liberalisation of capital controls on households and businesses in Iceland, and also on owners of offshore króna assets. (Emphasis mine).

The situation of the Icelandic economy can be debated but it is, for the time being, fairly if not extraordinary good.

The above mentioned  “continued restrictions” indicate that as capital controls are lifted on others, those who hold offshore ISK but didn’t want to participate in the auction are effectively kept locked in.

As soon as plan to lift capital controls was announced in June last year, carry trades on the ISK rose. Intriguingly, part of the present locked-in offshore ISK stems from carry trades (actually often long-term investment rather than only hot inflows). This means, that even before the old overhang has been released, new inflows have started – either a sign of the market’s extremely short memory or faith in the Icelandic economy.

The government carefully avoided legal wrangling with creditors of the estates of the fallen banks. The question is if the new Bill does the same trick and leads to a satisfactory outcome for all. The above are points likely to cause consternation among the four largest holders of offshore ISK, all institutional investors. The question is if it’s more important for them to find a solution and finally clarify the situation or if they see the new measures as an infringement on their legal rights.

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Written by Sigrún Davídsdóttir

May 20th, 2016 at 10:53 pm

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Presidential elections: fighting old debates or looking ahead? – Updated

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It’s no exaggeration to say that Icelanders are stunned to see another old politician throwing his gauntlet into the presidential ring: Davíð Oddsson is running for president, competing with Ólafur Ragnar Grímsson, his old political adversary from decades ago. There are several other candidates but the most serious threat to the political oldies is Guðni Th Jóhannesson lecturer in history. Icelanders will now be invited to watch a battle as if stuck in the 1990s or watching ahead with Jóhannesson and the younger candidates. 

“Davíð” is a common name in Iceland but an Icelander hearing the name “Davíð” without further qualifications will know who is being referred to. Davíð Oddsson has been a fixture in Icelandic politics since elected mayor in 1982. Born in 1948 he is five years younger than president Ólafur Ragnar Grímsson. As a leader of the conservative Independence party (1991-2005) Oddsson often fought ferociously against Grímsson the leftie in the 1980s and the 1990s until Grímsson moved to Bessastaðir, the presidential residence. – After all, the most famous description of Oddsson, that the at the time prime minister had a “shitty nature” (“skítlegt eðli” in Icelandic sounds much ruder), came from Grímsson.

Formally Grímsson left the political scene in 1996 but others claim the old politician has never left politics, just adapted his tactics to his role. All of this seemed history – until today when Oddsson announced he would run against Grímsson. Icelanders now feel they are being dragged into the political battles of earlier decades. Both Grímsson and Oddsson feel they “won” the Icesave dispute, a clear example of dragging the past into the present. The question is if Icelanders want to look back or onwards.

Oddsson brings the distant past and the banking collapse into the present

As a prime minister from 1991 to 2004 Oddsson became the longest serving PM in Iceland. After a year as a foreign minister he moved to the Central Bank of Iceland, serving as a governor until early 2009 when he was hounded out by public protest and the left government. He was then offered the post of editor of  Morgunblaðið, the newspaper once Icelandic strongest private media.

Among his supporters Oddsson is seen as a strong and fearless politician. Albeit, it’s likely that his supporters are losing numbers, not because they change their mind but because they are mostly old and are slowly leaving this world. These people see him as the best PM ever, later ignominiously treated in 2009 by “the loony left” and activists.

Younger people remember his time as a governor where the CBI lost around ISK270bn on repro deals with the banks in the year before the 2008 banking collapse: the CBI knew what was going on but didn’t want to stop the merry-go-round. Again, others will claim nothing else could be done. However, the loss was large and real.

On the the day the banking collapse became a reality, 6 October 2008, Oddsson decided to lend €500m to Kaupthing – this lending is one of the very few unexplained and inexplicable actions related to the banking collapse (see my blog on this loan).

Oddsson: writing for the fishing industry and his own irritation

Morgunblaðið is owned by two large and powerful fishing companies and has been seen as an untiring campaigner for the fishing industry’s interests, against the European Union, against taxing the fishing industry etc.

