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Why fisheries are such a difficult part of Brexit

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“I’m sure it must be (published somewhere) but I don’t know where,” was the answer I got from an insider in one of the UK fisheries organisations in response to an email, asking where the “relative stability keys” could be found. European Union regulation is normally published but the 1983 “keys” – the percentage, EU member states get of the annual fishing quotas – were never published. Nor were the Hague Preferences, another important element in the EU common fisheries policy. Both elements were negotiated after the UK became a member of the European cooperation.

The “relative stability keys” exist only within the EU software used to allocate the annual total allowable catches. The Hague Preferences are used to increase the “keys’” allocation to the UK and Ireland. The catches change from year to year but the percentage each country gets of the different stocks, remains the same. That is the relative stability part of the EU fisheries policy.

All of this helps to explain why the UK has had so little luck in renegotiating fisheries as part of Brexit. As the Irish say, “there is a story behind it.”

The story goes back to the 1957 Treaty of Rome, where fisheries was only mentioned once. On June 30 1970, two significant steps in the making of a common fisheries policy were taken: four nations – the UK, Ireland, Denmark and Norway – formally started accession negotiations with the European Communities, EC – and the six EC countries agreed on a legal basis for its fisheries policy.

The legal basis is found in two regulations, Regulation (EEC) no 2141/70 and Regulation (EEC) no 2142/70, respectively “a common structural policy for the fishing industry” stipulating “equal access… to fishing grounds in maritime waters coming under the sovereignty or within the jurisdiction of Member States” – and “the common organisation in the market in fishery product.”

Thus, when the UK, Ireland and Denmark joined the EC in 1973, the outlines of a common fisheries policy were already in place.

Fisheries were a major international topic in the 1960s and 1970s. In 1975, Iceland became the first European country to extend its fishery limits to 200 miles. Iceland’s unilateral move was inspired by a growing international consensus on 200 miles at the third United Nations Conference on the Law of the Sea, UNCLOS III, from 1973 to 1982, expressed in the 1982 Law of the Sea Treaty.

The UK opposed the 200-mile principle. After the third Cod War in the fishing waters around Iceland, where Icelandic coast guard boats faced British battle ships, the two nations, under pressure from Nato, settled the dispute in June 1976. In July that year, the EC agreed on a 200-mile fishing limit for the Community, i.e. also for the UK. – The UK not only lost its fight against the 200 miles but did not seem to have a strategy if it would lose.

With the EC 200-mile fishing limit and the principle of “equal access” established, the EC now needed to find a way to allocate annually the total allowable catches in the Community’s fishing waters.

The published part of the Hague Resolution in November 1976 signalled that the EC would seek agreements on access to fishing both in fishing zones of third countries and member states. The seven unpublished annexes acknowledged that with historic catches as the main parameter for quota allocation, particular consideration should be given to Ireland and to regions where fisheries were of vital importance. The UK was not mentioned but the intention was partly to make up to the UK the loss of Icelandic waters. The unpublished annexes, partly published in a 1998 ruling by the European Court of Justice, came to be known as the Hague Preferences.

The British fishing industry had insisted on a 50-mile exclusive fishing zone from where the UK would be able to expel foreign fishermen. Again, the UK was on the wrong side of the EC consensus: using historic catches as reference for allocating catches won over the British idea of an exclusive zone. The UK could not expel foreign fishermen from its waters as it had been expelled from Icelandic waters.

In January 1983, the EC had finally agreed on the principle for annual quota allocations: each fishing nation would get the same percentage of the annual allowable catches, according to a principle of “relative stability.” The tool was the so-called “relative stability keys,” i.e. the percentage each country would get of catches in the various fishing zones. The “keys” were based on catches in 1973 to 1978.

The “keys” from 1983 have never been published, but they are still used every year to allocate quotas. The Hague Preferences can be used to increase the share of the UK and Ireland, which means that other member states get less.

A Defra report from 2018, Sustainable Fisheries for Future Generations, outlines British fisheries policy for post-Brexit Britain. Without explaining the origin of the relative stability, the report states that the EU fisheries policy has been “a poor deal for the UK,” as it “does not accurately reflect the quantity of fish within the UK’s Exclusive Economic Zone,” but is “based on historical fishing patterns in 1973 – 1978. This is unrepresentative of the fish now in UK waters.”

The Defra report only mentions the Hague Preferences in a footnote, pointing out that for a certain fishing zone, the “relative stability key” is 18% but the Hague Preferences increase it to 35%, without mentioning that the Preferences are only ever used to increase the UK and the Irish quota.

The British government is entirely right that quotas can be allocated in many different ways. The principle of “relative stability” may well be unrepresentative of present stocks; after all, the principle is based on catches in the 1970s, not present stock.

Nothing lasts forever and certainly changes of the European fisheries policy have frequently been discussed, inter alia because it favours the UK and Ireland. But any British Brexit-proposal on fisheries is up against the system of “relative stability” that has served the EU well enough for 37 years and, ironically, favoured the UK.

*This blog is a short version of the longer blog below: The old saga of “relative stability” and why fisheries are such a Brexit obstacle

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Written by Sigrún Davídsdóttir

October 7th, 2020 at 2:53 pm

Posted in Uncategorised

The old saga of “relative stability” and why fisheries are such a Brexit obstacle

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Principle of “relative stability” may sound like a concept from international geopolitics but as those, who follow European fisheries, know it is the principle by which the EU allocates fish catches to member states. Based on this principle, the “relative stability key” is the percentage each member state, i.e. those with Northern European fishing grounds, gets of the quotas of various stocks. The quotas are mostly set annually, but the percentage that each member state gets of the quota was fixed in 1983. What is however not commonly known is that neither the Annexes underpinning the principle of relative stability nor the figures behind these “keys” have ever been published – part of an old saga of bitter fisheries dispute in Europe.

“I’m sure it must be (published somewhere) but I don’t know where,” was the answer Icelog got from an insider in one of the UK fisheries organisations in response to an email, asking where the “relative stability keys” could be found.

No, quite intriguingly, the exact percentage each EU country gets, is not published and has never been published since the keys were established in 1983 as the foundation of quota sharing between the EU countries sharing the fishing waters around the UK, Ireland and the North Sea. It is safe to say that the keys only exist within the EU software used to calculate the quota share of each EU country.

Although the so-called Hague Preferences – the other unpublished part of the EU Common Fisheries Policy – was designed to favour the UK and Ireland, the bitter discontent among British interest organisations related to fisheries seems to have had a great influence on support for Brexit. As to the fate of British fisheries, it is interesting to remember that the saga of government compensation for British trawlermen, for the lost fishing grounds around Iceland in the 1970s, dragged on until 2012, almost 40 years.

Now, new ideas for sharing the catches are part of the British Brexit-negotiations, where the British government seems ready to ignore the interests of the much larger car industry to score points for the fisheries. However, the story of the “relative stability” shows that the 1983 Regulation on sharing catches in European waters proved to be a magic formula providing stability. There are certainly various ways of dividing the fishing waters and the catches but as this magic formula has served its purpose and member states’ interests well enough for 37 years, it is not easy to replace it or tinker with, without disrupting the desired stability.

Towards Common Fisheries Policy: the European answer to international trends

In the 1957, Treaty of Rome, which laid the foundation of a cooperation of six European countries, fisheries is only once, as a part of the definition of agriculture: “The common market shall extend to agriculture and trade in agricultural products. “Agricultural products” means the products of the soil, of stock-farming and of fisheries and products of first-stage processing directly related to these products.”

At the time, fishing was in the shadow of agricultural interests of the six countries, but this mention of fisheries later on provided the legal basis for the common fisheries policy, CFP.

Internationally, fishing was a major topic in the late 1950s and 1960s. On one hand, there was a growing understanding that with ever larger and mightier trawlers, overfishing was a threat. On the other, countries were expanding their fishing limits.

The United Nations embraced this cause as it held the first UN Conference on the Law of the Sea, UNCLOS, in 1958. The third UNCLOS, 1973 to 1982, resulted in a treaty, which inter alia stipulated Exclusive Economic Zones, EEZs, of 200 nautical miles, giving costal states the sole right to natural resources within this zone.

The UK had for centuries fished in the waters around Iceland, which had brought prosperity to whole regions in the UK, Humberside in particular. When Iceland moved its fishing limit out from 4 miles to 12 miles in September 1958 the British fishing industry suffered. But there was more to come.

In September 1972 the Icelandic government extended its fishing limit to 50 miles. In November 1975, Iceland made the third and final move, this time to 200 miles. The three extensions gave rise to skirmishes, called the three Cod Wars though Iceland, a country without military, can per definition not go to war. In the summer of 1976, the two countries came to an agreement: the UK acknowledged Iceland’s right to rule over its 200 miles in return for a certain amount of catches within the Icelandic 200 miles for a limited time.

Iceland was the first European country to extend its fishery limits to 200 miles. This unilateral move was inspired by the fact that 200 miles were fast becoming the international norm, as later encompassed in UNCLOS III and the Law of the Sea Treaty in 1982.

The two significant European events June 30, 1970

The 30 June 1970 was the day of two significant events in the European cooperation: the six countries of the European Communities, EC, agreed on a legal basis for a common fisheries policy, published on 20 October 1970 and four nations – the UK, Ireland, Denmark and Norway – formally started accession negotiations with the EC.

From the single mention of fisheries in the Treaty of Rome the CFP was now being developed on the basis of work done in the late 1960s by the six EC countries: Regulation (EEC) no 2141/70, “laying down a common structural policy for the fishing industry;” and Regulation (EEC) no 2142/70, “on the common organisation in the market in fishery product.”

No 2141 stipulated “equal access”: “Whereas, subject to certain specific conditions concerning the flag or the registration of their ships, Community fishermen must have equal access to and use of fishing grounds in maritime waters coming under the sovereignty or within the jurisdiction of Member States.” – In line with other Community matters, fishing regulation in the member states could not lead to a differential treatment of other member states.

This first outline of the structural fishing policy constituted several important principles: measures to safeguard stocks; EC fishermen had access to all maritime waters of Member States, though exemption might be given to local populations dependent on inshore fishing; state aid could be given to ensure fair living in coastal communities; the Community could step in to fund common action in this direction.

Thus, as accession negotiations started, important principles had already been fixed for the new member states. Eventually, Norway voted down membership in a referendum but Ireland, Denmark and the UK joined the EC on January 1st 1973. The two EC countries where fisheries were now of greatest importance were the UK and Ireland.

As part of the membership agreement, all member states got the right for the next ten years, until 1983, to reserve fishing within 6 miles for those who had traditionally fished there, i.e. local fleets of small fishing boats from the coastal regions. Although in force for all member states, this was especially relevant for the three new member states.

How did British fishermen feel about sharing their waters with foreign fishermen? Importantly, the interest of inshore fishermen and deep-water fishing in foreign waters were wholly different. In 1971, the then Director of the British Trawlers’ Federation stated that inshore fishermen should not look for support among his members, fishing in distant waters. He was clearly wholly unworried about the shared fishing grounds around the British Isles. After all, British trawlers were happily fishing in the fish-rich waters off Iceland, as they had done for centuries, not envisaging or ignoring the international move towards 200-mile fishery limits.

The futile British opposition to the 200 miles principle

With the UK at the Community table from 1 January 1973, the British government was in the right place to influence the further development of the CFP. In forming the new policy, both international trends in fishery management and interests of member states had to be taken into account.

With the decision on shared Community waters in place, the next step was how to share the fishing grounds and the catches. At the same time, the EC had to take into account the move towards 200-mile EEZs and that the North-East Atlantic Fisheries Commission, NEAFC, established in 1959, was setting the fishing quotas, based on advice from International Council for the Exploration of the Sea, ICES.

The next decisive step in the making of the CFP came in January 1976 with a Council Regulation, which further laid “down a common structural policy for the fishing industry.” Again, it was emphasised that “Community fishermen must have equal access to and use of fishing grounds in maritime waters coming under the sovereignty or within the jurisdiction of Member States” – but the question as to how the catches should be allocated between the member states was still unresolved.

At UNCLOS, in other international fora and at home, the UK had opposed the 200-mile fishing limits. The dispute with Iceland, after its unilateral move to 200 miles, was only settled in June 1976 after a pressure from Nato; it was a cause for concern at Nato that two Nato countries were firing at each other, albeit with coastal guard boats on one side.

With that agreement, the UK in principle agreed to a 200-mile fishing limit.  By agreeing to an EC Declaration July 27 1976, confirming the creation of a 200-mile fishing zone for the Community, the UK formally changed sides on the 200-mile limit. By accepting the July Declaration, the UK had finally given up on its opposition to the 200 miles; via the EC, the British limit was now 200 miles.

The UK, partly due to lack of political insight, partly for its interest in deep water fisheries, had tried to oppose an international trend but lost.

1976: the Hague Resolution and its unpublished Annexes

Five months after agreeing on the principle of 200 miles, in the 1976 June agreement with Iceland, EC took the first significant step towards what was to become the principle of relative stability. Rules on how to allocate catches were outlined in the Hague Resolution 3 November 1976, which later became the basis for the so-called Hague Preferences: safeguards to ensure that Ireland and Northern England, where fisheries were of vital interest, would get extra share of the quota. Effectively by giving less to the other fishing countries sharing fishing zones with Ireland and the UK.

This did not all go smoothly: the Resolution was published but seven Annexes, were not published at the time and have never been formally published like other Resolutions nor have the Annexes ever been formally adopted by the Council. In principle, the Annexes did not have the same legal standing as the Resolution but expressed the political will of the Council.*

The published part of the Hague Resolution was only a short text, which took into consideration that fishing limits were moving out to 200 miles; though not mentioning Iceland, the Resolution also indirectly mentioned the loss of British fishing waters around Iceland following Iceland’s unilateral move:

COUNCIL RESOLUTION of 3 November 1976 on certain external aspects of the creation of a 200-mile fishing zone in the Community with effect from 1 January 1977

With reference to its Declaration of 27 July 1976 on the creation of a 200-mile fishing zone in the Community, the Council considers that the present circumstances, and particularly the unilateral steps taken or about to be taken by certain third countries, warrant immediate action by the Community to protect its legitimate interests in the maritime regions most threatened by the consequences of these steps to extend fishing zones, and that the measures to be adopted to this end should be based on the guidelines which are emerging within the Third United Nations Conference on the Law of the Sea.

It agrees that, as from 1 January 1977, Member States shall, by means of concerted action, extend the limits of their fishing zones to 200 miles off their North Sea and North Atlantic coasts, without prejudice to similar action being taken for the other fishing zones within their jurisdiction such as the Mediterranean.

It also agrees that, as from the same date, the exploitation of fishery resources in these zones by fishing vessels of third countries shall be governed by agreements between the Community and the third countries concerned.

It agrees, furthermore, on the need to ensure, by means of any appropriate Community agreements, that Community fishermen obtain fishing rights in the waters of third countries and that the existing rights are retained.

To this end, irrespective of the common action to be taken in the appropriate international bodies, it instructs the Commission to start negotiations forthwith with the third countries concerned in accordance with the Council’s directives. These negotiations will be conducted with a view to concluding, in an initial phase, outline agreements regarding the general conditions to be applied in future for access to resources, both those situated in the fishing zones of these third countries and those in the fishing zones of the Member States of the Community.

Few words, which masked the raging disagreement among the nine fisheries ministers. The UK was not content, to say the very least, of having been expelled from the fishing grounds around Iceland. Impounding that sense of loss and pain, was the fact that the British government, bound by the EC rules, could not turn to its own grounds and expel foreign fishing boats from its own waters. However, this sense of loss, was partly more symbolic than realistic: the deep-water trawlers, which had been fishing around Iceland, could not simply sail home and fish off British shores.

The Resolution acknowledged what was happening internationally, within UNCLOS III, and the fact that the EC was negotiating fishing rights with third countries on behalf of the member states. A case in point is that from 1976, Iceland negotiated fishing rights with the Community, not with individual member states.

The last sentence of the Resolution, innocuous at first sight, is the one that points to what was to come: a permanent decision on the share of each country of the fishing quotas, set for the various stocks – meaning that although the quotas, inevitably, fluctuate annually, each country’s share of that quota would always be the same. In other words, the aim was some sort of stability.

What exactly do the Annexes say?

As stated above, the Annexes have never been published in their entirety, but they have been cited in ECJ rulings in cases related to fisheries. Annex VI and VII were the most relevant in terms of influencing the member states’ share of catches as they would later be defined by the “relative stability principle.”

Annex VI was published in a 1979 opinion by the Advocate General:

Pending the implementation of the Community measures at present in preparation relating to the conservation of resources, the Member States will not take any unilateral measures in respect of the conservation of resources.

However, if no agreement is reached for 1977 within the international fisheries commission and if subsequently no autonomous Community measures could be adopted immediately, the Member States could then adopt, as an interim measure and in a form which avoids discrimination, appropriate measures to ensure the protection of resources situated in the fishing zones off their coasts.

Before adopting such measures, the Member State concerned will seek the approval of the Commission, which must be consulted at all stages of the procedures.

Any such measure shall not prejudice the guidelines to be adopted for the implementation of Community provisions on the conservation of resources.

Annex VII is found in an ECJ case from 1998 (emphasis mine):

The Council considers that the reconstitution and protection of stocks in order to permit an optimum yield from potential Community resources require strict control and Community-wide measures to that end.

The Council recognises that the protection and the control of the fishing zone off Ireland must not result, because of the size of this zone, in a charge, for that Member State, which is disproportionate to the volume of Community fish resources which can be exploited in that zone by the fishermen of that Member State. It agrees that the implementation of available means of surveillance or those to be foreseen must be accompanied by appropriate measures to ensure that the charges which ensue will be shared equitably.

Having regard to the economic relationships which characterise fishing activity in Ireland, it declares its intention so to apply the provisions of the Common Fisheries Policy, as further determined by the Act of Accession, and adapted to take account of the extension of waters to 200 miles, as to secure the continued and progressive development of the Irish fishing industry on the basis of the Irish Government’s Fisheries Development Programme for the development of coastal fisheries.

The Council furthermore recognises that there are other regions in the Community, inter alia those referred to in the Commission’s proposal to the Council, (1) where the local communities are particularly dependent upon fishing and the industries allied thereto. The Council therefore agrees that in applying the Common Fisheries Policy, account should also be taken of the vital needs of these fishing communities.

The decisions and the guidelines set out in the preceding paragraphs and the directives adopted for negotiations with third countries in no way prejudice the specific provisions which it is necessary to adopt without delay in order to solve the problems of coastal fishing activity, in particular in economically disadvantaged regions, and to regulate fishing activity within a coastal belt.

In summary, Annex VI allowed for a certain degree of independent action by member states in preserving resources, in reality deciding on catches, for 1977 (indeed until 1983, when the new rules were formed) whereas Annex VII stipulated that Ireland would, due to the relevance of fisheries, always get extra quotas, as would certain local communities, “particularly dependent upon fishing.” ­– Intriguingly, the UK was not mentioned by name, but everyone involved knew Annex VII would only ever be used for the benefit of the UK.

The purpose of the unpublished Annexes

The British government, at the time, was fighting a rather misunderstood battle within the EC, as a 1996 House of Commons Library research paper did indeed conclude. The British fishing industry insisted on a UK-exclusive zone of 50 miles from the British coast, from which foreign fishermen could be expelled. This however went against what was being discussed in the EC and did inevitably not find any support there.

