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Supreme Court rules in al Thani case: imprisonment confirmed

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“The results today shows that it is possible to bring complicated financial cases to court and get conviction,” Ólafur Hauksson head of Office of the Special Prosecutor said to Icelog, now that the Supreme Court has ruled in one of the OSP’s major cases, the al Thani case. “Building up the expertise has been a long process but the ruling today demonstrates that setting up an office, which didn’t exist earlier, was fully justified. No society can tolerate that certain parts of it are beyond law and justice.”

Those four charged were Sigurður Einarsson chairman of Kaupthing board, Magnús Guðmundsson manager of Kaupthing Luxembourg, Kaupthing CEO Hreiðar Már Sigurðsson and Ólafur Ólafsson the bank’s second largest shareholder. Reykjavík District Court had earlier ruled in the case where Einarsson was sentenced to 5 years in prison, Guðmundsson 3 years, Sigurðsson 5 1/2 years and Ólafsson 3 1/2 years. The Supreme Court has confirmed the ruling over Sigurðsson whereas Ólafsson has now been sentenced to 4 1/2 years, Einarsson to 4 years instead of 5 years and Guðmundsson to 4 years.

As detailed in an earlier Icelog the core of the al Thani case were loans to Ólafsson and Sheikh Mohammed bin Khalifa al Thani, a Qatari investor from the country’s ruling family. It is important to notice that the issuing of these loans was the criminal deed in the case – the three Kaupthing managers broke law by doing it and Ólafsson was complicit in that criminal deed.

The story behind the case is that in in September 2008 Kaupthing made much fanfare of the fact that Sheikh al Thani bought 5.1% of Kaupthing’s shares. The 5.1% stake in the bank made al Thani Kaupthing’s third largest shareholder, after Olafsson who owned 9.88%. This number, 5.1%, was crucial, meaning that the investment had to be flagged – and would certainly be noticed. Einarsson, Sigurðsson and Ólafsson all appeared in the Icelandic media, underlining that the Qatari investment showed the bank’s strong position and promising outlook.

What these three didn’t tell was that Kaupthing lent al Thani the money to buy the stake in Kaupthing – a well known pattern, not only in Kaupthing but in the other Icelandic banks as well. A few months later, stories appeared in the Icelandic media indicating that al Thani was not risking his own money. More was told in SIC report and the SIC recount indicated a fraudulent behaviour. The ruling today has confirmed the doubts, which have surrounded this investment from early on.

Although the case draws its name from Sheikh al Thani he has not been accused of any wrongdoing. He was one of the witness in the case, gave a statement over the phone.

As I have pointed out earlier there is an echo of this investment story in the ongoing investigation into Qatari and Middle East investment in Barclays, which saved the bank from seeking state support in autumn 2008.

The ruling in Iceland is i.a. in stark contrast to how Irish courts have tackled financial crimes related to the Irish collapsed banks. In April last year a court ruled that two former Anglo Irish managers, who had been convicted of issuing loans to prop up the bank’s share price, should not be imprisoned in spite of being found guilty. The judge ruled it was unjust they should go to prison for a criminal deed because they believed they had acted lawfully. Sean FitzPatrick, the bank’s former chairman, was cleared in this case. I find this Irish ruling truly incredible. This loan saga – loans to the so-called “Golden Circle” – has striking parallels in other Icelandic cases, which are being processed.

Icelandic law on financial fraud is in most respect similar to law on these issues in Northern Europe. There is nothing special about the Icelandic situation – except the will to carry out investigations and bringing cases to court. As Hauksson pointed out financial crimes need not be too complicated to be successfully prosecuted – and no part of society should be beyond the reach of the law.

*Update: I have seen some comments that because the four sentenced to prison in the al Thani case are living abroad they are unlikely to go to prison. That is not correct: the fact that they live abroad – in London, Switzerland and Luxembourg – will apparently not change anything. Ólafsson has already said he will come when called to go to prison. That is an unavoidable consequence of the sentencing. 

