Sigrún Davíðsdóttir's Icelog

People, mostly pensioners, who previously took out equity release loans with Landsbanki Luxembourg, have for a decade been demanding that Luxembourg authorities look into alleged irregularities, first with the bank’s administration of the loans, then how the liquidator dealt with their loans after Landsbanki failed. The Duchy’s regulator, CSSF, has staunchly refused to consider this case. Yet, following criminal investigations in Iceland into the Icelandic banks, where around thirty people have been found guilty and imprisoned over the years, no investigation has been opened in Luxembourg into the Duchy operations of the Icelandic banks so far. Criminal investigation in France against the Landsbanki chairman at the time and some employees ended in January this year: all were acquitted. Recently, investors in a failed Luxembourg investment fund claimed the CSSF’s only interest is defending the Duchy’s status as a financial centre.

Out of many worrying aspects of the rule of law in Luxembourg that the Landsbanki Luxembourg case has exposed, the most outrageous one is still the intervention in 2012 of the State Prosecutor of Luxembourg, Robert Biever. At the time, a group of the bank’s clients, who had taken out equity release loans with Landsbanki Luxembourg, were taking action against the bank’s liquidator Yvette Hamilius. Then, out of the blue, Biever, who neither at the time nor later, had investigated the case, issued a press release. Siding with Hamilius, Biever stated that a small group of the Landsbanki clients, trying to avoid paying back their loans, were resisting to settle with the bank.

Criminal proceedings in Iceland against managers and shareholders of the Icelandic banks, where around 30 people have been found guilty, show that many of the dirty deals were carried out in Luxembourg. Since prosecutors in Iceland have obtained documents in Luxembourg in these cases, all of this is well known to Luxembourg authorities. Yet, neither the regulator, Commission de Surveillance du Secteur Financier, CSSF, nor other authorities have apparently seen any ground for investigations, with one exception. A case related to Kaupthing has been investigated but, so far, nothing has come out of that investigation (here more on that case, an interesting saga in itself).

However, it now seems that not only the Landsbanki Luxembourg clients have their doubts about on whose side the CSSF really is. Investors in a Luxembourg-registered fund claim they were defrauded but that the CSSF has been wholly unwilling to investigate their claims. Their conclusion: the CSSF’s only mission is to promote Luxembourg as a financial centre, which undermines “its responsibility to protect investors.”

That would certainly chime with the experience of the Landsbanki clients. Further, the fact that Luxembourg is a very small country, which greatly relies on its financial sector, might also explain why the Landsbanki Luxembourg clients have found it so difficult even to find lawyers in Luxembourg, willing to take on their case.

A slow realisation – information did not add up

It took a while before borrowers of equity release loans from Landsbanki Luxembourg started to suspect something was amiss. The messages from the bank in the first months after the liquidators took over, in October 2008, were that there was nothing to worry about. However, it quickly materialised that there was indeed a lot to worry about: the investments, which had been made as part of the loans, seemed to have been wiped out; what was left was the loan, which had to be paid off.

In addition, there were conflicting information as to the status of the loans, the amounts that had been paid out and the status on the borrowers’ bank accounts. The borrowers, mostly elderly pensioners in France and Spain, many of them foreigners, took out loans with Landsbanki Luxembourg, with their properties in these two countries as collaterals. To begin with, they were to begin with dealing with this situation alone, trying to figure out on their own what was going on. It took the borrowers some years until they had found each other and had founded an action group, Landsbanki Victims Action Group.

Landsbanki clients in Spain are part of an action group in Spain against equity release loans, The Equity Release Victims Association, Erva. The Landsbanki clients have taken the Landsbanki estate to court in Spain in order to annul the administrator’s recovery actions there. Lately, the clients have been winning but given that cases can be appealed it might take a while to bring these cases to a closure. The administrator’s attempt to repatriate Spanish court cases against the bank to Luxembourg have, so far, apparently not been successful.

Criminal case in France, civil cases in France and Spain

Finding a lawyer, both for the group and the single individuals who took action on their own, proved very difficult: it has taken a lot of time and effort and been an ongoing problem.