As a PM Oddsson did lead Iceland into the European internal market by the agreement on the European Economic Area in 1993 but has grown ever more EU-sceptic. As editor, he has in addition cultivated his own unrelenting irritation against Rúv, the public broadcaster. Oddsson’s pen is sharp and merciless, in the latter years often more fierce than funny.

By deciding to run Oddsson brings all of his past into the present, both the deeds he’s still admired for by some conservative voters and the more questionable time, i.e. as a governor. Facebook has been ablaze in Iceland today, inter alia bringing up that the Time Magazine named Oddsson as one of 25 leaders from the world of banking and politics responsible for the banking crisis in 2008: he was earlier an avid campaigner for regulation-light and oversaw the privatisation of the banks, in  addition to the repo lending.

Icelandic presidents and changing public taste

The first Icelandic president, Sveinn Björnsson, was a politician voted by parliament as the Icelandic republic was founded in 1944. When Björnsson died in 1952 the second president Ásgeir Ásgeirsson, a social democrat was duly elected, remaining in office until he retired in 1968.

Before Ólafur Ragnar Grímsson’s victory in 1996, Icelanders had twice rejected politicians in favour of non-politicians. In 1968 the director of the Icelandic National Museum Kristján Eldjárn was voted president, beating Gunnar Thoroddsen, a conservative politician and Ásgeirsson’s son-in-law; in 1980 Vigdís Finnbogadóttir lecturer in French became the first Icelandic female president, also writing international history as the first woman democratically elected as president. The two had reached national fame through television, Eldjárn with a TV program on Icelandic archeology, Finnbogadóttir by teaching French on TV.

In 1996, times had changed and a politician won over several non-politicians. Grímsson, a divisive politician who started his political career in the Progressive party before moving farther left, to the People’s Alliance, won, much aided by his very charming Icelandic wife Guðrún Katrín Þorbergsdóttir. She died in 1998, after which he met the British-Israeli Dorrit Moussaieff, born into a wealthy family owning a jewellery business where she has later worked. They got married in 2003.

Surreal choices

It was already surreal to see a sitting president running for the sixth time. To see one of his political rivals from Grímsson’s political past conjures up a situation, which is beyond weird. Oddsson’s candidacy is not wholly surprising: it was frequently mentioned as a possibility in 2012 and this time there have been persistent rumours.

A four(!)-page article in Morgunblaðið, by an old friend of Oddsson on Oddsson, richly adorned with photos of the glorious leader with other glorious leaders, appeared last week, out of the blue; it now makes greater sense though the tone is no less comic. Think of the Guardian running four pages on Alan Rusbridger or the Financial Times on Lionel Barber…

The day Grímsson repeated his 2012 act by changing his mind and announcing he would run, contrary to his declaration in his New Year address, Morgunblaðið published a particularly vitriolic editorial about the man who couldn’t leave power. It was widely thought that part of the anger stemmed from the fact that Oddsson had been planning to run but hadn’t planned on challenging Grímsson.

Grímsson’s decision was however not as well received as in 2012. Lately, his wife’s links to offshore companies have done little to enthuse voters. Oddsson might think this paves his road to Bessastaðir. In addition, some are guessing he counts on Grímsson withdrawing – all of this are pure guesses.

As Oddsson rightly said this morning, politicians can no longer count on the party allegiance of voters; Icelandic voters have been extremely fickle lately. It was however remarkable how tepid the answer was from Bjarni Benediktsson leader of the Independence party when asked if he would support Oddsson: “I think the answer to this question is partly, no actually let us say wholly self-evident. But I believe Davíð will appeal to people far beyond the party.”

Oddsson has time and again scolded, reprimanded and denigrated Benediktsson in Morgunblaðið. From this point of view Benediktsson’s tone is understandable. Oddsson hasn’t made life easy for the party leadership; there will be many there who will feel no reason to show any allegiance at all. There will be those who see Oddsson as an earlier leader who time and again has made life very difficult for the party leadership by his comments; he has repeatedly be seen as a very vocal backseat driver, unhappy about his seat, certain of knowing what’s best for the party as the leader in more glorious times of much greater support.