The line of thought in the EC was instead that the share of catches would be based on earlier fishing. This was partly catastrophic for British interests: British trawlers had not been fishing in these waters, which meant that the British government could not refer to historic catches.

Instead, fishermen from other EC countries had been fishing off the British coast and thus had history on their side. With historic catches and Community law, the British hopes were entirely unrealistic. It was this disagreement that was being resolved with the Resolution – or rather, in the Annexes, which attempted to make good for the British loss of fishing in Icelandic waters.

The published Resolution was vague, but the Council came to rescue with the unpublished Annexes, which meant that the British government could live with the published Resolution. The Resolution and the seven Annexes expressed the political will of the fishery ministers. Or rather, an attempt to make up to the UK its loss of fishing waters around Iceland and the fact that the UK had fought the 200-mile limit and not really taken into account, for example in the accession treaty, that 200 miles would prevail, whether the UK wanted it or not.

The Hague Resolution becomes the Hague Preferences

The Annexes, not the vague Resolution, became the reference for the so-called “Hague Preferences,” used to increase the share Ireland and the UK would get of the annual catches, calculated on historic catches in 1973 to 1978. This meant that already in 1976, it had been agreed that in the group of nine equals, the UK and Ireland would be more equal than the others when it came to fishing quotas.

As pointed out in the ECJ 1998 ruling, the importance of the Hague Resolution was its recognition of “the special needs of those regions where the local communities are particularly dependent on fishing and allied industries.” In practice, a recognition of benefits allotted on these grounds to Ireland and the UK.

A clear indicator of how crucial the Hague Resolution turned out to be was that in June 1980, the EC Commission proposed to the Council “that, for each fish stock, Ireland should be ensured a doubling of its 1975 catch and the United Kingdom catches of a volume equivalent to that of landings in 1975 by vessels of less than 24 metres in its northern regions (the ‘Hague Preference’ system). In terms of annual tonnage, these parameters, according to the Commission, represent 6 954 tonnes of cod and 7 196 tonnes of whiting for Ireland, and 1 223 tonnes of cod and 2 334 tonnes of whiting for the United Kingdom.”

But did it matter that the Hague Resolution was never published in full? The 1998 ECJ ruling concluded that although it “was not published or made available” it did not matter because it later became part of subsequent fishing Regulations.

From the Hague Preferences to the relative stability and more explosive decisions

Having decided in 1976 that historic catches should be the decisive factor in allocating catches it now took until 1983 to formulate the magic formula in order to calculate the share of each member state of the total allowable catches, TACs, which vary from year to year depending on the standing of the various fish stocks.

The word “stability” is not used in the Hague Resolution, but the understanding was clearly that the Resolution expressed the notion of stability.

The principle of relative stability became the basis for that magic formula, as expressed in Regulation No 170/83 of 25 January 1983: “conservation and management of resources must contribute to a greater stability of fishing activities.”

It referred to the Council’s Hague Resolution, in particular Annex VII (nota bene without publishing it!) in that “stability, given the temporary biological situation of stocks, must safeguard the particular needs of regions where local populations are especially dependent on fisheries and related industries” and that this was the “sense that the notion of relative stability aimed at.”

This was how “the notion of relative stability aimed at must be understood” according the 1983 Regulation.

Article 4.1. of Regulation No 170/83 states: “The volume of the catches available to the Community referred to in Article 3 shall be distributed between the Member States in a manner which assures each Member State relative stability of fishing activities for each of the stocks considered.”

This Regulation established the rules for the distribution of the total allowable catches every year among the member states. The concept of relative stability was meant to safeguard the needs of local populations in regions particularly dependent on fisheries.

Regulation no 172/83, published at the same time as Regulation no 170/83, set out how this principle was used for “fixing for certain fish stocks and groups of fish stocks occurring in the Community’ s fishing zone, total allowable catches for 1982, the share of these catches available to the Community, the allocation of that share between the Member States and the conditions under which the total allowable catches may be fished.”

The unpublished “relative stability keys”

When fisheries minister Peter Walker made a statement to the House of Commons 26 January 1983, the day after the new Regulation was public, Walker said the agreement would last for 20 years, providing “a very firm long-term basis for our fishing industry to take advantage of the substantial benefits it receives from it… The quotas agreed for the seven main species of edible fish, which are the species of dominant importance to the United Kingdom fishing industry, provide Britain with 37.3 per cent. of the stocks in European waters, a figure higher than our actual catch for most stocks even in exceptional years.”

Walker also stated that this percentage was a whole lot better than the first EEC offer of 31%. What he did not mention, but some opposition MPs did, was that the UK’s demand had been 45%. Also, Walker wanted “to take into consideration the real difficulties that the long-distance fleet has had over the years as a result of the loss of Icelandic waters.” – The Parliamentary debate was however slightly misleading: the quotas were not overall figures but based on the different fishing waters. And Walker did not mention the Hague Preferences.

The concrete expression of the “relative stability” is the exact percentage each member state should be allocated of the catches in different fishing zones every year. These percentages are called “relative stability keys” – but again, they have never been published. Or rather, the keys for the Community member states in 1983 have never been published; when new countries joined, their relative stability figures were published in their Accession Treaty (For Sweden, see art. 121)

The allocation procedure was described in the 1998 ECJ ruling, stating that allocation according to the 1983 Regulation took account of average catches landed by member states during the period 1973 to 1978. In addition, the needs of areas particularly dependent on fishing, as defined by the Hague Preferences, were also taken into account – and the loss of fishing in the waters of non-member countries, a reference to loss of fishing grounds around Iceland, based on catches in 1973 to 1976.

Here, an example of the allocations keys was given: for the Irish sea, “the allocation keys were, for Ireland, 46.67% for cod and 39.625% for whiting, and, for the United Kingdom, 42.67% for cod and 52.83% for whiting (`the 1983 allocation keys’).”

The Hague Preferences meant that every year, the UK and Ireland are favoured. This has happened much to the irritation of countries like Denmark, Netherlands, Belgium, France and Germany since it means that they get less quota. The 1983 Regulation has been revised regularly, last in 2013, but the relative stability has never been changed, i.e. the percentages agreed on in the 1983 Regulation have stayed the same. Over the years, the Commission has tried to come up with solutions but nothing has been good enough for the member states to revise the “relative stability principle” and the accompanying keys.

The sorry saga of the end of British fishing around Iceland

Whenever I have met anyone with knowledge of British fishing, and the Cod Wars have been mentioned, I have never heard but the fullest understanding of the Icelandic actions. “We are not upset with Iceland but with British politicians,” was what one MP said to me many years ago. He fully understood why Iceland expanded its fishing limit to 200 miles. After all, Iceland was taking note of an international trend, though acting unilaterally and earlier than moster other nations.

His point was that all the promises by British politicians of acknowledging the loss of jobs and livelihoods in Humberside and elsewhere, had not materialised until decades later.

The first compensation scheme, operated from 1993 to 1995 when 9,000 former trawlermen received in total £14m, was found to be inadequate. In 2000, 25 years after Iceland announced their 200-mile limit, the British government agreed that trawlermen would each get £20,000 as a compensation for their loss of work in the 1970s. By 2002, £43m had been paid towards 4,400 claims from trawlermen.

However, these schemes were inadequately managed and yet another scheme followed in 2009. Also that was judged to have been badly managed, as pointed out in a report by the Parliamentary Ombudsman in 2012. Following that report, the Department for Business, Innovation and Skills, responsible for the 2009 scheme, apologised for the 2009 scheme.

The “relative stability keys”: the formula working its magic for 37 years

Though there have been some changes to the CFP over the decades, the relative stability keys have now been used for almost four decades and been the basis of the CFP. Never published, they can be said to only exist within the EU software used. And they can to a certain degree be calculated from the annual overview of catches allotted to each country, though the Hague Preferences skews the British and Irish shares. These annual overviews mention stability as a principle but do neither refer to “relative stability keys” nor to the Hague Preferences (see here the last one, for 2020).

In a Defra report from 2018, Sustainable Fisheries for Future Generations, the course is set for a sustainable fisheries policy for the UK after Brexit. The Hague Preference is only mentioned once en passant with no explanation of its purpose.

The report states that relative stability has been “a poor deal for the UK,” since it “does not accurately reflect the quantity of fish found and caught within the UK’s Exclusive Economic Zone.” Further the report points out that under “the CFP’s principle of ‘relative stability’, the UK receives a fixed share of fishing opportunities based on historical fishing patterns in 1973 – 1978. This is unrepresentative of the fish now in UK waters.”

Quite correct, the principle of “relative stability” may well be unrepresentative of present stocks – but “relative stability” was not based on present stock; it was based on what the countries had fished in the years before the principle was decided on.

The UK is entirely right that quotas can be allocated in many different ways. But it will need to be a really sound system for the EU to throw aside a system that has served Union well enough for 37 years to keep the system in place.

The UK did not understand the principle of 200-mile fishing limits in the 1970s. Perhaps it does not have a full understanding of, or prefers not to acknowledge, the interest the EU has in conserving a system that has worked for 37 years, ironically with extra quota for the UK built into the system.

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Written by Sigrún Davídsdóttir

October 7th, 2020 at 2:50 pm

Posted in Uncategorised

COVID-19 in Iceland – medical success (so far) but what do Icelanders really want?

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The Icelandic COVID-19 policy was less severe than in Denmark and, belatedly, in the UK. Iceland followed WHO guidelines to test, trace and then isolate – and COVID-19 cases have next to disappeared. The economy was in a healthy state at the beginning of the year, but the economic outlook is now bleak as the country’s three main sources of revenue are facing serious challenges: international tourism has been suspended, the market for fresh fish is seriously hit as restaurants in Iceland’s main markets are closed and price for aluminium is record low. With COVID-19 cases almost extinct, Icelanders are again out and about but now is the time for the existential questions: if Iceland should not aim for something more sustainable for the nation than the windfall of international tourism?

As a nation used to natural disasters, Icelanders have a well-developed rapid reaction team, Almannavarnir, recently tested by COVID-19 – and, as most Icelanders will tell you proudly, the team and the authorities have, so far, done well in beating the virus. The success strategy has been tracking, testing and isolating confirmed cases. One myth has already risen: that every Icelander has been tested. That is not the case but by 7 June, 62,795 tests had been carried out, in a population of 364,000; equivalent to having tested almost 1/6 of the population, probably the highest ration in any country.

The Icelandic name Almannavarnir is familiar to every Icelander and rather more appealing than its English name, Department of Civil Protection and Emergency Management, DCPEM. The Civil Protection responsibilities at the national level are delegated to the National Commissioner of the Icelandic Police, NCIP. This Department, together with Landlæknir, Directorate of Health, DoH, has orchestrated action against the Covid-19 transmission.

The three, by now, famous faces in Iceland leading the virus team – Alma Möller head of DoH, her colleague Þórólfur Guðnason Chief Epidemiologist and Chief Superintendent of the NCIP Víðir Reynisson – conducted daily televised press briefings. To add some fun during the Icelandic lock-down, the COVID-troika joined Icelandic musicians, singing about travelling inside our houses and maybe, if adventurous, camping in the garage. It was not the government but this troika that every day told Icelanders what they could and could not do, gave good advice on mental health and on the whole, informed the nation in a kind and caring way.

Knowing the pattern of social interaction in Iceland, where distances are short, car ownership high and social networks tight, it was not surprising that once the virus was spreading in Iceland – the first case was confirmed on 28 February – the initial transmission was ominously rapid. The policy was to track, test – and then isolate those who were infected.

The measures have not been as drastic as in Denmark and the UK but more severe than in Sweden. The first measures, by mid-March, encouraged social distance and limited social events. By now, June 7, Iceland seems more or less COVID-free; there have been 1807 confirmed cases, with 10 deaths. The webpage covid.19 (also in English) provides information on everything related to the virus in Iceland.

For the time being, anyone arriving in Iceland has to go into quarantine for two weeks. From June 15, anyone arriving in Iceland has the option of paying ISK15,000 (EUR100 / GBP90) or go into quarantine. Tourists are few and far between and their disappearance is already very visible: in April last year, 474,000 tourists visited Iceland; this year they were 3,000, a fall of 99,3%. Icelanders will be able to travel outside their own homes this summer, but they might enjoy the novel experience of mostly having their country to themselves.

A far-away-virus, rapidly very close

At the WHO headquarters in Geneva, the year 2020 began with an alert: on January 1, WHO set up an Incident Management Support Team, responding to an outbreak, reported on the last day of 2019 by Wuhan Municipal Health Commission where doctors had noticed a cluster of pneumonia cases. The first case might have sprung up in early December. On January 12, Chinese authorities had shared the genetic sequence of a new corona virus, Corona Virus Disease 2019 or COVID-19.

On January 13, the first case outside of China was confirmed, in Thailand. On that day the Icelandic DoH put out its first press release on the new virus, also sent to all health institutions in Iceland. The DoH pointed out that both the WHO and European Centre for Disease Prevention and Control, ECDC, had published notes on a pneumonia epidemy in Wuhan, caused by a coronavirus, but different from SARS and MERS.

Icelanders were informed that anyone who had been in Wuhan and developed fever and cold should contact a doctor but only if the symptoms were severe. An updated DoH press release that same day added five advices: wash hands; stay away from people who show signs of cold; stay away from animals, also wild animals; sneeze into a handkerchief; contact health workers if symptoms developed after a trip to China.

Late January: Icelandic authorities fully expect the new virus to reach Iceland

On January 24, DoH announced it was responding to the new virus according to Icelandic law and WHO guidelines. Three measures were put in place: 1) Information on hand at Keflavík Airport, for passengers who had been in Wuhan the previous two weeks; 2) Icelandic health institutions were being informed on preparedness. 3) A COVID-19 website with daily updates was opened, both for health workers and the general public.

On January 27, noting the transmission of the new virus to Taiwan, Thailand, Australia, Malaysia, Singapore, France, Japan, South-Korea, US, Vietnam, Cambodia, Nepal, as well as China, DoH underlined that it fully expected the virus to reach Iceland. At the time, there were 2800 confirmed cases worldwide, 2775 in China, the rest in single-digit numbers spread over the other twelve countries.

By January 29 the DoH advice was: don’t travel to Wuhan and avoid all unnecessary travel. On February 24, the focus changed: the COVID risk had reached Europe and DoH now advised against unnecessary travel to four Italian regions: Lombardy, Emilia Romagna, Veneto and Piemonte.

Two days later, the China and the four Italian regions were defined as risk zone. No one should travel there but anyone who had been there recently should go into quarantine. Any non-essential travel to South Korea and Iran should be avoided and those visiting other parts of Italy should take great care as well as those visiting Japan, Singapore, Hong Kong and Tenerife, where thousands of Icelanders, especially older people spend weeks and months over the winter. Also, people were now told to contact doctors by phone if they showed symptoms instead of going to the A&E or other health institutions.

First confirmed COVID-19 case in Iceland: February 28

By late February, the DoH was releasing COVId-information almost daily. On February 27, Icelandic health officials started testing for COVID-19 in Iceland among people who were returning from risk zones. That was also the day when the Icelandic COVID-troika, Alma, Þórólfur and Víðir, held their first press conference, streamed live in the Icelandic media. After testing 111 people on February 27 and 28, an Icelander who had been skiing in Northern Italy was confirmed positive on the 28th.

On February 29, a plane from Verona was met by health workers; passengers showing symptoms were tested. By March 1, there were two additional cases confirmed, again people returning from skiing trips on flights from Verona and Munich. The DoH defined the whole of Italy as a risk zone.

There were now 300 people in quarantine: passengers on the same flights as those, testing positive, were asked to isolate at home for two weeks. Foreigners travelling to Iceland on these flights were not asked to isolate since they would be less likely to interact with Icelanders in care homes and hospitals, the main causes for concern.

DoH was testing avidly: on March 2, 150 were tested, 180 the following day, as part of the program already in place of testing, tracing and isolating.

On March 4 ten people tested positive for COVID-19, bringing confirmed cases to 26. Since all of them had recently returned from Northern Italy and Austria they were already in quarantine. At this point, 380 people were in quarantine and testing facilities were being scaled up. So far, there was no confirmed community transmission of the virus, but the rapidly rising number of infected people was ominous.

Famously, on March 4, prime minister Boris Johnson said at a press conference he had shaken hands with people as he visited a hospital with COVID patients. That day, there were 87 confirmed COVID cases in the UK and rising rapidly.

DCPEM pointed out there was as yet no ban on social gatherings but stressed the importance that those who had been to risk zones respected the advice on quarantine. Contrary to the message Johnson was giving, the DCPEM asked people to avoid touch; no shaking hands or hugging.

Iceland and the Ischgl saga

Icelandic authorities were quick to spot a pattern: Icelandic skiers returning from Ischgl were particularly likely to have caught the virus. DoH added Ischgl to its list of risk zones on March 5. On that same day, the Chief Epidemiologist wrote to Austrian health authorities, pointing out that this popular skiing destination seemed the hot spot for the Icelandic COVID-19 cases.

It turns out that the Icelandic concern was the first indication from abroad to Austrian authorities that something was seriously wrong in the Tyrol skiing village. The Ischgl COVID-19 saga is clearly central in the spread of the virus in Europe: not only skiers from Iceland but also from the other Nordic countries, Germany and the UK, caught the virus there and transported it back home just as Europe was waking up to the fact that not only in Italy was the virus spreading rapidly.

Austrian health authorities later concluded that Ischgl was the largest virus cluster in Austria, infecting as many as 800 Austrians and twice as many foreign visitors, who then transmitted the virus to friends and family on returning home.

Small groups of friends and colleagues seem to have been the major part of the skiers who visited Ischgl, a merry crowd as can be seen on numerous pictures and videos on the internet. Sharing whistles to call for more beverages was part of the fun. This was a very lucrative business for the 1600 inhabitants who during the ski season welcome around 500,000 tourists.

Total denial was the first response from Tyrol authorities to the Icelandic letter: no, there was no indication of the virus spreading in Ischgl; most likely the Icelandic skiers had been infected on the plane, among skiers returning from Italy. – However, the Icelandic authorities were absolutely sure: the travellers had been ill as they boarded or became ill during or immediately after their return trip, which excluded transmission on the plane.

Change of heart: no more “Ibiza of the Alps”

On March 7 health authorities in Tyrol reluctantly confirmed that a bar tender at one of the most popular bars, Kitzloch, had tested positive but their conclusion was that there was no reason for further tests. Instead of seeing the bar tender as a super-spreader, the Tyrolians concluded, with no clear arguments, that it was unlikely he had spread the virus. It took two more days to order Kitzloch closed, on March 9.

By now, pressure on the Ischgl Municipality to react was growing. On March 12, a week after the letter from Iceland, the Ischgl Municipality announced that all ski facilities, hotels and restaurants would close, at least until Mid-May. The next day, the police were guarding road blocks on all roads to the village. And so, the ski season ended early in Tyrol this year, with a lockdown.

The source of contagion in Tyrol has been a hot dispute in Austria: Austrian health authorities now believe that the Patient Zero in Ischgl was a waitress who fell ill already on February 8. Tyrolian authorities have stuck to the story of the first case March 7. British media claim that an Englishman, who visited Ischgl with two friends, fell ill with COVID-19-like symptoms on returning home January 19, as did his two friends, from Denmark and the US. All of them spread the virus in their communities.

