Sigrún Davíðsdóttir's Icelog

The Russian Icelandic connections keep stimulating the fantasy. In a recent Bloomberg article Timothy L. O’Brien calls on special counsel Robert Mueller to “check out Iceland.” The facts are indeed elusive but Mueller and his team should be in an ace position to discover whatever there is to discover, via FL Group. If there is no story untold re Russia and Iceland, the unwillingness of the British government to challenge Russian interests is another intriguing Russia-related topic to explore.

“Iceland, Russia and Bayrock – some facts, less fiction” was my recent contribution to the fast growing compendium of articles on potential or alleged connections between nefarious Russian forces and Iceland. The recent Bloomberg article by Timothy L. O’Brien adds nothing new to the topic in terms of tangible facts.

The Russian oligarch Boris Berezovsky was one of those who early on aired the potential connection. Already in 2009, in a Sky interview that O’Brien mentions, Berezovsky made sweeping comments but gave no concrete evidence, as can be heard here in the seven minutes long interview.

What however Berezovsky says regarding London, the dirty money pouring into London is correct. That flow has been going on for a long time and will no doubt continue: it doesn’t seem to matter who is in power in Britain, the door to Russian money and dirty inflow in general is always open, serviced by the big banks and the enablers, such as accountants and lawyers, operating in London.

What Berezovsky really said

Asked how Putin and the oligarchs operated, Berezovsky said they bought assets all over the world but also took on a lot of debt. “They took a lot of credit from the banks and so they were not able to pay that back. And the best example is definitely Iceland. And you remember when lets say three months ago Russian government declared that they would help Iceland. And Russia is so strong that they’re able to help even a member of Nato. And their trick is very simple because Russian let’s say top level bureaucrats like Putin, like others and oligarchs together they created system how to operate on the West. How to use this fantastic money to buy assets and so and so. They found this very clever solution. They took a country and bought the country, which is member of Nato, which is not a member of EU. It means that regulation is different. They put a lot of money, dirty money in general, yeah.”

When asked further if Russians were buying high-end property in London with dirty money Berezovsky said this was indeed the case, all done to gain power: “The example which I gave you. As far as Iceland is concerned just confirmed realistically that Putin and his cronies made absolutely dirty money and tried to invest their money all over the world including Britain.”

This is very much Berezovsky but hardly a clear exposé. Exactly what the connection was, through the banks or the country as a whole isn’t clear. Sadly, Berezovsky died in 2013, under what some see as mysterious circumstances, others consider it a suicide. Incidentally, Berezovsky’s death is one of fourteen deaths in the UK involving Russians, enablers to Russian oligarchs or others with some Russian ties, recently investigated in four articles by Buzzfeed.

The funding of the Icelandic banks – yet again

In his Bloomberg article O’Brien visits the topic of the funding of the Icelandic banks. As I mentioned in my previous Russia blog, the rumours regarding the Russian Icelandic connections and the funding of the Icelandic banks were put to rest with the report of the Special Investigative Commission, SIC. The report analysed the funding the banks sought on international markets, from big banks that then turned into creditors when the banks failed.

O’Brien’s quotes Eva Joly the French investigative judge, now an MEP, who advised Icelandic authorities when they were taking the first steps towards investigating the operations of the then failed banks. Joly says that the Russian question should be asked. “There was a huge amount of money that came into these banks that wasn’t entirely explained by central bank lending,” Joly is quoted as saying, adding “Only Mafia-like groups fill a gap like that.”

I’m not sure where the misunderstanding crept in but of course the Icelandic central bank was not funding the Icelandic banks. As the SIC report clearly showed, the Icelandic banks, as most other banks, sought and found easy funding by issuing bonds abroad at the time when markets were flooded by cheap money. Prosecutor Ólafur Hauksson, who has been in charge of the nine-year banking investigations in Iceland, says to O’Brien that he and his team have not seen any evidence of money laundering but adds that the Icelandic investigations have not focused on international money flows via the banks.

As I pointed out in my earlier Russia blog, the Jody Kriss evidence, from court documents in his proceedings against Bayrock, the company connected to president Donald Trump, is again inconclusive. Something that Kriss himself points out; Kriss is quoting rumours and has nothing more to add to them.

Why and how would money have been laundered through Icelandic banks?

The main purpose of money laundering is to provide illicit money with licit origin. Money laundering in big banks like HSBC, Deutsche Bank and Wachovia is well documented and in general, patterns of money laundering are well established. The Russian Icelandic story will not be any better by repeating the scanty indications. We could turn the story around and ask: if the banks were really used by Russians or any other organized crime how would they have done it?

One pattern is so-called back-to-back loans, i.e. illicit money is deposited in a bank (which then ignores “know your customer” regulation) but taken out as a loan issued by that bank. That gives these funds a legitimate origin; they are now a loan. As far as I understand, there are no sign of this pattern in any of the Icelandic banks.

When Wachovia laundered money for Mexican drug lords cash was deposited with forex exchanges, doing business with Wachovia. The bank brought the funds to Wachovia branches in the US, either via wire transfers, travellers’ cheques or as part of the bank’s cash-moving operations. When the funds were then made available to the drug lords again in Mexico, it seemed as if the money was coming from the US, enough to give the illegitimate funds a legitimate sheen. Nothing like these operations was part of what the Icelandic banks were doing.

Money laundering outside the banks?

There might of course have been other ways of laundering money but again the question is from where to where. As I mentioned in my Russia blog, FL Group, the company connected to the Bayrock story, was short-lived but attracted and lost a spectacular amount of money. As did other Icelandic companies, which have since failed: there could be potential patterns of money laundering there though again there are no Russians in sight (except for Bayrock) – or simply examples of disastrously bad management.

Russians, or anyone else, certainly would not need Icelandic banks to move funds for example into the UK – the big banks were willing to and able to do it, as can be seen from the oligarchs and others with shady funds buying property in London. It was eye-opening to join one of the London tours organised by Kleptocracy Tours and see the various spectacular properties owned by Russian oligarchs here in London.

The Magnitsky Act was introduced in the US in 2012 but is only finding its way into UK law this year in the Criminal Finances Bill, meant to enable asset freezing and denying visa to foreign officials known to be corrupt and having violated human rights.

The Icelandic banks – the most investigated banks

There were indeed real connections to Russians in the Icelandic banks as I listed in my previous Russia blog. In addition, Kaupthing financed the super yacht Serene for Yuri Shefler with a loan of €79.5m according to a leaked overview of Kauthing lending, from September 2008. These customers were among Kaupthing non-Russian high-flying London customers, mostly clients in Kaupthing Luxembourg, such as Alshair Fiyaz, Simon Halabi, Mike Ashley and Robert and Vincent Tchenguiz.

None of the tangible evidence corroborates the story of the Icelandic banks being some gigantic Russian money laundering machine. That said, I have heard from investigators who claim they are about to unearth more material.

In the meantime we should not forget that Iceland has diligently been prosecuting bankers for financial assistance, breach of fiduciary duty and market manipulation – almost thirty bankers and others close to the banks have been sentenced to prison. Now that 2008 investigations are drawing to a close in Iceland, four Barclays bankers are facing charges in London, the first SFO case related to events in 2008, in a case very similar to one of the Icelandic cases, as I have pointed out earlier.

Exactly because the Icelandic banks have been so thoroughly investigated and so much is known about them, their clients etc., it is difficult to imagine there are humongous stories there waiting to be told. But perhaps Robert Mueller and his team will surprise us.

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Prosecuting big banks and senior bankers is hard for many reasons: they hire big name lawyers that fight tooth and nail, with delays, deviations and imaginable and unimaginable obstructions of all sorts. PR firms are hired to deviate and create smoke and mirrors. And some journalists seem easily to identify with the pillars of financial society, even talking about “victimless crime.” All of this springs to mind regarding the SFO charges against John Varley former CEO of Barclays and three senior managers – where an Icelandic parallel can possibly throw some light on the few facts in the case of Varley e.al.

In the summer of 2008, as liquidity was tight for many banks, two high-flying banks in the London business community, Barclays and Kaupthing, were struggling. Both sought salvation from Qatari investors. Not the same investors though the name al Thani, a ruling clan in the dessert state of Qatar, figures in both investment stories.

In 2012 as the Icelandic Office of the Special Prosecutor, OSP, brought charges against three Kaupthing managers and the bank’s second largest investor Ólafur Ólafsson, related to Qatari investment in Kaupthing in September 2008, the British Serious Fraud Office, SFO, was just about to start an investigation into the 2008 Qatari investment in Barclays.

In 2015 the four Icelanders were sentenced to 4 to 5 1/2 years in prison for fraudulent lending and market manipulation (see my overview here). SFO is now bringing ex CEO John Varley and three senior Barclays bankers to court on July 3 on the basis of similar charges. As the first UK bankers are charged for actions during the 2008 crisis such investigations are coming to a close in Iceland where almost 30 bankers and others have been sentenced since 2011 in crisis-related cases.

The Kaupthing charges in 2012 filled fourteen pages, explaining the alleged criminal deeds. That is sadly not the case with the SFO Barclays charges: only the alleged offences are made public. Given the similarities of the two cases it is however tempting to use the Icelandic case to throw some light on the British case.

SFO is scarred after earlier mishaps. But is the SFO investigation perhaps just a complete misunderstanding and a “victimless crime” as BBC business editor Simon Jack alleges? That is certainly what the charged bankers would like us to believe but in cases of financial assistance and market manipulation, everyone acting in the financial market is the victim.

These crimes wholly undermine the level playing field regulators strive to create. Do we want to live in a society where it is acceptable to commit a crime if it saves a certain amount of taxpayers’ money but ends up destroying the market supposedly a foundation of our economy?

The Barclays and Kaupthing charges – basically the same

When the Icelandic state prosecutor brings charges the underlying writ can be made public three days later. The writ carefully explains the alleged criminal deeds, quoting evidence that underpins the charges. Thus, Icelanders knew from 2012 the underlying deeds in the Icelandic case, called the al Thani case after the investor Sheikh Mohammed bin Khalifa al Thani who was not charged.

As to the SFO charges in the Barclays case we only know this:

Conspiracy to commit fraud by false representation in relation to the June 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977 – Barclays Plc, John Varley, Roger Jenkins, Thomas Kalaris and Richard Boath.

Conspiracy to commit fraud by false representation in relation to the October 2008 capital raising, contrary to s1 and s2 of the Fraud Act 2006 and s1(1) of the Criminal Law Act 1977 – Barclays Plc, John Varley and Roger Jenkins.

