Sigrún Davíðsdóttir's Icelog

The Luxembourg walls that seem to shelter financial fraud

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

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

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

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

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

A slow realisation – information did not add up

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

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

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

Criminal case in France, civil cases in France and Spain

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

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

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

Landsbanki Luxembourg: opacity before its demise in October 2008

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

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

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

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

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

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

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

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

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

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

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

Landsbanki Luxembourg: opacity after its demise in October 2008

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

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

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

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

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

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

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

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

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

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

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

The dirty deals of the Icelandic banks in Luxembourg

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

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

The incredibly long winding-up saga at Landsbanki Luxembourg

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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Written by Sigrún Davídsdóttir

March 10th, 2020 at 10:00 pm

Posted in Uncategorised

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

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

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

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

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

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

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

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

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

Angling – strictly regulated

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

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

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

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

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

From overfishing to highly regulated angling regime

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

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

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

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

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

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

Angling – from farmers to wealthy business men

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

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

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

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

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

The opaque ownership web that Ratcliffe is buying into

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

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

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

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

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

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

Luxembourg, Ginns and Reid

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Misinformed passion

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

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

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

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

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

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

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

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

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

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

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

Split families and farming communities, threats and bullying

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

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

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

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

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

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

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

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

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

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

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

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

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

Screenshot 2019-08-28 12.21.17

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Written by Sigrún Davídsdóttir

August 29th, 2019 at 2:59 pm

Posted in Uncategorised

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

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

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

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

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

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

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

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

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

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

KAUPTHING LUXEMBOURG: RISK, FRAUD AND FAVOURED CLIENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Back-dated documents in Kaupthing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Enter the administrators

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

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

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

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

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

JC Flowers, the Libyans and Blackfish Capital

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

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

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

Blackfish Capital and Jonathan Rowland’s “lieutenant”

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

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

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

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

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

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

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

The €320m Luxembourg state aid for restructuring

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

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

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

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

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

Pillar Securitisation

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

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

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

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

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

ROWLAND, THE BANK OWNER

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

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

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

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

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

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

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

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

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

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

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

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

Kaupthing, Banque Havilland and Kvika

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

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

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

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

THE KAUPTHING SKELETONS IN BANQUE HAVILLAND

The Kaupthing – Banque Havilland link: Immo-Croissance

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

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

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

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

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

The second and third life of Immo-Croissance

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

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

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

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

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

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

Havilland, Immo-Croissance and EHP

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

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

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

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

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

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

The ex-Kaupthing employee hounded by Banque Havilland

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

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

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

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

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

Baseless accusations of hacking and theft of documents

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

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

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

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

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

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

Luxembourg, the rotten heart of financial Europe             

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

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

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

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

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Written by Sigrún Davídsdóttir

August 1st, 2019 at 11:31 am

Posted in Uncategorised

The still untold story of the Kaupthing loan

with 2 comments

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

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

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

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

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

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

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

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

The unannounced report and its unclear goal

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

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

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

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

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

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

No paper trail, no documentation at the CBI

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

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

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

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

Where did the loan end up?

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

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

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

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

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

A bank is rarely a good collateral

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

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

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

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

Poorly planned and sloppily executed work

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

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

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

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

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Written by Sigrún Davídsdóttir

June 13th, 2019 at 4:11 pm

Posted in Uncategorised

Landsbanki Luxembourg equity release loans – again in Paris Court

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

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

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

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

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

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

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

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

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

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Written by Sigrún Davídsdóttir

May 21st, 2019 at 11:14 am

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The ELSTAT case in Greece exposes the weak rule of law

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

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

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

Data does not falsify itself

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

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

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

Kathimerini: the prosecutions of Georgiou equal witch hunt

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

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

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

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

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

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

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

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

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

International concern, yet no change of heart in Greece

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

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

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

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

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Written by Sigrún Davídsdóttir

May 16th, 2019 at 11:49 pm

Posted in Uncategorised

The two Al Thani cases, Qatari investors and Western banks

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At the height of the banking crisis in 2008, Qatari investors stepped in to invest in two European banks – Barclays and Kaupthing. Later, these investments were and are the focus of criminal charges, not against the investors but the bankers, who orchestrated the investments. Both cases show that the Qatari investors were intent on profiting not only from the investments but also from hidden fees and sham arrangements. “A sham agreement requires two parties;” if the defendants were dishonest, so were the other party, the Qatari investors,” said Justice Jay during the Barclays trial recently. – This is not only relevant in connection to stories from 2008 but raises impertinent questions regarding Qatari investments in Deutsche Bank and other banks.

