Sigrún Davíðsdóttir's Icelog

“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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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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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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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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The political earthquake following the Panama stories last week seems to have been a cause for Icelandic voters to reconsider whom to trust: indicative increase for the Independence party and the Left Green, dwindling support for the Pirate party, the first since their support started going up a year ago and a further decline for the Progressive party.

According to a new Gallup poll April 7-12 nearly 27% say they would vote for the Independence party, a sizeable jump from 22% only last week. The other winner is the Left Green, with nearly 20%, up from 17% last week, the party’s strongest outcome since September 2010.

The Pirate party has fallen below 30%, first time in a year, now at 29.5%. The Progressive party, now leading the government and still under the leadership of ex PM on-leave Sigmundur Davíð Gunnlaugsson, faces a disaster, with just under 7%, their lowest point since February 2008. The Social democrats have cause for further tears in their pillow, scoring only 9%.

The Progressives lose voters over to the Independence party reversing the flow in the 2013 election when many Independence party voters chose to cast their favour on the Progressives. Earlier Pirate supporters are now turning to the Left Green. The Social democrats can feel very disappointed that the Left Green are establishing themselves as the major left force, stealing the earlier force from the Social democrats.

Given that there will be an election in autumn – no date set yet – it is still possible that the Pirates might be the largest party but the Independence party could possibly be gathering its earlier strength when it could normally rely on ca. 30% of voters. With the Left Green at these levels the Pirates might turn to them, if the Pirates got the chance to form a government.

However, given the Left Green’s propensity for internal tension and turf wars, which so spectacularly weakened the Social democratic-led coalition of 2009 to 2013, it would be a weak government unless it had a strong majority.

Given the decimation of the Progressives Independence party leader Bjarni Benediktsson has good reasons to feel quietly content: after all, his name is in the Panama documents and his answers have not been entirely clear and forthcoming.

The Progressive’s outcome is bad news for the party, given that Gunnlaugsson has half-left the scene and will no doubt strengthen the feeling that he should leave as a leader, giving space for new forces. The latest addition to the government, minister of foreign affairs Lilja Alfreðsdóttir who is not an MP, is already being talked about as a possibly contender for the party’s leadership.

The upswing from ca. 12% to the 2013 election’s outcome of nearly 25% that Gunnlaugsson created in only a few months never looked sustainable, built as it was on false promises. The election outcome was an anomaly for the Progressives: in the last few elections they have been around 12%. A new leader who could bring the party to that level would be doing well as ca. 10% would perhaps be a more realistic expectation.

Given the volatility of Icelandic voters it’s difficult to gauge the directions but for the time being it seems to fit the national mood that Pirates are doing well, but among the old parties the Independence party and the Left Green are the main leaders. However, the Panama documents or some other unforeseen circumstances could still upset that balance and autumn is months away.

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Icelanders are catching their breath after an eventful week that it started with an infamous interview on April 3 where the then prime minster Sigmundur Davíð Gunnlaugsson failed to tell the truth on being confronted with Wintris, a BVI company in the name of his wife and himself. The following day, Icelanders broke all records in demonstrations and on the third day Gunnlaugsson resigned as a prime minister. Now Gunnlaugsson has gone on indeterminate leave. His party will hardly be keen on keeping Gunnlaugsson as a leader; one of its MPs says Gunnlaugsson lied. The Progressive’s vice chairman has replaced Gunnlaugsson as an MP and the coalition stays on, with some reshuffling. The question is what more the Panama papers will expose of Iceland, the most offshorised country in the world. The political effects aren’t yet clear but the popularity of the Pirate party has grown. And all of this is happening in country where the economy is thriving.

“It’s October 2008 all over again,” many Icelanders said following the famous, or infamous, TV interview April 3 with then prime minister Sigmundur Davíð Gunnlaugsson on his BVI company Wintris. There was this sense that the whole world was watching and Iceland, embodied in this one hapless politician who couldn’t but lie about an offshore company he clearly didn’t want to discuss, wasn’t putting on a brilliant performance.

When the TV interview was aired all over the world, Icelanders were already familiar with Wintris and the story Gunnlaugsson wanted to tell. The Panama documents contradicted his version. But he wasn’t the only Icelandic politician mentioned in the Panama papers: minister of finance and leader of the Independence party Bjarni Benediktsson was linked to a Seychelles company as is Ólöf Nordal minister of justice, through her husband, an Alcoa director. The companies these two are linked to were dissolved some years ago contrary to Wintris.

