Sigrún Davíðsdóttir's Icelog

Search Results

Capital controls abolished – offer to offshore króna holders

with one comment

As Már Guðmundsson governor of the Icelandic Central Bank, CBI underlined at a press conference today ordinary Icelanders have not felt the capital controls for a long time. Today, the controls are lifted for not only individuals but also for companies and the pension funds. Earlier limits have been lifted – de facto the capital controls are coming to an end in Iceland, more than eight years after they were put in place end of November 2008.

What remains in place is the following, according to the CBI press release:

i) derivatives trading for purposes other than hedging; ii) foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking; and iii) in certain instances, foreign-denominated lending by residents to non-residents. It is necessary to continue to restrict such transactions in order to prevent carry trade on the basis of investments not subject to special reserve requirements pursuant to Temporary Provision III of the Foreign Exchange Act and the Rules on Special Reserve Requirements on New Foreign Currency Inflows, no. 490/2016. Guidelines explaining the above-mentioned restrictions will be issued to accompany the Rules.

The measures announced today were mostly as could be expected. However, the unknown variable was what offshore króna holders would be offered. Last summer they were offered a rate of ISK190 a euro; the onshore rate was ca. ISK140 at the time. The four large funds holding most of the remaining offshore króna – Loomis Sayles, Autonomy, Eaton Vance and Discovery Capital Management – refused that offer and have since been locked into low interest rates with an uncertain date of exit.

Now the offer is quite a bit more attractive: ISK137.50 a euro; the onshore rate is today ISK115.41. Last year, the offshore króna holders were offering ISK160 a euro, quite a bit better had the government been willing to accept it last year.

The CBI has lowered its bar, presumably because getting rid of the offshore króna holdings is seen as a bonus for Iceland. The sums captured inside the capital controls now amount to ISK195bn, less than 10% of GDP. Settling this last important part of trapped offshore króna means that Iceland can now take a step out of the shadow of the 2008 banking collapse – a chapter is coming to an end.

Former prime minister and former leader of the Progressive party Sigmundur Davíð Gunnlaugsson, forced to resign because of his offshore holdings exposed in the Panama papers, wrote today on Facebook that now the vulture funds were being rewarded; the funds had known they could crush the Icelandic government and that’s what they have now done. Others will beg to differ.

According to governor Guðmundsson the amount of offshore króna exiting at the new offer is just under ISK90bn. As far as I’m aware three of the four large funds have agreed to the present offer, which remains in place for the coming two weeks. One fund is considering its options, which must include testing the legality of earlier measures, a route the funds had already embarked on.

In total the four funds hold ISK120bn, further ISK12bn are holdings in shares, which are not being sold (thus nothing volatile there) and ISK60bn are deposits owned by various investors (some of whom might well have forgotten about their holdings or who are for some reason unaware of being the lucky owners of some Icelandic króna).

This means that although ISK90bn is less than half of the remaining offshore króna it’s roughly 3/4 of the offshore króna that could potentially move (though the funds do indeed want to keep their Icelandic relatively high-interest króna assets but that’s another saga).

What now remains in place is hindrance on inflows – as I’ve said earlier some would call it another form of capital controls but I side with the CBI that already in 2012 announced the conditions after capital controls would not be like before November 2008. Iceland isn’t interested in being the destination of money flows looking for lucrative interest rates. Consequently, prudent measures are in place since last summer.

Benedikt Jóhannesson minister of finance called today “a day of gladness.” Given that the controls had already been eased it’s unlikely the Icelandic króna will move much tomorrow or the coming days. The pension funds have good reasons to be vary of moving abroad. Though foreign investments would be wise as means of hedging foreign markets of low interest rates and high asset prices are not inviting.

Iceland is booming – the economy grew by 7.2%(!) of GDP last year. No exaggeration that there are good times in Iceland but good times aren’t necessarily easy times in a small economy with its own currency. With capital controls out of the way Iceland there is one thing less to worry about, the rating agencies will see this as a favourable move that might soon be expressed in more favourable ratings, eventually meaning lower interest rates in Iceland – so as to end on an optimistic note.

