Sigrún Davíðsdóttir's Icelog

Does Iceland have a better legal code to deal with dodgy banking?

with 4 comments

“No” is the short answer. The Icelandic penal code on i.a. breach of fiduciary duty and market manipulation is similar to law in Western countries. The difference in Iceland was the swift awareness in autumn 2008 that there might be something worth investigating, later supported by setting up an Office of a Special Prosecutor, Special Investigating Commission and strengthening the financial supervision. Also, the Special Prosecutor quickly realised that behind the invariably complicated web of shell companies and transactions stories of fraud are in reality quite simple and follow the same patterns over and over again. This is why bankers and shareholders have been successfully prosecuted in Iceland – not because Iceland has better penal code.

“How come that Iceland is successfully prosecuting bankers, getting them sentenced to lengthy prison terms when no one else is doing it?” This is a question I keep being asked. The short answer is the one above but there is also a longer one.

Soon after Icelanders got used to the fact that the three large Icelandic banks had collapsed, in early October 2008, the country and the media was rife with rumours that something not entirely normal, not entirely legal, had been going on in the banks. Some tried to explain alleged irregularities by the unavoidable panic; that well, perhaps the bankers had in some cases overstepped the legal borderline, strayed into grey territories, as they fought to keep the banks as going concerns.

The Icelandic parliament, Alþingi, took two measures in December 2008 to clarify the collapse: it set up an investigative commission, The Special Investigative Commission, SIC, into the banking collapse – and it set up an Office of a Special Prosecutor, OSP.

The SIC already came across a number of cases it could not quite align with normal banking practices. These cases were outlined in its thorough report in April 2012 and it also presented its findings to the OSP. At the same time the financial supervisor, FME, was diligently reviewing the operations of the banks prior to the collapse. This meant that the OSP i.a. got input from these two institutions.

The Icelandic lesson from dealing with fraud related to the banks’ operations up to the banking collapse just proved the old saying: where there is a will there is a way.

A meagre and humble start

The beginnings of the OSP were not promising. First, no one applied for the job. Then a small-town sheriff was asked to apply and that is how Ólafur Hauksson, from Akranes across the bay from Reykjavík, got the job. This is a story often told before: Hauksson had never seen anything more serious than speed-driving, drunk driving, moonlighting, domestic violence, break-ins and drunken brawl, the average criminality in an Icelandic small town.

But Hauksson proved that give a person the occasion to shine and he/she very well might. He got funds to hire staff, three prosecutors were hired. Slowly slowly, the charges emerged. Slowly slowly, bankers started to pack to go on an unexpected trip, sent by the Supreme Court, to Snæfellsnes, the beautiful peninsula visible from Reykjavík, to an old farm, Kvíabryggja, a prison for non-violent prisoners.

Last year, following a system change, the OSP was moved into a bigger structure, the Office of County Prosecutor. This time, several people applied to lead the new institution. Hauksson was among the applicants and landed the job.

Digging out the simple truth from entangled webs of emails, shell companies and transactions

The main stories emerging from the collapse cases so far have revolved around market manipulation and breach of fiduciary duty. The real lesson here is the same as everywhere else: these cases look complicated, there are mountains of documents to read, often complicated web of shell companies and offshore companies, money floating around. Interestingly, phone tapping has been used successfully and there are also recordings from the old banks.

However, as in all such cases the underlying stories tend to be simple: the ways to commit a crime are not myriad. Think Enron: looks complicated, with all of the above – at the bottom, a simple story how losses were hidden from shareholders. Another entangled web is the Savings & Loan scandals in the US in the 1980s, nota bene where cases were really investigated and people sentenced to prison.

And these things do not happen by themselves. In every case it takes more than one to do all the necessary things. A prosecutor then decides whose deeds are grave enough to prosecute, who bears the responsibility etc.

Considering how little has been done i.a. in the UK to investigate the banks’ operations leading to the autumn 2008 banking collapse there and considering the screamingly obvious inactions by authorities in Luxembourg regarding banks – all the worst cases in Iceland have ties to the banks’ operations in Luxembourg – it is ironic that the OSP would have been a lot less successful were it not for a fruitful cooperation with these two countries. Authorities in both countries have carried out house searches and assisted in finding and identifying documents relevant for the OSP’s work. Yes, that is hugely ironic…

Market manipulation: burying shares like drug dealers with too much cash

Icelandic cases of market manipulation where bankers have been sentenced have mainly been carried out in two ways: through the banks’ own trading and by parking the banks’ shares into shell companies, invariably owned by clients with some particularly cosy ties to the banks and/or the banks’ shareholders.