The Austrian Consumer Protection Association, VSV is now preparing a class action lawsuit against both public authorities in Tyrol and owners of hotels and bars in the resort; five thousand people, who were in Ischgl at the time of the breakout, have signed up, most of them Germans but also Dutch and British people and one Icelander.

In the European COVID-19 saga, Ischgl has become the prime example of a place where economic interests took precedence to the safety of people, both inhabitants and visitors. Following this sorry saga and the lockdown, the inhabitants of Ischgl have had a rethink: they now want to cater to quality tourism instead of the rowdy party tourism of “Ibiza of the Alps.”

Iceland: ban on social gatherings announced March 11

Back to Iceland where DoH and DCPEM were rapidly preparing measures to come to grips with the transmission. On March 6, when two community transmitted cases were confirmed with no obvious links to travels abroad, a state of emergency was declared but so far, nothing much changed. Not yet.

On March 13 emergency measures were announced, to be in place two days later, from Monday March 16, for four weeks, until Monday April 14. A lockdown yes, but not quite as harsh as the UK lockdown announced whole ten days later, from March 23. From March 16 the general outlines in Iceland were no social gatherings of more than hundred people and 2 metre social distancing.

Schools, from primary schools to universities, could now have no more than 20 pupils in a classroom. The groups were to be segregated at all times, also during breaks, meaning that there had to be staggered lessons and division in all spaces. Nurseries were not restricted by numbers but advised to keep the children in as small groups as possible.

In principle, nothing needed to be locked completely, so long as these measures were met, meaning that restaurants, gyms and swimming pools were still open. Shops were never closed down but had to respect social distancing and crowds, in case of supermarkets.

The deCode testing

deCode is a genomic company, set up in Iceland in 1996, now owned by Amgen. deCode’s operations in Iceland have long been controversial and the same counts for the COVID-screening.

From March 13 people could apply for free screening. It caused some anger when it turned out that the testing site was in the largest office block in the Reykjavík area, where plenty of people still came in to work everyday. Also, those who were tested did not have to sign any informed consent form.

In an article April 14 in the New England Journal of Medicine, co-authored by both the Icelandic Chief Medical Officer, Alma Möller and the Chief Epidemiologist Þórólfur Guðnason, the conclusion is that the virus has infected 0.8% of the population. As known from elsewhere, children under 10 years of age were unlikely to be infected and females less likely than males.

Further, deCode has concluded that 0.5% of Icelanders got infected. Antibody test done by deCode shows however that around 1% of those who were tested but shown not to have the virus and who did not go into quarantine have COVID-19 antibodies. The deCode conclusion is that three times the number of those who were confirmed infected did get the virus and a large number of them did not fall ill. Another finding is that 90% of those who did get infected by the virus have antibodies. Two percent of those who did go into quarantine but tested negative for the virus do have antibodies.

With these results in mind, Amgen lab in Canada is working on a vaccine, partly made from blood from Icelandic COVID-patients. If successful, this vaccine would be used to help patients already ill with the virus.

A biting ban, from March 24

The second and harsher lockdown was announced March 22, due to start two days later: social gatherings of more than twenty people were now banned; the beloved public swimming pools – the Icelandic agora – were now closed, as well as gyms and museums, churches and cinemas and all events and public gatherings forbidden. Any form of public sport or sport in sport clubs was banned as well as work needing physical contact such as hairdressing and massage. Still, restaurants and cafés could remain open but could max have twenty guests, socially distant, at any one time.

Older people were advised to self-isolate as much as possible, staying away from children, grandchildren and other relatives. In Iceland, where family meetings are a large part of people’s social life this meant a huge change. Anecdotal evidence shows that most people followed this religiously, even from early March, before the measures taken.

The modelling

The first COVID-19 casualty in Iceland was on March 16: a tourist who came to the hospital in Húsavík on that day, already severely ill. On March 21, 473 cases of COVID-19 had been diagnosed in Iceland. Ten of them were hospitalised, one in intensive care.

According to a model by Lýðheilsustofnun, the Centre for Public Health, at the University of Iceland, the prognosis was that the disease would peak in early April, with 600 to 1200 cases, thirty to 130 would need to go to hospital and ten to thirty need intensive care. The intensified measures on March 22 were put in place in order to avoid the worst case scenario, which by 23 March were 2000 cases, at a peak in early April, but possibly as many as 4500 (see here on the UoI modelling).

The public policy and people’s efforts have paid off. In total, by 7 June, confirmed COVID-19 cases were 1807. In May there were only seven new cases, in June one so far; 1794 have recovered, 3 were still isolating; 922 are now in quarantine, 21,217 have been in quarantine. In total, there have been 62,795 tests. In a population of 360,000 this level of testing is probably unique. No COVID-19 patient is now in hospital. In total, ten people have died of COVID-19 in Iceland.

Iceland – opening up to a new reality

On April 21 the COVID-troika announced that the first steps towards easing earlier restrictions would be taken on May 4, thus giving schools and businesses the time to prepare. The major change on 4 May was that social gatherings of 50 people were now allowed, up from the previous figure of 20. The luxury of a hair-cut and massage returned. All restrictions on nurseries and schools offering the obligatory education (to age of 16) were lifted. Colleges (from age of 16), universities and other schools could now open.

May 18 was a day of celebration in Iceland: the swimming pools could open on midnight. Many pools did just that, opened at midnight and kept the pool open through the night. People started queueing up early evening.

As of May 25, social gatherings of up to 200 people are again allowed. Gyms are now open and, as the swimming pools, only allowed to take half the number of people they have the license for.

Icelanders are urged to stick to social distancing of 2 metres where possible but the emphasis is now on protecting vulnerable people, whereas the general public should be prudent and take care of itself. Social distancing is no longer a requirement at restaurants, cinemas and theatres, but vulnerable people should be able to require seats with social distance. The Icelandic Symphony Orchestra has already given three public concerts at Harpa, the concert house by the harbour. Families and groups of people could by seats together, but there were two empty seats between each cluster.

For the time being, there is a mandatory two weeks quarantine for everyone coming to Iceland, whether a visitor or living in Iceland. This restriction is due to end 15 June but will be replaced by COVID-19 test at the airport, at ISK15,000 (EUR100 / GBP90), for everyone born before 2005. Those unwilling or unable to pay, will have to go into quarantine.

After introducing the new COVID-19 regime on Monday May 25, after 73 daily meetings, the Icelandic COVID-troika decided the meeting that day should be the last such meeting. Iceland is not entirely back to normal, but the restrictions are less obvious than earlier.

“Two tourists spotted by Mývatn”

By late April, tourists had become a rarity in Iceland as elsewhere. The hotel manager in Mývatn told Rúv that normally at that time of the year he would have been welcoming groups of tourists and new staff, busily preparing for the summer. Instead, the hotel had not had a single guest for a month, but as the headline indicated, he had spotted two tourists in the area. That was all.

In late May, an Icelander sent me a photo of his car at the parking lot by Gullfoss, even in winter always with many buses and cars. This time, his car was the only vehicle there.

As other countries, Icelanders are still trying to figure out what the near future will be like. One thing seems certain: tourists are not out-crowding Icelanders in Iceland this summer. Tourists are few and far between. For those who dream of Iceland like it once was, being alone at Þingvellir or Gullfoss, this is the summer to go to Iceland.

The Icelandic tourist sector is preparing to receive Icelandic customers this summer. Tourist information, mostly available only in English, is being translated into Icelandic. And, from anecdotal evidence, prices are being cut, by as much as a third.

That will be popular among Icelanders who tend to be continuously upset by prices when travelling at home. One commentator said Icelanders were almost too stingy to go swimming when travelling in their home country. Interestingly, Brits travelling in the UK, only spend a third of what they spend once they have left their island; Icelanders might be similar.

Icelanders already planning trips abroad

In addition to Icelandair, SAS, Transavia and Wizz Air have put Iceland on their flight schedule this summer. It seems that from Mid-June there will be plenty of flights to choose from, though obviously nothing like before. The Advantage Travel Partnership, one of many to protest the UK government’s obligatory quarantine for everyone entering the UK from June 8, have put Iceland as number 8 on the list of countries with which they would like to see the UK negotiate an air corridor, with Spain, Greece and Turkey topping the list.

A poll shows that  13% of Icelanders plan to travel abroad already now in summer, with that figure up to 25% in autumn. Half of Icelanders intend to wait until next year, ten percent have no travel plans.

Denmark has lifted travel ban on Norwegian, Finnish and Icelandic tourists, but really does not care to have the Swedes coming over. Iceland is part of the Schengen area, where Germany and many other countries plan on easing travel bans by June 15, also expanding the choice of travel for Icelanders.

The COVID-19 triple whammy on the Icelandic economy

The prospect for the economy is not very bright, mainly because Iceland is very dependent on the economic wellbeing of its main trading partners. The Icelandic crisis benchmark has been the banking collapse in October 2008: after a savage contraction of 6.6% of GDP in 2009 and 4% in 2010, Iceland jumped to 3% growth already in 2011.

Sadly, the COVID-19 hit on the economy might be much worse. In addition, it is a triple whammy hitting the three main Icelandic export sectors: tourism, aluminium production and fish export. Tourism could contract by 27%, aluminium export by 2% and fish export by 8%.

The outlook for last year was a slight contraction of 0.2-0.5%. It now seems the real outcome was rather better, or a growth of GDP of 1.9%. A mid-May forecast (in Icelandic) from Landsbankinn for this year, envisages a contraction of the economy by 9% of GDP, turning into 5% growth in 2021 and 3% the following year, admittedly all with great uncertainty.

Given that tourism, directly and indirectly, has been a major source of employment in Iceland, unemployment has shot up. The forecast for this year is a peak of 13% in summer, 9% by the end of the year, with 7% and 6% in respectively 2021 and 2022. All shockingly high figures for a country that has had a fairly steady employment for the last several years: since summer 2016, unemployment has been hovering around 3%, down from just under 5% in January 2013.

Of other key indicators, the Landsbankinn forecasts big negative movements: private consumption contracting by 7%, import by 23% but balance of payment still positive because of reduced import and hardly any foreign travels.

Nothing like the 2010 Eyjafjalljökull eruption

After the April 2010 eruption of the famous glacier with the unpronounceable name, Icelanders feared the eruption would scare tourists away and devastate the fast-developing Icelandic tourism.

In hindsight, the eruption had the opposite effect: it died out quickly and the spectacular photos captured the imagination. After all, Iceland had already enchanted travel writers and adventurous travellers. The eruption came less than two years after the October 2008 banking collapse, which also created many headlines since Iceland was the first country brought to its knees by the financial crisis. The banking crisis was widely reported on with glorious landscape photos and many foreign journalists gave the Icelandic crisis saga a heroic twist, not recognised in Iceland.

This time, Iceland is not alone to suffer; most countries do, though to a varying degree. But this time, as following the financial crisis, Iceland has a rather good story to tell, actually a much better one than many other countries: the Icelandic authorities did not dither but took action very early. This will all later be scrutinised but though the measures were harsh, it was not a lockdown since schools and nurseries were not completely closed. Iceland certainly slowed down but did not come to a standstill and though the main emphasis was on working from home, most workplaces did remain open.

Now, Iceland can offer virus-weary tourists the possibility to take a vacation in a, so far, relatively safe environment. Some health workers think the government is slightly too keen to open up the country. There is also a hefty debate in Iceland, to some degree similar as the one in Ischgl: do Icelanders really want so many foreign tourists in Iceland? Is this the best path to a sustainable economy? Hopefully this healthy debate might be starting, another saga for another day.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

June 7th, 2020 at 10:08 pm

Posted in Uncategorised

The Georgiou affair: how Greece keeps failing the political corruption test

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After the election in Greece last summer, the country seemed to be on a positive path away from populism towards a more stable political environment. Though born into his party New Democracy, the new prime minister, Kyriakos Mistotakis, brought with him the air of the outside world: he had been a banker and consultant in London, before entering Greek politics in the early 2000s. Yet, he seems to stick to the same common thread as his predecessors in office since 2011: the persecution of the former head of ELSTAT, Andreas Georgiou, who took over as the head of the revamped Greek statistical office in August 2010 following the exposure in 2009 of how the national statistics had been falsified. Intriguingly, Georgiou and his staff have been persecuted relentlessly by political forces, whereas the falsification of the national statistics has not even been investigated at all. And not only that: those in positions of responsibility for the statistics from the time of falsified statistics sued Andreas Georgiou for slander and won at first instance civil court in 2017; since then, Georgiou’s hearing to appeal this decision has been continuously postponed, most recently to September 2020.  

Just like Icelanders, Greeks earned a lot of sympathy when Greece tumbled into a financial crisis in 2009. But the Greek crisis exposed that the political ruling class in Greece had, since the end of the 1990s, falsified the Greek national statistics, i.e. the government deficit and debt were considerably higher than the published figures showed. For example, the deficit in 2006, 2007 and 2008 had been presented in official Greek statistics in mid-2009, just before the Greek crisis erupted, at 2.8%, 3.6% and 5% of GDP, respectively. However, the real figures, which were calculated by ELSTAT, the reformed statistical office, in 2010, were about double that, reaching 6.2%, 6.8% and 9.9% of GDP, respectively. And the government debt, which had been misreported at oscillating from 96 to 99% of GDP those years, was actually rising and had reached 110% of GDP by end 2008.

After years of legal wrangling, there seems to be no end in sight of the persecutions of the statistician who put Greek statistics on the path stipulated by European regulations on national statistics. Persecutions, which are an affront to Greek and European rule of law on many counts. If the Greek Government of Mitsotakis wants to confirm that the bad habits of falsified statistics are well and truly over and that Greece is firmly in the core of the European Union, it should give the Greek courts an opportunity to right a wrong and to exonerate Andreas Georgiou instead of punishing him for doing his job according to the European and Greek law.

Exposed: Greek statistical frauds… from 1997 to 2003

Greek statistics, as they are now for the years before the crisis hit, are not what Greek statistics were showing before autumn of 2009. Not for the first time, there was a lingering suspicion that not all was well with Greek statistics. Before joining the euro in 2001, the Greek budget deficit and public debt dived miraculously low, well below their less glorious average in the years before joining the euro. Although only the deficit figure ever went below the required Maastricht criteria, Greece was allowed to join the euro.

The lingering suspicion was there for a reason. Already in 2004 Eurostat had discovered that the debt and deficit dip around the euro entry was no miracle but manipulation: Greek authorities simply reported the wrong figures. In 2004, Eurostat’s Report on the revision of the Greek government deficit and debt figures showed that this had been an on-going story from 1997 to 2003.

Consequently, the Greek statistical authorities, the then National Statistical Service of Greece, NSSG, was forced to revise its data upward for the years 1997 to 2003, including for the test year of 1999 for Greece’s entry into the Eurozone, above the criteria set by the EU for Greece: Revisions in statistics, and in particular in government deficit data, are not unusual… However, the recent revision of the Greek budgetary data is exceptional.” – The unusual aspect was that the wrong figures did not stem from missing or faulty data but from deliberate misreporting. The real figures were dismal so “better” figures, even though wrong, were reported.

Exposed again in 2009: repeated falsifications of national statistics

After the exposure in 2004, Greek statistics were under intense and unprecedented scrutiny. But NSSG was not prepared to abandon its earlier bad practices. In autumn 2009 the ECOFIN Council requested a new report, this time from the EU Commission, due to “renewed problems in the Greek fiscal statistics” after the “reliability of Greek government deficit and debt statistics (has) been the subject of continuous and unique attention for several years.

Greek figures on debt and deficit had, yet again, significant problems: First, deficit forecasts for 2009 changed drastically between March 2009 and September 2009 and then the forecasts changed again even further in October 2009. Regarding the actual statistics, the EC report on Greek Government Deficit and Debt Statistics, published in January 2010, showed that the statistics for the actual 2008 deficit had been revised upward significantly (by 2.7 % of GDP). Again, as the report pointed out, such a revision was rare in EU member states but have taken place for Greece on several occasions.” Once the real statistics for 2009 were available in April 2010, the numbers proved to be higher than any of the projections provided earlier and previous years’ statistics were again revised upwards.

As earlier, the faulty statistics had not been produced solely at the NSSG but were also made with components produced at the General Accounting Office (GAO) and other parts of the Ministry of Finance, as well as other public sector institutions responsible for providing data to NSSG. There was political interference and “deliberate misreporting” with the NSSG, GAO, MoF and other institutions involved in the reporting all playing their part, according to the January 2010 EC report. In total, the word “misreporting” was used eight times in the report.

Events before the setting up of ELSTAT and Georgiou’s time there

The Goldman Sachs, GS, off-market swap story was one chapter in the faulty statistics saga and one of many examples of misreporting affecting government deficit and debt statistics. In 2008, when Eurostat made official enquiries in all member states on off-market swaps, Greek authorities informed Eurostat promptly that the Greek state had engaged in nothing of the sort.

This statement turned out to be a blatant lie as Eurostat found out when investigating the matter in 2010; the findings were published in a Eurostat report (p.16) in November 2010. By 2009, this misreporting was understating the level of the Greek government debt by 2.3 percent of GDP. As with many other examples of faulty statistics, this misreporting, on the off-market swaps and the ensuing effect on government debt, was not a single event but a deceit running for years, in this case since 2001, where several Greek government agencies played their part.

Needless to say, fiddling with the numbers did not eradicate the actual debt and deficit problem. While this deceit was being uncovered in the last quarter of 2009 and early 2010, Greece was losing access to markets. Negotiations on a bailout were complicated by unreliable information on Greek public finances. On May 2, 2010, as the first Greek Memorandum of Understanding was signed, accompanied by a €110bn loan – €80bn from European institutions and €30bn from the IMF – it was clear that the crucial figures of debt and deficit might still go up.

Following these major failures at the NSSG, its head had resigned in mid-October 2009. With the new government of George Papandreou taking office in early October 2009, there were changes at the leadership of the MoF and the GAO, with a new minister, vice minister and general secretaries. However, the ranks below remained unchanged, as did the mentality.

With a new government and following these exposures the laws on official statistics were changed in the spring of 2010. NSSG was abolished, replaced by a new statistical office, ELSTAT. Andreas Georgiou, who having been with the IMF for more than 20 years, returned home to be the head of the new statistical office. After Georgiou took over, the last upward revisions to government deficit and debt data were done.

The context of the 2009 deficit and the statistical adjustments 2009 to 2010

It is important to keep in mind the context for the 2009 deficit: there was the forecasted deficit of 3.9% of GDP, put forth by the MoF and conveyed to the European Commission by NSSG in April 2009 and then the estimate of the actual 2009 deficit of 13.6%, as produced and reported by NSSG in April 2010. All of this, an upward adjustment of almost 10 percentage points of GDP, took place before Georgiou took over at ELSTAT in August 2010.

With the 2009 deficit number of 13.6% in April 2010, way up from the originally forecasted 3.9%, it was still clear and publicised by Eurostat that the final figure could be higher. As indeed it was: the final adjustment from 13.6% to 15.4% was made by Georgiou and his team. The actual monetary figure behind the last revision of the deficit figure was about 4 billion euro.