Already by Monday evening, 24 hours after the interview, Gunnlaugsson had lost the support of the Independence party. Benediktsson’s first comment, from his family’s pied à terre in Florida, was that the government was not necessarily continuing as if nothing had happened. Therefore, the question Tuesday morning was just how Gunnlaugsson’s departure would take place, not if – but no one had foreseen such a messy and ungracious departure.

All of this has simply strengthened the Pirate party even further; after all, that party thrives on the unpopularity of the other parties rather than its own deeds.

On Monday April Gunnlaugsson announced he would be taking a leave without mentioning when he would be back. Although he remains a party leader the Progressive party hardly plans to commit a collective hara-kiri by having him lead the party in the coming elections; there are already voices from his party demanding that he should step down as a leader and an MP. Benediktsson still struggles to silence questions regarding his offshore company.

In spite of the political tempest the economy is booming, largely due to factors outside of Icelandic control such as tourism, good fisheries, high fish prices on foreign markets and low oil prices.

March 15: Wintris introduced in an inaccurate and misleading statement

Wintris was first brought to the attention of Icelanders on Facebook March 15 by Gunnlaugsson’s wife, Anna Sigurlaug Pálsdóttir. From the first presentation of a company “registered abroad” the Wintris saga has infuriated Icelanders due to misleading and false information.

Pálsdóttir stated she felt forced to mention Wintris in order to silence slanderous rumours. Further she claimed that due to some unspecified European Union regulations she, as the prime minister’s wife, was under a particularly strict control.

This latter statement was shown to be baseless; possibly she somehow had in mind rules on “Politically Exposed Persons,” irrelevant in this context. Wintris wasn’t registered abroad but offshore, a very different matter. Thus, the first statement was misleading to say the very least and now, four weeks after first mentioning Wintris Gunnlaugsson has still not been able to silence questions raised by Wintris and his earlier attempts to clarify the issue.

Pálsdóttir didn’t mention that her Facebook statement rose from the fact that four days two journalists, a Swedish journalist and an Icelandic one had asked her husband about Wintris on camera. Gunnlaugsson’s spokesman only reluctantly mentioned the queries to Icelandic media some days after the Facebook statement without mentioning how Gunnlaugsson had reacted to the questions.

Tax issues still unexplained

Gunnlaugsson has time and again stated he has paid all taxes due. A letter from a KPMG employee to support that tax had been paid, published March 16 didn’t suffice to stamp out suspicion.

In particular, the prime minister hasn’t answered questions if “Controlled Foreign Corporation,” CFC, form, has been filed on Wintris. This weekend, Gunnlaugsson stated in an interview that no CFC form was needed for Wintris because it is not an operational company. Yet, according to the Icelandic tax code no such distinction is made as to an CFC form, it should be filed for all companies in low-tax jurisdictions. In addition, BVI companies and many other offshore companies can only be holding companies. That’s the whole idea.

Pálsdóttir’s wealth stems from inheritance her father paid her in 2007, after she sued her him for her share of the inheritance claiming her brother, a well-known businessman in Iceland, had been favoured so far. As she already owned these assets when she married Gunnlaugsson in 2010, signing a pre-nuptial would have been the correct form or having her specified by her father as the sole owner of the assets. No documents have been brought forward to show that Wintris only belongs to her.

Gunnlaugsson states that he didn’t register Wintris in the parliamentarians’ register of interest because it belongs to his wife. He tells a story of the company “mistakenly” bearing his name to begin with. Panama documents counteract his version; there is no indication he wasn’t supposed to own the company.

The unexpected creditor

Wintris already exposed the prime minister to the dilemma of being a prime minister in a Western country that is fighting the opacity of offshorisation. But more was to come: it turned out that Wintris held claims in the collapsed banks due to investing in the banks’ bonds before the collapse. Thus, the prime minister who was one of those forming the policy on how to deal with the banks’ estates had a hidden skin in that game.

Gunnlaugsson claims it would have been awkward if it had been known that his wife’s company held these claims. Others beg to differ: it was hardly any less awkward to be seen as having been compromised because of Wintris. I don’t for a moment think the outcome of the negotiations with the banks’ creditor was influenced by the fact that the prime minister had financial interests in that process. But in a Western democracy it is unacceptable that such interests had been hidden.