Although Landsbanki and Kaupthing, Glitnir to a much lesser extent, were successfully running high interest rates internet accounts, to fund their operations (Landsbanki and the ill-fated Icesave), all three banks relied on selling bonds on international markets. This funding kept the banks going like mills with water. When funding dried up in summer 2007 it was clear that the banks would come to a grinding halt.

That is also what foreign banks sensed, quickly starting to call in loans and, with sinking asset prices, making margin calls on the big Icelandic businesses, i.e. the banks’ main shareholders and their closest partners. Since Icelandic bank shares were the collaterals in most of these loans (after all, the banks had lent the large shareholders money to buy their shares, another aspect that made Icelandic banks weak), it was clear that the markets would be flooded with Icelandic bank shares if the margin calls went through.

Faced with this the Icelandic banks decided to increase the lending to their largest clients – yes, all of them large and the largest shareholders in the banks – in order to prevent this flooding. The feeling when reading the court rulings in these cases is that the banks were like drug dealers with more cash than they can stash, needing to bury it etc.; i.e. the shares were buried in various companies and these transactions were funded by the banks.

Lending on contracts with no provisions to hinder possible losses

Breach of fiduciary duty has figured prominently in banking collapse cases leading to imprisonment. These cases all revolve in some way around lending where the bank carries all the risk, where eventual losses, were they to arise, would always fall on the bank, i.e. losses were foreseeable.

It seems to me that there are some Irish cases very similar to the Icelandic ones of foreseeable losses, i.e. the management didn’t seem to have the interest of the banks and their shareholders at heart but assisting individual clients beyond rhyme and reason.

These Icelandic loan agreements were often only agreed on by the banks’ managers, i.e. outside of regular processes, without the knowledge of credit committees etc. There would then be lower-placed trusted lieutenants who organised the lending. In some cases they have also been charged and sentenced, in some cases not.

Thus, the banks lend in such a way, apparently knowingly, that would the borrower not be able to pay, it would lead to the bank losing money. Here it is important to keep in mind that these banks were public companies with thousands of shareholders – Kaupthing had well over thirty thousand shareholders – losing money on bad lending.

“No society can tolerate that certain parts of it are beyond law and justice” – well, some can…

From reading the SIC report it is clear that some cases have been prosecuted, others not. There was too much of this going on but yes, the managers and the top tier, in some cases also shareholders, have been targeted by the OSP.

It is important to keep in mind that bankers in Iceland have not been sentenced for stupid or unwise decisions but for actions which the Supreme Court has then ruled were criminal actions.

When I talked to Hauksson following the conviction in the so-called al Thani case, in February 2015, he pointed out that the Supreme Court’s decisions showed “that it is possible to bring complicated financial cases to court and get conviction. Building up the expertise has been a long process but the ruling today demonstrates that setting up an office, which didn’t exist earlier, was fully justified. No society can tolerate that certain parts of it are beyond law and justice.”

For some reason, countries like the US and the UK, with old and esteemed legal traditions have in many cases decided to fine rather than prosecute for financial crimes, thereby showing the opposite of the Icelandic examples show – the US and the UK have indeed at times shown that yes, certain parts of society are indeed beyond law and justice. That has sadly been the UK and the US lessons of the financial calamities of 2008.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

February 17th, 2016 at 8:29 pm

Posted in Uncategorised

4 Responses to 'Does Iceland have a better legal code to deal with dodgy banking?'

Subscribe to comments with RSS or TrackBack to 'Does Iceland have a better legal code to deal with dodgy banking?'.

  1. Sigrun,
    Thank you for this clear explanation.
    However I don’t entirely agree. I think that in the UK and also the US the powers that be (politicians) made it clear that they didn’t want prosecutions.
    We have seen with the HBoS report by the FSA/FCA/PRA that it has taken extraordinary energy by Andrew Tyrie to get anything sensible done.