This final adjustment made by Georgiou and his team seemed at the time wholly innocuous and a straightforward continuation of the earlier and much larger adjustments. But things were changing in Greece, though not in the direction of what those hoping for new and better times in Greece, would have hoped for.

The worm pit of Greek politics

Greek politics was a veritable worm pit during these months of fears over the country’s finances as the Papandreou government negotiated rescue packages and bailouts – in May 2010 and in June 2011 – with the IMF and European institutions.

After the elections that New Democracy lost in early October 2009, Antonis Samaras replaced the long-standing and earlier so powerful leader of the party of 12 years, Kostas Karamanlis. Karamanlis had been prime minister from 2004 until he lost the elections in 2009, that is during the time of the second round of the fraudulent statistics. In a much-noted speech in September 2011, Samaras attacked George Papandreou, accusing him of manipulating the statistics after Papandreou came to power in 2009, claiming Papandreou had done this only to discredit Kostas Karamanlis. This speech proved fateful, not for Papandreou but for ELSTAT’s president Andreas Georgiou.

Shortly after the Samaras’ speech, Georgiou was called to the parliament to explain the revision of the deficit and debt figures he had done. He was accused of ignoring national interests and inflating the 2009 figures under instruction of Eurostat to push Greece into the Adjustment Programme, set up to save the Greek state.

This narrative ignored four facts: the main corrections had been done before Georgiou took over at ELSTAT; Georgiou followed the same European regulation on national accounts statistics (Regulation 2223/96) and the same European Statistics Code of Practice as all other statistical offices in the EU; Greece had entered the Adjustment Programme three months before Georgiou took over at ELSTAT; Greece had repeatedly reported faulty data up to 2004 and then again up to end of 2009.

Political figures both on the left and the right of the political spectrum united against the ELSTAT president as if the only reason for the country’s debt and deficit problems were the statistics. The Greek Association of Lawyers even accused Georgiou of high treason.

Politicians unite in finding a scapegoat for the crisis: ELSTAT staff

In addition to the parliamentary hearing, the Samaras’ speech sat another thing in motion: a prosecutor opened a case against Georgiou and two ELSTAT managers and eventually pressed criminal charges in January 2013. In August 2013 an investigating judge recommended that the case be dropped as nothing was found to merit taking the case further.

However, political interventions, out in the open for all to see, kept the case alive in the Greek judicial system where it has been like a yo-yo: two additional times, in 2014 and 2015, prosecutors proposed that the case be dropped. However, what followed were interventions from nearly all sides of the political spectrum, fuelling the narrative of “false statements on the 2009 deficit and debt,” thus allegedly causing the Greek state to suffer staggering damages. A narrative that pushed the case to trial where the punishment should be relative to the damages, calculated to amount to €171bn, effectively amounting to a prison sentence for life.

In 2015 the charges against Georgiou and two ELSTAT managers, for allegedly making false statements on the 2009 statistics, were dropped by the Appeals Court Council after proceedings behind closed doors. However, this decision was annulled by the Supreme Court in 2016 after a proposal by Greece’s Chief Prosecutor and the Appeals Court Council, with new members, had to reconsider the case.

In 2017, the Appeals Court Council decided again to drop the charges, but the Supreme Court yet again annulled the decision, following yet another proposal for annulment by the Chief Prosecutor, an extraordinary move in Greek legal history. Then, in March 2019, the Appeals Court Council, under yet a new composition, decided for a third time to drop the charges against Georgiou and two senior staff regarding the alleged inflation of the deficit. This time, the decision was not annulled by the Supreme Court.

An acquittal that did not end the case

However, charges against Georgiou for alleged violation of duty, for not bringing the 2009 revised deficit and debt figures to a vote by the former board of ELSTAT before their publication in November 2010, were upheld. This, despite proposals to the contrary, by various investigating judges and prosecutors assigned to the case on three different occasions, in 2013, 2014 and 2015. Eventually, Georgiou was tried in open court in 2016 and acquitted.

However, this acquittal did not put an end to the case: ten days later, and before even the rationale of the acquitting decision had been made available, another prosecutor annulled the acquittal and Georgiou had to be retried in a “Double Jeopardy” trial in 2017. He was convicted to two years in jail, a suspended sentence unless he gets another conviction within three years. Georgiou appealed to the Greek Supreme Court, but his appeal was rejected, and the conviction sustained in a 2018 Supreme Court decision.

In court, Georgiou had argued that he was following both Greek and EU law, which refer to the European Statistics Code of Practice, making it clear that the head of the statistical authority has the “sole responsibility for deciding on statistical methods, standards and procedures, and on the content and timing of statistical releases”.

Georgiou requested the Greek courts to put – as provided in the Treaties – a pre-trial question to the European Court of Justice on the matter of the interpretation of the European Statistics Code of Practice in this matter; the courts ignored Georgiou’s request. Instead the convicting decision chose to use a blatantly false translation and interpretation of the European Statistics Code of the Practice asserting that “sole responsibility for deciding” does not really mean what is stated in the Code.

It seems safe to conclude that the conviction of Andreas Georgiou to two years in jail for not putting up the revised deficit and debt statistics to a vote does not rhyme with Greek and European rule of law. If the Greek Government of Mitsotakis wanted to set Greece back on the right track in this fundamental area and show that Greece is firmly in the core of the EU, it should initiate a re-examination of the case and give the Greek courts an opportunity to right a wrong and to exonerate Andreas Georgiou as he did his job according to the European and Greek law.

Further, two criminal cases

There are also two other ongoing criminal cases in Greece involving Andreas Georgiou.

In September 2016, the Chief Prosecutor of Greece ordered a new, preliminary criminal investigation into allegedly the 2009 deficit figures. This case, not the same as the case in which Georgiou and the two ELSTAT staff were acquitted in 2019, implicated not only Georgiou and the two ELSTAT staff for inflating the deficit figures but also officials from the European Commission, Eurostat and the IMF. So far, no charges have been pressed and Georgiou has not been summoned by the assigned prosecutor.

Another criminal case against Andreas Georgiou is with regard to his requesting ELSTAT staff in 2013 to sign a statistical confidentiality declaration, as required under the European Statistics Code of Practice, Indicator 5.2, for the purpose of protecting the private information of households and enterprises. There were two separate preliminary criminal investigations initiated in mid-2013 related to the Code, later combined into one. To this date no charges have been pressed but, as with the above-mentioned case, there is no evidence that the case has been closed.

If Greece and its political class wants to stop the scapegoating, all these cases against Andreas Georgiou ought to be dropped.

In addition to criminal cases: civil cases

In 2014, a civil case for criminal slander was brought against Georgiou. The plaintiff was Nikos Stroblos, who had been director of national accounts of the Greek statistics office in 2006 to 2010. Stroblos claimed Georgiou had engaged in criminal slander when he, as head of ELSTAT issued a press release in 2014, defending the final revised 2009 deficit and debt statistics produced by ELSTAT after Georgiou took over. The press release was published because of the legal proceedings since 2011 and the continuous attacks from most of the Greek political spectrum.

In 2017, the First Instance Civil Court decided that Georgiou had committed what is called in Greek legal terminology “simple slander,” meaning that what Georgiou said in his press release was true but had hurt the plaintiff’s reputation, (as opposed to “criminal slander”, whereby false statements are made to hurt somebody’s reputation). Thus, the court decided that Georgiou told the truth but he should not have made the statement he did. To atone for this, Georgiou was obliged to pay a compensation to the plaintiff and make a public apology in the Greek newspaper, Kathimerini, in the form of publishing large parts of the court decision against him.

When Georgiou appealed the decision, things took a peculiar turn: the appeal hearing has been postponed time and again. The last delay happened in January this year: the case was scheduled for January 16 but then postponed, for more than nine months, until September 24, 2020.

There is a peculiar irony here: Georgiou is appealing a court decision that found him guilty of “simple” slander for publicly defending his agency’s work; in layman’s terms, he was found liable for making true statements that happened to hurt someone’s reputation, an actual crime in Greece. If found liable, the person who restored the credibility of Greek statistics will have to publicly apologize to the person who was fudging the data previously and pay him compensation. This outcome would further damage Greece’s troubled image in the eyes of the global community.

European Convention on Human Rights: cases should be heard within a reasonable time

Now, six years after this civil case started, and nine years after Georgiou was first put under investigation, he and his family are still living with these never-ending court proceedings and the eternal postponements. It is of interest to keep in mind Article 6.1. of the European Convention on Human Rights:  In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.

Interestingly, one of Stroblos’ witnesses in the civil suit against Georgiou is Nikos Logothetis, who was vice-chairman of the board of ELSTAT when the board had demanded to vote on the revised 2009 deficit and debt figures in November 2010. Only weeks earlier, Logothetis was forced to resign from the ELSTAT board after the Greek police found that Logothetis had hacked Georgiou’s private email. A criminal investigation was opened against Logothetis at that time and in early 2011 two charges, of felony and misdemeanour, were pressed against him.

However, both cases against him were dropped for reasons that are difficult to fathom in the context of the rule of law and how Georgiou’s cases have fared in the Greek courts: one case was dropped as the court did not consider it before the five-year statute of limitations expired; the other case was thrown out because a receipt for a €20 fee, due when a complaint is filed, could not be found in the court file. And then, as if this was not scandalous enough, the court later met Logothetis’ request: that his computer, which the police had previously confiscated and which still contained Georgiou’s stolen emails, should be handed back to him.

International support for Georgiou – but that does not save him from the persecutions

There have been many instances of international support for Andreas Georgiou over the years. Below are some examples of recent ones.

The European Commission has repeatedly mentioned Georgiou’s case in its periodic reports of the post-program reviews for Greece. In its November 2019 Enhanced Surveillance Report it noted: The Commission has continued to monitor developments in relation to the legal proceedings against … the former President and senior staff of the Hellenic Statistical Authority. The case against the former Hellenic Statistical Authority President A. Georgiou related to charges filed in connection with fiscal statistics has been irrevocably dismissed. An appeal introduced by Mr. Georgiou in a civil defamation lawsuit is scheduled to be heard in January 2020.”

The International Statistical Institute noted in a statement published in December 2019: “It is of great concern to us that the legal harassment of Mr Georgiou is not yet over. There are three legal cases against him in Greece which are still open. He took these actions in accordance with statistical principles in his capacity as head of the national statistics office… Defending official statistics, as required by the UN Fundamental Principles of Statistics and the European Statistics Code of Practice, should not lead to any legal proceedings and even less to damages being awarded and public apologies. Now is the time for a fresh start in Greek statistics, and the ending of the victimisation of Mr Georgiou.”

The Board of the American Statistical Association also issued a statement in December 2019 stating inter alia that the Association was “troubled by Greece’s continued persecution of its former head statistician. Now in the ninth year, there are still open investigations and trials of Georgiou, a government professional who is loyal to his country. Greece’s new government provides an opportunity to remedy the unjust official treatment of Georgiou. Ending the prosecutions, accusations and legal proceedings and exonerating Georgiou would signal Greece’s commitment to accurate and ethical official statistics. This, in turn, could help foster foreign investment and overall confidence among Greece’s international partners, which helps Greece’s economy.”

Political witch hunt

In August 2017, Nikos Konstandaras columnist at Kathimerini and the New York Times warned that the Georgiou affair was “a witch hunt, not a thirst for justice.” Konstandaras concluded:

Beyond the injustice and the terrible personal cost for a fellow citizen, beyond the damage to the country’s credibility, the most tragic aspect of the affair is that people who know how dangerous this all is are investing in fantasies and encouraging fanaticism.

History, though, will record the role they played. In the end they will be loaded with more blame than that which they are trying to saddle onto others.

Now, more than two and a half years after this was written, the persecution of a civil servant who did what he was supposed to do, is still ongoing. Much to the shame of Greece the man who led ELSTAT from August 2010 to August 2015, putting in procedures for correct reporting of statistics following the exposure of fraudulent statistics for over a decade, is being prosecuted. At the same time, the people who for years provided false and fraudulent statistics to Greece, European authorities and the world, enjoy total impunity and even participate and benefit from Georgiou’s prosecutions.

In an article in the Washington Post as recently as 2 January this year, Georgiou’s case was brought up, pointing out how both professional rivals and politicians had decided to scapegoat Georgiou during the contagious time he was in office, creating the narrative that “he had “inflated” the deficit to “trap” Greece into accepting bigger international bailouts, with harsher conditions, than it needed.”

As pointed out, “the Greek government has changed hands multiple times” since the legal cases against Georgiou started, a particularly damning point for Mitsotakis and his government. “So far, though, those in power have continued to foment or tolerate the scapegoating of civil servants, and refused to help Georgiou clear his name.”

A worrying disincentive to service truthful information

The numerous prosecutions are utterly damning for the Greek political system. Equally, that the IMF and EU have not been able to adequately and decisively assist the quest for truthful statistics. It is a travesty of the rule of law that a civil servant has for more than eight years been persecuted for doing his job truthfully, to the professional standards expected of his office. A travesty that is harmful for not only for Greek civil servants and their work but elsewhere. Or, as concluded in the Washington Post article 2 January:

“And make no mistake: Georgiou may be the primary victim of this weaponization of the judicial system, but he is hardly its only target. Other civil servants — in Greece and in other countries weighing their commitment to rule of law — are watching and learning what happens when a number cruncher decides to tell the truth.”

In December 2016, Georgiou said to Icelog:The numerous prosecutions and investigations against me and others that have been going on for years – as well as the persistence of political attacks and the absence of support by consecutive governments – have created disincentives for official statisticians in Greece to produce credible statistics. As a result, we cannot rule out the prospect that the problem with Greece’s European statistics will re-emerge. The damage already caused concerns not only official statistics in Greece, but more widely in the EU and around the world, and will take time and effort to reverse.

How can Greece, the political class in Greece, face the fact that an innocent man is persecuted, and the real fraud of national statistics has never been investigated?

*Icelog has followed the Georgiou case since I visited Greece in 2015. See here for earlier blogs on the case.

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Written by Sigrún Davídsdóttir

April 2nd, 2020 at 6:43 pm

Posted in Uncategorised

The Luxembourg walls that seem to shelter financial fraud

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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 OTP Jelzálogbank Zrt, Case C‑26/13.

 

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Written by Sigrún Davídsdóttir

March 10th, 2020 at 10:00 pm

Posted in Uncategorised

Jim Ratcliffe and his feudal hold of Icelandic salmon rivers and farming communities

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The largest landowner in Iceland owns around 1% of Iceland, mostly land adjacent to salmon rivers in the North East of Iceland – and he is not Icelandic but one of the wealthiest Brits, James or Jim Ratcliffe, a Sir since last year, of Ineos fame. His secretive acquisitions of farms with angling rights have been facilitated by the Icelandic businessmen who for years have been investing in salmon rivers through offshore companies. Opaque ownership is nothing new. Though the novelty is the grip on these rivers now held by a foreigner, with no ties to the community and assets valued at just above the Icelandic GDP, the central problem is mainly the nationality of the owner, but the concentration of ownership.

“If you are doing honest business, I assume you would feel better if you could talk freely about it. This secrecy breeds suspicion,” says Ævar Rafn Marinósson, a farmer at Tungusel in North East Iceland. The secretive business he is talking about is the business of buying farms adjacent to salmon rivers in his part of Iceland.

The secrecy is not new: for more than a decade, the ownership of the attractive salmon rivers in Iceland has been hidden in an opaque web of on- and offshore companies. That opacity might now hit the community when rivers and land is increasingly being held by one man, Jim Ratcliffe, whose assets are estimated £18.15bn. Through direct and indirect ownership, Ratcliffe owns over forty Icelandic farms concentrated in and around Vopnafjörður, which gives him the control of angling rights in some of the best salmon rivers in Iceland.

The petrochemical giant Ineos is Ratcliffe’s source of wealth. Interestingly, his salmon investments are part of his recent, rapidly growing investment in sport, from cycling, sailing and football to his, so far, tentative interest in British Premier League football clubs with price tags of billions. Ratcliffe claims that his petrochemical industries are run in an environmentally friendly way and strongly denies that his sport investments are any form of green-washing.

The secrecy surrounding Ratcliffe’s Icelandic investments, so out of proportions in this rural community of salmon and sheep farmers, has bred both rumours and suspicion that splits apart families, neighbours and the local communities as they debate whether the funds on offer are a substitute for losing control of the angling and the land.

Also, because Ratcliffe is a distant owner. He leaves it to his Icelandic representatives to talk to the farmers some of whom, like Marinósson, refuse to sell and as a consequence feel harassed. And then there are the pertinent questions of how Ratcliffe’s funds flow into the local economy, as one farmer opposed to Ratcliffe’s growing hold of the region, mentioned in an interview in the Icelandic media.

Following Ratcliffe’s purchases, foreign ownership of land is now a hot topic in Iceland. The government is looking at legal restrictions to limit foreign ownership. A new poll shows that 83.6% of Icelanders support this step. – But that might be a mistaken angle: the problem is not foreign ownership but concentrated ownership.

“I’m not upset with Ratcliffe, he’s just a businessman pursuing his interests. I’m upset with the government of Iceland that is letting this happen,” says Marinósson. He is not the only one to point out that a new legislation might come too late for the salmon rivers in the North East.

Angling – strictly regulated

Though far from being a mass industry, angling has long been both a beloved sport in Iceland and attracted wealthy foreigners. In the early and mid 20th century, English aristocrats came to fish in Iceland. In the 1970s and 1980s, the Prince of Wales was fishing in Hofsá, now controlled by Ratcliffe. With the changing pattern of wealth came high-flyers from the international business world.

As angling interest grew, net fishing for salmon was restricted so as to let the angling flourish. In 2011, 90% of the salmon caught in Iceland was from angling. The annual average salmon catch is around 36.000 salmon, with the figures jumping over 80.000 in the best years. There are in total 62 salmon rivers with 354 rods allowed; the rivers in the North East are thirty, with 124 rods (2011 brochure in English; Directorate of Fisheries).

According to the Salmon and Trout Act from 2006, the fishing rights are privately owned by those who own the land adjacent to rivers and lakes. The fishing rights come with a string of obligations, supervised by the Directorate of Fisheries and most importantly: the fishing rights cannot be split from the land – the only way to control the angling is to own a farm or farms holding the angling right.

The owners of the farms owning a river or lake are obliged to set up a fishing association to manage the angling; both the necessary investment and the profit has to be shared according to the amount of land owned. The ownership is split according to voting rights and percentage owned.

Wielding control over the angling, these associations can decide either to manage the angling themselves or lease out the rights to angling clubs or other consortia.

From overfishing to highly regulated angling regime

Already in the 1970s, the fishing associations run by the farmers owning the best salmon rivers were increasingly leasing out the angling rights to groups of wealthy Icelandic anglers, mostly business men from Reykjavík.

In some rare cases, foreign anglers who frequented Iceland, held the angling rights through a lease. One attractive salmon river in the North East, Hafralónsá, where Ævar Rafn Marinósson and his family are among the owners, was leased by a Swiss angler from 1983 to 1994; from 1995 to 2003, a British and a French angler leased the river.

During the 1990s, the popularity of angling led to overfishing in many salmon rivers with tension between biology and the financial profits from the angling rights. But the owners of the angling rights quickly came to understand that overfishing would kill the goose laying the golden eggs, or rather the salmon that brought wealth to the community.