Who could beat Grímsson and Oddsson?

Not an easy task because of the electoral system: the candidate getting the greatest number of votes will be president; there is no second round in case no one gets a clear majority. There are now around ten candidates running, some have already withdrawn, unclear what happens with these two political titans… or dinosaurs, depending on the point of view.

Andri Snær Magnason is a well-known writer and environmental campaigner in Iceland, born in 1973. There was some buzz around his candidacy but he only seems to appeal to a small group of “latte-licking” 101 inhabitants, i.e. hipster in the centre of Reykjavík.

Born in 1968, Guðni Th. Jóhannesson has been a vocal public intellectual in the Icelandic political debate, not taking political sides but a voice of reason and historical oversight. With a Canadian wife and four young children and a daughter from a previous relationship he represents something entirely different from the two old politicians.

Both Grímsson and Oddsson argue for their candidacy by claiming that Iceland is going through perilous times and need an experienced captain. Johannesson doesn’t recognise the peril, any more than most Icelanders seem to do, and he propagates optimism and a firm belief in the future of Iceland.

Grímsson and Oddsson might to a certain extent appeal to the same voters leaving most likely Jóhannesson as a choice for those who want to tear themselves from former political debates and of problems. But because of the peculiarity of the electoral system, it’s not entirely easy to predict the outcome.

*Updated: after flip-flopping on earlier decision president Ólafur Ragnar Grímsson has now withdrawn his candidacy. Davíð Oddsson, rumoured to have known or had an inkling that Grímsson would leave the race, is now the only candidate of the old political guard in Iceland. The question is if Icelanders still want the old… or prefer new faces. It seems that Guðni Johannesson has a strong following. Remains to be seen, the elections are 25 June.

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Written by Sigrún Davídsdóttir

May 8th, 2016 at 6:48 pm

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Lessons on offshore from the Icelandic collapse

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After my talk on “Iceland: the offshorisation of an economy” at the Tax Justice Network Workshop on “Corruption and the Role of Tax Havens” I was invited to blog on the Icelandic offshore lessons. Thanks a million to TJN for the invite, the blog is here.

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Written by Sigrún Davídsdóttir

May 5th, 2016 at 12:06 pm

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Iceland hits back at Airbnb and other short-time let – updated

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When things get big in Iceland they get big, proportionally at least. There are 540 inhabitants in Vík, Mýrdalur – and 1300 spaces for short-time lets. Could that be a world record? Or only comparable to Venice, Cinque Terre etc…

Record or not, the Vík Council has now announced it will now stop granting licence for short-time lets. There is enough on offer in the village. Those who already hold licenses can extend them until 2022 so this isn’t a clamp-down but a mere halt on further expansion.

Apart from spaces offered by the locals there are examples that houses have been bought or built solely for the purpose of short-time lets for tourists. The Council points out that these houses, often empty, add nothing to the village life except a bit of cash, not necessarily profiting the local community if the owners live elsewhere.

Earlier, the Icelandic Supreme Court ruled in a case where flat-owners in one of the luxurious high-rises along Skúlagata, close to the music house Harpan, sought a confirmation that flat-owners need to agree to short-time lets; one owner can’t ignore the neighbours. The Court ruled in favour of the flat-owners. This does change the environment for short-time letters.

In the meantime, there is no lack of Airbnb and other letting suitable for tourists. However, this summer and the whole year will see an unprecedented number of tourists in Iceland. Bar eruptions etc. this year it’s likely there will be more than the 1.5m who came last year. If you are heading to Iceland, make sure you have your accommodation secured – there might be plenty of flights available, never so much on offer, but accommodation might at times be scarce.