April 3: TV interview exposes a web of lies and deceit

Icelanders had been drip-fed information on Wintris prior to the April 3 interview: from March 15 when Wintris’ existence first became public knowledge in Iceland until the April 3 interview Gunnlaugsson had tried as he could to make the matter go away. It hadn’t. On the day of the interview he made his final attempt: in a blog he yet again told his version and in particular attacked Rúv (and the writer of this blog) for unfair reporting.

Gunnlaugsson’s Wintris story seemed unconvincing before the interview April 3. He had not used the time up to the interview wisely. The Progressive parliamentary group had no idea what awaited them when they sat down in front of the TV set to watch an Icelandic programme on the Panama documents watched by practically every Icelander.

Gunnlaugsson’s ungraceful dealing with the unexpected questions regarding Wintris was certainly embarrassing. Worse was, as Progressive MP Frosti Sigurjónsson has now stated, that Gunnlaugsson seemed to have lied about Wintris.

Wintris was set up in 2007, the couple had moved to Iceland by 2008 and there would have been ample time to repatriate the company to Iceland. Even keeping the money invested abroad doesn’t explain the existence of Wintris: it is perfectly possible to invest without owning an offshore vehicle.

In addition to the above, the story as told in the documents was i.a. that Gunnlaugsson had on December 31 2009 sold his share in the company to his wife for $1; the date is significant since tax reporting rules changed the following day. This also means that he owned the company when he was elected as an MP in March 2009. Yet, in spite of this sale Gunnlaugsson still held power of attorney in Wintris.

Extolling the virtues of Iceland – and yet keeping one’s assets abroad

Worst of all is perhaps the hypocrisy: Gunnlaugsson has talked at length about the need to drum up Iceland, extolling the virtues of all things Icelandic. It upsets Icelanders that Gunnlaugsson didn’t trust Iceland with his family’s own money, which had indeed originated in Iceland. And with Iceland locked in capital controls since November 2008 neither people nor companies can invest abroad. Indeed, even a sale of $1 in a foreign company would have needed an exemption from the Central Bank; it’s not clear if this exemption was sought for Gunnlaugsson’s sale in Wintris.

In one of his first speeches abroad, at a meeting in London in autumn 2013 held by Invest in Iceland, Icelandic banks and public bodies, he ended his speech by saying he hoped “to see you and your money in Iceland.” – Neither investors nor Icelanders knew at the time that the wealth of his family was firmly placed outside of Iceland.

Tuesday April 5: threats, bluff and a resignation shrouded in euphemism

Already on Monday evening I had heard from sources that the Independence party was unwilling to save Gunnlaugsson and wanted him out. The first public announcement was a Facebook message from Gunnlaugsson early on Tuesday stating there were only two option he could offer: either that the Independence party supported him or he would call an election.

This he wrote after he had talked to Benediktsson but without mentioning that Benediktsson told him he saw a third option: a government without Gunnlaugsson.

Gunnlaugsson’s Facebook message sounded like a threat and that’s how president Ólafur Ragnar Grímsson understood the situation when Gunnlaugsson asked to see him at 11am. Gunnlaugsson arrived with his permanent secretary and another civil servant from the prime minister’s office. These two waited while Gunnlaugsson talked to Grímsson. The meeting ended with Gunnlaugsson storming out, unwilling to talk to the waiting media.

Grímsson however took the unprecedented steps of informing the media: he said Gunnlaugsson had asked him to dissolve parliament and call election. Grímsson denied, saying he didn’t feel Gunnlaugsson had conferred with Benediktsson and his MPs; Grímsson felt, like Benediktsson there was the third option, of the coalition finding their feet together thus calling Gunnlaugsson’s bluff. Now it was Gunnlaugsson who had run out of option: he was forced to resign.

Yet again, Gunnlaugsson tried to define things his own way: he wasn’t resigning but only “stepping aside” as he insisted on calling the result of his spectacular flop where he had tried to force the Independence party to either support him or else face elections.

In the evening came another breath-taking move by Gunnlaugsson: he claimed Grímsson had misunderstood his move or was lying – he hadn’t made any threats and was only scouting the possibilities. Yet, the president’s story fully rhymed with Gunnlaugsson’s Facebook message that morning. Grímsson quickly corrected him: he hadn’t misunderstood and he, Grímsson was in charge.

The weekend following the Panama interview Gunnlaugsson tried yet again to redefine the course of events: his two options that fateful Tuesday had sprung for his magnanimous attempt to save Benediktsson from what might have been a coup in the Independence party. Again, an interpretation few take seriously and certainly denied by Benediktsson.