The angling is now restricted in many ways: each river has only a certain number of rods; the angling time is restricted to certain hours of the day and a certain amount of annual angling days, often 90 days, from mid-June.

In addition, some form of “fish and release” is in place in most if not all the highly sought after and expensive salmon rivers. All these protective measures have been driven by those who control the angling, i.e. the fishing associations owned by the landowners.

Foreign anglers mainly pursue the sporty fly-fishing, whereas Icelanders tend not to frown upon using spoons and worms. Icelandic anglers know it is good to fish with spoons and worms after the foreign fly-anglers have been “beating the river” as we say in Icelandic. That normally ensures great catch, a trick the Icelandic anglers are happy to use.

Angling – from farmers to wealthy business men

The leases related to the salmon rivers normally run for some years. The fees to the fishing associations are a significant part of income for the farmers. The lessees are normally obliged to undertake investment in the infrastructure around the river.

Part of cultivating the salmon population in the rivers is expanding the habitat. This is for example done by building “salmon-ladders,” enabling the salmon to migrate beyond waterfalls or other hindrances, potentially increasing the rods allowed in each river and thus making the river more profitable.

Those who rent the rivers try to sell each rod at as high a price as the market can tolerate. Angling in the best rivers in Iceland is an expensive sport, also because the fishing is sold as a package with accommodation and meals included.

No longer primitive huts, the best fishing lodges are like boutique hotels, where the best chefs in Iceland come and cook for discerning anglers with the wines to match. Part of the summer news in the Icelandic media is reporting on the number of salmon caught in the well-known rivers, size and weight, what tools were used and sometimes also who is angling where.

This is the angling of the very wealthy. But angling is also popular with thousands of ordinary Icelanders. Angling for salmon, trout and sea trout in less famous rivers and lakes, is an affordable and ubiquitous sport in Iceland.

The opaque ownership web that Ratcliffe is buying into

Incidentally, this development of buying farms, not just licensing the angling rights, has been going on in Iceland for decades. In the early 1970s, a medical doctor and keen angler in Reykjavík, Oddur Ólafsson, bought five farms along Selá. Decades and several owners later these farms are now owned by Ratcliffe.

Orri Vigfússon (1942-2017) was a businessman and passionate angler, who in 1990 set up the North Atlantic Salmon Fund as an international initiative in order to protect and support the wild North Atlantic salmon. Vigfússon was influential in Icelandic angling circles and well known in angling circles all around the North Atlantic. He was also primus motor in Strengur, a company that for decades has controlled the best rivers in the North East, now controlled by Ratcliffe.

The web of on- and offshore companies related to angling has been in the making in Iceland since the late 1990s, when the general offshorisation of wealthy Icelanders boomed through the foreign operations of the Icelandic banks. A key person in this web is an Icelandic businessman.

Born in 1949, Jóhannes Kristinsson has been living in Luxembourg for years. Media-shy in Iceland he was in business with flashy businessmen like the duo Pálmi Haraldsson and Jón Ásgeir Jóhannesson of Baugur fame, synonymous with the Icelandic boom before the 2008. Kristinsson seems to be linked to around 25 Icelandic companies.

By 2006, it was attracting media attention in Iceland that wealthy anglers were no longer just licencing the angling rights but were outright buying farms holding angling rights. One name figured more often than others, Jóhannes Kristinsson. In an interview at the time, Kristinsson said he probably owned only one farm outright but was mostly a co-owner with others, without wanting to divulge how much he owned.

The farmers felt they knew Kristinsson, a frequent guest in the North East and the opaque ownership did not seem much of an issue. However, the effect of the opacity is now becoming very clear as Kristinsson is selling to a foreigner with no ties to the community, leaving the community potentially little or no control over some of its glorious rivers and land.

Luxembourg, Ginns and Reid

Kristinsson’s ownership of lands and rivers in the North East seems to have been held in Luxembourg from early on. Dylan Holding is a Luxembourg company, registered in 2000, by BVI companies, which Kaupthing owned and used to offshorise its clients. No beneficial owner is named in any of the publicly available Dylan Holding documents but the company was set up with Icelandic króna, indicating its Icelandic ownership.

According to Dylan Holding’s 2018 annual accounts, the company, still filing accounts in Icelandic króna, held assets worth ISK2.6bn. Its 2017 accounts list eleven Icelandic holding companies, fully or majority-owned by Dylan Holding, among them Grænaþing. Last year, Ratcliffe bought Grænaþing, as part of the deal with Kristinsson; an indication of Kristinsson being the beneficial owner of Dylan Holding.

The names of two of Ratcliffe’s trusted Ineos lieutenant, Jonathan F Ginns and William Reid, are closely linked to Ratcliffe’s Icelandic ventures as to so many other Ratcliffe ventures. According to UK Companies House, Ginns sits or has been on the board of over seventy Ineos/Ratcliffe related companies, Reid on seven.

Ginns and Reid sit on the boards of three Icelandic companies previously owned by Dylan Holding indicating that these companies are now under Ratcliffe’s control. Whether Ratcliffe has bought Dylan Holding outright or where exactly his ownership stands at, remains to be seen but it seems safe to conclude that Ratcliffe now owns significantly more land on his own rather than, as earlier, through joint venture with Kristinsson and others. Kristinsson seems to be withdrawing, leaving Ratcliffe as the sole owner.

Ratcliffe’s rapid rise to being Iceland’s largest landowner

Jim Ratcliffe, the angler with the funds to indulge his salmon passion was nr.3 on the Sunday Times Rich List this year, with assets valued at £18.15bn, down from £20.05bn in 2018, when he ranked nr.1. A Brexiteer who is not waiting for Brexit to happen: after relocating to the UK from Switzerland, where Ratcliffe and Ineos were domiciled from 2010 until some months after the EU referendum in 2016, Ratcliffe moved to Monaco last year. Tax and regulation seem to be his main concerns.

Ratcliffe had been fishing in Vopnafjörður for some years without attracting any attention. It was not until late 2016, when he visibly started buying into the Icelandic angling consortia, that his name first appeared in the Icelandic media. By then, he already owned eleven farms in the area, both through sole ownership and through his share in Strengur. Local sources believe Ratcliffe started investing earlier in angling assets, hidden in opaque ownership structures.

In December 2016 it was announced that Ratcliffe had bought the major part of the single largest farmland in Iceland, Grímsstaðir. This mostly barren wasteland of glorious beauty in the highlands beyond Mývatn had been owned by Grímstaðir farmers and their families for generations. The Icelandic state was a minority owner and has retained its share of the land. Ratcliffe stated at the time he was buying Grímsstaðir because it was part of the Selá water system; buying the land was part of his plan to support and protect the wild salmon.

The Grímsstaðir deal drew a lot of media attention in Iceland because in 2011, a Chinese businessman and poet, Huang Nubo, had tried to purchase this land with unclear intentions. Nubo had some Icelandic friends from his university years but practically no assets abroad except some real estate in the US, which he seemed to struggle to maintain. In 2014, the Icelandic government vetoed Nubo’s plans: he was not European, and his plans lacked clarity.

For decades, Strengur, under changing ownership, has managed the angling rights in Selá and Hofsá, two of the best salmon rivers in the North East and bought up farms adjacent to the rivers. In 2012, a new 960sq.m fishing lodge opened by Selá, a good example of the investment done in order to improve the angling experience and cater to wealthy anglers.

Following a 2018 transaction Ratcliffe owns almost 87% of Strengur, a jump from the 34% he had owned earlier, meaning that he controls the angling rights in both Selá and Hofsá. Ratcliffe bought the 52.75% by purchasing a company owned by Jóhannes Kristinsson. Strengur’s director Gísli Ásgeirsson (who features in this Ineos PR video) is now seen as Ratcliffe’s mouthpiece. He has ties to around twenty Icelandc companies, many of which are linked to Kristinsson.

The Ratcliffe Kristinsson consortium now owns 40 to 50 farms. But Ratcliffe is looking for more: earlier this year, Ratcliffe added one farm to his Icelandic portfolio. He now seems trying to secure ownership of yet another river, Hafralónsá.

The Icelandic media had reported that he had now secured majority in the angling association of that river but that does not seem to be the case. Ævar Rafn Marinósson is one of the owners of Hafralónssá. He says to Icelog that as far as he knows, Ratcliffe is still a minority owner.

The suspicion among those who are not in Ratcliffe’s fold is rife as a change in ownership might bring about drastic changes. With majority hold, Ratcliffe might for example drive the farmers in minority to bankruptcy by forcing through investments in the Hafralónsá angling association, which would wipe out the profits that make an important part of the farmers’ annual income.

Ratcliffe’s representative made Marinósson an offer to buy his farm. His answer was that the farm, which he owns with his parents, was not for sale. The representative then visited his elderly parents with the same offer, although it had been made clear to him that the farm was not for sale.

Misinformed passion

In a PR video from Ineos, Jim Ratcliffe talks of “overfishing and ignorance” that threat the salmon populations in Iceland. In the video Ratcliffe’s passion for salmon fishing is given as his drive for investing “heavily in the region to help expand the salmon’s natural breeding grounds” through constructing of salmon ladders in six rivers. The latter part of the video is about his investment in safari parks in Africa, with both initiatives presented as rising from Ratcliffe’s environmental concerns.

As mentioned earlier, the times of overfishing in Icelandic salmon rivers are long over. To portray Ratcliffe as a saviour of the salmon rivers in the North East is at best misinformed, at worst profoundly patronising to the farmers who have lived and bred salmon all their live and whose livelihoods have partly depended on the silvery fish. But the fact that Ratcliffe has the funds to follow his passion cannot be disputed.

In August this year Ineos Technology Director Peter S. Williams signed an agreement on behalf of Ratcliffe with the Marine and Fresh Water Institute in Iceland, where Ratcliffe takes on to fund salmon research to the amount of ISK80m, around £525.000. At the time it was announced that any profit from Strengur will be ploughed into maintaining and supporting the salmon populations in the rivers that Strengur controls. Strengur’s director Gísli Ásgeirsson said at the time that the aim was sustainability in cooperation with the farmers and local councils. There will be those in the local community who feel that cooperation is exactly what is lacking.

In a Rúv tv interview I did with Ratcliffe in 2017 (unfortunately no longer available online), Ratcliffe said he was driven by his passion for angling and the uniqueness of the unspoiled nature in Iceland, a value in itself. There is some speculation in Iceland that Ratcliffe’s angling investments might be driven by something else then his passion for angling.

Some think water as commodity in a world facing water shortage is his real interest, which would explain his emphasis on buying the rivers outright instead of joint venture or just renting the angling rights. Others, that plans by Bremenport to build a port in nearby Finnafjörður in order to service the coming Transpolar Sea Route might be in Ineos’ interest. Again, total speculation but heard in Iceland. – Ineos is investing in facilities in Willhelmshaven, where Bremenport is building a new container terminal.

Mushrooming sport investment: from millions in salmon and safari to, possibly, billions in Premier League football  

Ratcliffe’s UK holding company for his Icelandic assets is Halicilla Ltd, incorporated in 2015, its business being “mixed farming.” Halicilla’s 2017 accounts list two Icelandic companies as assets, Fálkaþing, incorporated in 2013 and Grenisalir, incorporated in 2016, “Icelandic companies, which in turn hold land and fishing rights.”

Ratcliffe has been unwilling to divulge how much he has invested in Iceland but that can be gleaned with some certainty from the Halicilla accounts: its assets amounted to £9.7m in 2016, which with further acquisitions in 2017, had grown to £15.3m by the end of 2017, financed directly by the shareholder, i.e. Ratcliffe.

In addition to investments in Icelandic salmon rivers, Ratcliffe’s sports investments have mushroomed in the recent years. In December 2017, he announced his investment in luxury eco-tourism project in safari parks in Tanzania through a UK company, Falkar Ltd, incorporated in 2015. As Halicilla, Falkar is financed by Ratcliffe, with a loan of £6.3m, at the end of 2017. With his interest in sailing, Ratcliffe owns two yachts, one of them, Hampshire II a superyacht worth $150m, with two of his Ineos partners owning three yacths. In addition, Ratcliffe owns four jets, three Gulfstream jets and one Dassault Falcon.

Ratcliffe’s other sport investments involve much higher figures than his investments in salmon and safari. Last year, he invested £110m in Britain’s America’s Cup team. His investment in March in the cycling Team Sky, now Team Ineos, seemed to imply that the Team’s earlier budget of £34m would increase significantly. In 2017 he bought the Lausanne-Sport football club, where his brother is now the club’s president, and has recently completed a £88.7m deal to buy Ligue 1 club Nice.

The figures might rise: last year, Ratcliffe led an unsuccessful bid of £2bn for Chelsea FC and has aired his interest to buy his favourite team, Manchester United – one day, some super-star footballers might be practicing fly-fishing under Ratcliffe’s instructions in Vopnafjörður.

Split families and farming communities, threats and bullying

The farmers in the North East face a dilemma. It is in the interest of farmers to be able to sell their farm for a reasonable price if they intend to retire or give up farming for other reasons. However, seeing whole fjords and entire rivers now owned not by a consortium of wealthy anglers in Reykjavík but by a single foreigner, wholly unrelated to the country and the North East, with a strangle hold on the community, has spread unease.

When the Icelandic consortia started buying farms in order to gain control of the angling, the farmers often continued to live on the farm, as tenants. On the whole, the farms have continued to be farmed, though there are exceptions.

Ratcliffe has stated he is keen for the farmers to keep living on the farms and has offered them to stay as tenants. With money in the bank the tenants can profit from the land as earlier but no longer benefit from the angling rights as earlier or have any say on the use of the river.

Ratcliffe’s acquisitions have completely changed the game around the rivers. The novelty is his immense buying power. His entrance into the angling circles has split families and communities. To sell or not to sell is a burning question for many since Ratcliffe’s representatives keep making lucrative offers to the few farmers who have so far been unwilling to sell.

This is, as such, not entirely Ratcliffe’s fault – he simply has an exorbitant amount of money to indulge in one of his hobbies though he has shown little interest in learning from the farmers who know the rivers like the back of their hands. But this sowing of anger and unease has been the side effect of his investments. Perhaps also to some degree because of the people he has chosen to work with in Iceland; how well informed Ratcliffe is of the circumstances surrounding his investments is unclear.

Ratcliffe flies in and out of Iceland. The Icelanders who work for him are there and some live in the communities Ratcliffe has already bought or is trying to buy. His salmon shopping spree may be backed by the best intensions, but the side effect is effectively making him the ruler of a few hundred Icelanders who live off the land they love dearly. The land, which Ratcliffe visits at his leisure, once in a while.

Restrictions on ownership of land may come too late for the North East

Foreign ownership is a hot topic in Iceland for the time being, given the quick and enormous concentration of Ratcliffe’s ownership in the North East. But it would be wrong to focus on foreign ownership – the real problem is concentrated ownership.

Ratcliffe is not the only foreign landowner in Iceland. There are a few others but there is increased interest from abroad for land in Iceland. One foreign owner closed off his land with signs of “Private road,” much to the irritation of his Icelandic neighbours since free passage in the country side is seen as a general right in Iceland. One practical reason is the gathering of sheep: sheep roam freely in summer and farmers need to roam just as freely when the sheep is gathered in autumn.

Though rapidly developing, luxury tourism is still a rarity in Iceland, and has so far not led to land being closed off. As Ratcliffe’s Tanzania investment shows, he is interested in luxury tourism. Seeing angling turning into an even more rarefied luxury than it already is, marketed mainly for people in Ratcliffe’s wealth bracket, is not an enticing thought for most Icelanders.

The government led by Katrín Jakobsdóttir, leader of the Left Green party (Vinstri Grænir), with the Independence party (Sjálfstæðisflokkur) and the Progressives (Framsóknarflokkur), is now under pressure to consider means to limit foreign ownership. A working group has been gathering material and new law is promised this coming winter. One step in the right direction of focusing on concentrated ownership, not just foreign ownership, would be to reintroduce pre-emptive purchase rights of local councils, abolished in 2004.

Finding the proper criteria that drive rural development in the right direction will not be easy. But Icelanders are certainly waiting for that to happen – having stratospherically wealthy people, Icelandic or foreign, owning entire rivers and fjords on a scale not seen since the time of the feudal lords of the Icelandic sagas is not seen as positive rural development. When law is finally passed, it might be too late to prevent that to happen in the North East.

*This image is from a July 21 July 2018 article on Ratcliffe’s acquisitions in the Icelandic daily Morgunblaðið and shows ownerships of farms in Vopnafjörður (there are other farms in the neighbouring communities.)

Screenshot 2019-08-28 12.21.17

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Written by Sigrún Davídsdóttir

August 29th, 2019 at 2:59 pm

Posted in Uncategorised

Kaupthing Luxembourg and Banque Havilland – risk, fraud and favoured clients

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Banque Havilland has just celebrated its tenth anniversary: it is now ten years since David Rowland bought Kaupthing Luxembourg out of bankruptcy. A failed bank not only tainted by bankruptcy but severely compromised by stark warnings from the regulator, CSSF. Yet, neither the regulator nor the administrators nor later the new owner saw any reason but to keep the Kaupthing Luxembourg manager and key staff. In four criminal cases in Iceland involving Kaupthing the dirty deals were done in the bank’s Luxembourg subsidiary with back-dated documents. Two still-ongoing court cases, which Havilland is pursuing with fervour in Luxembourg, indicate threads between Kaupthing Luxembourg and Havilland, all under the nose of the CSSF.

“The journey started with a clear mission to restructure an existing bank and the ambition of the new shareholder to lay strong foundations, which an international private bank could be built on,” wrote Juho Hiltunen CEO of Banque Havilland on the occasion of Havilland’s 10th anniversary in June this year.

This cryptic description of the origin of Banque Havilland hides the fact that the ‘existing bank’ David Rowland bought was the subsidiary of Kaupthing Luxembourg, granted suspension of payment 9 October 2008, the same day that the mother-company, Kaupthing hf, defaulted in Iceland.

The last year of Kaupthing Luxembourg’s operations had been troubled by serious concerns at the Luxembourg regulator, Commission de Surveillance du Secteur Financier, CSSF, regarding the bank’s risk management and the management’s willingness to move risk from clients onto the bank.

Unperturbed by all of this, Rowland not only bought the bank but kept the key employees, including the bank’s Icelandic director, Magnús Guðmundsson, instrumental in selling Kaupthing Luxembourg to Rowland. Guðmundsson stayed in his job until 2010, when news broke in Iceland he was under investigation, later charged and found guilty in two criminal cases (two are still ongoing) in Iceland, where he has served several prison sentences. He was replaced by Jean-Francois Willems, another Kaupthing Luxembourg manager, CEO of Banque Havilland Group since 2017. Willems was followed by Peter Lang, also an earlier Kaupthing manager. Lang left that position when Banque Havilland was fined by the CSSF for breaches in money laundering procedures.

David Rowland’s reputation in his country of origin, Britain, was far from pristine ­– in Parliament, he has been called a ‘shady financier.’ However, all that seemed forgotten in 2010 when the media-shy tycoon was set to become treasurer of the Conservative Party, having donated in total £2.8m to the party in less than a year. As the British media revised on Rowland stories, Rowland realised he was too busy to take on the job and stepped out of the spotlight again.