PS Why was the government keen to act now re offshore króna holders? Well, first for the entirely obvious reasons that Iceland is doing very well with large foreign currency reserves (not entirely trivial to invest them sensibly) and consequently it’s difficult to claim that economic hardship bars solution. In addition, as the minister of finance mentioned today: the rating agencies have indicated that the rating might move up, with the benefits such as lower interest rates when the sovereign borrows, spilling over into lower interest rates in Iceland. Last, it seems that the International Monetary Fund, very patient so far, was starting to air its worries: Iceland couldn’t keep boxing in the offshore króna holders indefinitely.

Pix-BB

Pix-BJ

Pix-MarGudm.

From top prime minister Bjarni Benediktsson, minister of finance Benedikt Johannesson (the two ministers are closely related, both from one of the most prominent business families in Iceland) and Már Guðmundsson governor of the CBI. Screenshots from the press conference today – notice the painting behind the two ministers: by Jóhannes Kjarval (1882-1972) the most iconic Icelandic artist, whose favourite motive was Icelandic landscape, most notable the lava landscape like here.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

March 12th, 2017 at 4:34 pm

Posted in Uncategorised

Offshore króna owners allowed to seek independent estimates – inflows have stopped

make a comment

An application with the Reykjavík District Court for independent assessment of the Icelandic economy, launched by  two of the funds holding the majority of the Icelandic offshore króna, has been met by the Court. Originally, the funds had eleven requests; the Court granted three of them according the Icelandic daily DV.

The two funds claim the measures taken against the offshore króna holders this summer – effectively forcing them out at a great discount or freezing the funds at below-inflation interest rates – are harmful measures, utterly unnecessary in the booming Icelandic economy. They now want an independent assessment of the economy, in order to show that the Icelandic government could well afford more generous terms.

According to a recent decision by the EFTA Surveillance Authority the offhore króna measures were within the remit of the Icelandic government and did not break any EEA rules.

The measures no doubt had a sobering effect on foreign visitors but it the use of a new tool to temper inflows, announced in June this year that has had an effect: according to new figures released by the Central Bank, inflows into Icelandic sovereign bonds have completely stopped since June when the measures were put in place.

There had been some concern that the large inflows might jeopardise Icelandic financial stability as indeed it did in 2008 when capital controls were put in place exactly because of these inflows. Governor of Central Bank Már Guðmundsson said earlier this year that the renewed inflows, which the Bank would monitor, were a sign of trust in the Icelandic economy. Well, no worries – the measures in June stopped the inflows.

For earlier Icelog on the offshore króna issues please search the website.

Update: this piece has been updated as the earlier report re the effect on inflows was incorrect.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

December 7th, 2016 at 1:03 pm

Posted in Uncategorised

ESA finds Iceland in compliance re offshore króna measures

with one comment

The EFTA Surveillance Authority, ESA, has now closed two complaints re treatment of offshore króna assets by Icelandic authority: ESA finds the Icelandic laws in compliance with the EEA Agreement (see ESA press release here, the full decision here). The disputed laws were part of measures taken in order to remove capital controls in Iceland.

I have earlier written extensively about the offshore króna issue, also the rather bizarre action taken by the so-called Iceland Watch against the Central Bank of Iceland, which rubbed Icelanders, even those sympathetic to the point of view taken by the offshore króna holders, completely the wrong way. The sound points, which can be made by the offshore króna holders, were missed or ignored and instead the Iceland Watch action was shrill and shallow, based on spurious facts.

In general EEA states are permitted, under the EEA Agreement, to take protective measures when a states is experiencing difficulties as regards its balance of payments. As spelled out in the press release the states, in such situations, “are allowed to implement a national economic and monetary policy aimed at overcoming economic difficulties, as long as the criteria for these protective measures are met.”

As Frank J. Büchel, the ESA College member responsible for financial markets sums it up: “Iceland’s treatment of offshore króna assets is a protective measure within the meaning of the EEA Agreement. The overall objective of the Icelandic law is to create a foundation for unrestricted cross-border trade with Icelandic krónur, which will eventually allow Iceland to again participate fully in the free movement of capital.”