*Update 25.2. 2015: Ólafsson asked to start his sentencing as soon as possible. According to Icelandic media he is now already in prison at Kvíabryggja, Snæfellsnes, where this sentenced in earlier banking collapse cases have been sent to jail (see here for details of this prison).

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Written by Sigrún Davídsdóttir

February 12th, 2015 at 5:02 pm

Posted in Iceland

Reykjavik District Court rules in the al Thani case today

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A ruling in the so-called al Thani case is expected today at 3pm in Iceland. The Office of the Special Prosecutor earlier charged Kaupthing top managers – Sigurður Einarsson, Hreiðar Már Sigurðsson, Magnús Guðmundsson – and the second largest Kaupthing shareholder, Ólafur Ólafsson, for market manipulation and breach of fiduciary duty. The case derives its name from a member of the Qatar-ruling al Thani family, involved in the case but not charged.

Involving both management and a shareholder this case is one of the most extensive cases brought by the OSP. So far, the District Court has tended to be more lenient than the Supreme Court in cases brought by the OSP. All of the OSP cases have gone to the second and highest court, the Supreme Court. No matter the outcome, this case will almost certainly be appealed by either party.

The OSP had demanded a six year unsuspended imprisonment for Einarsson and Sigurðsson and four years for the other two. See here for earlier Icelogs on the al Thani case.

UPDATE: Sigurðsson has been sentenced to 5 1/2 years, Einarsson 5 years, Ólafsson 3 1/2 years and Guðmundsson 3 years.

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Written by Sigrún Davídsdóttir

December 12th, 2013 at 1:13 pm

Posted in Iceland

Yet another unexpected turn in the al Thani case

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The al Thani case has taken yet another unexpected turn – it seems that there are only unexpected turns in this case. Instead of postponing the oral hearing until February next year, as Justice Pétur Guðgeirsson of Reykjavík County Court had decided after a meeting with the new defence lawyers, the case will be assigned to a new judge, Símon Sigvaldason. Guðgeirsson will be off due to illness. The oral hearing is now set to start 21 October. The Office of the Special Prosecutor and the defendants heard of this yesterday, according to Rúv.

The al Thani case relates to the share purchase of a Qatari investor from Qatar’s ruling family. He bought 5.1% of shares in Kaupthing in September 2008. It later transpired that Kaupthing financed the purchase. The case has strong parallels to a Qatari investment in Barclays in autumn 2008, saving the bank from seeking a bail-out from the UK Government (link to earlier Icelogs on the al Thani case).

This is the latest in a long wrestle over bringing the al Thani case to court. As reported earlier, the defense team of Sigurður Einarsson chairman of Kaupthing and Ólafur Ólafsson, the bank’s second largest shareholder, had used up all possibilities to have the case thrown out or postponed when they brought about a delay by simply resigning from the case and then refusing to obey the judge when he refused to accept their resignation.

The fact that the court itself has now taken action to diminish the delay indicates that further delaying tactics might prove more difficult. Those following the prosecution of bankers in Iceland are no doubt in for some interesting twists and turns in the different trial sagas.

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Written by Sigrún Davídsdóttir

April 25th, 2013 at 10:40 pm

Posted in Iceland

The latest on the al Thani case

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Instead of starting the oral hearings in the al Thani case – where the Office of the Special Prosecutor in Iceland has charged three former Kaupthing managers and the bank’s second largest shareholder – as planned Thursday morning, April 11, the hearings were postponed until further notice. This happened after the defense lawyers of Sigurdur Einarsson and Olafur Olafsson took the unprecedented step not to heed the judge who refused to accept their resignation of the case. In court, prosecutor Bjorn Thorvaldsson pleaded that the two lawyers would receive penalties for willfully causing delays to the case. The judge will consider any such step after the case had finally been heard.

The defendants have now appointed new lawyers who need to read up on the case. The two lawyers who resigned – Gestur Jonsson and Ragnar Hall – are two of the most experienced lawyers in Iceland. Jonsson was i.a. lawyer for Baugur’s main shareholder Jon Asgeir Johannesson in the so-called Baugur case and is also Johannesson’s defense lawyer in a case brought against Johannesson by the Office of the Special Prosecutor, the so-called Aurum case.