In the Duchy of Luxembourg, Rowland was seen as fit and proper to own a bank. And the bank, CSSF had severely criticised, was seen as fit and proper to receive a state aid in the form of a loan of €320m in order to give the bank a second life.

Criminal investigations in Iceland showed that Kaupthing hf’s dirty deals were consistently carried out in Luxembourg. There were clearly plenty of skeletons in the Kaupthing Luxembourg that Rowland bought. Two still-ongoing legal cases connect Kaupthing and Havilland in an intriguing way.

In December 2018, the CSSF announced that Banque Havilland had been fined €4m and now had “restrictions on part of the international network” for lack of compliance regarding money laundering and terrorist financing, the regulator’s second heftiest fine of this sort. Eight days later the bank announced a new and stronger management team: a new CEO, Lars Rejding from HSBC. It was also said that there were five new members on the independent board but their names were not mentioned. An example of the bank’s rather sparse information policy.

KAUPTHING LUXEMBOURG: RISK, FRAUD AND FAVOURED CLIENTS

2007: CSSF spots serious lack of attention to risk in Kaupthing Luxembourg

On August 25 2008, the CSSF wrote to the Kaupthing Luxembourg management, following up on earlier exchanges. The letter shows that as early as in the summer of 2007, the CSSF was aware of the serious lack of attention to risk. The regulator’s next step, in late April 2008, was to ask for the bank’s credit report, based on the Q1 results, from the bank’s external auditor, KPMG. In the August 2008 letter, the CSSF identified six key issues where Kaupthing Luxembourg was at fault:

1 The CSSF deemed it unacceptable that Kaupthing Luxembourg financed the buying of Kaupthing shares “as this may represent an artificial creation of capital at group level.”

2 Analysing the bank’s loan portfolio, the CSSF concluded that the bank’s activity was more akin to investment banking than private banking as the bulk of credits were “indeed covered by highly concentrated portfolios (for example: (Robert) Tchenguiz, (Kevin) Stanford, (Jón Ásgeir) Johannesson, Grettir (holding company owned by Björgólfur Guðmundsson, Landsbanki’s largest shareholder, together whith his son, Björgólfur Thor Björgólfsson) etc.)” The CSSF saw this “as highly risky and we ask you to reduce it.” This could only continue in exceptional cases where the loans would have a clear maturity (as opposed to bullet loans that were rolled on).

3 Private banking loans should have diversified portfolio of quoted securities and be easy to liquidate, based on a formal written procedure as to how that should be done.

4 Personal guarantees from the parent company should be documented in the loan files so that the external auditor and the CSSF could verify how these exposures were collateralised in the parent bank.

5 As the CSSF had already pointed out in July 2007, the indirect concentration risk should not exceed 25% of the bank’s own funds. CSSF concluded that the bank was not complying with that requirement as the indirect risk concentration on Eimskipafélagið hf, owned by Björgólfur Guðmundsson, and on Kaupthing hf, the parent bank, was above this limit.

6 At last, CSSF stated that only quoted securities could be easily liquidated, meaning that securities illiquid in a stress scenario, could not be placed as collateral. CSSF emphasised that securities like Kaupthing hf, Exista hf and Bakkavor Group hf, could not be used as a collateral, exactly the securities that some of Kaupthing’s largest clients were most likely to place as collaterals.

It is worth keeping in mind that the regulator had been studying figures from Q1 2008; in August, when CSSF sent its letter, the Q2 figures were already available: the numbers had changed much for the worse. Unfazed, Kaupthing Luxembourg managers insisted in their answer 18 September 2008 that the regulator was wrong about essential things and they were doing their best to meet the CSSF concerns.

What the CSSF identified: the pattern of “favoured clients”

The CSSF had been crystal clear: after closely analysing the Kaupthing Luxembourg operation it did not like what it saw. Kaupthing’s way of banking, lending clients funds to buy the bank’s shares and absolving certain clients of risk and moving it onto the bank, was not to the CSSF’s liking. What the CSSF had indeed identified was a systematic pattern, explained in detail in the 2010 Icelandic SIC report.

This was the pattern of Kaupthing’s “favoured clients”: Kaupthing defined a certain group of wealthy and risk-willing clients particularly important for the bank. In addition to loans for the client’s own projects, there was an offer of extra loans to invest in Kaupthing shares, with nothing but the shares as collateral. In some cases, Kaupthing set up companies for the client for this purpose, or the bank would use companies, owned by the client, with little or no other assets. The loans were issued against Kaupthing shares, placed in the client’s company.

How this system would have evolved is impossible to say but over the few years this ran, these shareholding companies profited from Kaupthing’s handsome dividend. The loans were normally bullet loans, rolled on, where the client’s benefit was just to collect the dividend at no cost. In some cases, the dividend was partly used to pay off the loan but that was far from being the rule.

What the bank management gained from this “share parking,” was knowing where these shares were, i.e. that they would not be sold or shorted without the management’s knowledge. Kaupthing had to a large extent, directly and indirectly funded the shareholdings of the two largest shareholders, Exista and Ólafur Ólafsson. In addition to these large shareholders there were all the minor ones, funded by Kaupthing. It can be said that the Kaupthing management had de facto complete control over Kaupthing.

All the three largest Icelandic banks practiced the purchase of own shares against loans to a certain degree but only Kaupthing had sat this up as part of its loan offer to wealthy clients. In addition, Kaupthing had funded share purchase for many of its employees.* This activity effectively turned into a gigantic market manipulation machine in 2008, again especially in Kaupthing, as the share price fell but would no doubt have fallen steeper and more rapidly if Kaupthing had not orchestrated this share buying on an almost industrial scale.

The other main characteristic of Kaupthing’s service for the favoured clients was giving them loans with little or no collaterals. This also led to concentrated risk, as pointed out in para 2 and 3 in the CSSF’s letter from August 2008 and later in the SIC report. As one source said to Icelog, for the favoured clients, Kaupthing was like a money-printing machine.

Back-dated documents in Kaupthing

After the Icelandic Kaupthing failed, the Kaupthing Resolution Committee, ResCom, quickly discovered it had a particular problem to deal with. The ResCom had kept some key staff from the failed bank, thinking it would help to have people with intimate knowledge working on the resolution.

A December 23 2008 memorandum from the law firm Weil Gotschal & Manges, hired by the ResCom, pointed out an ensuing problem: lending to companies owned by Robert Tchenguiz, who for a while sat on the board of Exista, Kaupthing’s largest shareholder, had been highly irregular, according to the law firm. As the ResCom would later find out, this irregularity was by no means only related to Tchenguiz but part of the lending to favoured clients.

The law firm pointed out that some employees had been close to these clients or to their closest associates in the bank and advised that all electronic data and hard drives from Sigurður Einarsson, Hreiðar Már Sigurðsson and seven other key employees should be particularly taken care of. Also, it noted that two of those employees, working for the ResCom, should be sacked; it could not be deemed safe that they had access to the failed bank’s documents. The ResCom followed the advice but by then these employees had already had complete access to all material for almost three months.

Criminal cases against Kaupthing managers have exposed examples of back-dated documents, done after the bank failed. According to one such document, Hreiðar Már Sigurðsson was supposed to have signed a document in Reykjavík when he was indeed abroad (from the embezzlement case against HMS). There is also an example of September 2008 minutes of a Kaupthing board meeting being changed after the collapse of Kaupthing. No one has been charged specifically with falsifying documents, but these two examples are not the only examples of evident falsification.

The central role of Kaupthing Luxembourg in Kaupthing hf’s dirty deals

The fully documented stories behind the many dirty deals in Kaupthing first surfaced in April 2010 in the report by the Special Investigative Commission, SIC. Intriguingly, these deals were, almost without exception, executed in Luxembourg.

By the time the SIC published its report, the Icelandic regulator, FME, already had a fairly clear picture of what had been going on in the banks. The fraudulent activities in Kaupthing made that bank unique – and most of these activities involved fraudulent loans to the favoured clients. In January 2010, the Icelandic regulator, FME, sent a letter to the CSSF with the header “Dealings involving Kaupthing banki hf, Kaupthing Bank Luxembourg S.A., Marple Holding S.A., and Lindsor Holdings Corporation.”

Through the dealings of these two companies, Skúli Þorvaldsson profited over the last months before the bank’s collapse by around ISK8bn, at the time over €50m. These trades mainly related to Kaupthing bond trades: bonds were bought at a discount but then sold, even on the same day, at a higher price or a par. Þorvaldsson profited handsomely through these trades, which effectively tunnelled funds from Kaupthing Iceland to Þorvaldsson, via Kaupthing Luxembourg.

Þorvaldsson was already living in Luxembourg when Kaupthing set up its Luxembourg operations in the late 1990s. He quickly bonded with Magnús Guðmundsson; Icelog sources have compared their relationship to that of father and son. When the bank collapse, Þorvaldsson was Kaupthing Luxembourg’s largest individual borrower and, in September 2008, the bank’s eight largest shareholder, owning 3% of Kaupthing hf through one of his companies, Holt Investment Group. At the end of September 2008, Kaupthing’s exposure to Þorvaldsson amounted to €790m. The CSSF would have been fully familiar with the fact that Þorvaldsson’s entire shareholding was funded by Kaupthing loans.

In addition, the FME pointed out that four key Kaupthing Luxembourg employees, inter alia working on those trades, had traded in bonds, financed by Kaupthing loans, profiting personally by hundreds of thousands of euros. Intriguingly, these employees had not previously traded in Kaupthing bonds for their own account. Some of these trades took place days before Kaupthing defaulted, with the FME pointing out that in some cases the deals were back-dated.

The central role of Kaupthing Luxembourg in Kaupthing’s Icelandic criminal cases

Following the first investigations in Iceland, the Office of the Special Prosecutor, OSP, in Iceland, now the County Prosecutor, has in total brought charges in five cases against Kaupthing managers, who have been found guilty in multiple cases: the so-called al Thani case, and the Marple Holding case, connected to Skúli Þorvaldsson, who was charged in that case but found not guilty.

The third is the CLN case, the fourth case is the largest market manipulation ever brought in Iceland. The charges in the fifth case concern pure and simple embezzlement where Hreiðar Már Sigurðsson, at the time the CEO of Kaupthing Group, is charged with orchestrating Kaupthing loans to himself in summer of 2008 in order to sell Kaupthing shares so as to create fraudulent profit for himself. Three of the cases are still ongoing. The two cases, which have ended, the al Thani case and the market manipulation case resulted in heavy sentencing of Sigurðsson, Magnús Guðmundsson and Sigurður Einarsson, as well as other employees.

The first case brought was the al Thani case where Sigurðsson, Guðmundsson, Einarsson and Ólafsson were charged were misleading the market – they had all proclaimed that Sheikh Mohammed Bin Khalifa al Thani had bought shares in the bank without mentioning that the shares were bought with a loan from Kaupthing. The lending issued by the Kaupthing managers was ruled to be breach of fiduciary duty. The hidden deals in this saga were done in Kaupthing Luxembourg. Equally in the Marple case and the CLN case: the dirty deals, at the core of these cases, were done in Kaupthing Luxembourg.

Hreiðar Már Sigurðsson has been charged in all five cases; Magnús Guðmundsson in four cases and chairman of the board at the time Sigurður Einarsson in two cases. In addition, the bank’s second largest shareholder and one of Kaupthing’s largest borrowers Ólafur Ólafsson was charged and sentenced in the al Thani case.

What the CSSF has been investigating: Lindsor and the untold story of 6 October 2008

One of the few untold stories of the Icelandic banking collapse relates to Kaupthing. On 6 October 2008, the Icelandic Central Bank, CBI, issued a €500m loan to Kaupthing after the CBI governor Davíð Oddsson called the then PM Geir Haarde to get his blessing. This loan was not documented in the normal way: it is unclear where this figure of €500m came from, what its purpose was or how it was then used. As Oddsson nonchalantly confirmed on television the following day, the loan was announced by accident on the day it was issued. The loan was issued on the day the government passed the Emergency Act, in order to take over the banks and manage their default.

On the day that Kaupthing received the CBI loan, Kaupthing issued a loan of €171m to a BVI company, Lindsor Holdings Corporation, incorporated in July 2008 by Kaupthing, owned by Otris, a company owned by some of Kaupthing’s key managers. The largest transfer from Kaupthing October 6 was €225m in relation to Kaupthing Edge deposit holders, who were rapidly withdrawing funds. The second largest transfer was the Lindsor loan.

Having obtained the loan of €171m, Lindsor purchased bonds from Kaupthing entities and from Skúli Þorvaldsson, again via Marple, which seems to have profited by €67.5m from this loan alone. In its January 2010 letter to the CSSF, FME stated it “believes that the purpose of Lindsor was to create a “rubbish bin” that was used to dispose of all of the Kaupthing bonds still on the books of Kaupthing Luxembourg as the mother company, Kaupthing Iceland, was going bankrupt… Lindsor appears to FME to be a way to both reimburse favoured Kaupthing bondholders (Marple and Kaupthing Luxembourg employees) as well as remove losses from the balance sheet of Kaupthing Luxembourg. These losses were transferred to Lindsor, and entity wholly owned by Kaupthing Iceland,” at the time just about to go into default.

In addition, FME pointed out that most of the documents related to these Lindsor transactions had not been signed until December 2008 “but forged to appear as though they had been signed in September 2008. Employees in both Kaupthing Luxembourg and Kaupthing Iceland appear to have been complicit in this forgery.” – Yet another forgery story.

Intriguingly, when the OSP in Iceland decided to investigate Marple Holding, it already had a long-standing relationship with authorities in Luxembourg, having inter alia conducted multiple house searches in Luxembourg, first in 2010, with assistance from the Luxembourg authorities.

The purpose of the FME letter in January 2010 was not only to inform but to encourage the CSSF to open investigations into these trades. It took the CSSF allegedly some years until it started to investigate Lindsor. According to the Icelandic daily Morgunblaðið, the Prosecutor Office in Luxembourg now has the fully investigated case on his desk – the only thing missing is a decision if the case will be prosecuted or not.

Judging from evidence available on Lindsor in Iceland, there certainly seems a strong case to prosecute but the question remains if the investigation wins over the extreme lethargy in the Duchy of Luxembourg in investigating financial institutions.

AND SO, BANQUE HAVILLAND ROSE FROM KAUPTHING LUXEMBOURG’S COMPROMISED BOOKS

Enter the administrators

It is clear, that already in the summer of 2008, before Kaupthing Luxembourg collapsed together with the Icelandic mother company, Luxembourg authorities were fully aware that not everything in the Kaupthing Luxembourg operations had been in accordance with legal requirements and best practice.

On 9 October 2008, Kaupthing hf was put into administration in Iceland. On that same day, Kaupthing Luxembourg was granted suspension of payment for six months with the CSSF appointing administrators: Emmanuelle Caruel-Henniaux from PricewaterhouseCoopers, PWC, and the lawyer Franz Fayot. After Banque Havilland later came into being, PWC became the bank’s auditor. Its auditing fees in 2010 amounted to €422,000. In 2017, the fees had jumped to €1.3m.

Fayot was to play a visible role in the second coming of Kaupthing Luxembourg and has, as PWC, continued to do legal work for Banque Havilland. From 1997 to 2015 Fayot worked for the law firm Elvinger Hoss Prussen, EHP, another name to note; in 2015 Fayot joined the Luxembourg lawyer, Laurent Fisch, setting up FischFayot.

Contrary to the measures taken in Kaupthing Iceland, there was allegedly no visible attempt by the Kaupthing Luxembourg administrators to comparable scrutiny: Magnús Guðmundsson stayed with the bank and worked alongside the administrators with other Kaupthing employees. Their aim seems to have been to make sure that the bank, bursting with skeletons, would be sold on to someone with a certain understanding of Kaupthing’s business model.

The Kaupthing sale could only have happened with the understanding and goodwill of Luxembourg authorities: in spite of knowing of the severe issues and faulty management, the regulator seems to have left the administrators and Kaupthing staff to its own devices. Crucially, the state of Luxembourg was instrumental in giving the bank a second life, as Banque Havilland, by guaranteeing it a state aid of €320m.

JC Flowers, the Libyans and Blackfish Capital

Consequently, right from the beginning, everything was in place to enhance Kaupthing Luxembourg’s appeal for restructuring; the only thing missing was a new owner. The Luxembourg government had already outlined a rescue plan, drawing in the Belgian government, as Kaupthing Luxembourg had operated a subsidiary in Belgium where it marketed its high-interest accounts, Kaupthing Edge.

In a flurry of sales activity, the administrators contacted 40 likely buyers but the call for tender was open for everyone. The investment fund JC Flowers, which earlier had been involved with Kaupthing hf, had briefly shown interest in buying the Luxembourg subsidiary. But already by late 2008, Kaupthing Luxembourg seemed to be firmly on the path of being sold to the Libyan Investment Authority, LIA, the Libyan sovereign wealth fund, at the time firmly under the rule of the country’s leader Muammar Gaddafi.

The LIA certainly had the means to purchase the Luxembourg bank. In the end, however, two things proved an unsurmountable obstacle. The creditors rejected the Libyan plan 16 March 2009, possibly taking the reputational risk into account. And perhaps most importantly, given that the Luxembourg state wanted to enable the purchase with considerable funds, the Luxembourg authorities did in the end balk at the deal with the Libyans but only after months of negotiations.

Blackfish Capital and Jonathan Rowland’s “lieutenant”

In 2008, Michael Wright, a solicitor turned businessman, was working for Jonathan Rowland, son of David Rowland. In an ensuing court case, Wright described his role as being Jonathan’s “lieutenant” in spotting investment opportunities.

By 2013, Wright had fallen out with the Rowlands, later suing father and son in London where he lost his case in 2017. According to the judgement, Wright maintained that he had played a leading role in securing the purchase of Kaupthing Luxembourg for the Rowlands: after being introduced to Sigurður Einarsson or “Siggi” as he called him, already in late 2008, Wright brought the opportunity to purchase Kaupthing Luxembourg to the Rowlands.

The Rowlands admitted that Wright had been involved in “some discussions” with Einarsson and Kaupthing Bank representatives in early 2009 relating to “a proposed transaction concerning bonds,” which did not materialise but that the contact leading to the Rowlands acquiring Kaupthing Luxembourg came “subsequently.” The judge on the case noted that all three men were unreliable witnesses.

As late as March 2009, a deal with the LIA to purchase Kaupthing Luxembourg still seemed on track. According to Kaupthing hf Creditors’ report, updated in March 2009, the government of Luxembourg and a consortium led by the LIA had signed a memorandum of understanding with the aim of enabling Kaupthing Luxembourg to continue its operations. In order to facilitate the restoration, the governments of Luxembourg and Belgium had agreed to lend the bank €600m, enabling the bank to repay its 22,000 retail depositors.

From other sources, Icelog understands that the Rowlands were only contacted after it was clear that neither JC Flowers nor LIA would be buying Kaupthing Luxembourg. The person who contacted the Rowlands, according to Icelog sources, was indeed Magnús Guðmundsson, who had heard that father and son might be looking for a private bank to buy. By early June 2009, the Rowlands’ agreement with the administrators was in place.