Unlawful financial assistance contrary to s151 of the Companies Act 1985 – Barclays Plc, John Varley and Roger Jenkins.

The Gulf investors named in 2008 were Sheikh Hamad bin Jassim bin Jabr al Thani, Qatar’s prime minister at the time and Sheikh Mansour bin Zayed al-Nahyan of Abu Dhabi. The side deals the bankers are charged for relate to the Qatari part of the investment, i.e. Barclays capital raising arrangements with Qatar Holding LLC, part of Qatar’s sovereign wealth fund and al Thani’s investment vehicle Challenger Universal Ltd and $3bn loan issued by Barclays to the State of Qatar, acting through the Ministry of Economy and Finance in November 2008.

Viewing the Barclays side deals via the Kaupthing case

The Barclays saga is allegedly that apart from the Qatari investments in Barclays in June and October 2008, in total £6.1bn, there were two side deals, allegedly financial assistance: Barclays promised to pay £322m to Qatari investors, apparently fee for helping Barclays with business development in the Gulf; in November 2008, Barclays agreed to issue a loan of $3bn to the State of Qatar, allegedly fitting the funds prime minister Sheikh al Thani invested, according to The Daily Telegraph.

Thus it seems the Barclays bankers (all four following the June 2008 investment, two of them following the October investment) were allegedly misleading the markets, i.e. market manipulation, when they commented on the two Qatari investments.

If we take cue from the Icelandic al Thani case it is most likely that the Barclays managers begged and pestered the Gulf investors, known for their deep pockets, to invest.

In the al Thani case, the Abu Dhabi sovereign wealth fund had earlier considered buying Kaupthing shares but thought the price was too high. Kaupthing then wooed the Qatari investors with some good offers.

What Kaupthing promised was a “risk-free” loan, a classic Kaupthing special offer to special clients, to place as an investment in Kaupthing. In other words, there was never any money coming into Kaupthing as an investment. It was just money merry-go-round from one Kaupthing account to another: funds going out as a loan and coming back as an investment. In addition, the investors got a loan of $50m directly into their pockets, defined as pre-paid profit.

Barclays hardly made such a crude offer to the Qatari investors but the £322m fee leads the thought to the pre-paid profit in the Kaupthing saga; the Barclays fee could allegedly be defined as pre-payment for services-to-come.

The $3bn loan to the state of Qatar is intriguing, given that the state of Qatar is and the finances of its ruling family have allegedly often seemed closely connected.

What we don’t know regarding the Barclays side deals

The September 2008 Qatari investment in Kaupthing figured in the 2010 report of the Special Investigative Commission, SIC, a report that thoroughly explained and mapped the operations of the Icelandic banks up to the 2008 collapse. The criminal case added details to the SIC saga. It is for example clear that Kaupthing didn’t really expect the Gulf investors to pay back the investment but handed them $50m right away.

Little is yet known about the details of the alleged Barclays side deals. How were the covenants for the $3bn loan? Has this loan been repaid or is it still on Barclays books? And was the service for the £322m ever carried out? Was there any specification as to what Barclays was paying for? Why were these services apparently pre-paid instead of being paid against an invoice after the services had been carried out?

These are some of the things we would need to know in order to assess the side deals and their context and connections to the Qatari investment in Barclays. Clearly, the SFO knows and this will no doubt be part of the coming court case.

The whiff of Qatari investors and how it touches Deutsche Bank

The Kaupthing resolution committee went after the Qatari investors to recover the loans, threatening them with legal proceedings. Investigators from the Office of the Special Prosecutor did question the investors.

According to Icelog sources, the Qatari investors were adamant about clarifying the situation both with Kaupthing and the OSP. The understanding was that the investors were worried about their reputation. They did in the end reach a settlement with the Kaupthing resolution committee as Kaupthing announced in 2013.

These two investment sagas do however leave a certain whiff. In August last year, when it transpired that Qatari investors had invested in troubled Deutsche Bank I sent a query to Deutsche’s spokesman asking if the bank was possibly lending the investors money. I got a stern reply that I was hinting at Deutsche committing a legal offense (well, as if Deutsche had not been found to have rigged markets, assisted in money laundering etc) but was later assured that no, Deutsche had not given any financial assistance to its Qatari investors, no side deals related to their investment in the bank.

Companies don’t commit crimes – people do

Although certainly not the only one, Barclays is a bank with a long register of recent financial sins, inter alia: in 2012 it paid a fine of £290m for Libor manipulation; in 2015 it paid £2.3bn for rigging FX markets and £72m to settle money laundering offenses.

As to lessons learnt: this spring, it turned out that Barclays CEO Jes Staley, has broken whistleblower-rules by trying to unmask a Barclays whistleblower. CEOs have been remarkably short lived at Barclays since Varley left in 2010: his successor Bob Diamond was forced out in 2012, replaced by Antony Jenkins who had to leave in 2015, followed by Jes Staley.

In spite of Barclays being fined for matters, which are a criminal offence, the SFO has treated these crimes (and similar offences in many other banks) as crimes not committed by people but companies, i.e. no Barclays bankers have been charged… until now.

After all, continuously breaking the law in multiple offences over a decade, under various CEOs indicates that something is seriously wrong at Barclays (and in many other big banks). Normally, criminals are not allowed just to pay their way out of criminal deeds. In the case of banking fines banks have actually paid with funds accrued by criminal offences. Ironically, banks pay fines with shareholders’ money and most often, senior managers have not even taken a pay cut following costs arising from their deeds.

In all its unknown details the Barclays case is no doubt far from simple. But compared to FX or Libor rigging, it is manageable, its focus being the two investments, in June and October 2008, the £322m fee and the November 2008 loan of $3bn.

The BBC is not amused… at SFO charges

Instead of seeing the merit in this heroic effort by the SFO BBC’s business editor Simon Jack is greatly worried, after talking to what only appear to be Barclays insiders. There is no voice in his comment expressing any sympathy with the rule of law rather than the culpable bankers.

Jack asks: Why, over the past decade, has the SFO been at its most dogged in the pursuit of a bank that DIDN’T require a taxpayer bailout? In fact, it was Barclays’ very efforts to SPARE the taxpayer that gave rise to this investigation.

This is of course exactly the question and answer one would hear from the charged bankers but it is unexpected to see this argument voiced by the BBC business editor on a BBC website as an argument against an investigation. In the Icelandic al Thani case, those charged and eventually sentenced also found it grossly unfair that they were charged for saving the bank… with criminal means.

Jack’s reasoning seems to justify a criminal act if the goal is deemed as positive and good for society. One thing for sure, such a society is not optimal for running a company – the healthiest and most competitive business environment surely is one where the rule of law can be taken for granted.

Another underlying assumption here is that the Barclays management sought to safe the bank by criminal means in order to spare the taxpayer the expense of a bailout. Perhaps a lovely thought but a highly unlikely one. There were plenty of commentaries in 2008 pointing out that what really drove Barclays’ John Varley and his trusted lieutenants hard to seek investors was their sincere wish to avoid any meddling into Barclays bonuses etc.

Is the alleged Barclays fraud a “victimless crime”?

It’s worth remembering that taxpayers didn’t bail out Barclays and small shareholders didn’t suffer the massive losses that those of RBS and Lloyds did. One former Barclays insider said that if there was a crime then it was “victimless” and you could argue that Barclays – and its executives – did taxpayers and its own shareholders a massive favour, writes Jack.

It comes as no surprise that “one former Barclays insider” would claim that saving a bank, even by breaking the law, is just fine and actually a good deed. For anyone who is not a Barclays insider it is a profound and shocking misunderstanding that a financial crime like the Barclays directors allegedly committed is victimless just because no one is walking out of Barclays with a tangible loss or the victims can’t be caught on a photo.

We don’t know in detail how Barclays was managed, there is no British SIC report. So we don’t know if the $3bn loan has been paid back. If it was not repaid or had abnormally weak covenants it makes all Barclays clients a victim because they will have had to pay, in one way or another, for that loan.

Even if the loan was normal and has been paid a bank that uses criminal deeds to survive turns the whole society into the victims of its criminal deeds: financial assistance and market manipulation skew the business environment, making the level playing field very uneven.

Pushing Jack’s argument further it could be conclude that the RBS and Lloyds managers at the time did evil by not using criminal deeds to save their banks, compared to the saintly Barclays managers who did – a truly absurd statement.

Charging those at the top compared to charging only the “arms” of the top managers, i.e. those who carry out the commands of senior managers, shows that the SFO understands how a company like Barclays functions; making side deals like these is not decided by low-level staff. Further, again with an Icelandic cue, it is highly likely that the SFO has tangible evidence like emails, recordings of phone calls etc. implicating the four charged managers.

The Barclays battles to come

Criminal investigations are partly to investigate what happened, partly a deterrent and partly to teach a lesson. If the buck stops at the top, charging those at the top is the right thing to do when these managers orchestrate potentially criminal actions.

But those at the top have ample means to defend themselves. Icelandic authorities now have a considerable experience in prosecuting alleged crimes committed by bankers and other wealthy individuals.

And Icelanders also have an experience in observing how wealthy defendants react: how they try to manipulate the media via their own websites and/or social media, by paying PR firms to orchestrate their narrative, how their lawyers or other pillars of society, strongly identifying with the defendants, continue to refute sentences outside of the court room etc. And how judges, prosecutors and other authorities come under ferocious attack from the charged or sentenced individuals and their errand boys.

All of this is nothing new; we have seen this pattern in other cases where wealth clashes with the law. And since this is nothing new, it is stunning to read such a blatant apology for the charged Barclays managers on the website of the British public broadcaster. Even if the SFO prosecution against the Barclays bankers were to fail apologising the bankers ignores the general interest of society in maintaining a rule of law for everyone without any grace and favour for wealth and social standing.

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Greek authorities have not yet dropped the wholly unfounded criminal cases against former head of  ELSTAT Andreas Georgiou. As expressed earlier on Icelog, the ELSTAT saga is a test if Greece is beholden to a corrupt past or trying to amend its ways. So far, no amendment. And interestingly, Greece is again stalling in terms of improving the economy and disbursement of €7bn from the Eurozone are being withheld.

The case of Georgiou and two ELSTAT colleagues was again up in court in Athens on Friday, Again acquitted but in this saga, where everything  goes in circles and nothing is brought to an end, it is far from certain if this really is the end. There is, yet again the distinct possibility that the Chief Prosecutor of  the Supreme Court will again reverse the acquittal, as in September 2015.