    Tony Shearer

    19 Feb 16 at 4:30 pm

  2. What is happening in Europe is more serious than people realise and one can understand why the British Justice Minister, Michael GOVE is convinced sadly, the BREXIT is Best for Britain.
    If one takes the abuse of hundreds of elderly pensioners suffering through Luxembourg’s creative interpretation of EU law, as it completely ignores and side-steps the serious, thorough and courageous investigations and Criminal proceedings of Iceland first and of France in the Landsbanki Luxembourg Bankruptcy administration case where the administrator is accused of Money Laundering through Bankruptcy, you will see that the Luxembroug “system” is contagious, with Jean-claude Juncker as President, spreading the corruption virus behind so much financial crime.
    Money Laundering finances terrorism, arms trade and war which in turn brings on horrifying human suffering and the mass migration we are seeing today which Jean-Claude Juncker, the King protector and inovator of financial crime and abuse, through Luxembourg, wants US, the hard-working , tax-paying citizens to pay for whilst the Financial Criminals get away with murder and no sanction!
    I would like to share an article by the courageous journalist Veronique Poujol, from Paper Jam, Luxembourg which has been translated into English and has no link since it was not put on the internet.
    The manipulation of eU law by the liquidator Yvette HAMILIUS, must be studied by all countries in Europe as it is very dangerous. she maintains that any Criminal Case has no consequence in another state, can be ignored and the Civil case in a neighbouring stat can never be stayed by any Criminal proceedings elsewhere.
    What does this say for the future of Europe for investors and clients of Financial institutions and big businesses?
    SUITE DE L’AFFAIRE LANDSBANKI : L’ARTICLE COMPLET
    Véronique Poujol Paper Jam Janvier 2016
    LA STRATÉGIE DE L’ÉPUISEMENT
    FACE -A- FACE
    La liquidatrice a ses dossiers
    Et les avocats de victimes s’impatientent.
    En dépit du renvoi en France de Landsbanki devant un tribunal pour escroquerie, sa liquidatrice poursuit les clients au Luxembourg.
    La saison des saisies judiciaires a repris contre les clients, avec le risque d’encourir des poursuites pour blanchiment.
    La liquidatrice de Landsbanki Luxembourg, Me Yvette HAMILIUS, continue de jouer avec les nerfs des victimes de la banque luxembourgeoise, laquelle a été renvoyée fin septembre en correctionnelle pour escroquerie. Le procès s’ouvrira à Paris et tout se passe comme si ce renvoi et le gel des saisies sur les biens immobiliers ordonnées par le juge Renaud Van Ruymbeke n’avaient aucune incidence sur la suite des procédures civiles au Luxembourg.
    Or, en essayant, comme elle le fait depuis plusieurs semaines, de récupérer des fonds qui pourraient provenir d’une escroquerie, la liquidatrice s’expose au risque de réaliser des opérations de blanchiment.
    C’est exactement ce qu’ont écrit en juillet 2014 les magistrats luxembourgeois de la chambre du conseil de la cour d’Appel:
    “En ce qui concerne le délit de blanchiment imputé à la liquidatrice de l’établissement financier Landsbanki Luxembourg(…), la qualité de liquidateur ne confère aucune immunité pénale.
    “Au vu des mises en examen intervenus en France, souligne l’arrêt, il existe d’ores et déjà des indices permettant de croire que la commercialisation du produit financier Equity Release a été opérée au moyen de procédés malhonnêtes susceptibles de revêtir la qualification d’escroquerie.
    “Les juges précisent encore que “l’infraction de blanchiment est également punissable lorsque l’infraction primaire a été commise à l’étranger”.
    VENDETTA PERSONNELLE
    Cette épée de Damoclès au dessus de sa tête ne semble pas impressionner Me HAMILIUS, qui s’entête contre certains victimes.
    En réclamant devant le tribunal civile au Luxembourg, par contrainte judiciaire, le remboursement des prêts toxiques, dites EQUITY RELEASE, après avoir échoué par des méthodes plus “douces” restées sans réponse de la part des anciens clients de LANDSBANKI, la liquidatrice prête le flanc à la critique.
    Ïl s’agit presque d’une vendetta personnelle; elle veut faire un procès pour elle, pour sa réputation, en oubliant qu’elle est mandataire de justice et que les prétentions propres doivent être étrangères à cette affaire”, estime un des avocats de victimes. La démarche de la liquidatrice témoigne, à ses yeux, à la fois d’un certain dédain pour les décisions de justice étrangère, mais relève aussi d’une manoeuvre “D’ÉPUISEMMENT” des clients de LANDSBANKI, qui ne sont plus tout jeunes.
    Dans une interview au WORT en Octobre 2014, Yvette HAMILIUS se disait INTOUCHABLE, se défendant de faire du blanchiment, puisqu’agissant sous le contrôle de juges dans le cadre de la liquidation de la banque:
    “Je déplore que manifestement les plaignants fournissent des contrevérités à la cour d’appel dans des procédure unilatérales alors qu’ils connaissent la vérité… Mais je suis confiante.”
    En novembre 2014, alors que des avocats de victimes avaient demandé sa révocation, le tribunal siégeant en matière commerciale confortait sa position, affirmant que,
    “la suspicion jetée sur la liquidatrice en rapport avec un éventuel blanchiment ne justifie pas de mesure de révocation à son encontre”.
    Pour autant, Mr Hamilius n’est pas a l’abris de poursuites, ni au Luxembourg et encore moins en France. Il n’est pas exclu que, dans l’Hexagone, elle s’expose à une plainte pour blanchiment. ce qui lui pend au-dessus de la tête…
    Dans des conclusions notifiées en octobre à un couple de retraités français, qui s’est porté partie civile en France et qui réclame au Luxembourg que les saisies engagées par Mr Hamilius soient enlevées en raison précisément du renvoi en correctionnelle, l’avocate semble ne rien craindre:
    “Landsbanki Luxembourg, et non pas la liquidatrice, a été renvoyée devant le tribunal correctionnel, non pas pour abus de confiance, escroquerie et défaut d’agrément, mais pour la prévention d’escroquerie seulement. ( …) En France, il n’y a aucune plainte en cours à l’encontre de la liquidatrice”, écrit-elle.
    “L’affaire en France, affirme-t-elle encore, n’est pas susceptible d’exercer une influence”
    A ses yeux, la règle selon laquelle le criminel tient le civil en état ne s’applique qu’au cas où l’action pénale est engagée devant une “JURIDICTION INDIGÈNE”
    Il est vrai qu’au Grand-Duché, où un juge d’instruction est censé enquêter depuis un an sur l blanchiment du fait de la récupération des garanties liées aux prêts toxiques, qui seront au coeur du futur procès à Paris, le dossier en est nulle part, car le magistrat luxembourgeois est dans l’attente de voir comment l’affaire va évoluer… en France.
    LES PRETS TOXIQUES- 75% placés par la banque-25% contractuellement réservé pour usage personnelle et non pas pour investir
    La banque a accordé prêts couplés à une offre de contrats de d’Assurance vie, principalement en France et en Espagne.
    Les prêts correspondaient à 90% de la valeur du bien immobilier, mis en garantie. 75% du montant était placés et 25% mis à la disposition des clients en cash. Les placements devaient générer assez d’intérêts pour rembourser le prêt, mais le système, techniquement, ne pouvait pas fonctionner, d’où la qualification d’escroquerie.
    ENQUÊTE POUR BLANCHIMENT
    02/07/14
    Le 23 décembre 2013, veille de Noël, le Juge d’instruction directeur, Ernest NILLES a classé une première fois une plainte de victimes pour blanchiment contre Mr HAMILIUS, estimant qu’il y a prescription.
    Un appel est interjeté et le 2 juillet 2014, la chambre de conseil de la cour d’appel demande l’ouverture d’une enquête pour blanchiment.
    35 MILLIONS
    ENRICO MACIAS, MÉDIATIQUE VICTIME
    Gaston Grenassia, alias Enrico Macias, chanteur français, a souscrit en 2007 un prêt Equity Release de la Landsbanki pour un montant de 35 millions. 9 millions furent mis à sa disposition et 26 furent placés dans trois contrats d’assurance.
    C’est son cas “représentatif” que le Juge VAN RUYMBEKE a instruit et qui a débouché sur un correctionnelle.