Interestingly, there had apparently been some tentative interest from large Kaupthing shareholders – who nota bene had all bought Kaupthing shares with Kaupthing loans. The Guðmundsson brothers, Lýður and Ágúst, who owned Exista, Kaupthing’s largest shareholder, had allegedly been interested in joining David Rowland as minority shareholders but that did not happen. In an open letter to Hreiðar Már Sigurðsson and Magnús Guðmundsson, published in January 2019, Kevin Stanford, once close to the Kaupthing managers, claimed the two bankers did explore the possibility of buying Kaupthing together with the Guðmundsson brothers but the plan was abandoned.

Whatever the reality of these tentative plans, they show that the Kaupthing managers and the largest shareholders focused on keeping Kaupthing Luxembourg alive, caring less for other parts of the bank. That is intriguing, given the role of the Luxembourg subsidiary in Kaupthing’s dirty deals.

The €320m Luxembourg state aid for restructuring

From contemplating a loan of €600m, as the Kaupthing hf creditors had been led to believe, the final figure was a still generous €320m. Led by Luxembourg, with half of the funds provided by the Belgian government through an inter-state loan, the deal was finalised 10 June 2009. The sum of €320m was decided since €310m was deemed to cover the liquidity shortfall with €10m extra as a margin.

In December 2008, the Kaupthing Luxembourg shares had been moved to a new company, Luton Investments (now BH Holdings), set up by a BVI nominee company, Quebec Nominees Limited that Kaupthing Luxembourg had often used (and most likely owned).

Rowland took Luton Investments over in May 2009. On 10 July, Rowland increased its capital by the agreed amount of €50m, raising its capital to the agreed figure, according to the restructuring plan. Rowland also pledged to add further €25 to 75m in liquidity. The private banking activities and the deposits, at 13 March 2009 €275 to 325m, were taken over by Rowland’s Blackfish Capital, and registered as a new bank, Banque Havilland. Its starting balance was €1.3bn, €750 to 800m of which were existing commitments to the Luxembourg Central Bank, BCL.

Part of Rowland’s lot was also Kaupthing Luxembourg’s entire infrastructure, including headquarters and IT system. With Kaupthing’s staff of 100 employees, Banque Havilland had from the beginning funding, infrastructure and staff to ensure a smooth transition from the old Kaupthing Luxembourg to the new Banque Havilland.

On July 9 2009, the European Commission gave its approval of the state aid. It indicates that the Banque Havilland’s main source of income during its early years, was indeed the money coming from the Luxembourg state.

Pillar Securitisation

Banque Havilland’s €1.3bn starting balance was only around half of old Kaupthing Luxembourg’s balance sheet. The rest, €1.2bn, more or less the old bank’s lending operations, for which no buyer was found, was placed in a new company, Pillar Securitisation, in order to be sold over the coming years, to pay off the main creditors: the Luxembourg state, the Luxembourg deposit guarantee fund, AGDL, Luxembourg Deposit Guarantee Association (funded by retail banks), and Kaupthing Luxembourg’s inter-bank creditors.

Having received a banking licence, Banque Havilland came into being on July 10 2009: Luton Investments, the sole owner of Kaupthing Luxembourg, was split in two, Banque Havilland, the “living” bank and Pillar Securitisation, the “dead” bank. Crucially, Pillar was de facto not a separate unit: it had no staff but was run in-house by Banque Havilland, residing at the Banque Havilland address at 35A avenue J.F. Kennedy, formerly the premises of Kaupthing Luxembourg.

The proceeds of Pillar were vital for the recovery of creditors since asset sales of that company determine their recovery. The main creditors were the two governments that lent into the restructuring. The loan was divided into a super-senior tranche of €210m and a senior tranche of €110m, split in two to repay the two states, Luxembourg and Belgium. The same was for the AGDL, and the around €300m it covered as deposits were transferred: AGDL received bonds in return.

Having scrutinised the state loans to Kaupthing Luxembourg, the European Commission ruled that the loans amounted to state aid: after all, no commercial bank would have agreed to a non-interest loan to a bank during suspension of payment. These advantages were conferred to Blackfish Capital via the state-aided restructuring plan. However, the Commission was equally clear that this state aid was compatible with the Treaty, which does allow for a remedy caused by “serious disturbance in the economy of a Member State.”

Interestingly, the original plan was to wind Pillar down in just a few years; ten years later, that goal has still not been reached.

ROWLAND, THE BANK OWNER

What Rowland bought: CSSF’s concerns and Kaupthinking in practice

By buying a failed bank, Rowland showed he was not too bothered about reputational risk. By keeping the ex-manager of Kaupthing Luxembourg, Magnús Guðmundsson and his staff, he also showed that he was not worried about Kaupthing’s activities. True, much of that story was not public at the time. Rowland would however have heard of CSSF’s serious concern in summer of 2008, before the bank failed. Concern, related to risky loans to large shareholders and related parties, that would have leapt out of the books on due diligence.

Although the CSSF had been chasing Kaupthing for credit risk and over-exposure to large clients and shareholders, the regulator was apparently as unbothered as the administrators that the Kaupthing managers were in charge of the bank during its suspension of payment.

Not only did CSSF apparently not follow up on earlier worries but the Luxembourg state decided to facilitate the bank’s second life with loans, notably without making it a condition that the management should be changed.

In Banque Havilland’s 2010 annual accounts, COO Venetia Lean (Rowland’s daughter) and CFO Jean-Francois Willems stated in their introduction that the bank would focus on retaining clients who met “strategic requirements… Towards the end of the year the family started to introduce members of its network to the Bank and we are working on the development of co-investment products whereby clients have the opportunity to invest alongside the family.” This focus, on co-investing with the family, is no longer mentioned.

Rowland’s first foreign investments after Luxembourg: Belarus and Iceland

In November 2010, Banque Havilland embarked on its first foreign venture, in Belarus: ‘the first Belarusian foreign direct investment fund,’ apparently a short-lived joint-venture with the Russian Sberbank Group. The press release seems to have disappeared from the Havilland website.

From 2011 to 2015 Banque Havilland expanded both in Luxembourg and abroad, i.e. in Monaco, London, Moscow, Liechtenstein, Switzerland and Nassau, either by buying banks or opening offices. The expansion in Monaco, Liechtenstein and Switzerland were done inter alia by buying Banque Pasche in these three locations. In the London office it set up a partnership with 1858Ltd in order to add art consultancy to its services.

Rowland’s interest for Icelandic investments did not end with Kaupthing Luxembourg. Contrary to most other foreign investors at the time, Rowland did not seem unduly worried by capital controls in Iceland, in place since autumn 2008. In the spring of 2011, it transpired that he had bought just under 10% of shares in the Icelandic MP Bank, which he held through a family-owned company, Linley Limited, represented on the MP board by Michael Wright.

MP Bank was named after its founder Margeir Pétursson, a Grand Master in chess, who set it up in 1999. In 2005, Pétursson was interested in expanding abroad but rather than following Icelandic bankers to the neighbouring countries, he made use of his knowledge of Russian and bought Lviv Bank in Ukraine. MP Bank survived the banking collapse in 2008 but was struggling. By 2010, the bank was no longer under Pétursson’s control and he left the board. In early 2011 the bank was split in two, with Pétursson still running that part owning the bank’s foreign assets.

At the time Rowland bought shares in MP Bank the bank was being revived with new capital and new shareholders. Another new foreign shareholder, who bought a stake in MP, equal to Rowland’s, was the ex-Kaupthing client, Joe Lewis, who, with Kaupthing loan to buy shares in Kaupthing and scantily covered loans, fitted the characteristics of a favoured client.

Enic was a holding company Lewis co-owned with Daniel Levy through which they held their trophy asset, Tottenham Hotspur. Kaupthing Singer & Friedlander, KSF, Kaupthing’s UK subsidiary, had issued a loan of €121.9 million to Enic, with shares in the football club as collateral. Kaupthing deemed the club was worth €89m, which meant the loan was only party covered in addition to the collateral being highly illiquid. Yet, the rating of the collateral on Kaupthing books was ‘good’ as Kaupthing had “confidence in the informal support of the principals.” According to the loan book “Joe Lewis is reputedly extremely wealthy and a target for doing further business with.”

Kaupthing, Banque Havilland and Kvika

In 2009, the former KSF director Ármann Þorvaldsson published a book, Frozen Assets, about his Kaupthing life. In it, he tells, almost with palpable nostalgia, of sitting on Lewis’ yacht in June 2007, discussing further projects; Þorvaldsson was keen to build a stronger relationship with the man estimated to be one of the 20 richest people in the UK. What ties were being forged on the yacht is anyone’s guess.

Rowland was clearly as unworried about MP Bank’s reputation – at the time, involved in some court cases – as he had been about Kaupthing Luxembourg’s reputational risk. In 2014, MP Bank and Virðing, an Icelandic asset management company with numerous ex-Kaupthing employees, attempted to merge with MP Bank, giving rise to rumours in Iceland that a new Kaupthing was in the making. The merger floundered. In the summer of 2015, both Rowland and Lewis apparently sold their stakes to Straumur, another resurrected Icelandic investment bank. Yet, according to Linley Limited 2015 annual accounts, the MP Bank shares were written down that year and Rowland is no longer a shareholder in the bank.

After the Straumur purchase in 2015, MP Bank changed its name to Kvika. As Virðing and Kvika did indeed merge in 2017, the former director of KSF, Ármann Þorvaldsson became CEO of Kvika until he recently demoted himself by swapping places with Kvika’s deputy CEO Marínó Örn Tryggvason, another ex-Kaupthing employee, and moved to London in order to focus on Kvika London. The question is if Kaupthing’s former clients in London will be tempted to bank with Kvika. One of them has already stated to Icelog that he will not be switching to Kvika.

Out of the three largest Icelandic banks, that collapsed in October 2008, Kaupthing, or rather Kaupthing-related people, both managers and shareholders, seem to be the only ones who keep giving the idea that Kaupthing-connections are still alive and meaningful. These musings reverberate in the Icelandic media from time to time.

THE KAUPTHING SKELETONS IN BANQUE HAVILLAND

The Kaupthing – Banque Havilland link: Immo-Croissance

One link that connects old Kaupthing with Banque Havilland is the real estate company, Immo-Croissance, founded in 1988. By the time, Immo-Croissance attracted Icelandic attention, it owned two prime assets in Luxembourg, Villa Churchill and a building, set for demolition, on Boulevard Royal, where the land was the valuable asset. In 2008, Jón Ásgeir Jóhannesson, the Icelandic businessman of Baugur-fame and a long-time large borrower of Kaupthing and all other Icelandic banks, had set his eyes on Immo-Croissance.

Jóhannesson had hoovered up real estate companies here and there, most notably in Denmark, where he had been on a wild shopping spree, all merrily funded by the three Icelandic banks. Interestingly, he used Kaupthing Luxembourg for this transaction – Kaupthing put up a loan of €122m – although a consortium under Jóhannesson’s control had been the largest shareholder in Glitnir since spring 2007.

In November 2007, Immo-Croissance’s board reflected the Baugur ownership as Baugur-related directors took seat on the board, together with Kaupthing employee Jean-François Willems. Under Baugur-ownership, Immo-Croissance apparently went on a bit of a cruise through several Baugur-owned companies. In  June 2008, a Baugur Group company, BG Real Estate Europe, merged with Immo-Croissance, whereby magically the €122m loan to buy Immo-Croissance landed on Immo-Croissance own books.

But as with so many purchases by the Kaupthing’s favoured clients, Baugur’s purchase depended entirely on Kaupthing’s funding. By the end of September 2008, Baugur was in dire straits and Immo-Croissance was sold, or somehow passed on to SK Lux, a company belonging to the Kaupthing Luxembourg’s largest borrower, Skúli Þorvaldsson.

According to Icelog sources in Luxembourg, familiar with the Immo-Croissance deals in 2008, the SK Lux purchase of Immo-Croissance left all the risk with Kaupthing Luxembourg, a consistent pattern in deals financed by Kaupthing for the bank’s favoured clients.

The second and third life of Immo-Croissance

A key person in the Immo-Croissance saga, as in the origin of Banque Havilland, is the lawyer Franz Fayot, Kaupthing Luxembourg’s administrator until the bank was sold in summer of 2009. It was during his time as administrator of Kaupthing Luxembourg that Immo-Croissance was put up for sale, as SK Lux defaulted when the Kaupthing loan came to maturity at the end of October 2008.

At the time, Dexia was interested in buying Immo-Croissance. Its offer was a set-off against Kaupthing debt to Dexia, in addition to a cash payment. Kaupthing Luxembourg however preferred to sell to an Italian businessman Umberto Ronsisvalle and his company, R Capital. Guðmundsson arranged the deal for Ronsisvalle through Consolium, a Luxembourg company set up by an Icelandic company, later taken over by Guðmundsson and a few other ex-Kaupthing bankers. Consolioum went through name changes, with some of the bankers’ wives later taking over the ownership as the bankers got indicted or were at risk from being indicted in Iceland.

Ronsisvalle offered €5.5m. In addition, Immo-Croissance would get a loan from Kaupthing Luxembourg of €123m to refinance the earlier loan. This time however the loan was against proper guarantees, not like the earlier loan to the Icelandic Immo-Croissance owners, where no guarantees to speak of were in place.

By the end of January 2009, Umberto Ronsisvalle was in charge of Immo-Croissance but only for some months. By early summer 2009, the Kaupthing-related directors were again in charge, amongst them Jean-François Willems.

The unexpected turn of events took place in early 2009. Ronsisvalle paid the €5.5m but asked for some payment extension since he had problems in moving funds. He had understood that Kaupthing had agreed but hours after he provided the funds, Kaupthing changed its mind: it announced the loan was in default and moved to take a legal action to seize not only Immo-Croissance but also the collaterals, getting hold of €35m. The thrust of Kaupthing’s legal action was that Ronsisvalle had tried to take over Immo-Croissance without paying for it.

Early on, a judge refuted this Kaupthing allegation, pointing out that there was both the down-payment of €5.5m and the guarantees, contrary to earlier arrangements. Ronsisvalle’s side of event is that Kaupthing manipulated a default in order to get hold of the cash and the collaterals, in addition to keeping the assets in Immo-Croissance, a saga followed by the Luxembourg Land.

Havilland, Immo-Croissance and EHP

The lawyer for Kaupthing in the Immo-Croissance case was Pierre Elvinger from the legal firm Elvinger Hoss Prussen, EHP, where Franz Fayot worked prior to taking on the administration of Kaupthing. As the case has stretched over a decade now, Pillar Securitisation replaced the old Kaupthing Luxembourg in the Immo-Croissance chain of legal cases. Franz Fayot has been a lawyer for Havilland in these cases.

In 2013, the case had reached a point where a judge had ordered Pillar to hand back Immo-Croissance to Ronsisvalle, its legal owner according to the judge. The problem was that in the meantime, Pillar had sold the company’s two most valuable assets, Villa Churchill and the building on Boulevard Royal.

In an article in Land, in July 2013, it was pointed out that Villa Churchill was sold to a company owned by three partners at EHP. The Boulevard Royal asset was sold to Banque de Luxembourg, a private bank where one EHP partner was a member of the board. In both cases, questions were raised regarding the price and a friendly deal.

EHP complained about the reporting and its comment was published in Land: EHP pointed out that Fayot ceased to be administrator as Banque Havilland and Pillar Securitisation came in to being in July 2009, whereas the two assets were sold in 2010. Also, that the price had to be agreed on by Immo-Croissance owner, Pillar Securitisation, i.e. the Pillar creditors’ committee.

What the law firm does not mention is that Fayot has stayed in business relationship with Banque Havilland, inter alia as a lawyer for Banque Havilland, for example in the Immo-Croissance cases and in a case against a Kaupthing employee whom Havilland has kept in a legal battle for over a decade.

Court cases related to this action are still ongoing but Ronsisvalle has so far won at every stage and has regained control of the company after fighting in court for years. He is now involved in a legal battle with Banque Havilland and Pillar regarding the assets sold. Since Immo-Croissance was placed in Pillar Securitisation, the outcome could in the end spell losses for the creditors of Pillar, mainly the two governments that provided the state-aid, which made Kaupthing Luxembourg an attractive and largely risk-free purchase.

The ex-Kaupthing employee hounded by Banque Havilland

On 9 October 2008, the day of Kaupthing Luxembourg’s default, the bank’s risk manager resigned. In his opinion, the bank had paid far too little attention to his warnings on exposures to the large favoured clients, with equally little notice being taken to the CSSF’s warnings on the same issues. The attitude of the bank’s management seemed to be that it could not care less.

In his resignation letter, the risk manager referred to the CSSF August letter to the Kaupthing management. In spite of the warnings, Kaupthing had, according to the risk manager, not taken any measures to diminish the risk, thus probably aggravating the bank’s situation. And by doing nothing, the bank had cast shadow over the reputation of both the bank itself and its risk professionals.

In addition, the bank had not dedicated enough resources to its risk management, leaving it both lacking in personnel and IT solutions. This had also led to the standards of risk management, as expressed in the bank’s Handbook, being wholly unachievable. All of this had become much more pressing since the bank’s liquidity position had turned dramatically for the worse after 3 October 2008.

As he had resigned by putting forth a harsh criticism of the bank, effectively making himself an internal whistle-blower, he expected to be contacted by the CSSF. When that did not happen, he did contact the regulator. It turned out that the letter had not been passed on to the CSSF and no one there was particularly interested in meeting him. After pressing his point, the risk manager did get a meeting with the CSSF, which showed remarkable little enthusiasm for his message.

The CSSF, in August 2008 so critical of the Kaupthing Luxembourg management, now seemed wholly uninterested in the bank. That is rather remarkable, given that the state of Luxembourg had risked millions of euros to revive the bank, now run by the bankers that the CSSF had earlier criticised.

Baseless accusations of hacking and theft of documents

The risk manager heard nothing further from the CSSF nor from the administrators but strangely enough he got a letter from Magnús Guðmundsson, with the Kaupthing logo as if nothing had happened. He finally brought his case to Labour Court in Luxembourg both to assert that he had had the right to resign and to get a final salary settlement with Kaupthing Luxembourg.

Although the risk manager quit Kaupthing around nine months before Banque Havilland came into being, that bank counter-sued the risk manager for hacking, theft of documents and breach of banking secrecy. Interestingly these allegations were raised in 2010, after the risk manager had been called in as a witness by the UK Serious Fraud Office and the Icelandic OSP.

The hacking and theft allegations ended with a judgment in 2015, where the risk manager won the case. The judge found that the risk manager had obtained these documents as part of his duties and could legitimately hold them as evidence in the Labour Court case. This case had delayed the Labour Court case, which then could only be brought to court by the end of 2017, a still ongoing case.

Technically, the labour case was part of the liabilities that Banque Havilland took over and litigations take time. The remarkable thing is that Banque Havilland has pursued the case without any regard for the evidence of illegalities taking place in Kaupthing as well as not paying consideration to the fact that the CSSF had severely criticised Kaupthing’s management.

After all the risk manager had quit Kauthing as he felt he could no longer work with the management the CSSF had found to be failing. Using the courts to harass people is a common tactic, used to the fullest in this case. Havilland has pursued the case forcefully, which is why the case is still doing the rounds in the various courts of Luxembourg thus undermining the risk manager both financially and in terms of his professional reputation.

If a Banque Havilland employee has ever contemplated criticising the bank or in any way bringing up anything about the bank, this case shows how the Havilland owners might react. It is not certain that the attitude of Luxembourg authorities regarding whistle-blowers rhyme with European legislation.