Offshore stinks

Things are certainly going well in Iceland in terms of the economy. However, there has been a growing sentiment over the last months that the corrupt business practices from the boom haven’t been eradicated: that the banks are still selling assets to favoured clients and that political ties still matter. (See my take here on Panama documents and corruption).

Adding Wintris and the Panama connections to this sentiments has created a poisonous atmosphere in Iceland, as seen from the fact that never have so many people demonstrated in Iceland as on April 4. Demonstrations have continued though nothing like on that day.

Like in may other countries Trust is in short supply in Icelandic politics. However, trust could easily be greatly mended just by telling the truth – but that hasn’t quite been understood.

Gunnlaugsson came into Icelandic politics in autumn of 2008. He went to Norway just after the collapse claiming it would be no problem getting a Norwegian loan to save Iceland. Nothing came of it. Following questions from the media on his CV after being elected the Progressives’ leader in January 2009 he gave conflicting answers as to what he had been studying, where and when.

Gunnlaugsson’s great interest is city planning and cultural heritage; he tried unsuccessfully to get his own sketches of new buildings in the centre of Reykjavík agreed on and amassed power over cultural institutions under his office. Apart from the lying, much of his doings were simply weird but not necessarily in an endearing way.

A new coalition with the old parties under a new prime minister

Gunnlaugsson suggested that Sigurður Ingi Jóhannsson should be his successor and named a new foreign minister, not from the parliamentary group but an economist from the Central Bank, Lilja Alfreðsdóttir, who having been his adviser is seen to be close to Gunnlaugsson. Appointing Alfreðsdóttir hardly won Gunnlaugsson much popularity among Progressive’s MPs.

During the weeks of wrangling over Wintris Jóhannsson had been a staunch supporter of Gunnlaugsson, at one time saying it was difficult to own money in Iceland, implying that owning an offshore company was logical. This comment went viral. On his first appearance in Alþingi today Jóhannsson had completely changed his tune, now wanting to ban Icelanders owning offshore companies. Benediktsson is still fighting nagging suspicions regarding his offshore ties.

It remains to be seen how the new government of the old coalition will tackle things. Now that the Gunnlaugsson’s government has found an agreement with the creditors of the banks’ estate, an important step towards lifting the capital controls, the next needs to be re the offshore króna. That step has taken much longer than previously thought, indicating that it’s clearly much complicated problem to solve than it appeared to be.

The pirates will shape the political future

The left side of Icelandic politics is still in tatters. On the whole, the four old parties – the two coalition parties, the social democrats and the Left Green, in addition to the much younger Bright Future, a split from the social democrats – do not appeal to voters.

Instead, voters are flocking to the untested Pirate party who score well above 30% in opinion polls with the old big party, Independence party at ca. 20%, their lowest every. The Progressive party has fallen below 10%; both coalition parties got 25% in the last elections. Other parties are around 10% except Bright future that hover around 5%.

The pirate MPs make a point of not promising much except that they will try finding a logical solution to the problems as they arise. They also want to position themselves beyond the old schism of left and right, want new politics of participation and direct democracy. As to the economy their policies are not clear.

Their great emphasis has been on a new constitution, set in motion after the 2008 collapse, never brought to fruition but already existing in a draft. Once Alþingi has voted on it the pirates want to call another election; the constitution has to be agreed on by two parliaments. Many see a new constitution as something of a pet project of no urgency, with the danger that the pirates get lost in this process rather than focusing on more important issues.

The new government hasn’t set a date for the coming election; it should be in either September or October. If by that time the political undercurrents in Iceland haven’t changed greatly it’s clear that the pirates will be setting the political agenda and will almost certainly be in a position to choose a coalition partner.

As a sign of the great discontent one business leader said to me well before the Panama papers shook Icelandic politics: “I can’t wait to see the pirates in power; they can’t be worse than what we have now.”

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“It is not evident that the government will remain in power,” was the cryptic answer from minister of finance and leader of the Independence party Bjarni Benediktsson earlier today. Tonight, the Progressive councillors on the Akureyri city council issued a statement pointing out that prime minister and their leader Sigmundur Davíð Gunnlaugsson has lost all trust and should resign. – It now seems that tomorrow the Independence party will tell Gunnlaugsson that he no longer has their support. The will set in motion events not entirely easy to predict.