    The Ongoing SAGA of the LANDSBANKI Case : in 2 parts translated from the French article by
    Veronique Poujol Paper Jam January 2016
    THE STRATEGY OF EXHAUSTION
    FACE – to – FACE
    The liquidator has her files
    The victims’ lawyers are getting impatient.

    Despite the LANDSBANKI case being sent to Criminal Correctional Court in Paris, the liquidator pursues the clients in the Luxembourg Courts.
    The season of judicial seizures is resumed against theclients, but with the risk of incurring charges of money laundering against her.

    The liquidator of Landsbanki Luxembourg, Me Yvette HAMILIUS, continues to play with the nerves of the victims of the Luxembourg bank, which was referred to Correctional Criminal Court in late September.
    The trial is opening in Paris and yet everything is happening as if this Criminal proceeding and the freezing order on on foreclosures on real estate property ordered by judge Renaud Van Ruymbeke, has no impact of any kind on the implementation of civil proceedings in Luxembourg.
    However, by trying to realize her demands , as she has done for several weeks, and to recover funds that could be issue of fraud, the liquidator is exposed to the risk of being guilty of conspiracy in money laundering operations.
    This is exactly what the Luxembourg judges concluded in July 2014 in the Chamber of the Council of the Court of appeal:
    “With regard to the crime of money laundering that the liquidator of the financial institution Landsbanki Luxembourg (…), was charged with, it must be said that the quality of liquidator confers no criminal immunity.
    “In the light of the indictments that took place in France, as shown in the ruling, there is already evidence to suggest that the marketing of the financial product Equity Release has been operated by dishonest means qualifying it as fraud.
    “The judges underlined the fact that the criminal “offence of money laundering is also punishable when the primary offence was committed abroad”.