The defense in the Aurum case shows a similar trend to the al Thani case. – The oral hearings were due to start in January, got postponed until early April when it was again postponed, this time because documents that the defense team wanted to present were not ready. After the events in the al Thani case Special Prosecutor Olafur Hauksson expressed his worries that similar things might start to happen in other cases brought by the OSP.

The two lawyers replacing Jonsson and Hall – Olafur Eiriksson and Thorolfur Jonsson– are not at all big names in the Icelandic legal profession. The are both from Logos, the largest Icelandic law firm.

The two lawyers who resigned claim they felt forced to resign because of the way their clients have been treated. Still, they have neither filed any complaints nor taken any action. Earlier, they had made several attempts to have the case thrown out or postponed, taking their cases all the way to the Supreme Court, which has rejected their attempts. In its last ruling re the case the Supreme Court reprimanded the two lawyers, saying their case was without merit.

The strong feeling in Iceland is that the two lawyers resigned in order to gain the postponements they could not obtain via the courts. It is well known in big white-collare cases that highly paid lawyers often try all possible tricks to thwart and delay going to court. Both lawyers strongly deny any such tactics.

The judge will meet with the new defense lawyers on April 22, after which it might be clear when the oral hearings will start. Given the complexity of the case, it is quite likely that the next chapter in the case will not commence until autumn.

*Here are earlier blogs where the al Thani case is mentioned – and here is the story behind the charges in the al Thani case. 

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Written by Sigrún Davídsdóttir

April 14th, 2013 at 10:20 pm

Posted in Iceland

New turn in the al Thani case – but again on track to start on April 11th – but not quite (updated)

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Just as the defense team for those indicted in the al Thani case – Kaupthing’s second largest shareholder Olafur Olafsson and managers Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson – had exhausted all means of getting the case thrown out of court or suspended, the defense lawyers for Einarsson and Olafsson, Gestur Jonsson and Ragnar Hall, have resigned from the case. They claim that the defendants are not getting a fair trial and criticise the investigation by the Office of the Special Prosecutor and how the County Court and the Supreme Court have handled their case.

Bjorn Thorvaldsson, who represents the OSP, says to Ruv that the move by the defense lawyers came as a great surprise. The two lawyers tried five different ways to have the case thrown out or suspended, all five times taking the case to the Supreme Court. In the last case, for suspension, ruled on the the Supreme Court only last week, the Supreme Court reprimanded the two lawyers in its ruling for bringing a needless case to the Court.

However, only a few hours after the two lawyers handed in their letter (in Icelandic) to the Country Court, the judge in the coming case, Petur Gudgeirsson, refused to acknowledged their resignation. The oral hearings are planned to run for eight days. Ca. 50 people are being called to give witness. Now that the latest attempt by the defense lawyers to suspend the case it seems that the oral hearings will start, as planned, on Thursday.

*Updated: In spite of the judge having refused to acknowledge the lawyers’ resignation the two defense lawyers have reiterated their intention. No one seems to know what the legal situation is here. The lawyers can hardly be pushed against their will to defend their two clients. It means that the case is now in jeopardy and might be postponed until next autumn. 

*A link to earlier Icelogs on the al Thani case.

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Written by Sigrún Davídsdóttir

April 8th, 2013 at 4:44 pm

Posted in Iceland

The al Thani Kaupthing case on the horizon

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The case that the Icelandic Office of the Special Prosecutor is bringing against three Kaupthing managers and Olafur Olafsson, at the time Kaupthing’s second largest shareholder, is coming up in the Reykjavik County Court today. It seems that now all legal quibbles the defendants brought up have been dealt with – all of them brushed aside – which means that the case can now take its course. Not quite now though, that will happen in mid April when the main proceedings are due to start. The Kaupthing managers charged are Sigurdur Einarsson, Hreidar Mar Sigurdsson and Magnus Gudmundsson.