As Benediktsson unceremoniously refused to lend prime minister Sigmundur Davíð Gunnlaugsson his support he did indeed spell the end of the government – it makes no sense for Benediktsson to sow the seeds of uncertainty unless he means to harvest a political opportunity. This also seems to be the mood in his parliamentary group: there is not the slightest wish or will to save Gunnlaugsson’s political skin. However, how it will end and what the process will be out of this uncertainty is… uncertain, to say the very least.

Benediktsson was absent from the political scene today as he has been in his family flat in Florida. He claimed he lost his flight on Sunday though the news-site Kjarninn investigated the matter and found no reported delays on Benediktsson’s route to Iceland.

It was in a phone call with Icelandic media that Benediktsson stated his lack of support for Gunnlaugsson. The parliamentary group had met and no doubt this is what he gathered from his troops.

This leaves it all but evident what now will happen: there is no appetite within the Independence parliamentary group to support Gunnlaugsson after his newly acquired international fame – too many Icelanders were utterly dismayed to see the documents counteracting his version of the Wintris story, his efforts over the last two weeks to blame the media for negative reporting and finally how he dealt with the challenge from the Swedish journalist who interviewed him.

So many Icelanders feel that the good reputation Iceland built up following the 2008 crisis has now been if not destroyed then at least blemished. Seeing the prime minister in Alþingi today refusing to acknowledge that the BVI, where his wife’s company is registers, is on the Ministry of finance list of tax havens and claiming that also Sweden is a tax haven didn’t sound like a winning argument.

Theoretically, Gunnlaugsson can now resign but he can also call election and resign. There is zero appetite in the Independence party to see Gunnlaugsson lead a minority government. There might however be willingness among the some of the other parties to form a government under Benediktsson’s premiership.

Tough the Pirates will no doubt call for elections right away they might not be too unhappy to gain time in order to strengthen their party organisation and recruit candidates in order to lessen their unavoidable growing pain.

The question is how damaging the Panama papers will prove for Benediktsson given the fact that Gunnlaugsson will be stepping down due to his offshore connections. Another question is what role president Ólafur Ragnar Grímsson will play – after all, Grímsson chose Gunnlaugsson over Benediktsson who won more votes at the 2013 elections; the two parties got the same number of MPs but Grímsson’s argument for choosing Gunnlaugsson was that his party had gained more from the 2009 election.

This and that might happen in Icelandic politics in the coming day – the course is by no means clear – but it now seems certain that the event triggering it all will be the resignation of prime minister Gunnlaugsson and that starting point is likely to take place tomorrow. When his resignation comes it will be the first political casualty of the Panama leak – after the events of 2008 there is little sympathy in Iceland for a leading politician playing hide and seek, in and out of tax havens, with the nation.

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After digesting the Panamapapers and the interview (watch it here) with prime minister Sigmundur Davíð Gunnlaugsson parliamentary groups are meeting today. At 3pm GMT Alþingi convenes for direct questions to ministers instead of other topics, previously planned for today. The opposition is expected to ask for a vote of confidence in the prime minister.

Gunnlaugsson has, as earlier, refused to speak to Rúv, the state broadcaster, but said, on entering the Alþingi this morning, that he would speak to them later. However, on private channel Stöð 2 he said he has not at all considered resigning.

That might however be something his own party asks him to consider. Gunnlaugsson is now at a meeting with the parliamentary group. Some MPs from the Progressive party, Gunnlaugsson’s party, said to Rúv, as they entered the meeting that things will now be discussed. Given the fact that Gunnlaugsson has so far enjoyed unanimous support in his parliamentary group, at least outwardly, the support sounded somewhat more subdued than earlier.

The onus is really on the Independence party, the Progressives’ coalition party – are they willing to support Gunnlaugsson? So far, no clear answers.

Birgitta Jónsdóttir, leader of the Pirate party, which has unprecedented support in opinion polls, said she was greatly saddened to see where things are at now following the interview. She has called for Gunnlaugsson to resign, said it was the only decent thing for him to do and he should do it before the Alþingi meeting today.

MPs have at times complained of Gunnlaugsson’s unwillingness to face questions in Alþingi; the question is if he will be there at 3pm. Also, if he will still be a prime minister.

There is little tradition in Iceland for ministers resigning following scandals but a great tradition for hanging tenaciously onto power. It is difficult to see how the prime minister can brush this scandal off but at the same time it takes external action to push him out: it’s not easy to gauge who among the coalition MPs will dare to step out of line and vote for no confidence.