Another part of this case – for some reason it has been split up and the two cases are tried separately – came up this Monday, 29 May.

Also a new criminal investigation about exactly the same issue, ordered last September by the same Chief Prosecutor, could theoretically continue and keep the case going for years to come.

Leaked minutes from the Eurogroup meeting 22 May shows that ECB governor Mario Draghi brought the ELSTAT case up right at the beginning of the meeting, asking that, as agreed earlier, priority should be given to implementing “actions on ELSTAT that have been agreed in the context of the programme. Current and former ELSTAT presidents should be indemnified against all costs arising from legal actions against them and their staff.”

Greek minister of finance Euclid Tsakalotos said that “On ELSTAT, we are happy for this to become a key deliverable before July.”

The Eurogroup has clearly noticed the ELSTAT case. It remains to be seen if Tsakalotos does indeed deliver before July. I’m told that there is a real opposition in some quarters to give earlier ELSTAT president indemnity against cost. Unless he and his staff is included this action does not have the intended effect. Hopefully, Draghi and others in the Eurogroup will not lose sight of this issue.

Sir, As you reported on May 22 (FT.com), the eurogroup failed to complete the review of the economic programme with Greece and enable the disbursement of €7bn of Eurozone member taxpayer money to Greece. Negotiations are continuing. Meanwhile, on May 29, Andreas Georgiou again went on trial for violation of duty while he was president of the Hellenic Statistical Authority (Elstat) from August 2010 to August 2015 (The Big Read, December 30, 2016).

These two strands should be linked, but to date have not been. The eurogroup and associated European organizations (the European Stability Mechanism, the European Commission and the European Central Bank) have not established the appropriate linkage.

Mr Georgiou and senior colleagues of his at Elstat are being prosecuted for doing their job in producing honest statistics about Greece’s fiscal condition for 2009, before the start of the first Greek programme, and during the first five years of programmes. Their work is central to the Greek economic reform efforts. It was based on European standards for statistical data quality. Successive Greek governments have committed to comply with those standards and to defend the professional independence of Elstat. The current government and several previous governments have failed to live up to these commitments.

We the undersigned call on the European authorities not to complete the programme review with Greece until and unless the Greek government declares publicly in writing that the statistics compiled by Mr Georgiou and his colleagues at Elstat were accurate and that they were produced and disseminated using appropriate processes and procedures based on European standards.

Michel Camdessus Paris, France; José Manuel Campa Madrid, Spain; Edwin M. Truman Washington, DC, US; Gertrude Trumpel-Gugerell Vienna, Austria; Nicolas Véron Washington, DC, US and Paris, France; Geoffrey Woglom Amherst, MA, US; Edmond Alphandéry Paris, France; Paul Armington Washington, DC, US; Ruthanne Deutsch Washington, DC, US; Robert D Kyle Washington, DC, US; Barry D Nussbaum Annandale, VA, US; Christopher Smart Boston, MA, US; Peter H. Sturm Washington, DC, US; Stephanie Tsantes Lewes, DE, US; Ronald L. Wasserstein Springfield, VA, US; Charles Wyplosz Geneva, Switzerland; Jeromin Zettlemeyer Washington, DC, US

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Contacts between Iceland and Russia have for almost two decades been a source of speculations, some more fancifully than others. The speculations have now again surfaced in the international media following the focus on US president Donald Trump and his Russian ties: part of that story involves his connections with Bayrock where two Icelandic companies, FL Group and Novator, are mentioned. Contrary to the rumours at the time, Icelandic expansion abroad up to the banking collapse in 2008 can be explained by less sensational sources than Russian money – but there are some Russian ties to Iceland.

“We have never seen businessmen who operate like the Icelandic ones, throwing money around as if funding was never a problem,” an experienced Danish business journalist said to me in 2004. From around 2002 to the Icelandic banking collapse in October 2008, the Icelandic banks and their largest shareholders attracted attention abroad for audacious deals.

The rumours of Russian links to the Icelandic boom quickly surfaced as journalists and others sought to explain how a tiny country of around 320.000 people could finance large business deals by Icelandic businesses abroad. The owners of one of Iceland’s largest banks, Landsbanki, father and son Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson, had indeed become rich in Saint Petersburg in the 1990s.

The unequivocal answer on how the foreign expansion of Icelandic banks and businesses was funded came in the Special Investigative Commission Report, SICR, in 2010: the funding came from Icelandic and international banks; the Icelandic banks found easy funding on international markets, the protagonist were at the same time the banks’ largest shareholders and their largest borrowers.

The rumours of Russian connections have surfaced again due to the Bayrock saga involving US president Donald Trump and his relations to Russia and Russian mobsters. Time to look at the Icelandic chapter in the Bayrock saga and Russian Icelandic links.

The Bayrock saga

By now, there is hardly a media company in the world that has not paid some attention to Donald Trump and Bayrock, with a mention of the Icelandic FL Group and the Russian money in Icelandic banks and businesses. The short version of that saga is the following:

Tevfik Arif, born in Kazakhstan during the Soviet era, was a state-employed economist who turned to hotel development in Turkey in the 1990s before moving into New York property development where he founded Bayrock in 2001. As with many real estate companies Bayrock’s structure was highly complex with myriad companies and shell companies, on- and offshore.

Arif hired a Russian to run Bayrock. Felix Sater or Satter was born in Russia in but moved to New York as youngster with his family. In 1991 Sater was sentenced to prison for a bar brawl cutting up the face of his adversary with a broken glass. Having admitted to security fraud in cohort with some New York Mafia families in 1998 he was eventually found guilty but apparently got a lenient sentence in return for becoming an informant for the law enforcement.

In 2003, Arif and Sater were introduced to a flamboyant property developer by the name of Donald Trump, already a hot name in New York. One of their joint projects was the Trump Soho. The Trump connection did attract media attention. Apparently following a New York Times profile of Sater in December 2007, unearthing his criminal records, Arif dismissed Sater in 2008.

Bayrock and FL Group

By then, another scheme was brewing and that is where the Icelandic FL Group enters the Bayrock and Trump story. This part of the story has surfaced in court cases, still ongoing, where two ex-Bayrock employees, Jody Kriss and Michael Ejekam, are suing Bayrock for cheating them of profit inter alia from the Trump SoHo deal.

Their story details complicated hidden agreements whereby Arif and Sater, according to Kriss and Ejekam, essentially conspired to skim off profit from Bayrock, cheating everyone who entered an agreement with them. According to the story told in the court documents (see inter alia here) Bayrock entered an agreement with FL Group in May 2007: for providing a loan of $50m FL Group would get 62% of the total profits from four Bayrock entities, expected to generate a profit of around $227.5m.

The loan arrangement with FL Group did not make a great financial sense for Bayrock, again according to Kriss and Ejekam, but it was part of Arif and Sater’s scheme to cheat investors as well the US tax authorities. When Kriss complained to Sater that the $50m loan from FL Group was not distributed as agreed, Sater “made him (Kriss) an offer he couldn’t refuse: either take $500,000, keep quiet and leave all the rest of his money behind, or make trouble and be killed.” – Given Sater’s criminal record and threats he had made to another Bayrock partner Kriss left Bayrock.

The short and intense FL saga and its record losses

FL Group was one of the companies that formed the Icelandic boom. Out of many financial follies in pre-crash Iceland the FL Group saga was one of the most headline-creating. In 2002 Jón Ásgeir Jóhannesson, of Baugur fame, bought 20% in the listed air carrier Flugleiðir. In 2004 he teamed up with Hannes Smárason who with a degree from the MIT and four years at McKinsey in Boston had a stellar CV.

Smárason was first on the board until he became a CEO in October 2005. The duo oversaw the take-over of Flugleiðir, sold off assets and turned the company into an investment company, FL Group; inter alia FL Group was for a short while the largest shareholder in EasyJet.

In spring 2007, a group of investors led by Jóhannesson became the largest shareholder in Iceland’s third largest bank, Glitnir. Their Glitnir holding was through FL Group, consequently the bank’s largest shareholder.

At the beginning of 2007, the FL Group debt with the Icelandic banks amounted to almost €600m but had risen to €1.1bn in October 2008. Interestingly, its debt to Glitnir rose by almost 800%. As mentioned above, Jóhannesson and his business partners, among them FL Group, became Glitnir’s largest shareholder in spring 2007, following the pattern that the banks’ largest shareholders were also their largest borrowers.

FL Group – folly or a classic “pump and dump”?

By the end of 2007, 26 months after Hannes Smárason became CEO, FL Group had set an Icelandic record in losses: ISK63bn, now €660m, ten times the previous record, from 2006, incidentally set by a media company controlled by Jóhannesson.

Facing these stunning losses Smárason left FL Group in December 2007. The story goes that at the shareholders’ meeting where his departure was announced he left the room waving, saying “See you in the next war, guys” (In Icelandic: “Sjáumst í næsta stríði, strákar).

There are endless stories of staggering cost and insane spending related to the FL Group boom and bust. Interestingly, a large part of the losses stemmed from consultancy cost for projects that never materialised. Smaller investors lost heavily and in hindsight the question arises if the FL saga was a folly or some version of a “pump and dump.” Smárason was charged with embezzlement in 2013, acquitted in Reykjavík District Court but the State Prosecutor’s appeal was thrown out of the Supreme Court due to the Prosecutor’s mistakes.

FL Group never recovered from the losses and was delisted in the spring of 2008 and its name changed to Stoðir. FL Group never went into bankruptcy but its debt was written off. A group of earlier FL Group managers (Smárason is not one of them) now owns over 50% of Stoðir.

FL Group and the Icelandic Bayrock

Part of FL Group’s eye-watering losses was the Bayrock adventure. FL Group set up a company in Iceland, FL Bayrock Holdco, financed by the Icelandic mother company. Already in 2008 the FL Group Bayrock was a loss-making enterprise, its three FL Bayrock US companies were written off with losses amounting to ISK17.6bn, now €157m. When the Icelandic FL Bayrock finally failed in January 2014 Stoðir (earlier FL Group) was more or less the only creditor, its claims amounting to ISK13bn; no assets were found.

According to the Kriss-Ejekam story, FL Group willingly and knowingly took part in a scam. When I approached a person close to FL Group, he maintained the investment had not been a scam but just one of many loss-making investments, not even a major investment, compared to what FL Group was doing at the time.