This is by far the largest case brought so far by the OSP. There are fifty names on the witness list. One of them is the man who has given the case its name, Sheikh Mohammed bin Khalifa al Thani. The Sheikh is not accused of any wrongdoing and has not been charged but the OSP would like him to bear witness. It is not known if he will answer the request.

This case has been extensively dealt with on Icelog, i.a. here. The interesting UK angle to the story is that there are striking parallels of this loan story – a Middle Eastern investor being lent money by a bank to invest in that same bank, which then uses that investment as a sign of its rude health – in the Barclay story, also from 2008, now being investigated by the SFO, also covered earlier on Icelog.

Middle Eastern and Russian money is famously finding its way into many London-based investments and investment companies, adding glamour and building cranes to the city. The question is how sparkling clean and healthy all this money is – but as we know from the HSBC money laundering case even major banks are not too squeamish when it comes to the choosing their customers.

 

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Written by Sigrún Davídsdóttir

March 7th, 2013 at 9:17 am

Posted in Iceland

Kaupthing Winding-Up Board settles with Sheikh al Thani

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Kaupthing hf – the Winding-up Board of Kaupthing bank – has announced it has reached “an agreement concerning the settlement of all claims and liabilities between them. This agreement has been reached on a commercial basis with no admission of liability by any party. As a result of the settlement, the proceedings commenced in Iceland by Kaupthing against Sheikh Mohammed Bin Khalifa Bin Hamad Al Thani have been discontinued and all other claims and liabilities have been released. All other terms of the settlement remain confidential.”

According the SIC report Kaupthing loaned companies owned by Sheikh al Thani to buy shares in Kaupthing. This loan was allegedly behind the purchase of Kaupthing shares in September 2008. As reported earlier on Icelog the Office of the Special Prosecutor has charged three former Kaupthing managers and Kaupthing’s second largest shareholder in relation to this loan in a case similar to Barclays and the Qatari investors: neither bank declared it had allegedly loaned the investors money to buy the shares. In addition, Kaupthing lent the Sheikh against future profits. The Sheikh has not been charged of any wrong doing in Iceland but according to Icelandic media the OSP has indicated it might want to call him in as a witness in this case.

So what is Kaupthing hf settling? The SIC report and the OSP charges indicate that as well as issuing two loans in ISK, now around €157m, one of the Sheikh’s companies got a loan of $5om. This loan was “parts of the profits from the transaction” according to a Kaupthing overview of loans issued or discussed in one of the bank’s credit committees just before it collapsed. According to the writ, these three loans have never been repaid.

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Written by Sigrún Davídsdóttir

February 8th, 2013 at 4:32 pm

Posted in Iceland

The al Thani story behind the Kaupthing indictment (updated)

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The Office of the Special Prosecutor is indicting Kaupthing’s CEO Hreidar Mar Sigurdsson and Kaupthing’s chairman Sigurdur Einarsson for a breach of fiduciary duty and market manipulation in giving loans to companies related to the so-called ‘al Thani’ case; indicting Kaupthing Luxembourg manager Magnus Gudmundsson for his participation in these loans and Kaupthing’s second largest shareholder Olafur Olafsson for his participation. In addition, Olafsson faces charges of money laundering because he accepted loans to his companies without adequate guarantees.

In September 2008 Kaupthing made much fanfare of the fact that Sheikh Mohammed bin Khalifa al Thani, a Qatari investor related to the Qatar ruler al Thani, bought 5.1% of Kaupthing’s shares. The 5.1% stake in the bank made al Thani Kaupthing’s third largest shareholder, after Olafsson who owned 9.88%. This number, 5.1%, was crucial, meaning that the investment had to be flagged – and would certainly be noticed. Einarsson, Sigurdsson and Olafsson all appeared in the Icelandic media, underlining that the Qatari investment showed the bank’s strong position and promising outlook.