Theoretically, the Independence party could try to find allies for a new coalition. However, the opposition parties have all been asking for a new election and nothing less which makes it unlikely they would be tempted to form a government without elections. Perhaps things will be more clear by the end of the day but considering how things tend to drag on in Icelandic politics it would show a new and unexpected political energy if some decisive answers had been found by the end of the day.

Update: Alþingi is convening right now. Seems the vote of confidence will take place on Wednesday. If this turns out to be the case the coalition partners have 48 hours to decide if to act or not. The vote is not only on prime minister Gunnlaugsson but on the whole government. – The youth association of the Independence party has already announced it does not support Gunnlaugsson premiership. This is in no way meaningful but it shows that the party as a whole would no longer be united in its support for Gunnlaugsson.

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Together with leaders from Russia, Ukraine and a few other countries Iceland isn’t happy to compare itself with the story of prime minister Sigmundur Davíð Gunnlaugsson played a key role in tonight’s exposure of the Panama law firm Mossack Fonseca. Documents shown do not support his earlier version of his involvement with Wintris, the BVI linked to him and his wife.

In an interview on Rúv professor of history and a frequent commentator on the collapse and related matters Guðni Th. Johannesson said: “First and foremost I find it sad that men, who want to and claim they want to lead by good example, who say the grand plan is to believe in Iceland then decide that their money is better off elsewhere.” – His words are directed to the prime minister who repeatedly has talk of the necessity to believe in Iceland.

The focus is now ia on the political future of the prime minister. It is unlikely he will see this exposure as any reason to step down as prime minister and leader of the Progressive party. One question is what his own party will do. Since the election 2013 Gunnlaugsson has seen the support for the party dwindle. The exposure now is unlikely to reverse that path, which might make the party’s members of parliament despair for their future in the elections set to be in spring 2017. So far, no one has dared to step forth to criticise the prime minister.

Another and more relevant question is what the coalition partner, the Independence party, will do. Given the anger in Iceland over the revelations – already clear even before the program on Rúv tonight (here, in Icelandic) – it would be a political harakiri for the Independence party to support the prime minister.

However, as shown by the Panama Papers Indepence leader and minister of finance Bjarni Benediktsson also had an offshore company though that story, however inglorious, pales in comparison to Gunnlaugsson’s company.

Other politicians, shown to have owned offshore companies, will also have to ponder on their position. All owners of these companies have questions to answer not only related to tax but to law on capital controls.

It was not an entirely popular decision within the Independence party to support Gunnlaugsson as prime minister after the election in 2013. The reason was that many thought this was the party’s only way to get into power. With the situation now it’s clear that supporting Gunnlaugsson might have come at a very high price for the party. The situation now will be a tricky topic for the Independence party to handle and that’s what the politics in Iceland in the coming days will revolve around.

During the boom years Iceland turned into possibly the most offshorised country in the world as I’ve pointed out earlier. Iceland has done remarkably well following the collapse in autumn 2008 but the economic revival will have its limits if its political class prefers to be compared to Russia and Ukraine.

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What do Russia’s president Vladimir Putin and Iceland’s prime minister Sigmundur Davíð Gunnlaugsson have in common? Both have recently tried some pre-emptive damage-control measures before the material from a leak, administered by International Consortium of Investigative Journalists, ICIJ, is published. Gunnlaugsson’s wife has a BVI company as do or did minister of finance Bjarni Benediktsson and another minister. – While waiting for the ICIJ leak it’s worthwhile revising on the Icelandic offshorisation: Iceland is probably one of the most offshorised countries in the world.

Since his wife posted on Facebook March 15 that she owned a “company abroad” prime minister Sigmundur Davíð Gunnlaugsson has tried in various ways to brush off this whole affair of his link to an offshore company. As so often, when dignitaries are under pressure to inform the information given has proved to be less than informative.

Two things have been taken up by his critics: although members of parliament are required to register financial interests Gunnlaugsson had not seen it necessary to register this company since it was his wife’s and while Iceland was negotiating with creditors to the banks he did not mention that this wife holds claims in the banks.

This led to queries from a Rúv journalist to all parliamentarians as to offshore companies. Both Bjarni Benediktsson minister of finance and minister of justice Ólöf Nordal acknowledged such ownership. They have both mentioned that they had had questions regarding their ownership from an Icelandic journalist working with the ICIJ. Several other politicians or people with political ties now also acknowledge owning offshore companies but nothing as spectacular as the PM offshore link.