The funds in question, Eaton Vance and Autonomy, are testing their case in an Icelandic court.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

November 23rd, 2016 at 11:47 am

Posted in Uncategorised

Iceland – lessons from an offshored country

make a comment

Iceland is, in my opinion, the most offshorised economy in the world, from the point of view of how pervasive it was. The banks diligently sold offshore solutions as an everyman product. I talked about this topic as a Tax Justice Network workshop in spring. This was also the topic of an interview Naomi Fowler from the TJN recently did with me.

After the collapse of the Icelandic banks in October 2008 my attention turned to the role of offshorisation in Iceland. The banks operated in London, the Channel Islands and most important of all, in Luxembourg.

The widespread offshorisation, its effect and general lessons of offshorisation in Iceland was the topic of the interview Naomi Fowler did with me for Tax Justice Network recently, see here.

After my talk at the TJN spring workshop I wrote an article on the TJN see here.

The general lesson is: offshore creates an onshore shelter from tax, rules and regulation and thus creates a two tier society where tax, rules and regulation becomes optional for those offshored while living onshore, wether it’s in Iceland, the UK, US or elsewhere…

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

October 21st, 2016 at 12:26 pm

Posted in Uncategorised

Offshore króna holders with interesting friends

with 5 comments

Holders of Icelandic offshore króna holders seem to have gained some intriguing friends. A so-called think tank, Institute for Liberty with the slogan “Defending America’s Right To Be Free” has suddenly found the urge to set up a project called “Iceland Watch” with its own website, specifically to follow, it seems, how Icelandic authorities deal with offshore króna holders (inter alia linking to some of my blogs).

The focus of interest, according to the Institute, is the following:

“The Institute for Liberty has followed Iceland’s path to recovery since the 2008 collapse and has developed an increased concern over recent protectionist economic policies like the discriminatory practices against offshore króna investors.

“In creating Iceland Watch, we aim to keep the public apprised of any anti-democratic and anti-free trade policies put into place by the Althingi, Iceland’s parliament, which could threaten the property rights of offshore investors in Iceland’s króna.

“Holders of Iceland’s offshore krona include several American investors, which serve a variety of retail investors like retirees with 401k plans and institutional investors such as corporate and public retirement plans, foundations, and endowments.

“Despite investors’ willingness to support Iceland during its time of transition and several distinct offers to negotiate good faith solutions, the Icelandic government refuses to offer anything other than a clear take-it-or-leave-it scenario. The discrimination against foreign investors is disturbing and could affect millions of American holders of 401k and retirement accounts.

“When Iceland’s parliament, the Althingi, convenes its Summer Special Session on August 15, its actions will indicate whether the island nation will reintegrate itself into international free markets or further its isolation by instating new costly, misguided policies that chill investment and economic growth.”

The Institute’s website indicates it’s also interested in Puerto Rico’s debt, another place where American investment funds struggle to get repaid. More intriguingly, the Institute has also fought Obamacare and other typically far-right interests.

Indeed, the Institute is part of ad hoc networks of “think tanks,” non-profit organisations and ,,grassroots” organisations funded by far-right American billionaires such as David and Charles Koch and the hedge fund owner Paul Singer, who for years fought the Argentinian government, now a settled issue.

The Institute is mentioned in Jane Mayer’s insightful and well-documented analysis of the money powers on the right-wing of the Republican party, far more right-wing than the mainstream Grand Old Party is. Powers, that for a few decades have pumped money into setting up phoney “grassroots” organisations in support of the tobacco industry, against environmental issues and lately, Obamacare. Mayer’s book, Dark Money; The Hidden History of the Billionaires Behind the Rise of the Radical Right, came out in spring, an essential read to understand the undercurrents in US politics the last decades and the issues behind political funding, now open to anonymous donations, and the Citizens United ruling in 2010.