What these three didn’t tell was that Kaupthing lent the al Thani the money to buy the stake in Kaupthing – a well known pattern, not only in Kaupthing but in the other Icelandic banks as well. A few months later, stories appeared in the Icelandic media indicating that al Thani wasn’t risking his own money. More was told in SIC report – and now the OSP writ tells quite a story. A story the four indicted and their defenders will certainly try to quash.

The story told in the OSP writ is that on Sept. 19 Sigurdsson organised that a loan of $50m was paid into a Kaupthing account belonging to Brooks Trading, a BVI company owned by another BVI company, Mink Trading where al Thani was the beneficial owner. Sigurdsson bypassed the bank’s credit committee and was, according to the bank’s own rules, not allowed to authorise on his own a loan of this size. The loan to Brooks was without guarantees and collaterals. This loan, first due on Sept. 29 but referred to Oct. 14 and then to Nov. 11 2008, has never been repaid. – Gudmundsson’s role was to negotiate and organise the payment to Brooks. According to the charges he should have been aware that Sigurdsson was going beyond his authority by instigating the loan.

But this was only the beginning. The next step, on Sept. 29, was to organise two loans, each to the amount of ISK12.8bn, in total ISK25.6bn (now €157m) to two BVI companies, both with accounts in Kaupthing: Serval Trading, belonging to al Thani and Gerland Assets, belonging to Olafsson. These two loans were then channelled into the account of a Cyprus company, Choice Stay. Its beneficial owners are Olafsson, al Thani and another al Thani, Sheikh Sultan al Thani, said to be an investment advisor to al Thani the Kaupthing investor. From Choice Stay the money went into another Kaupthing account, held by Q Iceland Finance, owned by Q Iceland Holding where al Thani was the beneficial owner. It was Q Iceland Finance that then bought the Kaupthing shares. As with the Brooks loan, none have been repaid.

These loans were without appropriate guarantees and collaterals – except for Serval, which had al Thani’s personal guarantee. After noon Wed. Oct. 8, when Kaupthing had collapsed, the US dollar loan to Brooks was sent express to Iceland where it was converted into kronur at the rate of ISK256 to the dollar (twice the going rate in Iceland that day) and used to repay Serval’s loan to Kaupthing – in order to free the Sheik from his personal guarantee.

This is the scheme, as I understand it from the OSP writ. And all this was happening as banks were practically not lending. There was a severe draught in the international financial system.

The Brooks loan is interesting. It can be seen as an “insurance” for al Thani that no matter what, he would never lose a penny. When things did go sour – the bank collapsed and all the rest of it – this money was used to unburden him of his personal guarantee. Otherwise, it would have been money in his pocket. It’s also interesting that the loan was paid out to Brooks on Sept. 19, his investment was announced on Sept. 22 – but the trade wasn’t settled until Sept. 29. This means that his “guarantee” was secured before he took the first steps to become a Kaupthing investor.

Apparently, Kaupting’s credit committee was in total oblivion of all this. The CC was presented with another version of reality. Below is an excerpt from the minutes regarding the al Thani loan, discussed when the Board of Kaupthing Credit Committee met in London Sept. 24. 2008 (click on the image to enlarge).

Three things to note here: that the $50m loan “is parts of the profits from the transaction.” Second, that al Thani borrowed €28m to invest in Alfesca. It so happens that Alfesca belonged to Olafsson. Al Thani’s acquisition in Alfesca was indeed announced in early summer of 2008 and should, according to rules, have been settled within three months. At the end of Oct. 2008 it was announced that due to the market upheaval in Iceland al Thani was withdrawing his Alfesca investment. Thirdly, it’s interesting to note that Deutsche bank did lend into this scheme – as it also did into another remarkable Kaupthing scheme where the bank lent money to Olafsson and others for CDS trades, to lower the bank’s spread; yet another untold story.

According to the OSP writ, the covenants of the al Thani loans differed from what the CC was told. It’s also interesting to note that the $50m loan to al Thani’s company was paid out on Sept. 19, five days before the CC meeting. This fact doesn’t seem to have been made clear to the CC.

The OSP writ also makes it clear that any eventual profits from the investment would have gone to Choice Stay, owned by Olafsson and the two al Thanis.