*May 14, the local council in Kirkjubæjarklaustur decided to restrict bed & breakfast/home accommodation: no more than ten places will get permission and only if certain criteria met. The council motivates its decision by pointing out that lack of housing, i.a. because of lack of land to build on, prevents development at Kirkjubæjarklaustur.

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Written by Sigrún Davídsdóttir

May 4th, 2016 at 10:16 am

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Offshore onshore and Luxembourg, the black heart of Europe

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“Corruption and the role of tax havens” was the headline of the annual workshop of the Tax Justice Network – and the word Luxembourg was heard quite often there.

There were plenty of interesting talks, much to learn. Two things are still playing around in my head: an exchange on the offshore bubble inside, not outside, of our Western countries – and the destructive role of Luxembourg when it comes to both taxation and finance.

Offshore is actually onshore

I was on a panel today about “Stories of secrecy;” I gave a talk about “Iceland, the offshorisation of an economy” and Richard Smith from Naked Capitalism talked about the role of Scottish LPs in the Moldova bank robbery where $800 were syphoned off, into offshore companies. Nicholas Shaxson, author of “Treasure Islands,” was the moderator.

Shaxson mentioned the increasing focus on financial stability and the offshore universe, something that is very clear when it comes to Iceland and events in autumn 2008 – the offshorisation did not alone cause the banking collapse but it played its role in hiding money, connections, ownership, debt and everything else that can be hidden offshore.

One image I have been toying with lately, in order to explain the dangerous effect of offshorisation, is that each Western country is like a balloon where law and order, civil society seems to permeate the whole balloon. However, at a closer look, the offshore is like a bubble inside the balloon, where civil society is kept out, where bankers, accountants and other facilitators, together with companies and wealthy individuals act as if the rules of society, the social pact, didn’t exist; i.a. have created this safe haven from law and order.

What we should really be focusing on is that offshore isn’t outside of our countries, it is right within, creating a space immune to all the things the social pact otherwise touches, the social pact of taxation, rule of law etc. And it hugely undermines financial stability… as we saw in 2008, not only in Iceland.

Luxembourg: at the heart of dirty deals and tax destruction

Omri Marian is an assistant professor of law at the Irvine School of Law, University of California. He has studied 172 of the tax contracts the Lux Leaks brought into the open. His very illuminating point is that at first glance the Luxembourg tax laws looks just as sophisticated as tax laws normally do in Western countries. However, there is simply no execution of this convincingly looking legal tax code.

It sounds insane but one person, a certain Marius Kohl, was in charge of agreeing to all the privately negotiated “advance tax agreement,” effectively the tax for individual companies. The agreements, normally running to hundreds of pages, would often be signed off by the very hard-working Kohl on the day of application.

This reminded my of my experience with the Luxembourg financial regulator, Commission de Surveillance du Secteur Financier, CSSF. After the collapse of the Icelandic banks in October 2008 it slowly dawned on me that most of the banks’ dirty deals, especially in Kaupthing and Landsbanki, had been run through their Luxembourg operations.

Yet, when I asked lawyers and accountants I was told that all was in good order in Luxembourg, they had strict laws regarding the financial sector; the CSSF was there to keep an eye on things.

Listening to Marian it dawned on me that yes, this is how Luxembourg does it: it pays lip service to European rules and regulation and what you normally expect from a Western democracy by having a legal code on tax and the finance sector. But that’s all: the laws exist but only on paper – there is no execution to speak of.

Some years ago I visited the CSSF, got an audience with some six or seven people there. A very memorable meeting; we sat at the largest meeting table I have ever sat at; I on one side, the CSSF-ers on the other side. I told them what was slowly coming to light in Iceland: the alleged fraud and shenanigans, the loans with light covenants and little or no collaterals and guarantees, alleged market manipulations via the banks’ proprietary trading and share parking in companies the banks finances etc. – so, weren’t they going to look into the banks’ operations. There were darting eyes and down-cast faces: no, no need to do anything, all in good order in Luxembourg. D’accord…

I intend to write further on the thoughts above – but suffice it to say that if the European Union is at all serious about acting on the offshorisation of the European economies it has to make sure that Luxembourg not only adorns itself with all the correct-looking legal codes but actually enforces it, i.a. by having the staff needed to do so.