According to Mayer, Institute for Liberty got lucky with funding, yet another node in the efforts to fight Obamacare; in 2009 it received $1.5m:

Four hundred thousand dollars of these funds were channeled back to DCI Group (Washington PR company, instrumental according to Mayer in fighting Obamacare) for “consulting.” The previous year, the Institute for Liberty’s entire budget had been $52,000. Suddenly it was so awash with cash that the group’s president, Andrew Langer, told the The Washington Post,‘ “This year has been really serendipitous for us.” He said a donor, whom he declined to name, had earmarked the funds for a five-state advertising blitz targeting Obama’s health-care plan. (Mayer, p.192).

As I’ve pointed out earlier, there have been some articles popping up here and there – op-ed in WSJ, guest blog on FT Alphaville and the most recent on The Street, “Iceland Should Learn From Argentina’s Bad Example” by Aldo Abraham, an Argentinian academic.

No need to point out that of course all of the media rumbling is orchestrated, driven as it is by non-journalistic input; as seen from Mayer’s book the DCI Group has links to the Institute. Everyone fights their turf as best they can, the links to the knights of dark money is rather unsettling but “à chacun son goût.” It is intriguing to see the cause of Icelandic offshore króna holders as part of this picture: not necessarily surprising but yes, intriguing.

The Princeton economist Angus Deaton,  summarises masterly in his powerfully argued “The Great Escape” that the worrying trend in US politics is the tendency of interest groups to buy influence in Washington.

As spelled out in earlier blogs Argentina is potentially a worrying example for Iceland: it fought creditors and then settled after a decade of costly legal wrangling, beneficial for the lawyers involved and corrupt powers but deeply deeply harmful for Argentina. In Iceland, voices similar to those Argentinian politicians who fought the Argentinian debtors can be heard. Elections are coming up in October, politicians will hardly strife to be on the side of foreign creditors although successful plan last year re the estates of the failed banks, based on agreement with creditors, is a positive argument for co-operation with creditors.

Views vary: some claim Iceland’s cause is wholly different from Argentina. However, although Iceland has graduated from the earlier IMF program the Fund is still closely connected to Iceland; it’s difficult to imagine that the Fund’s views will be ignored. Happily, Iceland is blossoming and, according to the latest IMF report, has more than gained what it lost on the crisis, i.e. it’s difficult to argue for any emergency actions. In the end, Iceland will have to decide on the best course to follow so as to adhere to the rule of law and further prosperity.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

August 10th, 2016 at 1:12 pm

Posted in Uncategorised

Next step by offshore króna holders: call the IMF

make a comment

Congressman Dennis A Ross has written a letter, see below, to Sunil Sabharval, US Executive Director at the International Monetary Fund, IMF, inquiring as to what US officials knew about the offshore króna actions taken by the Icelandic government. The Congressman’s mission is clearly to safeguard US interests, i.e. the interest of US funds holding offshore króna, a problem I have dealt with extensively in earlier blogs, inter alia here. Although not stated explicitly, the most sensitive underlying assets are sovereign securities, payable in Icelandic króna.

In the letter the reasons for the Icelandic collapse are somewhat simplified to say the very least, apparently easier to blame the government than the banks; also rather funny to see the offshore króna holders treated as entirely blameless lured by good deals, another saga.

The thrust of the letter is that since Iceland has now recovered well from its 2008 crisis Iceland shouldn’t be discounting the offshore króna or offering the investors punitive terms. – Further to this: intriguingly, Iceland had not made a loss on the 2008 banking crisis but a gain of 9% of GDP(!), according to the latest IMF Article IV Consultation statement on Iceland, from June 22.

The Congressman points out that the offshore króna holders (i.e. the largest holders) have come up with various solution but Icelandic authorities have been unwilling to take any notice. He now wants to know if US officials are aware of what is going on – and he expects an answer, which as far as I know has not yet been given. IMF has preached a cooperative approach to lift capital controls, reiterated in its June statement on Iceland but seems to consent with the action taken by Icelandic authorities re the offshore króna.

Here is Congressman Ross’ letter:

Screenshot 2016-07-14 23.44.59

Screenshot 2016-07-14 23.47.25

Last time, this time – in general

As I recounted at length in the years, months and days up to the plan to lift capital controls on the estates of the banks, presented June 8 last year, Icelandic authorities dithered for long due to infighting until they took the plunge – to be fair, the authorities claimed it just took time to prepare the plan and refused all allegations of infighting. But the plunge wasn’t taken until it was clear the plan was supported by the largest creditors.