An FL Group investor told me that he had never even heard of the Bayrock investment until the Trump-related Bayrock stories surfaced. He expressed surprise that such a large investment could have been made without the knowledge of anyone except the CEO and managers. He added however that this was perhaps indicative of the problems in FL Group: managers making utterly insane and ill-informed decisions leading to the record losses.

Bayrock and Novator

Another Icelandic company, mentioned in the Kriss-Ejekam case is Novator, which was offered to participate in Bayrock. There is a whole galaxy of Novator companies, inter alia 19 in Luxembourg, encompassing assets and businesses of Björgólfur Thor Björgólfsson.

This, according to court documents (emphasis mine):

During the early FL negotiations, Bayrock was approached by Novator, an Icelandic competitor of FL’s, which promised to go into the same partnership with Bayrock as FL was contemplating, and at better terms. Arif and Satter told Kriss that this would not be possible, because the money behind these companies was mostly Russian and the Russians behind FL were in favor with Putin, but the Russians behind Novator were not, and so they had to deal with FL. Whether or not this was true and what further Russian involvement existed must await disclosure.

This is the clause that has yet again fuelled speculations of Russian dirty money in the Icelandic banks and Icelandic companies. As stated in the last sentence this is however all pure speculation.

The story from the Novator side is a different one. In an email answer to my query, the spokeswoman for Björgólfsson wrote that Bayrock approached Novator Properties, which considered the project far from attractive. Following some due diligence Novator concluded that the people involved were not appealing partners, which led Novator to decline the invitation to participate.

The origin of rumours of corrupt Russian connections to Iceland

Towards the end of 2002 the largest Icelandic banks and their main shareholders were already attracting foreign media attention. Euromoney (paywall) raised “Questions over Landsbanki’s new shareholder” in November 2002 focusing on the story of the father and son Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson, who with their business partner Magnús Þorsteinsson struck gold in Saint Petersburg in the 1990s and were now set to buy over 40% of privatised Landsbanki.

The two businessmen, the Brit Bernard Lardner and his Icelandic partner Ingimar Ingimarsson, who in the mid 1990s had hired the three Icelanders to run their joint Saint Petersburg venture, were less lucky. In 2011 Ingimarsson published a book in Iceland, The Story that Had to be Told, (Sagan sem varð að segja), where he tells his side of the story: how father and son through tricks and bullying took over the Lardner and Ingimarsson venture, essentially the story told in Euromoney in 2002 (see earlier Icelog).

In June 2005, Guardian’s Ian Griffith wrote an article on the Icelandic businessmen Björgólfsson and Jón Ásgeir Jóhannesson, ever more visible in the London business community, asking where the Icelandic “Viking raiders” as they were commonly called got their money from, hinting at Russian mafia money. The quick rise to riches, wrote Griffith, exposed the Icelanders to “the persistent but unsubstantiated whispering that the country’s economic miracle has been funded by Russian mafia money rather than growth and liberalisation.”

As Griffith points out, Björgólfsson and his partners were operating in Saint Petersburg, “the city regarded as the Russian mafia capital. That investment was being made in the drinks sector, seen by the mafia as the industry of choice. 

Yet against all the odds, Bravo went from strength to strength. 

Other St Petersburg brewing executives were not so fortunate. One was shot dead in his kitchen from the ledge of a fifth-floor window. Another perished in a hail of bullets as he stepped from his Mercedes. And one St Petersburg brewery burned to the ground after a mishap with a welding torch. 

But the Bravo business, run by three self-confessed naives, suddenly found itself to be one of Russia’s leading brewers. In under three years it became the fastest-growing brewer in the country. It secured a 17% market share in the St Petersburg region and 7% in the Moscow area. It was selling 2.5m hectolitres of beer a year in 2001 and heading for 4m when Heineken of the Netherlands stepped in to buy it for $400m in 2002. Heineken said one of the reasons for the Bravo purchase was the absence of any corruption.”

Björgólfsson has always vehemently denied stories of his alleged links to the Russian dark forces and Ingimarsson’s story. Billions to Bust and Back, published in 2014, is Björgólfsson’s own story of his life. The book has not been published in Iceland.

The Icelandic miracle exposed: international banks and “favoured clients”

During the Icelandic boom years Griffith was not the only one to question how the tiny economy of tiny Iceland could fund the enormous expansion of Icelandic banks and businesses abroad. The Russian rumours were persistent, some of them originating in the murky London underworld, all to explain this apparently miraculous growth. Most of this coverage was however more fiction than facts (the echo of this is found in my financial thriller, Samhengi hlutanna, which takes place in London and Iceland after the collapse, published in Iceland in 2011; English synopsis.)

The Icelandic Special Investigative Commission Report, SICR, published in April 2010, convincingly answered the question where the money came from: “Access to international financial markets was, for the banks, the principal premise for their big growth,” facilitated by their high credit ratings and Iceland’s membership of the European Economic Area, EEA. As to the largest shareholders the SICR concluded: “The largest owners of all the big banks had abnormally easy access to credit at the banks they owned, apparently in their capacity as owners… in all of the banks, their principal owners were among the largest borrowers.”

The story told in the SICR is how the Icelandic banks essentially ran a double banking system: one for normal bank clients who got loans against sound collaterals and loan contracts with normal covenants – and then another system for what I have called the “favoured clients,” i.e. the largest shareholders and their business partners.

The loans to the “favoured clients” were on very favourable terms, mostly bullet loans extended as needed, often with little or no collateral and light covenants. The consequence was that systematically, these clients profitted but if things went wrong the banks shouldered the losses. – In recent years, some of these abnormally favourable loans have sent around twenty bankers to prison.

The real Russian connections in Iceland

Although the Icelandic expansion abroad can be explained with less exciting facts than Russian Mafia and money laundering, there are a few tangible Russian contacts to Iceland: Vladimir Putin and the Kremlin did show an interest in Iceland at a crucial time, just as in Cyprus in 2013; Alisher Usmanov had ties to Kaupthing; the Danish lawyer Jens Peter Galmond, famous for his Leonid Reiman connections, and his partner Claus Abildstrøm did have Icelandic clients and Mikhail Fridman gets a mention.

At 4pm Monday 6 October 2008 prime minister and leader of the Independence party (conservative) Geir Haarde addressed Icelanders via the media: the government was introducing emergency measures to deal with the banks in an orderly manner. Icelanders sat glued to their tv sets struggling to understand the meaning of it all.

Haarde’s last words, “God bless Iceland,” brought home the severity of the situation. Icelanders had never heard head of government bless the country and never heard of measures like the ones introduced. The speech and the emergency Act it introduced came to be seen as the collapse moment – the three banks were expected to fail and by Wednesday 8 October they had all failed indeed.

An elusive Russian loan offer

The next morning, 7 October 2008 as Icelanders woke up to a failing financial system, the then governor of the Icelandic Central Bank, CBI, Davíð Oddsson, an earlier leader of the Independence Party and prime minister, told the still shocked Icelanders that all would be well: around 7am Victor I. Tatarintsev the Russian ambassador in Iceland had called Oddsson to inform him that the Russian government was willing to lend €4bn to Iceland, bolstering the Icelandic foreign reserves.

According to the CBI press release the loan would be at 30-50bp above Libor and have a maturity of three to four years. Later that day another press release just stated that representatives of the two countries would meet in the coming days to negotiate on “financial issues” – no mention of a loan.

According to Icelog sources, the morning news was hardly out when the CBI heard from news agencies that Russian minister of finance Alexei Kudrin had denied the story of a Russian loan to Iceland; indeed the loan never materialised though some CBI officials did fly out to Moscow a week later.

There have of course been wild speculations as to if the offer was real, why Kremlin was ready to offer the loan and then why Kremlin did, in the end, not stand by that offer.

Judging from Icelog sources it seems no misunderstanding that Tatarintsev mentioned a loan to Oddsson. As to why Kremlin – because that is where the offer did come from – wanted to lend or at least to tease with the offer is less clear though there is no lack of undocumented stories.

One story is that some Russian oligarchs did have money invested in Iceland. Fearing their funds would be inaccessible they pulled some strings but when they realised their funds were not in danger they lost interest in helping Iceland and so did Kremlin. Another explanation is that Kremlin just wanted to tease the West a bit, make as if it was stretching its sphere of interest further west. Yet another story is that a European minister of finance called his Russian counterpart telling him to stay away from Iceland; the European Union, EU would take care of the country.

Iceland found in the end a more conventional source of emergency funding: by 19 November 2008 it had secured $2.1bn loan from the International Monetary Fund, IMF.

Russia, Iceland and Cyprus

In 2013, Russia played the same game with Cyprus: it teased Cyprus with a loan. The difference was however that the Russian offer to Cyprus did not come as a surprise: Russia had long-standing and close political ties to the island. Russian oligarchs and smaller fries had for years made use of Cyprus as a first stop for Russian money out of Russia. At the end of 2011, Russia had lent €2.5bn to Cyprus. However, the crisis lending did not materialise, any more than it had in Iceland (see my Cyprus story).

The international media reported frequently that the EU and the IMF were reluctant to assist Cyprus because these organisations were irritated by the easy access of Russian funds to and through the island’s banks. A classified German report was said to show how Cyprus had been a haven for money laundering (if that report did indeed exist Germans could and should have used the same diligence to check their own Deutsche Bank!)

After the 2008 collapse in Iceland a credible source told me he had seen a US Department of Justice classified report on money laundering stating that Icelandic banks were mentioned as open to such flows. Given the credibility of the source I have no doubt that the report exists (though all my efforts to trace it have failed). I have however no idea if that report was thoroughly researched or not nor in what context the Icelandic banks were mentioned.

Kaupthing and Usmanov

Some Icelandic banks did have clients from Russia and the former Soviet Union. The only one mentioned in the SICR, is the Uzbek Alisher Usmanov. He turned to Kaupthing in summer of 2008 when he was seeking to buy shares in Mmc Norilsk Adr. According to the SICR the bank also sold Usmanov shares in Kaupthing – by the end of September 2008 he owned 1.48% in the bank.

I am told that Usmanov was not Kaupthing client until in the summer of 2008 (earlier Icelog). Funding was generally drying up but Kaupthing was keen on the connection as it was planning to branch out to Russia and consequently looking for Russian connections.

If Usmanov’s shareholding in Kaupthing comes as surprise it is important to keep in mind that part of Kaupthing’s business model was to lend money to clients to buy Kaupthing shares. This was no last minute panic plan but something Kaupthing had been doing for years.

