Three Kaupthing bankers and the bank’s second largest shareholder were recently sentenced in Iceland to 3 to 5 1/2 years in prison for market manipulation and breach of fiduciary duty. The story behind the case is a share purchase in Kaupthing in September 2008. At the time, all four now convicted – then chairman of the board Sigurður Einarsson, CEO Hreiðar Már Sigurðsson, Kaupthing Luxembourg manager Magnús Guðmundsson and investor Ólafur Ólafsson – were interviewed in the Icelandic media where they underlined the strength of Kaupthing by pointing out that a Qatari investor, al Thani, had bought 5.1% in the bank.
What they failed to mention was that al Thani was not so much risking his own money as Kaupthing money: via an intricate scheme based on a few offshore companies the funds for the share acquisition came from Kaupthing itself. And where was the master plan carried out? In Luxembourg.
Kaupthing subsidiary in Luxembourg was at the centre of the al Thani saga. That was were the idea was brought into action, money into one vehicle and out into another. It is a well known fact in Iceland that most of the banks’ most questionable deals were indeed carried out in Luxembourg. It is an intriguing thought that Luxembourg was time and again chosen at the preferred place for these deals.
In early 2011 I was in Luxembourg and had a meeting at the Luxembourg financial services authorities, Commission de Surveillance du Secteur Financier, CSSF.* I met with a few people in a meeting room. I was on one side of a huge table, four or five people on the other side. Already then it was clear that the Icelandic banks had been doing some rather “inventive” banking in Luxembourg. I presented some of the cases I knew of. On the other side of the table there were only expressionless faces and then I was told that rules and regulations were strict in Luxembourg. Nothing contrary to laws could take place in Luxembourg banks.
In the CSSF 2012 Annual Report its Director General Jean Guill writes:
During the year under review, the CSSF focused heavily on the importance of the professionalism, integrity and transparency of the financial players. It urged banks and investment firms to sign the ICMA Charter of Quality on the private portfolio management, so that clients of these institutions as well as their managers and employees realise that a Luxembourg financial professional cannot participate in doubtful matters, on behalf of its clients.
“… cannot participate in doubtful matters…” – If only matters were that simple. Now four people have been sentenced to prison in Iceland for participating in doubtful matters that violate Icelandic laws, according to the Reykjavík District Court, but were carried out in Luxembourg, by using Luxembourg expertise and the so very favourable circumstances created in Luxembourg over decades.
A group of Landsbanki Luxembourg clients have for several years been trying to catch the attention of the Luxembourg authorities, a saga that Icelog has reported on time and again. This group had taken out equity release loans at Landsbanki. These clients have asked 1) serious questions about the dealings of Landsbanki Luxembourg before it went bankrupt – such as evaluation of property, calculations on loans breaching the collateral limit, investments related to the loans and how products were sold; 2) serious questions as to how the estate has been run, its misleading information or lack thereof, numbers that did not add up.
None of this has been addressed by the CSSF or other Luxembourg authorities so far. However, the Luxembourg paper Wort has reported that two cases related to Landsbanki Luxembourg are now being investigated, quoting minister of justice Octavie Modert.
So far, and to great cost and immeasurable emotional distress the bank’s clients – mostly elderly citizens living in France and Spain – have been left to battle on their own. In Luxembourg the State Prosecutor issued a press release in support of the Landsbanki Luxembourg administrator – unthinkable in most other European countries – thereby making it look as if the Landsbanki Luxembourg clients were trying to evade paying their debt. – Through court cases in Spain and France the group has made some advances but none of this is taken into any consideration at all in Luxembourg.
One client has shown me a set of calculations regarding one specific loan portfolio. Landsbanki Luxembourg, prior to its collapse, had claimed that this portfolio no longer covered the loan so the borrower was obliged to pay a certain amount in cash as a cover. As far as I could see, the number from the bank was wrong: the client was not in breach and should not have been obliged to pay. I could of course well be wrong. I sent this calculation to someone from Landsbanki Luxembourg with whom I had been in touch and whom I had told of this. I know for certain that this person got the calculation but I never heard back.
Only Luxembourg authorities can access documents regarding the operations of Landsbanki Luxembourg. Although the bank’s managers have been charged with criminal offenses in Iceland (case pending but due in the new year) by the Icelandic Office of the Special Prosecutor as well as being sued in a civil case by the Landsbanki Winding-up Board for misleading reporting Luxembourg authorities have not been willing to listen to well-founded claims by the Landsbanki Luxembourg clients: unanswered questions about the Landsbanki Luxembourg operations before the bank’s demise in October 2008 – as well as the administrator’s operations.
Noticeably, an administrator has the duty to investigate operations, as indeed the Landsbanki Winding-up Board has done. The administrator, Yvette Hamilius and lawyers working for her, have stated in Luxembourg media that everything the administrator has done is according to the law.
In one case that the Landsbanki Luxembourg administrator took to court, the administrator caused delays of, in total, 200(!) days. And on it goes.
The fact that the numerous authorities in Luxembourg, such as the CSSF and the State Prosecutor have either ignored pleas from clients or outrightly sided with the administrator, without any chance of the claims actually being heard or looked at, shows a horrendous lack of care for clients and a sound protection for the financial industry. And everyone can pretend that it is, as Director General Guill points out: that professionalism and transparency is such in the financial sector in Luxembourg that financial players “cannot participate in doubtful matters.”
One way to supervise financial institutions is by box-ticking: to look at each item in its narrow and isolated meaning, never look at connections or behaviour, never try to understand meaning and context. The institutions know this and prepare their material accordingly. Then there is little to fear. One reason why so little was seen and caught before 2008 was this attitude by regulators. Judging from the lack of interest in claims by Landsbanki Luxembourg clients this still seems to be the attitude among Luxembourg authorities. Authorities in Cyprus have announced that banks in Cyprus will be investigated, a little bit is being done in Ireland and the UK. When will Luxembourg follow suit? From anecdotal evidence there have been things going on in Luxembourg that merit investigations.
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