In autumn 2008, many Western banks were forced to seek emergency loans from governments. Three banks – Barclays, Deutsche Bank and Credit Suisse – were boastful of the fact that they did not need government funding. As has now become abundantly clear, all three tapped heavily into US measures to save US banks and foreign banks operating in the US. Even more to brag about was the fact that Barclays and Credit Suisse were able to raise funds in the market: Qatari investors were crucial in saving the two banks. Admittedly investment at a high price but these were singularly difficult times.

The Barclays investors were two Royal Qataris. Sheikh Hamad bin Jassim bin Jabr Al Thani, at the time Qatari’s prime minister, also known by his initials, HBJ. In 2013, The Independent dubbed him “the man who bought London” where he has invested both through his private companies and Qatar Investment Authority, QIA. His co-investor was Sheikh Mohammed Bin Khalifa Al Thani who in 2008 also invested in Kaupthing. Barclays paid them £66m for bringing along Sheikh Mansour Bin Zayed al Nahyan, well known in the UK for high octane investments such as Manchester City Football Club, another 2008 investment of his.

The Barclays Qatar story took a different turn in 2012 when the Serious Fraud Office, SFO, opened a criminal investigation into the Barclays deal with the Qataris: the price for the investment was even higher than previously disclosed as Barclays had kept quiet about two “Advisory Services Agreements.” On the basis of these agreements, Barclays paid the Qatari investors and Sheikh Mansour £322m; allegedly, no advice was given. The four Barclays bankers – Barclays CEO at-the-time John Varley and then-senior executives Roger Jenkins, Richard Boath and Tom Kalaris – who orchestrated the payments are now fighting criminal charges in court. Intriguingly, charges against Barclays PLC concerning a loan of $3bn to the Qatari investors were dismissed last year by the High Court.

In Iceland, the Special Prosecutors has exposed another Qatari investment saga, at the core of a criminal case against three Kaupthing bankers and the bank’s second largest investor. It turned out that a Qatari investment in Kaupthing in September 2008 was entirely funded by Kaupthing. Sheikh Khalifa was not charged but charges brought against three Kaupthing bankers and Ólafur Ólafsson, the second largest shareholder at the time, all of them sentenced to lengthy prison sentences.

Now, to the plights of Deutsche Bank. It survived 2008, much thanks to US funding but in 2014 Deutsche Bank was lacking capital; luckily, Sheikh Hamad bin Jassim bin Jabr Al Thani and Sheikh Mohammed Bin Khalifa Al Thani started investing in the bank, eventually becoming the bank’s largest investors. Now, as the German government hopes that a merger between two weak banks, Deutsche Bank and Commerzbank, might (contrary to evidence and experience) make a strong bank, the Qatari investors have indicated they might be ready to invest further.

Intriguingly, two criminal cases regarding Qatari investments show hidden deals the banks did with the Qataris to meet their demands for benefits beyond what investors could normally expect. The question is if these hidden favours were only relevant for these two cases – or if they are general indications of Qatari investors’ preferences in doing deals. If so, it raises questions regarding other Qatari investments in European banks.

Kaupthing and the Qatari investment in September 2008

After a tsunami of bad news in 2008, the one good news for Kaupthing came in September, miraculously a week after the collapse of Lehman Brothers: Sheikh Mohammed Bin Khalifa Al Thani, of the Qatari ruling family, had privately invested in Kaupthing. The investment amounted to 5.01%, just above the 5% threshold that triggered a notification to the Icelandic stock exchange, securing media attention. This investment made the Sheikh Kaupthing’s third largest investor and the only major foreign investor.

In a statement, the Sheikh claimed he had followed Kaupthing closely for some time and was satisfied of its performance and good management team. Chairman of Kaupthing Sigurður Einarsson said at the time that the bank’s strategy to diversify the shareholder base was paying off. To Icelandic media Kaupthing’s CEO Hreiðar Már Sigurðsson said this showed investors had faith in the bank.