    PERSONAL VENDETTA

    Even this sword of Damocles hanging over her head does not seem to bother Mrs HAMILIUS, who stubbornly targets certain victims.
    Claiming the civil Case now to be in Luxembourg Court , by judicial constraint demanding full repayment of the Toxic Equity Release loans, after failing in ‘softer’ methods and having no response from the former customers of LANDSBANKI, the liquidators lays herself wide open to criticism.
    This has become almost a personal vendetta; She wants to go to Court for herself, for her reputation, forgetting that she is an auxiliary of justice and that her personal pretentions must not enter this case “, states one of the victims’.
    The approach and methods of the liquidator display, in his eyes, both of a disdain for foreign judicial decisions, but is also a manoeuvre of ” exhaustion” of customers of LANDSBANKI, who cannot be called young.

    In a press interview with the Luxembourg WORT in October 2014, Yvette HAMILIUS affirmed that she was UNTOUCHABLE, frefuting the accusations of money laundering, since she claims she is acting on the instruction of judges handling the liquidation of the Bank:
    “I regret that manifestly the complainants provide untruths to the Court of appeal in process when they know the truth… “But I remain confident.”

    In November 2014, when the victims lawyers had requested she be dismissed from the case, the tribunal sitting in commercial matters comforted her position, stating that,
    “suspicion thrown on the liquidator in relation to any money-laundering crime, justifies no measure of dismissal against her”.

    However, Mrs Hamilius is not sheltered or immune from prosecution in Luxembourg and even less so, in France. It cannot be excluded that, in France, she is most exposed to a complaint for money laundering. This fact hangs over ther head…

    In the Court Conclusions notified in October, to a couple of French pensioners who had made a Civil complaint in France and who claim that the Luxembroug forclosures be stayed precisely as the case was sent to Criminal Correctional Court, the lawyer appears to fears nothing.
    She wrote: “ In France, there is no complaint lodged against the administrator. Landsbanki Luxembourg and not the liquidator has been summoned before Criminal Correctional Court and not for breach of trust, embezzlement or lack of proper licence, but simply for accusations of fraud only (…)

    “The case in France, is not likely to have any influence at all “, she once again affirms.
    As she sees it, the rule that the Criminal case stays the Civil case, applies only in the event that the criminal action is taken before an ” INDIGENOUS JURISDICTION”.

    It is true that in the Grand Duchy, where an investigating judge is supposed to have been investigating the evidence of money laundering, because of the administrator’s recovery of guarantees related to toxic loans, which will be at the heart of the forthcoming trial in Paris, the investigation has not even begun, because the Luxembourg magistrate is waiting to see how the criminal case will evolve… in France.

    TOXIC LOANS – 75% of the loan was invested by the Bank – 25% were contractually reserved for personal use and not to invest
    The Bank has granted loans coupled with an offer of contracts of life insurance, mainly in France and Spain.
    Loans were 90% of the value of the property, in garantie . 75% of the amount was placed and 25% made available to customers in cash.
    Investment should have generated enough in interest to repay the loan, but the flawed system, technically, could not work, from whence the qualification of FRAUD.

    INVESTIGATION FOR MONEY LAUNDERING
    02/07/14
    December 23, 2013, On Christmas Eve, the Director Investigating Judge, Ernest NILLES Classified or threw out the victim’s money laundering complaint against Mrs Hamilius, ruling there was proscription.
    An appeal was lodged and on July 2, 2014, the Chamber of Council of the Court of Appeal ordered an investigation for money laundering.

    35 MILLION
    ENRICO MACIAS, the VICTIM in the MEDIA SPOTLIGHT
    Gaston Grenassia, alias Enrico MACIAS, A French singer, has in 2007 took out a loan in 2007, from Landsbanki Luxembourg, for 35 million euros . 9 million were placed at his disposal and 26 were placed in three insurance contracts.

    It is his “representative” case which has resulted in the Landsbanki case being sent to Criminal Correctional Court.

    Rachael Williams

    27 Feb 16 at 10:21 am

  3. http://www.telegraph.co.uk/business/2016/03/09/uk-wields-no-influence-in-german-dominated-eu-warns-iceland/
    Well one Prime Minster talks sense and tells the truth at least some of the time.

    Tony Shearer

    10 Mar 16 at 5:46 pm

  4. Has there been any progress on lifting the capital controls?

    Hallam

    11 Mar 16 at 11:59 pm

Leave a Reply