By January 2012, a French judge, Renaud van Ruymbeke, had opened an investigation into the loans in France. The French prosecutor lost the case in the Criminal Court of First Instance in Paris in August 2017; on 31 January 2020, the Paris Appeal Court upheld the earlier ruling, acquitting Landsbanki Luxembourg S.A., in liquidation and some of its managers and employees at the time. The case regarded the operations before the bank’s collapse, the administrator was not prosecuted. The Public Prosecutor as well as the borrowers, in a parallel civil case, have now challenged the Paris Appeal Court decision with a submission to the Cour de cassation.

While this case is still ongoing, the administrator’s recovery actions in France were understood to be on hold. According to Icelog sources, that has not entirely been the case.

Landsbanki Luxembourg: opacity before its demise in October 2008

The main issues with the bank’s marketing and administration of the loans has earlier been dealt with in detail on Icelog but here is a short overview:

As Hamilius mentioned in an interview in May 2012 with the Luxembourg newspaper Paperjam, the loans were sold through agents in Spain and France. After all, the whole operation of the equity release loans depended on agents; Landsbanki Luxembourg was operating in Luxembourg, not in France and Spain.

The use of agents has an interesting parallel in how foreign currency loans, FX loans, have been sold in Europe (see Icelog on FX loans and agents). In the case of FX loans, the Austrian Central Bank deemed that one reason for the unhealthy spread of these risky loans was exactly because they were sold through agents. Agents had great incentives to sell the loans and that the loans were as high as possible but no incentive to warn the clients against the risk. Interestingly, the sale of financial products through agents has been found illegal in some European cases regarding FX loans.*

Other questions relate to how the equity release loans were marketed, i.e. the information given, that the bank classified the borrowers as professional investors, which greatly diminished the bank’s responsibility in informing the clients and also what sort of investments they would choose for the investment part of the loan. Life insurance was a frequent part of the package, another familiar feature in FX loans.

Again, given rulings by the European Court of Justice on FX loans, it seems incomprehensible that the same conditions should not apply to equity release loans as FX loans. After all, there are exactly the same issues at stake, i.e. how the loans were sold, how borrowers were informed and classified (as professional investors though they clearly were not).

How appropriate the investments were for these types of loans and clients is an other pertinent question in this saga. After the collapse of Landsbanki Luxembourg, the borrowers discovered to their great surprise that in some cases the investments were in Landsbanki bonds, even in its shares, as well as in shares and bonds of the two other Icelandic banks, Glitnir and Kaupthing.

That the bank would invest its own loans in the bank’s bonds is simply outrageous. Already in analysis of the Icelandic banks made by foreign banks as early as 2005 and 2006, the high interconnection of the Icelandic banks, was seen as a risk. Thus, if the CSSF had at all had its eyes on these investments, made by a bank operating in Luxembourg, the regulator should have intervened.

It was also equally wholly unfitting to buy bonds in the other Icelandic banks: their credit default swap, CDS, spread made their bonds far from suitable for low-risk investments. – Interestingly, the administrator confirmed in the Paperjam interview 2012 that the loans were indeed invested in short-term bonds of Landsbanki and the two other banks: thus, there is no doubt that this was the case. – Only this fact per se, should have made the liquidator take a closer look at the time.

The value of the properties used as collaterals also raises questions. The sense is that the bank wanted to lend as much as possible to each and every borrower, thus putting a maximum value of the properties put up as collateral.

One of many intriguing facts regarding the Landsbanki Luxembourg equity release loans exposed in the French criminal case was when French borrowers told of getting loan documents in English and English borrowers of getting documents in French. As pointed out earlier on Icelog this seems to indicate a concerted effort by the bank to diminish clarity (at least in some cases, clients were promised they would get the documents in their language of choice, i.e. English borrowers getting documents in English, but the documents never materialised).

Again, this raises serious questions for the CSSF: did the bank adhere to MiFID rules at the time? And did the liquidator really see nothing worth reporting to the CSSF?