Why did al Thani pop up in September 2008? It seems that he was a friend of Olafsson who has is said to have extensive connection in al Thani’s part of world. Olafsson’s Middle East connection are said to go back to the ‘90s when he had to look abroad to finance some of his Icelandic ventures. London is the place to cultivate Middle East connections and that’s also where Olafsson has been living until recently. It is interesting to note that the Financial Times reports on the indictments without mentioning the name of Sheikh al Thani.

The four indicted Icelanders are all living abroad. Sigurdur Einarsson lives in London and it’s not known what he has been doing since Kaupthing collapsed. Hreidar Mar Sigurdsson lives in Luxembourg where he, together with other former Kaupthing managers, runs a company called Consolium. His wife runs a catering company and a hotel in Iceland.

Magnus Gudmundsson also lives in Luxembourg. David Rowland kept him as a manager after buying Kaupthing Luxembourg, now Banque Havilland, but Rowland fired Gudmundsson after Gudmundsson was imprisoned in Iceland for a few days, related to the OSP investigation. In the Icelandic Public Records it’s said that Olafsson lives in the UK but he has now been living in Lausanne for about two years. In Iceland, he has a low profile but is most noted in horse breeding circles, a popular hobby in Iceland. He breeds horses at his Snaefellsnes farm and owns a number of prize-winning horses.

Following the indictment, Olafsson and Sigurdsson have stated that they haven’t done anything wrong and that the al Thani Kaupthing investment was a genuine deal. The case could come up in the District Course in the coming months. But perhaps this isn’t all: it’s likely that there will be further indictment against these four on other questionable issues related to Kaupthing.

*The OSP indictment, in Icelandic.

**Does it matter that the four indicted are all living abroad? When I made an inquiry at the Ministry of Justice in Iceland some time ago whether Icelanders, living abroad but indicted in Iceland, could seek shelter in any country in Europe by refusing to return to Iceland I was told they couldn’t. If an Icelandic citizen is indicted in Iceland and refuses to return, extradition rules will apply. In this case, Iceland would be seeking to have its own citizens extradited and such a request would be met. – It has been noted in Iceland how many of those seen to be involved in the collapse of the banks now live abroad. It can hardly be because they intend to avoid being brought to court – they would have to go farther. Ia it’s more likely they want to avoid unwanted attention. For those with offshore funds it might be easier to access them outside of Iceland rather than in a country fenced off by capital controls.

 

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Written by Sigrún Davídsdóttir

February 23rd, 2012 at 5:57 pm

Posted in Iceland

OSP brings charges in the al-Thani case (updated)

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The Office of the Special Prosecutor in Iceland has now brought charges in the so-called al-Thani case. In September 2008 Kaupthing announced that a Qatar investor, Mohamed bin Khalifa al-Thani, had bought just over 5% of share in Kaupthing. It later turned out that al-Thani wasn’t risking his own money but Kaupthing’s fund: the bank lent him money to buy the shares. A familiar pattern but this was an important statement because it made the bank seem like a good investment. The interesting thing is that according to documents from Kaupthing Deutsche Bank was involved in the al-Thani investment scheme.

Those charged now are the bank’s CEO Hreidar Mar Sigurdsson, Chairman Sigurdur Einarsson, Kaupthing Luxembourg manager Magnus Gudmundsson and the second largest shareholder in Kaupthing Olafur Olafsson. They are all charged with market manipulation. Sigurdsson and Einarsson are seen as the organisers and are in addition charged with breach of fiduciary duty. Olafsson and Gudmundsson are charged for participation in this breach and Olafsson is in addition charged for money laundering.

The charges are not public yet. Those four now charged are all living abroad. Olafsson has sent out a statement denying the charges. Sigurdsson says he is disappointed and holds on to the official story from September 2008: the sale was genuine and the sheikh did indeed risk his money.

*A blog on the al-Thani case will be coming here soon. Here are earlier blogs referring to the al-Thani case. – The OSP writ can be read here, only in Icelandic.