This model, which looks like a share-parking scheme, is a likelier explanation for Usmanov’s stake in Kaupthing rather than a sign of Usmanov’s interest in Kaupthing. A Kauphting credit committee minute from late September 2008, leaked after the collapse, shows that Kaupthing had agreed to lend Usmanov respectively €1,1bn and $1.2bn. According to Icelog sources the bank failed before the loans were issued.

Fridman, Exista and Baugur/Gaumur

There are two Icelandic links to Mikhail Fridman, through Kaupthing and the investment bank Straumur. Its chairman, largest investor and eventually largest borrower was Björgólfur Thor Björgólfsson.

By 1998, Kaupthing was operating in Luxembourg. In June that year, a Luxembourg lawyer, Francis Kass, appeared twice on the same day as a representative of two BVI companies, Quenon Investments Ltd and Shapburg Ltd, both registered at the same post box address in Tortola. His mission was to set up two companies, both with names linked to the North: Compagnie Financiere Scandinave Holding S.A. and Compagnie Financiere Pour L’Atlantique du Nord Holding S.A. The directors were offshore service companies, owned by Kaupthing or used in other Kaupthing offshore schemes.

These two French-named companies, founded on the same day by the same lawyer, came to play major roles in the Icelandic boom until the bust in October 2008. The former was for some years controlled by Kaupthing top managers until it changed name in 2004 to Meiður and to Exista the following year. By then it was the holding company for Lýður and Ágúst Guðmundsson who became Kaupthing’s largest shareholders, owning 25%. In 2000, the latter company’s name changed to Gaumur. Gaumur was part of the Baugur sphere, controlled by Jón Ásgeir Jóhannesson.

The owners of Exista and Baugur were dominating forces in the years when Icelandic banks and businesses were on their Ikarus flight.

Apart from the UK, the Icelandic business expansion abroad was most noticeable in Denmark. Danish journalists watched with perplexed scepticism as swaggering Icelanders bought some of their largest and most eye-catching businesses. In Iceland, politicians and business leaders talked of Danish envy and hostility, claiming the old overlords of Iceland were unable to tolerate the Icelandic success. They were much happier with the UK press that followed the Icelandic rise rather breathlessly.

In 2006 the Danish tabloid Ekstra bladet wrote a series of articles again bringing up Russian ties. Part of the coverage related to the two Krass companies: Quenon and Shapburg have also set up Alfa companies, part of Mikhail Fridman’s galaxy of on- and offshore companies.

The Danish articles were translated into English and posted on the internet. Kaupthing sued the Danish tabloid, which was forced to retract the articles in order to avoid the crippling costs of a libel case in an English court.

JP Galmond – the fixer who lost his firm

An adversary of Fridman, with Icelandic ties, figures in a long saga where also Usmanov plays a role: the Danish lawyer, Jeffrey Peter Galmond. – Some of the foreign fixers who have worked for ex-Soviet oligarchs have in some cases lost their lives under mysterious circumstance. JP Galmond lost his law firm. His story has been told in the international media over many years (my short overview of the Galmond saga).

Galmond was one of the foreign pioneers in St Petersburg in the early 1990s where he soon met Leonid Reiman, manager at the city’s telephone company. By the end of 1990s many foreign businessmen had learnt there was not a problem Galmond could not fix. Reiman went on to become a state secretary in 1999 when Boris Jeltsin made his Saint Petersburg friend Vladimir Putin prime minister.

By 2000 the Danish lawyer had turned to investment via IPOC, his Bermuda-registered investment fund. The following year he bought a stake in the Russian mobile company Megafon. Soon after the purchase Mikhail Fridman claimed the shares were his. This turned into a titanic legal battle fought for years in courts in the Netherlands, Sweden, Britain, Switzerland, the British Virgin Islands and Bermuda.

In 2004 Galmond’s IPOC had to issue a guarantee of $40m to a Swiss court in one of the innumerable Megafon court cases. The court could not accept the money without checking its origin. An independent accountant working for the court concluded that the intricate web of IPOC companies sheltered a money-laundering scheme. In spring of 2008 IPOC was part of a criminal case in the BVI. That same spring, the Megafon battle ended when Alisher Usmanov bought IPOC’s Megafon shares.

The Megafon battle exposed Galmond as a straw-man for Leonid Reiman who was forced to resign as a minister in 2009 due to the IPOC cases. In 2007, Galmond was forced to leave his law firm due to the Megafon battle; his younger partner Claus Abildstrøm took over and set up his own firm, Danders & More, in 2008.

Galmond’s Icelandic ties

In spite of the international media focus on Galmond, he and his partner Claus Abildstrøm enjoyed popularity among Icelandic businessmen setting up business in Copenhagen. An Icelandic businessman operating in Denmark told me he did not care about Galmond’s reputation; what mattered was that both Galmond and Abildstrøm understood the Icelandic mentality and the need to move quickly.

Already in 2002, Abildstrøm had an Icelandic client, Birgir Bieltvedt, a friend and business partner of both Björgólfur Thor Björgólfsson and Jón Ásgeir Jóhannesson. In 2004 Abildstrøm assisted Bieltvedt, Jón Ásgeir Jóhannesson and Straumur investment bank, where Björgólfsson was the largest shareholder, to buy the department store Magasin du Nord, where Abildstrøm then became a board member.

In 2007, when the IPOC court cases were driving Galmond to withdraw from his legal firm, the Danish newspaper Børsen reported that among Galmond’s clients were some of the wealthiest Icelanders operating in Denmark, such as Björgólfur Thor Björgólfsson and Jón Ásgeir Jóhannesson.

In his book, Ingimar Ingimarsson claimed that Galmond acted as an advisor to Björgólfsson. According to an Icelog source Galmond represented a consortium led by Björgólfsson’s father Björgólfur Guðmundsson when they bought a printing press in Saint Petersburg in 2004. Björgólfsson has denied any ties to Galmond and to Reiman but has confirmed that Abildstrøm has earlier worked for him.

Alfa, Pamplona Capital Management and Straumur/Björgólfsson

Pamplona Capital Management is a London-based investment fund, which in late 2007 entered a joint venture, according to the SICR, with Straumur, an investment bank where Björgólfur Thor Björgólfsson was the largest shareholder, chairman of the board and Björgólfsson-related companies were eventually the largest borrower (SICR).

In 2005 Pamplona had bought a logistics company, ADR-HAANPAA, operating in the Nordic countries, the Baltics, Poland and Russia. In 2007 Straumur provided a loan of €100m to refinance ADR in a structure where Pamplona owned 80.8%, Straumur 7.7% and ADR managers the rest.

Pamplona was set up in 2004 by the Russian Alexander Knaster, who as a teenager had immigrated to the US with his parents. Knaster was the CEO of Fridman’s Alfa Bank from 1998 until 2004 when he founded Pamplona, partly with capital from Fridman. Knaster has been a British citizen since 2009 and has, as several other Russian billionaires living in the UK, donated money, £400.000, to the Conservatives.

Incidentally, Pamplona shares the same London address as Novator, Björgólfsson’s investment fund, according to Companies House data: 25 Park Lane is one of London’s most attractive business addresses.

The Icelandic business model: corrupt patterns v “time is money”

Big banks such as Wachovia and Citigroup have been fined for facilitating money laundering for Mexican gangs. Deutsche Bank as been fined recently for doing the same for Russians with ties to president Trump. All of this involves violating anti-money laundering rules and regulations and this criminal activity has almost invariably only been discovered through whistle-blowers. Since large international banks could get away with laundering money, could something similar have been going on in the Icelandic banks?

The Icelandic Financial Supervisor, FME, was famously lax during the years of the banks’ stratospheric growth and expansion abroad. One anecdotal evidence does not inspire confidence: during the boom years an Icelandic accountant drew the attention of the police to what he thought might be a case of money laundering in a small company operating in Iceland and offshore. The police seemed to have a very limited understanding of money laundering other than crumpled notes literally laundered.

However, the banking collapse set many things in motion. The failed banks’ administrators, foreign consultants and later experts at the Office of the Special Prosecutor have scrutinised the accounts of the failed banks landing some bankers and large shareholders in prison. I have never heard anyone with plausible insight and authority mention money laundering and/or hidden Russian connections.

I do not know if it was systematically investigated but some of those familiar with the failed banks would know that money laundering, though of course hidden, leaves a certain patterns of transactions etc. But most importantly, the banks’ operation in Luxembourg, where in the Kaupthing criminal cases the dirty deals were done, have not been scrutinised at all by Luxembourg authorities.

The Icelandic businessmen most active in Iceland and abroad were famous for two things: complex structures, not an Icelandic invention – and buying assets at 10-20% higher prices than others were willing to offer.

As one Danish journalist asked me in 2004: “Why are Icelanders always willing to pay more than the asking price?” The Icelandic businessmen explained this by “time is money” – instead of wasting time to negotiate pennies or cents it paid off to close the deals quickly, they claimed.

Paying more than the asking price, exorbitant consultancy fees, sales at inexplicable prices to related parties and complicated on- and offshore structures are all known characteristics of systematic looting, control fraud and money laundering – and there are many examples of all of this from the Icelandic boom years. But these features can also be the sign of abysmally bad management.

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The long-winding saga of the Landsbanki Luxembourg equity release loans is now in a French court in Paris, i.e. the alleged mis-selling. However, as the oral hearings brought out so clearly, other angles of this case have been ignored, i.e. the bank’s potential mismanagement of clients’ funds and the very questionable handling of the Landsbanki Luxembourg administrator. These last two issues have left so many clients frustrated and at their wit’s end.

A court case at the Palais de Justice, part of the spectacular Palais de la Cité on the Îsle de la Cité in the heart of Paris, is a grand spectacle to behold. Or at least that was my impression last week as I sat through two afternoons of oral hearing in the penal case against Landsbanki Luxembourg bankers and Landsbanki’s chairman Björgólfur Guðmundsson, the only one of the accused who was not present.

Apart from the three judges and the prosecutor there were the thirty or so lawyers fluttering around in their black cloaks with white bands around the neck. The lawyers were defence lawyers for those charged, lawyers for some of the witnesses and then there were lawyers related to civil cases connected to this case.

The case, brought by a prosecutor after an investigation led by Justice Renaud van Ruymbeke, centres on alleged mis-selling of equity release loans, as explained in an earlier Icelog. Oral hearings are scheduled until May 24, but the hearings were taking longer than expected and extra days to be added. The judgement can be expected in autumn.