The same now with the offshore króna action, it all took longer than had been planned, my understanding is that it took long because of different views; however, those involved say it just took the time it took, complicated matters etc. Yet, this time the government acted unilaterally, no agreement with the largest offshore króna holders. Thus inter alia the above letter, I assume.

The government claims the offshore króna holders do not act as a group, contrary to the creditors to the old banks. That isn’t wholly correct – each estate had to be dealt with separately and support was sought for each estate. Thus, the creditors were not a unified group but three groups. So much for that  argument now re the offshore króna holders.

As a ground for pride Bjarni Benediktsson minister of finance has pointed out that there was no legal aftermath to the plan last year. Quite true but that’s because the plan wasn’t passed until creditors’ support was ensured. Which is exactly the opposite of now where the government has acted unilaterally re the offshore króna holders who consequently have taken the first steps towards legal action.

In addition, there is the concern Congressman Ross shows, as well as articles in the Wall Street Journal and FT Alphaville, as I have mentioned in earlier blogs – offshore króna holders are clearly trying to point out to the world that Iceland, by planning a haircut on the offshore króna assets (when they are converted into foreign currency) doesn’t intend to honour its international commitments.

Last time, this time – in particular

I have earlier pointed out that I was wondering if the Icelandic government was going to make use of some “tricky teleological interpretation” in its dealings with offshore króna holders.

I didn’t explain in any detail what I had in mind but here it is:

Long before the June 8 plan last year, the Icelandic government claimed it couldn’t possibly have anything to do with the composition of three private banks. Right, except that composition was meaningless if it wasn’t clear beforehand how much of the Icelandic assets creditors (only 10% of the assets went to Icelandic creditors, mostly the CBI) could convert into foreign currency. Composition agreement couldn’t be reached until the government had found a solution i.e a haircut, which the creditors could agree to – that was what mostly took so long to solve.

This time, the core of the offshore króna problem is similar regarding sovereign securities. The government can claim that it’s honouring all its obligations as it will pay out any such securities in full and on time… in króna. The thing is that offshore króna holders can – or could, the auction is now over – either choose to convert at ISK190 a euro (the onshore rate is now ISK136, was ISK139 at the time of the auction) or have their króna kept on a special deposit account at 0.5% interest rates with no maturity in sight. The question is if this is seen as fair… or not.

Last year, the government came to the conclusion that it had to step in to facilitate a composition. Now, it’s just shrugging its shoulder and the message is, as I’ve stated earlier, “let them litigate” – alors, last year, the goal was to prevent legal action, this year it’s bring it on…

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

July 15th, 2016 at 3:35 pm

Posted in Uncategorised

Getting rid of the offshore ISK: plenty of sticks, carrots uncertain

with one comment

After markets closed May 20, minister of finance Bjarni Benediktsson introduced a new Bill (text in English) on offshore ISK, now amounting to ISK319bn, around 14% of Icelandic GDP.

As expected, offshore ISK owners are will be offered  to participate in an auction. Those who don’t accept the offer will see their funds put into so-called “Central Bank of Iceland certificates of deposit: Debt instruments issued by the Central Bank of Iceland to deposit money banks that hold offshore króna assets in accounts subject to special restrictions.”

The restrictions are special indeed: the debt instrument will only carry interest of 0.5%, to be reviewed every year. In addition, this debt instrument does not have a specified maturity. As interest rates in Iceland are well above 0.5% and not likely to be near this rate any time soon, the offer is to participate in an auction or have the funds locked in at negative interest rates forever and a day, i.e. well below market rates in Iceland.

If the word “expropriation” comes to mind the 4.1 Chapter is on “Provisions of the Constitution and the European Human Rights Convention”:

The recommendations in the bill of legislation have been drafted with the aim of maintaining compliance with the Constitution and the European Human Rights Convention, particularly as regards protection of ownership rights and prohibition of discrimination. Failure to adhere to these principles could create liability for compensatory damages on the basis of Article 72, Paragraph 1 of the Constitution, cf. also the protection of ownership rights according to the European Human Rights Convention, or could constitute illegal discrimination, which would be in violation of the non-discrimination rule contained in Article 65 of the Constitution, cf. also the prohibition of discrimination on the basis of subjective considerations, according to the European Human Rights Convention and the EEA Agreement.