 

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Written by Sigrún Davídsdóttir

February 22nd, 2012 at 1:58 pm

Posted in Iceland

Does Iceland have a better legal code to deal with dodgy banking?

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“No” is the short answer. The Icelandic penal code on i.a. breach of fiduciary duty and market manipulation is similar to law in Western countries. The difference in Iceland was the swift awareness in autumn 2008 that there might be something worth investigating, later supported by setting up an Office of a Special Prosecutor, Special Investigating Commission and strengthening the financial supervision. Also, the Special Prosecutor quickly realised that behind the invariably complicated web of shell companies and transactions stories of fraud are in reality quite simple and follow the same patterns over and over again. This is why bankers and shareholders have been successfully prosecuted in Iceland – not because Iceland has better penal code.

“How come that Iceland is successfully prosecuting bankers, getting them sentenced to lengthy prison terms when no one else is doing it?” This is a question I keep being asked. The short answer is the one above but there is also a longer one.

Soon after Icelanders got used to the fact that the three large Icelandic banks had collapsed, in early October 2008, the country and the media was rife with rumours that something not entirely normal, not entirely legal, had been going on in the banks. Some tried to explain alleged irregularities by the unavoidable panic; that well, perhaps the bankers had in some cases overstepped the legal borderline, strayed into grey territories, as they fought to keep the banks as going concerns.

The Icelandic parliament, Alþingi, took two measures in December 2008 to clarify the collapse: it set up an investigative commission, The Special Investigative Commission, SIC, into the banking collapse – and it set up an Office of a Special Prosecutor, OSP.

The SIC already came across a number of cases it could not quite align with normal banking practices. These cases were outlined in its thorough report in April 2012 and it also presented its findings to the OSP. At the same time the financial supervisor, FME, was diligently reviewing the operations of the banks prior to the collapse. This meant that the OSP i.a. got input from these two institutions.

The Icelandic lesson from dealing with fraud related to the banks’ operations up to the banking collapse just proved the old saying: where there is a will there is a way.

A meagre and humble start

The beginnings of the OSP were not promising. First, no one applied for the job. Then a small-town sheriff was asked to apply and that is how Ólafur Hauksson, from Akranes across the bay from Reykjavík, got the job. This is a story often told before: Hauksson had never seen anything more serious than speed-driving, drunk driving, moonlighting, domestic violence, break-ins and drunken brawl, the average criminality in an Icelandic small town.

But Hauksson proved that give a person the occasion to shine and he/she very well might. He got funds to hire staff, three prosecutors were hired. Slowly slowly, the charges emerged. Slowly slowly, bankers started to pack to go on an unexpected trip, sent by the Supreme Court, to Snæfellsnes, the beautiful peninsula visible from Reykjavík, to an old farm, Kvíabryggja, a prison for non-violent prisoners.

Last year, following a system change, the OSP was moved into a bigger structure, the Office of County Prosecutor. This time, several people applied to lead the new institution. Hauksson was among the applicants and landed the job.

Digging out the simple truth from entangled webs of emails, shell companies and transactions

The main stories emerging from the collapse cases so far have revolved around market manipulation and breach of fiduciary duty. The real lesson here is the same as everywhere else: these cases look complicated, there are mountains of documents to read, often complicated web of shell companies and offshore companies, money floating around. Interestingly, phone tapping has been used successfully and there are also recordings from the old banks.

However, as in all such cases the underlying stories tend to be simple: the ways to commit a crime are not myriad. Think Enron: looks complicated, with all of the above – at the bottom, a simple story how losses were hidden from shareholders. Another entangled web is the Savings & Loan scandals in the US in the 1980s, nota bene where cases were really investigated and people sentenced to prison.

And these things do not happen by themselves. In every case it takes more than one to do all the necessary things. A prosecutor then decides whose deeds are grave enough to prosecute, who bears the responsibility etc.