French borrowers got contract in English, foreigners in French

The involvement of the very famous French singer Enrico Macias in the Landsbanki Luxembourg case has secured the attention of the French media; Macias took out an equity release loan of around €35m and his losses amount to €9m.* On the first day of the oral hearings, 2 May, Macias sat in court surrounded by his black-cloaked lawyers. On the second day of the hearings when Macias was questioned I counted nine lawyers apparently part of his entourage.

Macias was questioned back and forth for ca. three hours, no mercy there for this elderly gentleman, by the very astute and sharp judge. Only at one point, when one of the defence lawyers had probed Macias’ story did the singer lose his patience, crying out he had lost his wife and his house because of this bank. The judge reminded him that the charges were serious and the nine men accused had the right to defend themselves.

When Macias’ contract was brought up during the questioning an interpreter was called to assist. It turned out that Macias’ contract was in English. Some of the foreign borrowers were in court – German, English, American etc. It turns out that the foreign equity release borrowers all seem to have a contract in French. One told me he had asked for a contract in English and been told he would get it later; he didn’t.

Intriguingly, there seems to be a pattern here as I heard when I spoke to other borrowers: Landsbanki Luxembourg gave the foreign borrowers, i.e. non-French, a contract in French but the French borrowers, like Macias, got a contract in English.

“Produit autofinancé”

Much of the questioning centred on the fact that Landsbanki Luxembourg promised the borrowers the loans were “auto-financed.” To take an example: if the loan in total was for example €1m, the borrower got 20-30% paid out in cash and the bank invested the rest, stating the investment would pay for the loan. Ergo, Landsbanki promised the borrowers they would get a certain amount of cash for free, so to speak.

The judge asked the various witnesses time and again if that had not sounded to too good to be true to get a loan for free. As Macias and others pointed out the explanations given by the bankers and the brokers selling the loans seemed convincing. After all, these borrowers were not professionals in finance.

This line of questioning rests on the charges of alleged mis-selling. Other questions related to information given, who was present when the contracts were signed, validity of signatures etc.

The dirty deals in Luxembourg

The operations of the Icelandic banks have been carefully scrutinised in Iceland, first in the SIC report, published in April 2010 and later in the various criminal cases where Icelandic bankers and some of their closest collaborators have been prosecuted in Iceland.

There is one common denominator in all the worst cases of criminal conduct and/questionable dealings: they were conducted in and through Luxembourg.

All of this and all of these cases are well known to authorities in Luxembourg: Luxembourg authorities have assisted the investigations of the Icelandic Special Prosecutor, i.e. enabled the Prosecutor to gather information and documents in house searches in Luxembourg.

These cases exposing the role of Luxembourg in criminal conduct are all Icelandic but the conduct is not uniquely Icelandic. I would imagine that many financial crooks of this world have equally made use of Luxembourg enablers, i.e. bankers, lawyers and accountants, in financial shenanigans and crimes.

The Landsbanki questions Luxembourg has ignored

As I have pointed out earlier, alleged mis-selling is not the only impertinent question regarding the Landsbanki Luxembourg operations. There are also unanswered questions related to management of clients’ fund by Landsbanki Luxembourg, i.e. the investment part of the equity release loans (and possibly other investments) and, how after the bank’s collapse in October 2008, the bank’s court appointed Luxembourg administrator Yvette Hamilius has fulfilled her role.

As to the management of funds, some borrowers have told me that after the collapse of Landsbanki Luxembourg they discovered that contrary to what they were told the bank had invested their funds in Landsbanki bonds and bonds of other Icelandic banks. This was even done when the clients had explicitly asked for non-risky investments. As far as is known, Luxembourg authorities have neither investigated this nor any of the Icelandic operations with one exception: one case regarding Kaupthing is being investigated in Luxembourg and might lead to charges.

The latter question refers to serious complaints by equity release borrowers as to how Hamilius has carried out her job. Figures and financial statements sent to the clients do not add up. Hamilius has given them mixed information as to what they owe the bank and kept them in the dark regarding the investment part of their loans. Icelog has seen various examples of this. Hamilius has allegedly refused to acknowledge them as creditors to the bank.

On the whole, her communication with the clients has been exceedingly poor, letters and calls ignored and she has been unwilling to meet with clients. One client, who did manage to get a meeting with her, was seriously told off for bringing his lawyer along even though he had earlier informed her the name of the person he would bring with him.

Hamilius, on the other hand, claims the clients are only trying to avoid paying their debt. She has tried to recover properties in Spain and France, even after the bankers were charged in France. One of many remarkable turns in this case (see here) was a press release issued Robert Biever Procureur Général d’Etat – nothing less than the Luxembourg State Prosecutor – in support of Hamilius in her warfare against the equity release clients.

The court case at the imposing Palais de Justice in Paris gives an interesting insight into the operations of Landsbanki Luxembourg. As to management of funds prior to the bank’s collapse and the administrator’s handling of her duties Luxembourg has, so far, only shown complete apathy.

*I picked these numbers during the hearings but French media has reported different figures so I can’t certify these are the correct figures.

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During the Cold War there was no lack of Western intellectuals prophesying the end of the Western world as the efficient Soviet bloc would unavoidably win over democracy. Now the pre-destined outcome is seen to be populism that will engulf Western democracy. Making democracy work certainly is no mean task but one way of understanding the victory of Emmanuel Macron in France is reason beating irrational fears. Or as Macron himself has said: you convince people “by speaking to their intelligence.”

What do you do if you want to become a political leader? Listen to angry voters airing ideas politicians for decades haven’t had the wisdom or courage to challenge, such as foreigners and Europe being the reason for all problems – or do you formulate ideas you feel are important and debate them?

The latter is what Emmanuel Macron did in France: instead of lapping up anti-Europe sentiments and xenophobia advocated by Marine le Pen and her National Front, echoed in Brexit and, on a wider scale, the Trump victory in the US, Macron took two ideas seemingly on the vain, free trade and Europe, and won.

How did he do it? As Macron explained in a Channel 4 interview: “By fighting. By convincing people, by speaking to their intelligence, by trying to build stronger arguments in order to present and highlight our project.”

Take a risk or die

A key moment in Les coulisses d’une victoire, (01:16:24) a documentary of Macron’s campaign, is when Macron, after an off-site meeting with some Whirlpool workers, is told that National Front leader Marine Le Pen has just visited the factory: she appeared, she told the workers they were fighting for France and then left after giving some selfie opportunities.

Now, Macron wants to go to the factory – one has to take risks, he says, jump into the battle. His team worries about security but he counters them saying that at present no place in the country is completely safe. “If you listen to the security guys you end up like Hollande,” Macron says. “You may be safe but you are dead.”

Yes, Macron may very well fail. He has only conquered his first hurdle; the second one is securing support in the parliamentary elections in June. The third and most difficult hurdle is governing for the next five years, fulfilling some of his promises.

The power of ideas

However, the refreshing air Macron has already brought into politics is the power of reason, the power of reasoning, the sense that ideas are powerful.

Much of the political discourse of the 1960s and the 1970s was coloured by the sense of predestination on the Left that the democratic West was doomed to fail and the Soviet Union would rule. That dictatorship, void of stimulating competition and sparkling innovation, does not foster growth did not enter this argument.

Following the 2016 Brexit outcome in Great Britain and then the Trump victory, the general line of the commentariat, both in the established media and the social media, has benn that the West was destined for populist rule.

Speaking to people’s intelligence, not their ignorance

Macron has shown that fear of “the other,” xenophobia in all its gloom, fear of jobs leaving, jobs being taken by foreigners, fear of international trade agreements, European co-operation etc. can be encountered with reason and arguments for a better society. Closing borders does not create jobs. Pandering to ignorance and fear does not solve the underlying problems.

Macron has encountered these sentiments “by convincing people, by speaking to their intelligence, by trying to build stronger arguments” for the things he believes in, such as Europe and free trade.

With the Macron victory in France Front National and populism has neither been eradicated in France nor elsewhere. But after the elections in Austria, Netherlands and now France it can be argued that the populist element in Brexit and the election of Trump could be an aberration – is does not need to be an invincible trend.

Determinism and democracy

To claim that populism is unavoidable in our times of growing inequality is to believe in some sort of determinism: that certain conditions unavoidably lead to a certain outcome. But that is to negate the power of ideas, the power of reasoning and ultimately the power of democracy.

However, democracy certainly is vulnerable, exactly because it rests on ideas, on the power of ideas, on the need to have the energy to debate what one believes in. And democracy is also vulnerable to the distorting and corruptive force of money working for narrow special interests and not the general good. Alarmingly, this can possibly be happening in the US as Jane Mayer has so brilliantly documented and argued in her book Dark Money and as Angus Deaton concludes in The Great Escape. – Another saga but a very important one.

Not big data but big ideas

The thrust of opinions aired in much of the established media and the social media since Brexit and Trump is the belief that what has happened will continue, will increase and is unavoidable and unstoppable. Macron’s victory has shown that the rise and rise of populism is neither unavoidable nor unstoppable. It was not about clever use of big data but of big ideas and forceful arguments.

Contrary to what the UK Tories and to a certain degree Labour have done by towing the Ukip line or Francois Fillon trying to make a palatable version of Le Pen, Macron has shown that by taking a political risk, by throwing himself into the battle it is possible to win. – To believe in democracy is to believe in the power of ideas and to believe in the power of ideas is to believe in democracy.

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Equity release loans are a dangerous product to offer to all and sundry and that’s exactly what happened to those who took out such loans with Landsbanki Luxembourg – mostly elderly property owners in France and Spain. In addition, there are suspicions as to how the bank managed the investment part of the loans. In 2015 this  led to charges against Björgólfur Guðmundsson, Landsbanki’s chairman of the board and (together with his son Björgólfur Thor Björgólfsson) the bank’s main shareholder, as well as Gunnar Thoroddsen manager of Landsbanki Luxembourg and other employees. The case is coming up in a Paris Court now on Tuesday, scheduled to run through May.

Icelog has earlier reported on the sorry saga of the Landsbanki Luxembourg equity release loans. The borrowers, elderly non-Icelandic owners of properties in Spain and France, have been fighting the administrator of Landsbanki Luxembourg, Yvette Hamelius as well as trying to attract the attention of Luxembourg authorities to what the borrowers allege to be criminal offences committed by the bank prior to the collapse and lack of attention by the administrator.