Since 2013 Group of States against Corruption, GRECO, have been reminding Iceland of its faulty measures against corruption, i.a. that interests of public officials are not transparent enough. This was latest underlined in GRECO’s fourth evaluation round, published March 23. In addition, foreign-owned companies are a particularly sore subject in a country where capital controls have for almost eight years prevented both individuals and companies from investing abroad.

Leaked material will be published later today by international media such as the Guardian, Süddeutsche Zeitung, DR, SVT and Rúv in collaboration with the ICIJ. All three offshore companies, which have now surfaced, were set up by Landsbanki Luxembourg. The context for the three new Icelandic-owned offshore companies is interesting: the Icelandic banks were extremely efficient in selling offshore solutions to their clients, also much less wealthy clients than foreign banks would have offered these services to.

Following the banking collapse in October 2008 I started investigating matters related to the Icelandic banks. What I found most surprising was how diligently the banks had been in selling offshore services. I believe it’s not too much to say that Iceland was the most offshorised country in the world because so many small business-owners were offered offshore companies. As often happens in Iceland things spread quickly. During the heady years up to 2008, a source said to me “you just weren’t anyone unless you owned an offshore company.”

Ca 250-300 individuals might have owned offshore companies

The easiest way to search was to use Luxembourg, the gate to most of the Icelandic offshore sphere, to search for companies. There is no official statistics regarding offshore companies but my guess is that perhaps 250-300 individuals owned offshore companies. Most of these people would own only one company except the wealthiest businessmen might have many to their name.

Among companies there were Baugur Group and others that had a veritable offshore galaxy connected to their activities. Certainly, the use of offshore companies is not an Icelandic invention but the Icelandic banks seem to have taken it further than in many other countries, resulting in utterly meaningless ownership of offshore companies by small investors who could perfectly well invest without owning such a company.

“Don’t be silly”

After the prime minister’s wife informed on her “company abroad” it quickly transpired that the company wasn’t only abroad but offshore, registered in the BVI. The debate in Iceland has been hefty and the truth has appeared only slowly.

At first, Gunnlaugsson claimed the company was entirely his wife’s affair, which made people wonder why he then chose to use his own spokesman, paid for by the public purse, to deal with questions. The Icelandic media was also quick to pull up sound-bites from the election campaign in 2009 where Gunnlaugsson pointed out that since his wife was wealthy he couldn’t be bought by anyone.

Apart from questions from the media, which have been sparsely answered, the PM chose to inform through chosen channels. Since the original Facebook message proved somewhat uninformative the couple has brought out the following: a short message on Gunnlaugsson’s own webpage, much in praise of his unselfish wife who had sacrificed possible wealth because of her husband’s political carrier; a letter from KPMG, to confirm that all due taxes have been paid; an interview in Fréttablaðið, owned by the wife of Jón Ásgeir Jóhannesson, of Baugur fame, at one time owner of a myriad of offshore companies, where the questions left something to be desired; an interview on a private radio station, also owned by Jóhannesson’s media company; a 12 page questions and answers, published on Gunnlaugsson’s webpage, informing i.a. on why the offshore company is called Wintris (thus this relevant fact that the name was not chosen by the wife but came with the “company-packet”) – on social media in Iceland this Q&A is widely called “the prime minister’s interview with himself.”

Gunnlaugsson has however been entirely unwilling to submit himself to being questioned by Rúv or any media known for independence. A few days after the story broke a Rúv journalist managed to track him down in the Alþingi’s parking basement where the prime minister had found an unusual way out of the building as the journalist was standing by the main door. When the journalist asked the PM what he wanted to say regarding Wintris Gunnlaugsson said laughing: “Látt’ekki svona” which might be translated as “Don’t be silly.”

The Wintris saga – so far

Pálsdóttir is independently wealthy, the daughter of a businessman who i.a. owned the Toyota dealership in Iceland. Following the sale of the dealership in 2005 Pálsdóttir got her share of the sale in 2007.

Here comes the first slight ambiguity. In his first response the PM says that when she acquired the assets, in 2007, the couple had lived in the UK “for a few years” intending to live abroad for a few more years, either in Denmark or in Britain. Strangely enough the prime minister has never been able to clarify completely where he lived 2005 until late 2008 when he showed up in Icelandic politics. These years have sometimes been referred to as Gunnlaugsson’s lost years and his academic achievements were for a while not quite clear.