But this investment was not enough to save the bank: in the second week of October 2008, Kaupthing collapsed, together with 90% of the Icelandic financial system.

The Kaupthing undisclosed loan and fees behind the Qatari investment

Only months later, rumours were circulating that the Qatari investment in Kaupthing had not been quite what it seemed to be. In April 2010, when the Icelandic Special Investigative Commission, SIC, published its report one of its many colourful stories recounted the reality behind this Qatari investment in Kaupthing: it had been entirely funded by Kaupthing and Sheikh Mohammed Bin Khalifa Al Thani had apparently only lent his name to this Kaupthing PR stunt. The go-between was Ólafur Ólafsson, Kaupthing’s second largest investor.

The mechanism was that Kaupthing lent funds to an Icelandic company owned by the Sheikh. In addition, Kaupthing issued a loan of $50m, labelled as advance profit, to another company owned by the Sheikh. The three Kaupthing bankers involved in the transaction – Hreiðar Már Sigurðsson, Sigurður Einarsson and Kaupthing Luxembourg’s director Magnús Guðmundsson – and also Ólafur Ólafsson were charged for breach of fiduciary duty and market manipulation and sentenced to between three and five and half years in prison (further on Icelog on the Icelandic al Thani case). Although the case was called “the Al Thani case,” the Sheikh was not charged with any wrongdoing.

Kaupthing had further plans of joint ventures with the Sheikh. In summer 2008 there had been an announcement, duly noted in the Icelandic media, that the Sheikh was investing in Alfesca, owned by Ólafsson. According to the SIC report, also here the plan was that Kaupthing would finance Sheikh Al Thani’s Alfesca investment.

In August and September 2008 Kaupthing, advise by Deutsche Bank, financed credit linked notes, CLN, transactions linked to Kaupthing’s credit default swaps, CDS, in order to influence, or rather manipulate, the CDS spreads. Two rounds of transactions were carried out: first via companies owned by a group of Kaupthing clients, then on behalf of Ólafur Ólafsson. A third round was planned, via a company owned by Sheikh Mohammed Bin Khalifa Al Thani, mimicking the earlier transactions, again with Deutsche Bank. Neither the Sheikh’s involvement with Alfesca nor the CDS trades happen as Kaupthing had run out of time and money (further on the CDS saga, see Icelog).

Barclays and Qatari investors in June and October 2008

Kaupthing was a small fry in the financial ocean, Barclays a much bigger fish. Already in spring of 2008, funding worries at Barclays were rising – the share price was falling, market conditions worsening. As Marcus Agius, Barclays chairman of the Barclays’ board 2006 to 2012, recently a witness for the prosecution in the criminal case against the four Barclays bankers, explained in court 19 February 2019, Barclays wanted to be ahead of the market, i.e. adequately capitalised: in the summer of 2008 it was time to raise capital, in fierce competition with other banks.

Consequently, Barclays decided to raise capital and underwriting was arranged. As summerised in Barclays 2008 Annual Report: On 22nd July 2008, Barclays PLC raised approximately £3,969m (before issue costs) through the issue of 1,407.4 million new ordinary shares at £2.82 per share in a placing to Qatar Investment Authority, Challenger Universal Limited (a company representing the beneficial interests of His Excellency Sheikh Hamad Bin Jassim Bin Jabr Al-Thani, the Chairman of Qatar Holding LLC, and his family), China Development Bank, Temasek Holdings (Private) Limited and certain leading institutional shareholders and other investors, which shares were available for clawback in full by means of an open offer to existing shareholders. Valid applications under the open offer were received from qualifying shareholders in respect of approximately 267 million new ordinary shares in aggregate, representing 19.0 per cent. of the shares offered pursuant to the open offer. Accordingly, the remaining 1,140.3 million shares were allocated to the various investors with whom they had been conditionally placed.

The Qatari investors were new to Barclays. At the time, Barclays’ top management saw it as highly beneficial for the bank to attract major investors from the Middle East, according to Agius. Keen to expand, the bank aimed at being a global player. The Qatari connection fitted the bank’s vision of its goal in the international world of finance.