Landsbanki Luxembourg: opacity after its demise in October 2008

After Landsbanki Luxembourg failed in October 2008, Yvette Hamilius and Franz Prost were appointed liquidators for Landsbanki. Following Prost’s resignation in May 2009, Hamilius has been alone in charge. As the Court had originally appointed two liquidators the Court could have been expected to appoint another one after Prost resigned. That however was not the case. Not in Luxembourg. There have been some rumours as to why Prost resigned but nothing has been confirmed.

Be that as it may, the relationship between Hamilius and the borrowers has been a total misery for the borrowers. One of the things that early on led to frustration and later distrust were conflicting and/or unexplained figures in statements. Clarification, both on figures on accounts, and more importantly regarding the investments, was not forthcoming according to borrowers Icelog has heard from.

Hamilius’ opinion of the borrowers could be seen from the Paperjam interview in 2012 and from the remarkable statement from State Prosecutor Biever: the liquidator’s unflinching view was that the borrowers were simply trying to make use of the fact the bank had failed in order to save themselves from repaying the loans.

The interview and the statement from Biever came as a response to when a group of borrowers tried to take legal action against the Landsbanki Luxembourg and its liquidator. In the interview, Hamilius was asked if she was solely trying to serve the interest of Luxembourg as a financial centre, something she staunchly denied.

The action against Landsbanki Luxembourg has so far been unsuccessful, partly because Luxembourg lawyers are noticeably unwilling to take action against a bank, even a failed bank. In that sense, anyone trying to take action against a Luxembourg financial firm finds himself in a double whammy: the CSSF has proved to be wholly unsympathetic to any such claims and finding a lawyer may prove next to impossible.

Why was the investment part of the Landsbanki Luxembourg equity release loans killed off?

The key characteristic of equity release loans is that this product consists of a loan and investment, two inseparable parts. However, that proved not to be the case in the Landsbanki Luxembourg loans. Suddenly, after the demise of the bank, the borrowers found themselves to be debtors only, with the investment wiped out. This did fundamentally alter the situation for the borrowers.

The liquidator seems allegedly to have taken the stance that to a great extent, there was nothing to do about the investments in these cases where the bank had invested in Icelandic bank shares and bonds. That is an intriguing point: as pointed out earlier, the bank should never have been allowed to make these investments on behalf of these clients.

In Britain, as in many European countries, the law in general stipulates that if a lender fails, loans are not to be payable right away. As far as I can see, this counts for equity release loans as well: both parts of the loan should be kept going, the loan as well as the investment. Frequently, a liquidator sells off the package at a discount, for another company to administer, in order to be able to close the books of the failed bank.

This has not been the case in Landsbanki Luxembourg equity release loans, the investments were wiped out – and yet, Luxembourg authorities have paid no attention at all to the borrowers’ claims of unfair treatment by the liquidator.

As mentioned above, Hamilius’ version of the sorry saga is that the borrowers are simply unwilling to repay the loan.

The dirty deals of the Icelandic banks in Luxembourg

The recurrent theme in so many of the criminal cases in Iceland after the banking collapse 2008 against bankers and others related to the banks is the role of the banks’ subsidiaries in Luxembourg. The dirtiest parts of the deals were done through the Luxembourg subsidiaries (particularly noticeable in the Kaupthing cases). Since Hamilius has assisted investigations into Landsbanki in Iceland, she will be perfectly well aware of the Icelandic cases related to Landsbanki.

The administrators of the Icelandic banks in Iceland were crucial in providing material for the criminal proceedings in Iceland. Yet, as far as can be seen, the administrator has allegedly not deemed it necessary to take a critical look at the Landsbanki operations in Luxembourg. Which is why no questions regarding the equity release loans have been raised by the administrator with Luxembourg authorities.

The incredibly long winding-up saga at Landsbanki Luxembourg

One interesting angle of the winding-up of Landsbanki Luxembourg saga is the time it is taking. The administrators (winding-up boards) of the three large Icelandic banks, several magnitudes larger than Landsbanki Luxembourg, more or less finished their job in 2015, after which creditors took over the administration of the assets, mostly to sell them off for the creditors to recover their funds. The winding-up proceedings of LBI ehf., the estate of Landsbanki Iceland, came to an end in December 2015, when a composition agreement between LBI ehf. and its creditor became effective.