As reported earlier on Icelog: The authorities in Luxembourg have shown a remarkable lack of interest in this case and certainly the borrowers have been utterly and completely shunned there. The most remarkable and incomprehensible move was when the Luxembourg state prosecutor, no less, Robert Biever Procureur Général d’Etat sided with the administrator as outlined here on Icelog. The prosecutor, without any investigation, doubted the motives of the borrowers, saying outright that they were simply trying to avoid to pay back their debt.

However, French authorities have taken the case seriously. After investigation, a French judge, Renaud van Ruymbeke, took on the case and then passed his findings on to a French prosecutor. In August 2015 Landsbanki managers, i.a. Gunnar Thoroddsen and Björgólfur Guðmundsson, as well as some foreign Landsbanki staff (see here) were charged with breeching the French penal code, risking both fines and up to five years in prison.

The case starts on Tueday. The oral hearings are, as far as I know, scheduled for 2, 3, 9, 10, 15, 16, 17, 22, 23 and 24 May at Tribunal de grande instance de Paris. I plan to report on the on-going proceedings.

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In a formal signing ceremony 16 January 2003 a group of Icelandic investors and the German bank Hauck & Aufhäuser purchased shares in a publicly-owned Icelandic bank. Paul Gatti represented the German bank, proudly airing the intension of being a long-term owner together with the Icelandic businessman Ólafur Ólafsson. What neither Gatti nor Ólafsson mentioned was that earlier that same day, at a meeting abroad, their representatives had signed a secret contract guaranteeing that the Icelandic bank Kaupthing, called ‘puffin’ in their emails, would finance the H&A purchase in Búnaðarbanki. A large share of the profit, 57,5 million USD, would accrue to Ólafsson via an offshore company, whereas 46,5 million USD was transferred to the offshore company Dekhill Advisors Limited, whose real owners remain unknown. Thus, Ólafsson and the H&A bankers fooled Icelandic authorities with the diligent help of advisors from Société General. – This 14 year old saga has surfaced now thanks to the Panama Papers. What emerges is a story of deception similar to the famous al Thani story, which incidentally sent Ólafsson and some of the Kaupthing managers involved in the ‘puffin plot’ to prison in 2015. Ólafsson is however still a wealthy businessman in Iceland.

The privatisation of the banking sector in Iceland started in 1998. By 2002 when the government announced it was ready to sell 45.8% in Búnaðarbanki, the agrarian bank, it announced that foreign investors would be a plus. When Ólafur Ólafsson, already a well-known businessman, had gathered a group of Icelandic investors, he informed the authorities that his group would include the a foreign investor.

At first, it seemed the French bank Société General would be a co-investor but that changed last minute. Instead of the large French bank came a small German bank no one had heard of, Hauck & Aufhäuser, represented by Peter Gatti, then a managing partner at H&A. But the ink of the purchase agreement had hardly dried when it was rumoured that H&A was only a front for Ólafsson.

Thirteen years later, a report by Reykjavík District judge Kjartan Björgvinsson, published in Iceland this week, confirms the rumours but the deception ran much deeper: through hidden agreements Ólafsson got his share in Búnaðarbanki more or less paid for by Kaupthing. Together with Kaupthing managers, two Société General advisers, an offshore expert in Luxembourg, Gatti and H&A legal adviser Martin Zeil, later a prominent FDP politician in Bayern, Ólafsson spun a web of lies and deceit. A few months after H&A pretended to buy into Búnaðarbanki the hidden agreements made an even greater sense when tiny Kaupthing bought the much larger Búnaðarbanki. Until Kaupthing collapsed in 2008 Ólafsson was Kaupthing’s second largest shareholder and, it can be argued, Kaupthing’s hidden mastermind.

The H&A deceit turned out to be only an exercise for a much more spectacular market manipulation. In the feverish atmosphere of September 2008, Ólafsson, following a similar pattern as in 2003, got a Qatari sheikh to borrow money from Kaupthing and pretend he bought 5.1% in Kaupthing as a proof of Kaupthing’s strength. Ólafsson was charged with market manipulation in 2015 and sentenced to 4 ½ years in prison, together with Kaupthing managers Sigurður Einarsson, Hreiðar Már Sigurðsson and Magnús Guðmundsson, all partners in Ólafsson’s H&A deceit.

Preparing the ‘puffin plot’

Two SocGen bankers, Michael Sautter and Ralf Darpe, worked closely with Ólafsson from autumn 2002 to prepare buying the 45.8% of Búnaðarbanki the Icelandic government intended to sell. Ólafsson gave the impression that SocGen would be the foreign co-investor with his holding company, Egla. Sautter, who had worked on bank privatisation in Israel and Greece, said in an interview with the Icelandic Morgunblaðið in September 2002 that strong core investors were better than a spread ownership, which was being discussed prior to the privatisation. In hindsight it’s easy to guess that the appearances of Ólafsson’s advisers were part of his orchestrated plot.

But something did not work out with SocGen: by mid December 2002 the bank withdrew from the joint venture with Ólafsson who asked for an extended deadline from the authorities to come up with new foreign co-investors. The SocGen bankers now offered to assist in finding a foreign investor and that’s how Ólafsson got introduced to H&A, Peter Gatti and Martin Zeil.

The privately held H&A came into being in 1998 when two private Frankfurt banks merged: 70% was owned by wealthy individuals, the rest held by BayernLB and two insurance companies.

Until last moment Ólafsson withheld who the foreign investor would be but assuring the authorities there would be one. And lo and behold, Peter Gatti showed up at the signing ceremony 16 January 2003, held in the afternoon in an old and elegant building in Reykjavík, formerly a public library. H&A bought the shares in Búnaðarbanki through Egla, Ólafsson’s holding company, which also meant that Ólafsson was in full control of the Búnaðarbanki shares.

At the ceremony in Reykjavík Gatti played the part of an enthusiastic investor, promising to bring contacts and knowledge to the Icelandic banking sector. To the media Ólafsson in his calmly assuring way praised the German bank, which would be valuable to Búnaðarbanki and Icelandic banking. “We chose the German bank,” he stated, “because they were the best for Búnaðarbanki and for our endeavours.”

The particular benefit for Búnaðarbanki never materialised but the arrangement certainly turned out to be extremely lucrative for Ólafsson and others involved. However, it wasn’t the agreement signed in Reykjavík but another one signed some hours earlier, far from Reykjavík, that did the trick.

The hidden agreements at the heart of the ‘puffin plot’

The other agreement, in two parts, signed far away from Reykjavík told a very different story than the show put on at the old library in Reykjavík.

That agreement came into being following hectic preparation by Guðmundur Hjaltason, who worked for Ólafsson, Sautter and Darpe, Gatti and Zeil, an offshore expert in Luxembourg Karim van den Ende and a group of Kaupthing bankers. The Kaupthing bankers were Sigurður Einarsson, Hreiðar Már Sigurðsson, Steingrímur Kárason, Bjarki Diego and Magnús Guðmundsson who have all been convicted of various fraud and sentenced to prison, and two others, Kristín Pétursdóttir, now an investor in Reykjavík and Eggert Hilmarsson, Kaupthing’s trusted lawyer in Luxembourg. Karim Van den Ende is a well known name in Iceland from his part in various dubious Kaupthing deals through his Luxembourg firm, KV Associates.

The drafts had been flying back and forth by email between the members this group. Three days before the signing ceremony Zeil was rather worried, as can be seen from an email published in the new report. One of his questions was:

Will or can Hauck & Aufhäuser be forced by Icelandic law to declare if it acts on its own behalf or as trustee or agent of a third party?

Zeil’s email, where he also asked for an independent legal opinion, caused a flurry of emails between the Kaupthing staff. Bjarki Diego concluded it would on the whole be best that “as few as possible would know about this.”

But how was the H&A investment presented at the H&A? According to Helmut Landwehr, a managing partner and board member at H&A at the time of the scam, who gave a statement to the Icelandic investigators the bank was never an investor in Iceland; H&A only held the shares for a client. Had there been an investment it would have needed to be approved by the H&A board. – This raises the question if Gatti said one thing in Iceland and another to his H&A colleagues, except of course for Zeil who operated with Gatti.

The offshored profits

The hidden agreement rested on offshore companies provided by van den Ende. Kaupthing set up an offshore company, Welling & Partners, that placed $35.5m, H&A’s part in the Búnaðarbanki share purchase, on an account with H&A, which then paid this sum to Icelandic authorities as a payment for its Búnaðarbanki purchase. In other words, H&A didn’t actually itself finance its purchase in the Icelandic bank; it was a front for Ólafsson. H&A was paid €1m for the service.

Then comes the really clever bit: H&A promised it would not sell to anyone but Welling & Partners – and it would sell its share at an agreed time for the same amount it had paid for it, $35.5m. When that time came, in 2005, the H&A share in Búnaðarbanki was worth quite a bit more, $104m to be precise.

Kaupthing then quietly bought the shares so as to release the profit – and here comes another interesting twist: this profit of over $100m went to two offshore companies: $57.5m to Marine Choice, owned by Ólafsson and $46.5m to a company called Dekhill Partners. Kaupthing then invested Ólafsson’s profit in various international companies.

In the new report the investigator points out that the owners of Dekhill Partners are nowhere named but strong indications point to Lýður and Ágúst Guðmundsson, Kaupthing’s largest shareholders who still own businesses in the UK and Iceland.

At some point in the process, which took around two years, the loans to Welling & Partners were not paid directly into Welling but channelled via other offshore companies. This is a common feature in the questionable deals in Icelandic banks, most likely done to hide from auditors and regulators big loans to companies with little or no assets to pledge.

Who profited from the ‘puffin plot’?

Ólafsson is born in 1957, holds a business degree from the University of Iceland and started early in business, first related to state-owned companies, most likely through family relations: his father was close to the Progressive party, the traditional agrarian party, and the coop movement. Ólafsson is known to have close ties to the Progressives and thought to be the party’s major sponsor, though mostly a hidden one.

Ólafsson was also close to Kaupthing from early on and was soon the bank’s second largest shareholder. The largest was Exista, owned by the Guðmundsson brothers.

There are other deals where Ólafsson has operated with foreigners who appeared as independent investors but at a closer scrutiny were only a front for Ólafsson and Kaupthing’s interests. The case that felled Ólafsson was the al Thani case: Mohammed Bin Khalifa al Thani announced in September 2008 a purchase of 5.1% in Kaupthing. The 0.1% over the 5% was important because it meant the purchase had to be flagged, made visible. To the Icelandic media Ólafsson announced the al Thani investment showed the great position and strength of Kaupthing.

