The Office of Special Prosecutor normally doesn’t confirm what it’s investigating unless people are called in for investigation, something that normally doesn’t happen in the early stages of an investigation. However, the word is now out in Iceland the Landsbanki and Glitnir’s auditors, PwC, are under a criminal investigation in Iceland. Already in October last year the OSP conducted house searches at the PwC in Iceland though it wasn’t clear at the time to what purpose.
The OSP investigation is a criminal investigation. PwC is already being sued by Glitnir, in New York together with the bank’s principal shareholders and managers and Landsbanki has recently made some moves. Both banks are trying to reclaim money thought to have been lost due to PwC misleading auditing.
If investigative reports done at the behest of OSP, showing that the two banks were in reality bankrupt late 2007 but could only keep operating because of PwC’s misleading auditing, prove to be correct it seems that a flood of court cases could follow. Icesave is a case in point: Landsbanki couldn’t have collected the amounts it did if it had ceased to operate late 2007. The two banks couldn’t have run up the debt they did both with the European and the Icelandic Central Bank. And then there are the bondholders, banks such as UBS, Royal Bank of Scotland, Barclays, Deutsche Bank e.a. that stayed in business with the Icelandic banks till their last hour. Certainly some dizzying perspectives here – and pretty great prospects for lawyers.
Reynir Vignir managing partner at PwC Iceland has acknowledged that the allegation brought forward in the two investigative reports are serious but he and his staff have neither had the time nor the opportunity to scrutinise them. He emphasised that neither he nor any of his staff have been called in for questioning and doubts that the those who did the two reports had access to the same data that PwC had when the audits were done. In a statement earlier, PwC underlined that the final responsibility for the accounts lay with the boards of respective banks.
Where does that leave Kaupthing, audited by KPMG? Most likely in a similar situation, if you ask around in Iceland. It seems that the OSP is conducting its own investigation into the Kaupthing audits. Since the banks were run in such similar ways, milling around the same major shareholders and big clients, the feeling is that Kaupthing would be no different.
But questioning the auditing of the banks has much wider ramification than just the auditing itself. In the report of the Althing Special Investigative Commission Sigurjon Arnason ex-CEO of Landsbanki points out that Deutche Bank offered Landsbanki the possibility to put a certain loan line on its books though the bank would never use the facility because the terms and conditions were outrageously unfavourable. These ‘Potemkin-loans’ (my word for these make-believe constructions) were only given to decorate the books – and to make it look as if their liquidity was stronger than it really was. Kaupthing had a similar arrangement with DB, a loan line of €1bn from 9 Nov. 2007, that Kaupthing never used since the terms were really punitive but it served Kaupthing as a ‘Potemkin-loan’. Though Kaupthing never used it the bank had to pay 0,35% fee for the service, in total paying DB €3,5m a year.
Most Icelanders will say that the OSP is taking long to bring out charges. The auditing, both the auditing itself and possibly Potemkin tricks in the books, gives an idea of the complexity of his task – plenty of needles in three gigantic haystacks. Then there is the widespread feeling that the banks engaged in market manipulation. But as one of my sources said: ‘Trying to hook the banks on market manipulation is like charging someone for driving over on red light after he’s robbed a bank.’ The feeling in Iceland is that just as Glitnir has alleged in their charges in New York the three banks were robbed from the inside.
Fictional auditing would be the means to commit the alleged robbery. At some point the OSP must and will make up his mind as to what kind of charges can be pressed and against whom.
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