*Nicholas Shaxson blogged today on the Tax Justice Network on these aspects of Luxembourg and quoted some of my earlier blogs on Luxembourg, i.a. my observations that Luxembourg attract financial companies because they know full well that Luxembourg is a safe haven… from regulatory scrutiny.

 

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Written by Sigrún Davídsdóttir

April 29th, 2016 at 11:41 pm

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Six resignations in Iceland due to the Panama papers

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The resignation of prime minister Sigmundur Davíð Gunnlaugsson is the most spectacular event stemming from the leaked Panama papers. Gunnlaugsson resigned less than two days after the infamous interview, broadcast April 3, where two journalists asked him about Wintris, the offshore company linked to him and his wife. – So far, five others have resigned because of coverage related to the Panama papers.

Noticeably, Gunnlaugsson only resigned as prime minister, not as leader of the Progressive party. Yet, Progressive members have now shown their disdain for party members’ offshore activities:  yesterday, the chair of the Progressive party, Hrólfur Ölvisson resigned after a coverage, again based on the Panama papers.

Ölvisson, until then only known to a small circle of Progressives, has made use of more than one offshore company, i.a. to hide ownership. Also, Ölvisson enjoying political connections, benefitted from the type of loans the Icelandic banks issued to well-connected people, i.e. loans with no or light guarantee, collaterals and covenants, essentially leaving all risk with the bank. – Several bankers have been sent to prison for breach of fiduciary duty by issuing such loans.

Ölvisson has had close business relations to Finnur Ingólfsson, a Progressive MP and minister before he became governor of the Central Bank of Icelandi. He did only make a short stop at the CBI, leaving after only two years, in autumn 2002, when the privatisation of the banks was ongoing. Ingólfsson was part of the group, all with ties to the Progressive party, who then bought Búnaðarbanki. When Kaupthing, a much smaller bank, bought Búnaðarbanki, the close ties of the group moved along to Kaupthing.

Also this week, two pension fund directors resigned, Kristján Örn Sigurðsson and Kári Arnór Kárason. Both figure in the Panama papers, both had set up offshore companies, Kárason in 1999 and 2004, Sigurdsson before and after the banking collapse in October 2008. As far as can be seen neither made use of the companies, i.e. the businesses of the companies didn’t evolve as planned.

Vilhjálmur Þorsteinsson is a well-known investor in Iceland. His wealth stems originally from his tech ventures and later fom investments. He was named in the reporting before April 3 and then resigned as a cashier for the Social Democratic Alliance. When further offshore ventures came to light, which he had vehemently denied he had, he resigned from the board of the web-media Kjarninn, which he has invested in.

The first one to resign, even before Gunnlaugsson, was Júlíus Vífill Ingvarsson, a Reykjavík councillor from the Independence party. Ingvarsson set up an offshore company as late as 2014. He went public with it after having been asked about it by journalists from the International Consortium of Investigative Journalists, resigning at the same time. His motivation for the company was that he wanted to set up a private pension saving fund although it’s impossible to set up such a fund and define it as a private pension plan.

The leader of Independence party and minister of finance Bjarni Benediktsson was exposed as an owner of an offshore company to encompass property investment with two other Icelanders in Dubai. However, he has resisted demands to resign, he still enjoys the support of his party, which following Gunnlaugsson’s resignation made a significant gain in the opinion polls, jumping fom 20% to 27%.

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Written by Sigrún Davídsdóttir

April 28th, 2016 at 2:37 pm

Posted in Uncategorised

Complaints against Landsbanki Luxembourg – and the Duchy’s sordid secrets

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Twelve clients of Landsbanki Luxembourg have placed a complaint in a French court against the bank, now in administration, and its administrator Yvette Hamilius.