Luxembourg, the rotten heart of financial Europe             

The ongoing legal wrangling with the risk manager and the Immo-Croissance are two stories that embody the strong and long-lived ties between Kaupthing Luxembourg and Banque Havilland. Both Franz Fayot and Pierre Elvinger from EHP, the company that still resides in Villa Churchill bought out of Immo-Croissance, have represented Banque Havilland in court.

Quite remarkably, the CSSF lost all interest in Kaupthing Luxembourg, after the bank failed. Instead, it chose to lend funds to its new owners, who had less than a stellar reputation. Owners, who kept the Kaupthing management, that had given rise to the CSSF’s earlier concerns.

In addition, after knowing full well what had gone on in Kaupthing Luxembourg and being fully informed about the criminal cases in Iceland, the Luxembourg Prosecutor, now seems to be dithering as to bringing a case related to Lindsor Holding, not to mention other cases that were never investigated.

This is the state of affairs in Luxembourg, still the rotten heart of financial Europe.

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Written by Sigrún Davídsdóttir

August 1st, 2019 at 11:31 am

Posted in Uncategorised

The still untold story of the Kaupthing loan

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Of the known unknowns of the Icelandic banking collapse in early October 2008, the most intriguing story is the €500m emergency loan issued to Kaupthing by the Icelandic Central Bank. In the early hours of 6 October 2008, the prime minister and other leading ministers had realised that the only thing to do was to put in place the Emergency Act, enabling the authorities to take over the banks. Yet, on that same day, the CBI shovelled 500m from the fast depleting foreign currency reserve into Kaupthing although the governor of the CBI at the time did not believe Kaupthing would ever be able to repay the loan. The CBI has now published a much delayed report on the loan: it leaves all the fundamental questions unanswered and adds one question to the sorry saga: is it ever a good idea to let an organisation investigate itself?

“What are we doing? We are deciding we’re not paying the debt of spendthrifts… We are not going to pay other people’s debts. We are not going to pay debt of the banks that have been somewhat reckless.’ This is how the then governor of the Central Bank, Davíð Oddsson, explained in an interview 7 October 2008 the drastic measures Icelandic authorities had taken with the Emergency Act the day before.

The governor was also asked about a certain loan to Kaupthing. He explained that the information had been made public by mistake the previous day; a so-called bridge loan amounting to €500m to be repaid in a few days. In the unlikely circumstances that the bank would default on the loan, the CBI had a good collateral, the Danish FIH Bank, a Kaupthing subsidiary.

The day before appearing on television, the governor had described this loan rather differently. In a telephone conversation with then prime minster Geir Haarde, Oddsson sought the agreement of the prime minister for the loan, which they had apparently discussed earlier.

Intriguingly, Oddsson made the call not from his office but the office of another employee, where Oddsson knew the call could be recorded. That recording remained a mystery for years as the CBI refused to release it, claiming it contained sensitive information. In November 2011, Morgunblaðið, where the editor is a certain Davíð Oddsson, published a transcript of the call. Haarde expressed his annoyance but no measures were taken against the paper for the publication of material it could not explain how it had obtained.

In the phone call 6 October 2008, Oddsson emphasised that the loan was risky and would most likely be of some relief for Kaupthing for only four or five days, adding: “I don’t expect we will get this money back. They say they will repay us in four or five days but I think that’s untrue or let’s say wishful thinking.”

That inkling proved to be correct – less than 48 hours after receiving the loan, Kaupthing was in default. Neither Oddsson nor Haarde have ever explained why the loan was issued.

Now a report (only in Icelandic) on the loan saga, published by the CBI 27 May shows that there is no documentation to be found at the CBI on the loan: nothing that explains why the loan was issued, what it was intended for nor properly how Kaupthing made use of it. Worse is, that the new report fails standards set in other reports, most recently a report on how Kaupthing was bought in 2003 on false premises. The obvious question is: was it ever justified that the CBI would write a report on its own deeds?

The unannounced report and its unclear goal

In the new report, CBI governor Már Guðmundsson says in his preface that the work on the report started four years ago. As far as I can see, there is no press release on the CBI website to announce that the CBI is now embarking clarifying its €500m loan to Kaupthing nor has this ever been mentioned in the bank’s annual reports.

When I checked my emails, I can see that I first heard about the report in late 2016: I wrote to the bank’s spokesman in November 2016 asking him about the report I had then just heard Guðmundsson mention in the media, also when it could be expected. The answer was that the bank was waiting for the final results of the sale of the FIH. I mentioned that the sale, which was obviously going to incur losses for the bank, was the result of the loan – the interesting bit was why the loan was issued.

Over the years, my inquiries into the report-in-making have usually been answered by pointing out that the final result of the FIH sale – which happened in 2010 – was still due.

In his preface, governor Guðmundsson writes that since the collapse, the bank has been focused on the present and the future, rather than the past. Also, that the FIH sale had been a complicated issue and those working on it had been very busy doing other things. I have to say that I find it beneath the dignity of the bank to explain the long conception time by saying that CBI employees have been busy. It just gives the sense that this report was far from any priority at the CBI.

From the preface, it is clear that to begin with the report was meant to focus on the loss-incurring FIH sale. Only after receiving a query from prime minister Katrín Jakobsdóttir as late as November 2018 on how Kaupthing made use of the loan, i.e. where the funds flowed, the bank had set about to make inquiries to clarify this issue.

This indicates that there was no proper plan to begin with but to focus on the FIH sale, not on the real issue: why did the CBI lend Kaupthing €500m when the governor was clear the loan was a risk and would not be repaid?

No paper trail, no documentation at the CBI

As pointed out in the CBI report there is indeed no paper trail of the loan, no documentation, nothing, at the bank. The report emphasises that everything regarding the loan seems to have been planned outside the bank. Therefore, the report has nothing to add on why the loan was issued, why the loan figure was €500m, what it was intended to do etc.

There have been indications earlier, that the documentation regarding the loan, the collateral, interest rates etc. was only made some days after the loan was issued, i.e. that the loan document was back-dated. Again, this is not mentioned in the CBI report and what exactly is on paper is not clear. It is however clear that there is no paper trail as to how the loan came into being, i.e. there is a lacuna at the bank regarding this loan, which the governor at the time suspected, so as not to say knew, would not be repaid.

The report states that decisions regarding the Kaupthing loan were taken outside of the bank, explaining the lack of documentation at the bank. However, it does not make it entirely clear if ever there was a documentation, which then has disappeared or if there really never were any documents at all in the bank.

Since the lacuna must have been clear from early on, the CBI knew from early on that by only focusing on documents in the bank, nothing much would come out of its investigation. Why it did not try to turn to other sources, such as the FME, which took a back-up of all the banks right after they failed or the Kaupthing estate, indicates that publishing a report with nothing in it, did not feel too disturbing.

Where did the loan end up?

Already in earlier criminal cases against Kaupthing managers, notably the CLN case, evidence emerged as to how some of the €500m were used, or rather how funds were allocated on 6 October 2008 as the collapse of Kaupthing was imminent. There has however not been any comprehensive overview of transactions in Kaupthing these days, i.e. how did Kaupthing allocate funds from 6 October 2008, when the loan was issued.

Interestingly, we know that as the bank was stumbling to default, the Kaupthing managers had their eyes on making payments to fulfil the bank’s obligations in the CLN transactions, in total €50m. Also, Kaupthing issued a loan to a company called Lindsor Holding Corporation, a total of €171m. Lindsor was owned by some Kaupthing employees and amongst other things used to buy bonds from Skúli Þorvaldsson, an Icelandic businessman living in Luxembourg, with strong ties to Kaupthing. This diminished Þorvaldsson’s losses but increased Kaupthing’s losses.

Lindsor is the only Icelandic entity being investigated by Luxembourg authorities. Over two years ago it seemed that criminal charges might soon be brought in that case but since then, total silence. Yet another example of the extreme lethargy in the Duchy when it comes to investigating banks (see here blogs related to Lindsor).

The CBI report mentions these two loans but in its overview of outgoings it does not list the Lindsor loan, only the CLN transactions. This, in addition to the single highest payment €225m to deposit holders in Kaupthing Edge, €170m to Nordic central banks, €42m REPO payments to two European banks, €203m in foreign currency transactions – and then, the only novelty in the CBI report: 400-500 “small transactions” according to the CBI report, i.e. lower than €10m, in total €114,5m.

It is not clear why the Lindsor loan is mentioned but not added to the list. Also, there is no further information regarding the “small transactions” – who were the beneficiaries, individuals or companies, who owned the companies, how many transactions at around €8 to €10m etc.?

A bank is rarely a good collateral

In his preface, governor Már Guðmundsson concludes that in hindsight, the lending was miscalculated. However, the lending was not miscalculated only in hindsight: the governor at the time did not believe the loan would ever be repaid.

Governor Guðmundsson also claims that one lesson from the Kaupthing loan saga is that shares in a foreign bank do not constitute a good collateral. In my opinion, this is too limited a lesson: a bank, domestic or foreign, is not a good collateral.

In evaluating collateral, not only its monetary value is of importance but also how quickly and easily it can be sold. A bank makes a bad collateral as it can hardly ever be a quick sale and it is also costly to sell. For good reasons, central banks do not normally accept a bank as a collateral; they prefer assets that can be sold easily and quickly at not too high a cost.

I have not scrutinised that part of the report, which deals with the loss-incurring sale of the FIH bank as I have very little insight into that story. The sale itself turned into quite a saga in Denmark, covered by the Danish media.

Poorly planned and sloppily executed work

To my mind, it is beneath the dignity of the bank to publish this report as so much is lacking. The long time it took to write it cannot be excused by CBI employees being busy; it just shows that writing the report was never a priority.

If the CBI concluded it did not have the authority to ask for further information, it should have turned to the Prime Minister Office to suggest the report should be written by someone with the proper authority to do so. Indeed, it is a fundamental question why the CBI was allowed to handle this investigation, an untrustworthy move from the beginning.

Almost eleven years after the banking collapse in early October 2008, one key story of these days is still untold. The CBI is clearly uninterested in the story. The question is if the political powers in Iceland are equally uninterested.

*I have long been interested in this loan, see here a blog from 2013 on the CBI loan to Kaupthing.

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Written by Sigrún Davídsdóttir

June 13th, 2019 at 4:11 pm

Posted in Uncategorised

Landsbanki Luxembourg equity release loans – again in Paris Court

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In August 2017, French prosecutors lost their criminal case against ex Landsbanki chairman of the board Björgólfur Guðmundsson* and eight former employees of Landsbanki Luxembourg. These nine were charged in relation to the bank’s equity release loans. The prosecution won an appeal and the case is now in court again at Palais de Justice, expected to run into June.

Over the last few decades, equity release loans have wrecked havoc for borrowers in many countries. Like FX loans (see Icelog here), they have been a wandering financial curse. When circumstances change, bankers claim they could not have known – a hollow claim given the history of these loans.

The Landsbanki equity release lending saga has now been running for over a decade, closely followed on Icelog for the last few years (an overview here; link to earlier coverage here). This is a saga in three chapters:

1 The Landsbanki Luxembourg lending – how the loans were sold (an interesting aspect, given that banks all over Europe have lost FX lending cases due to EU consumer directives); the (unrealistically high?) evaluation of the properties used as collaterals; was there ever a viable plan in place in the bank to properly invest that part of the loan that was suppose to pay for the payout part; how credible and trustworthy was the bank’s information to customers? Given that Landsbanki was in dire straits when it started selling these loans it is also of interest what the bank’s purpose was with the loans: just another financial product or a product to save the bank? – This chapter is part of the criminal case in Paris.

2 The administration of Landsbanki Luxembourg has raised many and serious questions that Luxembourg authorities have so far been utterly unwilling to consider. The administrator, Yvette Hamilius, accuses the borrowers of simply trying to avoid paying. In 2012, the Luxembourg prosecutor Robert Biever issued a statement in her favour, without ever having investigated the case; an interesting if scary example of how the justice operates in the Duchy that depends on banking for its good life. – However, as earlier recounted on Icelog, the borrowers have a very different story to tell, of misleading and conflicting information on their loans and then an unwillingness on behalf of the administrator to engage with them and answer their questions. – Interestingly, Landsbanki Luxembourg has recently been losing in civil cases in Spain where equity release borrowers have brought the estate to court, mainly on the ground of consumer protection (see ERVA for various moves in Spain).

3 The sole creditor to Landsbanki Luxembourg is LBI., the estate of the failed Landsbanki Iceland. LBI has no direct control over Landsbanki Luxembourg but as seen from its webpage, it follows the case closely. The assets in Luxembourg are now the only assets left for LBI to distribute to its creditors. The question is if the administrator’s hard line against the borrowers, with the accruing legal cost and the clock ticking in eternity, really is in the interest of Landsbanki Luxembourg’s sole creditor.

This time there is a formidable presence on the borrowers’ legal team. Originally Norwegian, Eva Joly studied law in France. She was appointed an investigative judge in the early 1990s, famous for taking on the great and the not so good in major corruption case, where dozens of people, who never expected to see the inside of a prison cell, ended up just there. Joly, an MEP since 2006, cooperates with her daughter, Caroline, also a lawyer.

It remains to be seen how things progress this time in the Paris court room at the grandiose Palais de Justice.

*Together with his son Thor Björgólfsson, Björgólfur Guðmundsson was the largest shareholder of Landsbanki; father and son owned just over 40% of the bank but in reality, controlled over 50% of the bank since ca. 10% of the bank’s shares were in several offshore companies, controlled by the bank itself. This is one the many things exposed by the 2010 report by the Icelandic Special Investigative Commission. Guðmundsson was declared bankrupt following the banking collapse, his son is still one of the wealthiest people on this planet.

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Written by Sigrún Davídsdóttir

May 21st, 2019 at 11:14 am

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The ELSTAT case in Greece exposes the weak rule of law

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Yes, the case against former head of ELSTAT Andreas Georgiou is still on-going in Greek courts. In spite of international concern for rule of law in Greece, Greek authorities continue the persecution of Georgiou, now in its 8th year. The latest turn beggars belief: the former vice president of ELSTAT, Nikos Logothetis was found to have hacked Georgiou’s emails for months in 2010 after which the Greek police confiscated two computers and a hard drive from Logothetis. Logothetis was charged with hacking but, on account of ‘technical reasons’ he was never tried! Now, following his recent request, Logothetis has been given back his previously confiscated assets, with Georgiou’s emails still in them. In the meantime, there is no mercy for the man who, together with his team at ELSTAT, oversaw the final corrections of Greek statistics and changed the working practice at ELSTAT in order to re-establish trust in Greek statistics.

As the Greek economy started to deteriorate in 2009, it was discovered that since before 2000, Greek national statistics concerning the economy had been falsified. During the winter of 2009 to 2010, work was done in order to find the correct data. Part of that process was hiring a new director of ELSTAT, the Greek national statistics office.

The new director was Andreas Georgiou, who had previously worked at the IMF in Washington. When Georgiou started in his new job at the beginning of August 2010, the relevant statistics had mostly been corrected. Georgiou and his team put the last corrections in place and introduced the necessary and recognised statistical methods, in order to safeguard the correct procedures and consequently the correct statistics.

Data does not falsify itself

Since data does not falsify itself, it would have been expected that Greek authorities would have opened an investigation into the falsification, which, as mentioned above, took place for over a decade.

But no, that was never done – no investigation, no stones turned.

Instead, only a year after Andreas Georgiou took over at ELSTAT, he and some from his team found themselves investigated and prosecuted, in several still on-going cases. Although parts have been thrown out repeatedly, the cases have been re-instated, again and again, in a process that shows clearly that Greek courts and Greek judicial authorities do not abide by the sort of justice principles considered the fundament of rule of law. Georgiou served his full term as director, from 2010 to 2015.

Kathimerini: the prosecutions of Georgiou equal witch hunt

Greek media, such as the newspaper Kathimerini, has earlier called the prosecutions against Georgiou a witch-hunt, and connected it to the dark forces around Kostas Karamanlis.

The latest turn in the ELSTAT saga – a worrying sign of the state of the Greek judicial system – is yet another unbelievable chain of events: Nikos Logothetis was found to have hacked and stolen emails from Georgiou from the time Georgiou became the director of ELSTAT and for the following months, until Logothetis was literally caught in the act when the Greek police paid him a visit at his home.

As a consequence of the hacking, Logothetis was dismissed as the vice president of ELSTAT and charged in 2011 with the hacking. However, although material from Georgiou was found on Logothetis’ computers, the charges were finally dropped in 2017 for “technical reasons.” Thus, Logothetis was charged but never tried for hacking Georgiou’s email.

The last turn in this story is this: Logothetis asked to have his two confiscated computers and a hard drive returned. His request was duly met: not only did he get his machinery back – it was not wiped clean but still contains Georgiou’s emails.

Slander case – yet another example of how dismissed cases pop up again

Further, On May 23, 2019 the Athens Appeals Court is slated to try Andreas Georgiou’s appeal of his October 2017 civil conviction for simple slander, for which he will have to pay monetary damages and make a ‘public apology’ by publishing parts of the decision to convict him in Kathimerini. In Greek law, “simple slander” means making statements that are not false but nevertheless damage the plaintiff’s reputation.

In this case, the plaintiff is Nickolas Stroblos, who was head of the National Accounts Division of the Greek statistics office from 2006 to 2010. In 2014, Stroblos objected to a 2014 press release by Georgiou where Georgiou defended the statistics produced during his time in office, noting they had always been validated by Eurostat contrary to earlier; yet, the period when fraudulent statistics, as deemed by Eurostat, were produced was not being investigated.

This fact, that Georgiou, who corrected the statistics is being investigated and not those who were responsible for the fraudulent statistics, has also been pointed out by the EU’s European Statistical Governance Board.

This is what Georgiou was stating in the 2014 press release where he was defending himself against baseless and slanderous public accusations, made inter alia by Stroblos. It should be noted in 2016, Georgiou was convicted of parallel criminal slander complaint, made by Stroblos, in criminal court but that conviction was annulled by the Greek Supreme Court on account of legal errors and irregularities in the convicting decision.

International concern, yet no change of heart in Greece

Both Eurostat and international associations of statisticians have voiced their concern. As Georgiou said when he addressed the Financial Assistance Working Group of the Economic and Monetary Affairs Committee at the European Parliament a year ago, the fact that these prosecutions have continued for seven years in Greece seriously undermines Greek and ultimately European statistics. This has long ceased to be only a Greek affair – it is a serious threat to European institutions.

In his talk Georgiou pointed out that the incentives created in Greece “are poisonous. Would the responsibility for allowing such incentives to arise burden only the Greek State or also EU institutions and other EU stakeholders that are willing to live for years with this situation, which gives rise to these incentives?”

Further, Georgiou underlined that Greece will not leave its troubles behind and prosper until “there is a firm commitment to credible official statistics. And this commitment will not be there—irrespective of anything that may be declared or signed—as long as the relentless prosecution of statisticians who followed European statistical law and statistical principles continues.”

Icelog has over the years on various occasions covered the ELSTAT case. See here a link to previous blogs on the case.

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Written by Sigrún Davídsdóttir

May 16th, 2019 at 11:49 pm

Posted in Uncategorised