For some years now, the LBI ehf has been the only creditor of Landsbanki Luxembourg, i.e. all funds recovered by the liquidator go to LBI ehf. Formally, LBI ehf has no authority over the Landsbanki Luxembourg estate. Yet, it is more than an awkward situation since LBI ehf is kept in the waiting position, while the liquidator continues her actions against the equity release borrowers, whose funds are the only funds yet to be recovered.

That said, Luxembourg is not unused to long winding-up sagas. The fall of the Luxembourg-registered Bank of Credit and Commerce International, BCCI, in 1991, was one of the most spectacular bankruptcies in the financial sector at the time, stretching over many countries and exposing massive money laundering and financial fraud. Famously, the winding-up took well over two decades, depending on countries. Interestingly, Yvette Hamilius was one of several administrators, in charge of the process from 2003 to 2011; the winding-up was brought to an end in 2013.

The CSSF on a mission to protect its financial sector, not investors

Recently, another case has come up in Luxembourg that throws doubt on whose interest the CSSF mostly cares for: the financial sector it should be regulating or investors and deposit holders. A pertinent question, as pointed out in an article in the Financial Times recently (23 Feb., 2020), since Luxembourg is the largest fund centre in Europe, with €4.7tn of assets under management and gaining by the day as UK fund managers shift business from Brexiting Britain to the Duchy.

The recent case seems to rotate around three investment funds – Columna Commodities, Aventor and Blackstar Commodities – domiciled in Luxembourg, sub funds of Equity Power Fund. As early as 2016, the CSSF had expressed concern about the quality of the investments: astoundingly, 4/5 of the investments were concentrated in companies related to a single group. Lo and behold, this all came crashing down in 2017.

The investors smelled rat and contacted David Mapley at Intel Suisse, a financial investigator who specialises in asset recovery. Mapley has a success to show: in 2010 he won millions of dollars from Goldman Sachs on behalf of hedge funds, which felt cheated by the bank.

In order to gain insight into the Luxembourg operations, Mapley was appointed a director of LFP I, one of the investment funds in the Equity Power Fund galaxy. (Further on this story, see Intel Suisse press release August 2018 and coverage by Expert Investor in January and October 2019.)

According to the FT, the directors of LFP I claim the CSSF has not lived up to its obligation under EU law. They have now submitted a complaint against the CSSF to European Securities and Markets Authority, Esma, which sets standards and supervises financial regulators in the EU.

In a letter to Esma, Mapley states that the CSSF’s “marketing mission to promote Luxembourg as a financial centre” has undermined its focus on protecting investors. Mapley also alleges the CSSF has attempted to quash the directors’ investigations into mismanagement and fraud by the funds’ previous managers and service providers in order to undermine the funds’ efforts “and prevent any reputational risk”. – That is, the reputational risk of Luxembourg as a financial centre.

As FT points out, investors in a Luxembourg-listed fund that invested in Bernard Madoff’s $50bn Ponzi scheme have also accused the CSSF of leniency, i.e. sheltering the fraudster and not the investors.

Luxembourg, the stain on the EU that EU is unwilling to rub off

Worryingly, the CSSF’s lenient attitude might be more prominent now than ever as Luxembourg competes with other small European jurisdictions of equally doubtful reputation such as Cyprus and Malta (where corrupt politicians set about to murder a journalist, Daphne Caruana Galizia, investigating financial fraud; brilliant Tortoise podcast on the murder inquiry) in attracting funds leaving the Brexiting UK. Esma has been given tougher intervention powers, though sadly watered down from the original intension, in order to hinder a race to the bottom. It is very worrying that the EU does not seem to be keeping an eye on this development.

As long as this is the case, corrupt money enters Europe easily, with the damaging effect on competition, businesses, politics – and ultimately on democracy.

*Foreign currency loans, FX loans, have been covered extensively on Icelog, see here. For a European Court of Justice decision in the first FX loans case, see Árpád Kásler and Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt, Case C‑26/13.

 

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