The second round in autumn 2008 – the “tart” and the Sheikh

In autumn 2008, market conditions went from worrying to worse than anyone had thought possible, according to Agius’ witness statement in court. There were only two options: accept state funding or try another capital raising. Barclays hoped to again raise capital from the Qataris.

This time, the Qataris brought another Middle Eastern investor to the table, Sheikh Mansour Bin Zayed al Nahyan. Interestingly, there was some confusion if an Abu Dhabi public body was investing or if Sheikh Mansour was investing privately as Barclays publicly stated to begin with. In the end, the investor turned out to be International Petroleum Company where Sheikh Mansour was a chairman.

The Abu Dhabi investment saga is an even more colourful financial thriller than the Qatari saga. An independent financier Amanda Staveley advised Sheikh Mansour and got at least 30m of the £110m Sheikh Mansour allegedly got in fees from Barclays. In addition, Staveley’s company has sued Barclays for fees of £720m plus interests and cost, potentially well over £1bn,in relations to Sheikh Mansour’s investment. Her case is on hold until the criminal case against the Barclays four is brought to an end.

Somewhat ungracefully, the Barclays bankers referred to Staveley as a “tart” in a telephone recording played at the Southwark County Court recently during the Barclays trial. Intriguingly, this name-calling came from one of the charged bankers, Roger Jenkins, who argued for £25m bonus for 2008 as he had been instrumental in bringing in the Sheikhs, rather belittling Staveley’s part in it.

Barclays’ cash call of £6.1bn in times of panic

There was panic in the autumn air of 2008. Barclays fought to raise capital in order to avoid making use of the 8 October 2008 banking package, in total a staggering £500bn on offer from the government; for comparison, the total government annual spending was 618bn. One condition: participating banks would have to sign up to an agreement with the FSA on executive pay and dividend, making it rather unappealing for the well-paid Barclays bankers.

After some hesitation from the Gulf investors – they allegedly left the negotiations but returned – the bank could finally put out an innocuous statement on 31 October 2008 that Barclays had “held discussions in recent days with Qatar Holding LLC and entities representing the beneficial interests of HH Sheikh Mansour Bin Zayed Al Nahyan (“the Investors”) who agreed … to invest substantial funds into Barclays.” 

As summerised in Barclays 2008 Annual Report, Barclays would issue “£4,050m of 9.75% Mandatorily Convertible Notes (MCNs) maturing on 30th September 2009 to Qatar Holding LLC, Challenger Universal Limited and entities representing the beneficial interests of HH Sheikh Mansour Bin Zayed Al Nahyan … and existing institutional shareholders and other institutional investors. If not converted at the holders’ option beforehand, these instruments mandatorily convert to ordinary shares of Barclays PLC on 30th June 2009. The conversion price is £1.53276 and, after taking into account MCNs that were converted on or before 31st December 2008, will result in the issue of 2,642 million new ordinary shares.

Further, Barclays issued warrants on 31 October 2008 “in conjunction with a simultaneous issue of Reserve Capital Instruments [RCI] issued by Barclays Bank PLC … to subscribe for up to 1,516.9 million new ordinary shares at a price of £1.97775 to Qatar Holding LLC and HH Sheikh Mansour Bin Zayed Al Nahyan. The warrants may be exercised at any time up to close of business on 31st October 2013.” – Qatar Holding now held 6.4% of Barclays shares.

Expensive and unpopular funding

Fund raising in these tumultuous times, as banks were scurrying for government money, might have looked like quite a feat. But the reception to Barclays fundraising was disappointing: the news came as a surprise to the market and existing shareholders were dismayed; also because the fund raising had not been a normal process, Agius said in court.

Reaching the agreement with the Sheikhs had been tough. In an email to Roger Jenkins John Varley said the Qataris and Sheikh Mansour had had “too good a deal.” It did in fact prove difficult to get shareholders to agree; many of the smaller shareholders were very upset.

At least one large shareholder in Barclays voiced concern publicly: though at the time not knowing how high the cost was indeed for Barclays, the pension fund Scottish Widows claimed the capital raising had been driven through at a high cost, just to avoid state ownership and its effect on bonuses. However, by the end of November Barclays shareholders had agreed to the capital raising.