Considering how little has been done i.a. in the UK to investigate the banks’ operations leading to the autumn 2008 banking collapse there and considering the screamingly obvious inactions by authorities in Luxembourg regarding banks – all the worst cases in Iceland have ties to the banks’ operations in Luxembourg – it is ironic that the OSP would have been a lot less successful were it not for a fruitful cooperation with these two countries. Authorities in both countries have carried out house searches and assisted in finding and identifying documents relevant for the OSP’s work. Yes, that is hugely ironic…

Market manipulation: burying shares like drug dealers with too much cash

Icelandic cases of market manipulation where bankers have been sentenced have mainly been carried out in two ways: through the banks’ own trading and by parking the banks’ shares into shell companies, invariably owned by clients with some particularly cosy ties to the banks and/or the banks’ shareholders.

Although Landsbanki and Kaupthing, Glitnir to a much lesser extent, were successfully running high interest rates internet accounts, to fund their operations (Landsbanki and the ill-fated Icesave), all three banks relied on selling bonds on international markets. This funding kept the banks going like mills with water. When funding dried up in summer 2007 it was clear that the banks would come to a grinding halt.

That is also what foreign banks sensed, quickly starting to call in loans and, with sinking asset prices, making margin calls on the big Icelandic businesses, i.e. the banks’ main shareholders and their closest partners. Since Icelandic bank shares were the collaterals in most of these loans (after all, the banks had lent the large shareholders money to buy their shares, another aspect that made Icelandic banks weak), it was clear that the markets would be flooded with Icelandic bank shares if the margin calls went through.

Faced with this the Icelandic banks decided to increase the lending to their largest clients – yes, all of them large and the largest shareholders in the banks – in order to prevent this flooding. The feeling when reading the court rulings in these cases is that the banks were like drug dealers with more cash than they can stash, needing to bury it etc.; i.e. the shares were buried in various companies and these transactions were funded by the banks.

Lending on contracts with no provisions to hinder possible losses

Breach of fiduciary duty has figured prominently in banking collapse cases leading to imprisonment. These cases all revolve in some way around lending where the bank carries all the risk, where eventual losses, were they to arise, would always fall on the bank, i.e. losses were foreseeable.

It seems to me that there are some Irish cases very similar to the Icelandic ones of foreseeable losses, i.e. the management didn’t seem to have the interest of the banks and their shareholders at heart but assisting individual clients beyond rhyme and reason.

These Icelandic loan agreements were often only agreed on by the banks’ managers, i.e. outside of regular processes, without the knowledge of credit committees etc. There would then be lower-placed trusted lieutenants who organised the lending. In some cases they have also been charged and sentenced, in some cases not.

Thus, the banks lend in such a way, apparently knowingly, that would the borrower not be able to pay, it would lead to the bank losing money. Here it is important to keep in mind that these banks were public companies with thousands of shareholders – Kaupthing had well over thirty thousand shareholders – losing money on bad lending.

“No society can tolerate that certain parts of it are beyond law and justice” – well, some can…

From reading the SIC report it is clear that some cases have been prosecuted, others not. There was too much of this going on but yes, the managers and the top tier, in some cases also shareholders, have been targeted by the OSP.

It is important to keep in mind that bankers in Iceland have not been sentenced for stupid or unwise decisions but for actions which the Supreme Court has then ruled were criminal actions.

When I talked to Hauksson following the conviction in the so-called al Thani case, in February 2015, he pointed out that the Supreme Court’s decisions showed “that it is possible to bring complicated financial cases to court and get conviction. Building up the expertise has been a long process but the ruling today demonstrates that setting up an office, which didn’t exist earlier, was fully justified. No society can tolerate that certain parts of it are beyond law and justice.”

For some reason, countries like the US and the UK, with old and esteemed legal traditions have in many cases decided to fine rather than prosecute for financial crimes, thereby showing the opposite of the Icelandic examples show – the US and the UK have indeed at times shown that yes, certain parts of society are indeed beyond law and justice. That has sadly been the UK and the US lessons of the financial calamities of 2008.

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Written by Sigrún Davídsdóttir

February 17th, 2016 at 8:29 pm

Posted in Uncategorised