In 2012, when the Special Prosecutor charged Sigurður Einarsson, Magnús Guðmundsson, Hreiðar Már Sigurðsson and Ólafsson for their part in the al Thani case it turned out that al Thani’s purchase was financed by Kaupthing and the lending fraudulent. Ólafsson was charged with market manipulation and sentenced in 2015 to 4 ½ years in prison. He had only been in prison for a brief period when laws were miraculously changed, shortening the period white-collar criminals need to spend in prison. Since his movements are restricted it drew some media attention when he crashed his helicopter (he escaped unharmed) shortly after leaving prison but he is electronically tagged and can’t leave the country until the prison sentence has passed.

The Guðmundsson brothers became closely connected to Kaupthing already in the late 1990s while Kaupthing was only a small private bank. Lýður, the younger brother was in 2014 sentenced to eight month in prison, five of which were suspended, for withholding information on trades in Exista, where he and his brother were the largest shareholders.

Both Ólafsson and the Guðmundsson brothers profited handsomely from their Kaupthing connections. Given Ólafsson’s role in the H&A alleged investment and later in the al Thani case it is safe to conclude that Ólafsson was a driving force in Kaupthing and could perhaps be called the bank’s mastermind.

In spite of being hit by Kaupthing’s collapse Ólafsson and the brothers are still fabulously wealthy with trophy assets in various countries. This may come as a surprise but a characteristic of the Icelandic way of banking was that loans to favoured clients had very light covenants and often insufficient pledges meaning the loans couldn’t be recovered, the underlying assets were protected from administrators and the banks would carry the losses. How much this applied to Ólafsson and Guðmundsson is hard to tell but yes, this was how the Icelandic banks treated certain clients like the banks’ largest shareholders and their close collaborators.

When Ólafsson was called to answer questions in the recent H&A investigation he refused to appear. After a legal challenge from the investigators and a Supreme Court ruling Ólafsson was obliged to show up. It turned out he didn’t remember very much.

Ólafsson engages a pr firm to take of his image. After the publication of the new report on the H&A purchase Ólafsson issued a statement. Far from addressing the issues at stake he said neither the state nor Icelanders had lost money on the purchase. Over the last months Ólafsson has waged a campaign against individual judges who dealt with his case, an unpleasant novelty in Iceland.

The Panama Papers added the bits needed to understand the H&A scam

In spite of Gatti’s presence at the signing ceremony in January 2003 the rumours continued, even more so as H&A was never very visible and then sold its share in Búnaðarbanki/Kaupthing. One person, Vilhjálmur Bjarnason, now an Independence party MP, did more than anyone to investigate the H&A purchase and keep the questions alive. Some years later, having scrutinised the H&A annual accounts he pointed out that the bank simply couldn’t have been the owner.

Much due to Bjarnason’s diligence the sale was twice investigated before 2010 by the Icelandic National Audit Office, which didn’t find anything suspicious. The investigation now has thoroughly confirmed Bjarnason’s doubts.

Both in earlier investigations and the recent H&A investigation Icelandic authorities have asked the German supervisors, Bundesanstalt für Finanzdienstleistungsaufschicht, BaFin, for information, a request that has never been granted. During the present investigation the investigators requested information on the H&A ownership in 2003. The BaFin answer was that it could only give that information to its Icelandic opposite number, the Icelandic FME. When FME made the request BaFin refused just the same – a shocking lack of German willingness to assist and hugely upsetting.

The BaFin seems to see its role more as a defender of German banking reputation than facilitating scrutiny of German banks.

The Icelandic Special Investigative Commission, SIC, set up in December 2008 to investigate the banking collapse did investigate the H&A purchase, exposed the role played by the offshore companies but could not identify the owners of the offshore companies involved and thus could not see who really profited.

The Panama leak last year exposed the beneficial owners of the offshore companies. That leak didn’t just oust the then Icelandic prime minister Sigmundur Davíð Gunnlaugsson, incidentally a leader of the Progressive party at the time but also threw up names familiar to those who had looked at the H&A purchase earlier.

Last summer, the Parliament Ombudsman, Tryggvi Gunnarsson who was one of the three members of the SIC made public he had new information regarding the H&A purchase, which should be investigated. The Alþingi then appointed District judge Kjartan Björgvinsson to investigate the matter.

By combining data the SIC had at its disposal and Panama documents the investigators were able to piece together the story above. However, Dekhill Partners was not connected to Mossack Fonseca where the Panama Papers originated, which means that the name of the owners isn’t found black on white. However, circumstantial evidence points at the Gudmundsson brothers.

How relevant is this old saga of privatisation fourteen years ago?

The ‘puffin plot’ saga is still relevant because some of the protagonists are still influential in Iceland and more importantly there is another wave of bank privatisation coming in Iceland. The Icelandic state owns Íslandsbanki, 98.2% in Landsbanki and 13% in Arion.

Four foreign funds and banks – Attestor Capital, Taconic Capital, Och-Ziff and Goldman Sachs – recently bought shares in Arion, in total 29.18% of Arion. Kaupskil, the holding company replacing Kaupthing (holding the rest of Kaupthing assets, owned by Kaupthing creditors) now owns 57.9% in Arion and then there is the 13% owned by the Icelandic state.

The new owners in Arion hold their shares via offshore vehicles and now Icelanders feel they are again being taken for a ride by opaque offshorised companies with unclear ownership. In its latest Statement on Iceland the IMF warned of a weak financial regulators, FME, open to political pressure, particularly worrying with the coming privatisation in mind. The Fund also warned that investors like the new investors in Arion were not the ideal long-term owners.

The palpable fear in Iceland is that these new owners are a new front for Icelandic businessmen like H&A. Although that is, to my mind, a fanciful idea, it shows the level of distrust. Icelanders have however learnt there is a good reason to fear offshorised owners.

The task ahead in re-privatising the Icelandic banks won’t be easy. The H&A saga shows that foreign banks can’t necessarily be trusted to give sound advice. The new owners in Arion are not ideal. The thought of again seeing Icelandic businessmen buying sizeable chunks of the Icelandic banks is unsettling, also with Ólafsson’s scam with H&A in mind.

It’s no less worrying seeing Icelandic pension funds, that traditionally refrain from exerting shareholder power, joining forces with Icelandic businessmen who then fill the void left by the funds to exert power well beyond their own shareholding. Or or… it’s easy to imagine various versions of horror scenarios.

In short, the nightmare scenario would be a new version of the old banking system where owners like Ólafsson and their closest collaborators rose to become not only the largest shareholders but the largest borrowers with access to covenant-light non-recoverable loans. Out of the relatively small ‘puffin plot’ Ólafsson pocketed $57.5m. The numbers rose in the coming years and so did the level of opacity. Ólafsson is still one of the wealthiest Icelanders, owning a shipping company, large property portfolio as well as some of Iceland’s finest horses.

In 2008, five years after the banks were fully privatised the game was up for the Icelandic banks. The country was in a state of turmoil and it ended in tears for so many, for example the thousands of small investors who had put their savings into the shares of the banks; Kaupthing had close to 40.000 shareholders. It all ended in tears… except for the small group of large shareholders and other favoured clients that enjoyed the light-covenant loans, which sustained them, even beyond the demise of the banks that enriched them.

Obs.: the text has been updated with some corrections, i.a. the state share sold in 2003 was 45.8% and not 48.8% as stated earlier. 

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It beggars belief: over eight years from a calamitous financial crash in Iceland, much to do with failed financial supervision, there is still reason to worry about financial supervision in Iceland. Or rather, there is again reason to worry now that the sheltering capital controls are for all intents and purposes abolished Iceland. All of this, according to the latest IMF Concluding Statement of the 2017 Article IV Mission on Iceland. To Icelog Ashok Vir Bhatia who led the IMF mission says that “worried” wouldn’t be the right word regarding the Icelandic financial supervision but there certainly was cause for concern, as the Statement reflects.

‘The economy of Iceland is doing very well,’ Ashok Vir Bhatia said to Icelog today. With growth of 7% of GDP Iceland is clearly doing well indeed. This rapid growth might be another cause for concern but according to Bhatia the growth seems sustainable.

In short, this is the IMF summary:

What the IMF is worried about, is political pressure on Fjármálaeftirlitið, FME, the Icelandic supervisory authority. FME “is not sufficiently insulated from the political process.” The outline of political pressure is there to see. FME needs to go hat in hand to the Parliament every year to beg for a slice of the budget. The present chairman of the board, appointed by prime minister Bjarni Benediktsson during his time in office as a minister of finance, is a young ex-banker; difficult to imagine anyone with her CV in the same position with any regulator in the neighbouring countries.

In Iceland, the IMF Statement will be read with the people at FME in mind, how fit they are at their job. From the point of view of the IMF this criticism is about institutions, not people. If the institutional framework is robust, there is less scope for political pressure. As it is, the institutional frame isn’t as robust as it should be – and that’s what the IMF is emphasising here.

Banks and ownership is one thing to worry about now that things in Iceland will slowly be normalised, post controls. The fear is that the old normal – few big shareholders in each of the three largest banks, not only the largest owners but also the largest borrowers – will be normal again.

The recent purchase of creditors of Arion (via Kaupskil the holding company of Kaupthing) all through totally opaque offshore vehicles, has led to a furious debate in Iceland of fit and proper owners. Here the FME took a rather weak stance as to identifying beneficial owners, after all these new owners have been in Iceland for some years, not exactly new faces.

The new owners are Taconic Capital Advisors, Attestor Capital, Och-Ziff Capital Management Group and Goldman Sachs. Reading between the lines the IMF Statement indicates these are not necessarily ideal bank owners: ‘The recent purchase of the one privately owned pillar bank poses a test for Fjármálaeftirlitid. Financial stability considerations and fairness require that the mandatory fit and proper assessment be thorough, uncompromising, and evenhanded.’

The phenomenal, compared to other European countries, growth of the Icelandic economy is mainly due to tourism and as Bhatia points out to Icelog experience from other countries suggests that tourism doesn’t normally vanish over night. ‘The effect is not just temporary. Tourism is fundamentally good for the economy, a real blessing.’

In Iceland, the attitude towards the booming tourism has been that surely this is like the herring: it comes and goes and while it’s there it should just be exploited. This is answered in the new Statement: ‘Evidence from elsewhere suggests the shoal of tourists is not about to swim away abruptly: tourists are not herring.’ – The Statement emphasises the need for holistic tourism strategy.

A real friend is the one who doesn’t shy away from criticising – this old Icelandic saying comes to mind reading the latest IMF Statement on Iceland.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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