It is clear that the beneficial owners of offshore króna assets are residents and non-residents and that disposal of offshore króna assets has been subject to restrictions ever since the capital controls were imposed. The extraordinary circumstances currently prevailing are considered to justify the transfer of offshore króna assets in the form of electronically registered securities to administrative accounts with the Central Bank of Iceland and the transfer of deposit balances to accounts that will be subject to the special restrictions provided for in the bill of legislation. The same principles lie behind the recommendation that payments due to other offshore króna assets be subjected to comparable restrictions.

It is appropriate to emphasise that the bill of legislation does not represent a transfer of ownership rights. Furthermore, changes in the custody of króna-denominated assets are not conducive to eroding their value, with reference to the fact that the authorisations for disposal will be either unchanged or more liberal. Nevertheless, it can be said that, by stipulating changes in administration of custody, owners’ right of disposal are being restricted as regards the selection of an administrator.

The Central Bank is authorised to charge administrative fees on offshore króna assets, but these fees shall not exceed the Bank’s actual incurred expense. The restrictions in the bill of legislation centre mainly on owners’ right to decide where their assets are held in custody.

The restrictions provided for in the bill are an element in the vital task of reducing the risk attached to the aforementioned offshore króna assets. The conditions prevailing at the time this bill of legislation is presented – i.e., the imposition of capital controls following the financial crisis in autumn 2008, the steps taken since then, and the damage that protracted capital controls do to the domestic economy – are discussed in detail in Section 2. Furthermore, reference is made to the discussion in that section concerning the necessary scope of the measures provided for in the bill of legislation.

The continued restrictions on the right to dispose of offshore króna assets are based on vital public interest considerations. These restrictions are a necessary element of measures to release the pressure that offshore króna assets could put on the exchange rate of the Icelandic króna, other things being equal, and they are also a way to give the owners of the assets the option of releasing them without jeopardising exchange rate stability. The objective of the bill is to enable the liberalisation of capital controls on households and businesses in Iceland, and also on owners of offshore króna assets. (Emphasis mine).

The situation of the Icelandic economy can be debated but it is, for the time being, fairly if not extraordinary good.

The above mentioned  “continued restrictions” indicate that as capital controls are lifted on others, those who hold offshore ISK but didn’t want to participate in the auction are effectively kept locked in.

As soon as plan to lift capital controls was announced in June last year, carry trades on the ISK rose. Intriguingly, part of the present locked-in offshore ISK stems from carry trades (actually often long-term investment rather than only hot inflows). This means, that even before the old overhang has been released, new inflows have started – either a sign of the market’s extremely short memory or faith in the Icelandic economy.

The government carefully avoided legal wrangling with creditors of the estates of the fallen banks. The question is if the new Bill does the same trick and leads to a satisfactory outcome for all. The above are points likely to cause consternation among the four largest holders of offshore ISK, all institutional investors. The question is if it’s more important for them to find a solution and finally clarify the situation or if they see the new measures as an infringement on their legal rights.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

May 20th, 2016 at 10:53 pm

Posted in Uncategorised

Lessons on offshore from the Icelandic collapse

with one comment

After my talk on “Iceland: the offshorisation of an economy” at the Tax Justice Network Workshop on “Corruption and the Role of Tax Havens” I was invited to blog on the Icelandic offshore lessons. Thanks a million to TJN for the invite, the blog is here.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

May 5th, 2016 at 12:06 pm

Posted in Uncategorised

Offshore onshore and Luxembourg, the black heart of Europe

with 4 comments

“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.