What is clear is that he finished the Icelandic equivalent of A levels in 1995 and then graduated from the University of Iceland a decade later with a BS business degree and media studies. During that time he worked for some years at Rúv; a BS degree normally takes three years to finish if the student is studying full time.

According to his CV on the Alþingi website he was an exchange student at the Plekhanov University in Moscow, studied international relations and public affairs in Copenhagen and then economics and politics in Oxford during these three years. Icelandic media has tried, unsuccessfully, to get information from Oxford University as to what exactly Gunnlaugsson had studied; it seemed the student had asked the OU not to give any information on his time there. Also, according to his CV he worked part time for Rúv 2000 until 2007.

Whatever the exact timing of his whereabouts and studies the couple decided to keep the money abroad, meaning that the assets, which originated in Iceland, were moved abroad. This, at the time when Iceland was functionally part of the free flow of funds in the European Economic Area and in terms of access to funds in Iceland it shouldn’t have mattered where the couple lived.

In her FB message Pálsdóttir claimed she was under particular EEA tax scrutiny, something that proved to be a “misunderstanding” when the media inquired as to what exactly this meant. In her original message she also indicated that she was posting this because of rumours regarding her assets. Only later came the information the couple had received questions some days earlier from an ICIJ journalist regarding her offshore company.

Creditors and claims

Another drip of information brought out that Wintris did indeed own claims in the Icelandic banks, i.e. the PM’s wife had invested in bank bonds before the banks collapsed and now owned claims.

Gunnlaugsson has emphasised that Wintris is not his company. Another ambiguity is how exactly the ownership was separated. Pre-nuptials are not uncommon in Iceland but that doesn’t seem to have been their arrangement. The same counts for information that Wintris has always been declared to tax authorities, again somewhat ambiguous.

Before broadcasting a piece on Rúv on Friday regarding “Controlled Foreign Corporations,” CFC, I had asked the PM’s adviser and the KPMG-employee who wrote the letter if the tax filing in Iceland was done by using a CFC form, as is the only correct way of filing a company like Wintris. I did not get an answer. (In a blog post Gunnlaugsson has today expressed anger at my reporting.)

Since becoming a prime minister finding a solution for lifting capital controls, where the banks’ estates and their creditors were a significant part of the equation has been one of Gunnlaugsson’s major task. He claims he was not at all obliged to declare interest, given that his wife held claims in the banks. On the contrary, he claims it would have been an impossible situation had his wife’s interest been known. Some political opponents claim that Gunnlaugsson can’t simply set his own ethical standards and definition.

Gunnlaugsson’s wife is a client of Crédit Suisse, which following the collapse of the Icelandic banks took over private banking for some wealthy Icelandic clients. Crédit Suisse has at times invited its clients to meeting abroad. I have asked the PM’s adviser if Pálsdóttir has ever accepted such invitations but again, no answer has been forthcoming.

Pálsdóttir has claimed she instructed CS not to invest in any Icelandic asset. Questions from Icelandic media on the content of her CS portfolio have not been answered.

Principles, not persons

Much of the debate in Iceland regarding Wintris so far has centred on if Gunnlaugsson profited, via Wintris, from decisions taken regarding the plan to lift capital controls and its effect on creditors.

This angle is, from my point of view, rather futile. Although Gunnlaugsson has in the Wintris debate repeatedly emphasised his own valiant action against the creditors his version can be contested. It was clear already by 2012 that what needed to be done regarding the estates was to write down the ISK assets; there was not enough foreign currency to pay the ISK in the estates in FX.

Creditors were ready to negotiate by late 2012 but given the fact that the left government was greatly weakened by internal fights it didn’t have the political strength and mandate to enter into negotiations. It was clear to all involved that this would have to wait until after the elections.

During the election campaign Gunnlaugsson talked about the billions that would fall in the lap of the Icelandic state; billions that would be used to write down private loans and for other good things. It then took the government two years to find the solution. My understanding was during that time, as I repeatedly mentioned on Icelog, that the two government leaders disagreed: Benediktsson wanted to find the least risky solution in unison with creditors, Gunnlaugsson wanted to play hardball, ignoring the legal risk Benediktsson repeatedly referred to. The two leaders have challenged his course of events.

Ultimately, this affair is not about people but principles – if leading politicians should be connected to offshore companies at the same time that Icelandic authorities have joined international effort to fight tax havens and secrecy jurisdiction. It is after all perfectly possible to invest, at home or abroad, without owning an offshore vehicle.

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