In his foreword to the Barclays 2008 Annual Report, Agius acknowledged the anger the capital raising had caused among shareholders: “…we also recognised that some of our shareholders were unhappy about some aspects of the November capital raising. This unhappiness is a matter of great regret to us.” Further, Agius set out to explain the process and the great care taken by the board to make these difficult decisions “…as we sought to react to the circumstances prevailing at the time. The Board regrets, however, that the capital raising denied Barclays existing shareholders their full rights of pre-emption and that our private shareholders were not able to participate in the raising.”

It was indeed an expensive undertaking: the official terms seemed quite generous, 2% on the RCIs, 4% on the MCNs, as Agius pointed out in court. The RCIs carried interests of 14% until June this year, 2019, (see 2008 Annual Report p.228) when the rate would be 13.4% on top of three months LIBOR. The initial coupon was deemed to carry a cost of 10% after tax for Barclays. In addition, there was a disclosed fee of £66m to the Qatari investors, for having introduced Sheikh Mansour.

The undisclosed fees of £322m for the Sheikhs – and a Barclays loan to the investors

What Agius and others at the bank say they did not know was that the cost of extracting investment from the Qatari and Abu Dhabi Sheikhs were even higher than disclosed. The four Barclays bankers agreed to fees totalling £322m, to be paid over 60 months, hidden in two so-called “Advisory Services Agreements,” ASAs, now the focus of the SFO case against the Barclays four.

What transpires from the Barclays court case is that the three Sheikhs wanted fees for investing; the original figure floated was £600m. It was not trivial to dress up the agreed fee as anything remotely acceptable: after all, these three investors were getting fees no other investors were offered. When the “Advisory Services Agreements” surfaced in communication between the Barclays bankers and the Qataris negotiating on behalf of the Middle Eastern investors as a way for Barclays to pay the companies investing, it turned out that Sheikh Hamad bin Jassim bin Jabr Al Thani also wanted fees for his personal investment.

The bankers saw the absurdity in an ASA with a prime minister: he could not be an adviser to Barclays any more than a US president could be an adviser to JP Morgan! The solution was to increase the total payment for the ASAs to QIA: there would probably be some means to get the extra funds from QIA to its chairman, Sheikh Hamad bin Jassim bin Jabr Al Thani.

The thrust of the criminal case against the four Barclays bankers is if the fees were paid for real service, if any services were given in return for the exorbitant fees. So far, witnesses have not been aware of any services given; indeed, Agius and other witnesses were not aware of the ASAs until some years later, when the they surfaced in relation to the SFO investigation.

It is also known that the Qatari investors got a loan of $3bn from Barclays at the time, which is interesting given the Kaupthing story. This information surfaced in SFO charges against Barclays bank itself; this case was however dismissed in May 2018 by the Crown Court; in October 2018 the High Court ruled against SFO’s application to reinstate the case.

Deutsche Bank – another big bank at the mercy of Qatari investors

Deutsche Bank survived the 2008 crisis through the open funding route in the US. As Adam Tooze points out: In Europe, the bullish CEOs of Deutsche Bank and Barclays claimed exceptional status because they avoided taking aid from their national governments. What the Fed data reveal is the hollowness of those boasts.”  Fed records show “the liquidity support provided to a bank like Barclays on a daily basis, revealing a first hump of Fed Borrowing during the Bear Stearns crisis and a second in the aftermath of Lehman (p.218).

As time passed, the German bank behemoth, weighed down by falling share prices inter alia caused by scandals and fines for financial misdemeanour and sheer criminal acts in various countries, struggled to stay above required capital ratio. Already in 2014, there were news of Qatari investments in Deutsche Bank according to Der Spiegel: the deal in 2014 had been arranged by the then CEO of Deutsche, Anshu Jain. Of course, Jain knew Sheikh Hamas bin Jassim Bin Jabr Al Thani, one of the wealthiest and most influential men in the Gulf. The Sheikh had long been a valued Deutsche customer, even before the 2014 investment of €1.75bn in Deutsche made him one of the larger shareholders in Deutsche.