This is the culmination of a struggle over many years where a group of Landsbanki Luxembourg’s clients, who took out equity release loans with the banks, have been claiming that in spite of overwhelming evidence, i.a. criminal charges in Iceland, about the bank’s operations Hamilius has done nothing to investigate these matters. In addition, the clients claim she has harassed and intimidated them.

Further, not only has she taken no notice of charges brought in France last September by Justice Renaud van Ruymbeke against the bank, its directors and employees but has indeed chosen to discredit them publicly in Luxembourg media. As reported in the Luxembourg paper PaperJam, the complaints against Hamilius also concern money laundering since the charges in the van Ruymbeke case refer to fraud.

The saga of Landsbanki Luxembourg, its equity release loans, its other operations, the behaviour of the bank’s administrator and the unwillingness of the Luxembourg financial regulator, Commission de Surveillance du Secteur Financier, CSSF, to investigate both the bank’s operations and then the administrators  is a long and sad saga, which has often been brought up on Icelog (see earlier blogs here).

It can’t be said often enough – and I say it yet again – that it is impossible to understand the operations of the Icelandic banks without scrutinising their Luxembourg operations. Given the fact that managers and employees of all the three largest Icelandic banks have been investigated in Iceland and in some cases sentenced to prison and given that almost without exemption Luxembourg figures in these cases it is incomprehensible that the CSSF has not taken up a single case related to these banks.

The CSSF has recently set up a new office to protect the interests of depositors and investors. This may sound like good news, given the tortuous path of the Landsbanki Luxembourg clients to having their case heard in Luxembourg; CSSF has so far been utterly unwilling to consider their case. Interestingly, it’s the magistrate ruling on the Landsbanki administration Karin Guillaume who has been chosen to fill this post. As pointed out in PaperJam Guillaume has been under a barrage of criticism from the Landsbanki clients due to her handling of their case, which somewhat undermines the no doubt good intentions of the CSSF.

In addition, there is of course now the insight via the Panama leak into the operations of other banks in Luxembourg. When will the authorities in Luxembourg acknowledge that the many stories of financial malfeasance in the Duchy are a huge and ugly stain on this pretty little state at the heart of Europe? And when will other European countries bring enough pressure on the Duchy to confront the facts of the financial sector in Luxembourg: part of it is placed exactly there full well knowing that nothing seems sordid enough to wake the CSSF up to this disgraceful reality.

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Written by Sigrún Davídsdóttir

April 14th, 2016 at 5:46 pm

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Some thoughts on nepotism and corruption in Iceland

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Prospect Magazine asked me to write on last week’s events from the social perspective of corruption, here is the article.

Iceland is far from being corrupt in the sense that really corrupt countries are – judges and other public officials are not on the take, no such indication. But nepotism is a breeding ground for the kind of corruption that money brings – I always say that I didn’t understand Iceland until I got to know Italy in the sense that in both countries personal relations matter a lot, even to such a degree that it’s not easy for foreigners to settle in these countries because they don’t have the personal relations (unless they acquire them by marrying into Italian/Icelandic families).

However, Italy was a country with much wealth; in Iceland it wasn’t possible to get wealthy enough to be elevated to an international level. The extreme flow of money into Iceland in the years 2003 to 2008 and the Icelandic operations abroad, both by banks and individuals, changed that. Iceland is in a certain danger to fall pray to real corruption where money buys power and more wealth – but I still hope and believe that won’t happen, that social and judicial institutions are strong enough.

That said, it was shocking to see that due to changes in law, how and by whom is not yet clear, resulted in high-flying bankers to be released from prison after serving less than 20% of their time in prison. The rule had earlier been that prisoners, serving time for non-violent crimes, would be released after having served 50% of their prison sentence in prison, serving the rest of their time by being electronically tagged.

This change in the law came about without any debate on the purpose of sentencing etc., i.e. the general thought behind prison sentencing. A food for thought for those who care about the incentives to act within the law and what it takes to run a good and just society.

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Written by Sigrún Davídsdóttir

April 14th, 2016 at 10:52 am

Posted in Uncategorised