 

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

April 29th, 2016 at 11:41 pm

Posted in Uncategorised

A fallen government and breach of trust

make a comment

The Icelandic government has fallen due to lack of trust – Bright Future has decided to leave the government. That is the simple fact. The story behind this is a tad more complicated, based on a horrid story of sexual abuse, a strange system of “reviving honour” after an ended prison sentence and connections to the father of prime minister Bjarni Benediktsson leader of the Independence party. Benediktsson, the Teflon man of Icelandic politics, again has a case that raises questions but so far, he has not lost the trust of his party. He now wants to call elections in November. – This is not a case of pedophilia but of politics and trust.

The shortest lived government in the history of Iceland and the third government led by the Independence party to fall has now come to an end, greatly challenging the party’s claim to be the great stabiliser in Icelandic politics. The only government after the 2008 banking collapse that so far has lasted its full parliamentary term is the left government, which did manage to sit the full 4 years though struggling at times.

In spring last year, Bjarni Benediktsson pulled his party out of government led by the Progressives’ leader Sigmundur Davíð Gunnlaugsson; the reason was lack of trust. Gunnlaugsson, named in the Panama papers, had for weeks known of the infamous interview where confronted with evidence he walked out. When Benediktsson saw the interview he walked out of government.

This time, the story could not be more different but at the bottom is, again, lack of trust. Benediktsson did not inform his fellow ministers that his father had signed a statement of character for a sentenced pedofile seeking to rehabilitate his honour and thereby seeking to reclaim civil rights lost due to his long prison sentence.

The sordid origin of a political story

Róbert Árni Hreiðarsson is a lawyer, earlier convicted for grooming under-aged girls in a particularly vicious case. After ending his sentence he changed to name to Robert Downey (apparently taking up the name of his American father). A convicted lawyer can’t enter the legal profession again unless he goes through the process of rehabilitating, “reviving his honour” as it is called in Icelandic.

The process can be initiated five years after ending a prison sentence and implies inter alia getting someone to sign a statement confirming that this person is indeed a sound and good person. Though not without exceptions, this has mostly been a rather mechanical process where the rehabilitation is rarely denied.

The fact that Downey seemed so easily to get his place in society again caused a widespread disgust in Iceland. The father of one of his victims aired the distress of the family, shared by many Icelanders. Rúv, the Icelandic state broadcaster, tried for months to get minister of justice Sigríður Andersen, also an Independence party MP, to inform who had supported Downey in “reviving his honour.”

The very Icelandic story of a pedofile connected to the PM’s father

As a side story, the attention was also on others sentenced for sexual abuse and who had helped them to rehabilitate. One of them is a Hjalti Sigurjón Hauksson, sentenced for years of abusing his under-aged stepdaughter. It now turns out that one of those who assisted Hauksson was a well known businessman Benedikt Sveinsson, father of PM Bjarni Benediktsson.

Mostly, those who assist ex-prisoners to regain their full civil rights are people who have some standing in society and who known the convicted people for a long time. So what are the connections between Sveinsson, firmly in the centre of power and money in Iceland, and a sentenced pedofile?

In a press release, Sveinsson says that Hjalti Sigurjón Hauksson was for a while related to acquaintances of him and his wife from their school years and that Hauksson had over the years sometimes sought his help, mostly related to financial matters or work. Last year, Hauksson had brought him a letter for Sveinsson to sign, in order to use for his process of regaining his honour. Sveinsson signed the letter as it was, thereby signing off that Sveinsson now merited to be rehabilitated.

Hauksson has worked as a bus driver, also working for a bus company owned by Sveinsson and his family. This bus company has the license to operate on the very lucrative route Reykjavík – Keflavik airport.

Nagging suspicion and belated acknowledgment 

With the focus on Downey there had been some political manoeuvre, which caused suspicion and the media kept asking for more information. In hindsight, some media probably hard heard of a connection to the PM’s family that kept the Downey case alive in the media.

Following a Rúv Freedom of Information request, which ordered the ministry of justice to release information, Sigríður Andersen was just about to release information not only on Downey but all similar cases since 1995. On Monday, PM Benediktsson informed the two other coalition leaders that his father was implicated in one of these cases.

According to Óttarr Proppé leader of Bright Future he was then of the understanding that this information was about to be released. But when he then understood yesterday that Andersen had informed Benediktsson in July about his father’s involvement with the known pedofile, Proppé and his party concluded that this was such a breach of trust that leaving government was the only option.

Benediktsson adds to his list of political mishaps

There is no allegation of any connection between Benediktsson and a sentenced pedofile and this case has nothing to do with pedophilia, contrary to headlines in foreign media. The government did not fall due to a case of pedophilia but due to breach of trust, how Benediktsson had handled the case and if the minister of justice had acted properly by informing the PM of his family connections to this specific case.

But this case adds to Benediktsson’s list of mishaps that have so far not tainted his standing as a political leader. His father was connected to a banking collapse case, called the Vafningur case, related to illegal use of funds of Sjóvá, an insurance company where the family has for decades been a major shareholder. The case was not prosecuted. Benediktsson gave a witness statement where he claimed he had not known the details.

In 2014 Benediktsson was the minister of finance when the state-owned Landsbanki sold a credit card company to a consortium of businessmen. It later turned out the bank had grossly undervalued the company leaving a huge windfall to the consortium. Again, Benediktsson had been wholly aware of the whole thing.

Last, but not least, Benediktsson figured in the Panama Papers. He had owned an offshore company, holding failed investments in Macao. By saying this had all been only losses and was long gone, Benediktsson was able to move on and keeping his position as an undisputed leader of his party.

The political aftermath

So, what now? The first reaction was that the government had now fallen and there would be a quick election though there have also been rumours of other options. There are theoretical options for the government to continue operating for a limited time – for two months or so, long enough for the government to pass the budget, or if its live could be stretched until spring. Benediktsson has said he would prefer to call elections in November.

Sigurður Ingi Jóhannsson leader of the Progressive party, an old coalition partner of the Independence party, denied quite harshly today that he was interested in filling Bright Future’s seats in government. At the same time, the rumour mill claimed the party was indeed interested in this option. Less easy now after Jóhannsson’s firm denial.

One mealy-mouthed politician today is Benedikt Jóhannesson minister of finance and leader of “Revival,” partly a splinter party out of the Independence party touting itself as a liberal euro-phile party contrary to the old party of anti-European sentiments and special interests. Contrary to other Revival MPs, Jóhannesson was remarkably unwilling to criticise Benediktsson and unwilling to mention breach of trust. In a country where blood is thicker than water, all Icelanders know full well that Jóhannesson is closely related to Benediktsson.

Quite remarkably, Iceland has in many ways done all the right things following the banking collapse in 2008 – it investigated the collapse, prosecuted bankers and shareholders and its economy turned to growth already in summer of 2011. Yet, it has not yet found political stability or political strength. That however has perhaps more to do with the times we live in: in Iceland, the widespread demand for transparency keeps running against political love of opacity.

The Independence party and its loss of claim to stability

Given that the world has lately seen Brexit and Trump victory, I’ve been saying tongue in cheek that if there will be elections soon Iceland might wake up to a government of Independence party, the Progressives and a new anti-immigration populist party called Party of the People. So far, it is a joke (albeit not funny).

The new party has caught the favour of voters always looking for a new solution to the world’s ill. The Pirate party has held much of these votes but seems to be losing them to this new party. Compared to other European countries, anti-immigration sentiments have not surfaced as a political force in Iceland. Not for lack of trying: the Progressives have flirted with these sentiments but so far, no success. However, as we have seen, such a party can pull other parties in its direction. Remains to be seen.

In terms of political reputation, the greatest loser from this debacle is so far the Independence party: it has for decades laid claim to its central part in Icelandic politics as the great stabiliser. Now, the party has set a new record: the three last government is has sat in – after elections in 2007, 2013 and 2016 (with government formed in January 2017) – have fallen.

But as the Independence party knows better than any other party it can normally rely on its voters, no matter what. It has been hovering around 25% of votes in opinion polls lately, record low compared to its earlier glory of close to 40%. Our times of flimsy voters might test this but other parties have a lot harder battle, especially the two other coalition parties who are in danger of not getting any MP though Bright Future might have created some political sparks by walking out of government. All to be tested in November…

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

September 15th, 2017 at 6:27 pm

Posted in Uncategorised