In autumn 2016, more was needed. Again, the Sheikh was ready to invest, this time with Sheikh Hamad Bin Khalifa Al Thani, the Kaupthing investor. The two surpassed BlackRock as Deutsche’s largest shareholders, via two investment vehicles, the BVI-registered Paramount Services Holdings Ltd and Supreme Universal Holdings Ltd., registered in the Cayman Islands, respectively owned by Sheikh Jassim and Sheikh Khalifa.

With the Kaupthing saga in mind, I sent some questions to Deutsche Bank in August 2016, asking if Deutsche knew how the Qatari shareholders had financed their investment in the bank, if Deutsche could guarantee that the bank was not lending the Qatari shareholders, or anyone related to them, the invested funds, entirely or partly, and if the Qataris were getting in dividend in advance or other benefits that might later arise from their investments.

On 25 August 2016, Deutsche’s spokesman Ronald Weichert gave the following answer:

Special agreements with individual shareholders would be a breach of the stock corporation act. We want to point out, that allegations or the mere assumption that the Supervisory Board or the Management Board could enter into such an agreement or could have entered into such agreement, are absolutely unfounded and is highly defamatory. There is absolutely no indication to justify such a reporting or any allegation of this kind.

In addition to the Icelandic Al Thani case, I pointed out that Deutsche had quite some track record in being fined or scrutinized for various illegal activities, which made the tone in the answer somewhat surprising and a tad misplaced.

In addition, I mentioned that the Qatari shares purchase in Deutsche Bank, at a crucial time for the bank, had intriguingly, been just high enough to be flagged (as with the Al Thani Kaupthing investment); exactly this fact had caused attention in the media in various countries, an interest reflected in my question. I was merely trying to understand the situation, based on what had transpired in Kaupthing and Barclays with Qatari investors.

Qatari networks in European banks, with a Chinese hint 

As Der Spiegel pointed out, there have long been rumours about the origin of the fortune of Sheikh Hamas bin Jassim Bin Jabr Al Thani “some of which don’t cast a particularly flattering light on the sheikh…” He himself has mentioned that his wealth, “like that of all Qataris, may be questionable from a Western point of view. But according to Qatari standards, it was legitimate and had been obtained through legitimate business.” – And, as Der Spiegel noted, the Sheikh had a predilection for investing in the financial sector.

When the long-troubled Dexia sold Banque International a Luxembourg, BIL, in 2011, the Sheikh bought 90% of the shares via a Luxembourg company, Precision Capital, for €750m, with the remaining 10% going to the Luxembourg government, indirectly giving the bank a touch of state guarantee. BIL has offices in Switzerland, the Middle East and in Denmark, since 2000, and Sweden since 2016. In 2017, Precision Capital sold its holdings in BIL for €1.6bn, more than double the purchase price less than six years earlier.

The buyer was Legend Holdings, a Chinese investment fund with roots in the technology industry, best known as the owner of Lenovo Group. The Chinese fund enthusiastically touted its BIL acquisition as a new Chinese European co-operation and the fund’s gateway into Europe.

BIL is well connected in tiny Luxembourg: the chairman of the board is Luc Frieden, former minister for various ministries in Jean-Claude Juncker’s governments, last minister of finance 2009 to December 2013 when both Juncker, now president of the European Commission since 2014 and Frieden left Luxembourg politics. After politics, Frieden joined Deutsche Bank as vice chairman in 2014. Based in London, he advised the bank on international and European matters, as well as being chairman of Deutsche’s supervisory board in Luxembourg, until he joined BIL’s Board in early 2016, a post he kept after Legend Holdings became the bank’s largest shareholder.

In 2012, Precision Capital also bought a Luxembourg banking group, KBL European Private Bankers, which owns seven small banks and asset managing firms spread over Europe. One of them is Merck Finck, with sixteen offices in Germany.

Legend Holdings purchase of BIL coincided with other Chinese companies buying into European banks. Fosun is now the largest shareholder in Portugal’s largest listed bank, Millennium BCP, holding 24% of its shares.

Most noticeable was however HNA Group interest in Deutsche Bank.The HNA Group, formerly Hanan Airlines, holds €83bn in global assets, mainly in hotels and airlines. HNA Group is not state-owned but its chairman, Chen Feng, is a member of the National Congress of the Chinese Communist Party. In 2017 HNA Group had suddenly become Deutsche’s largest shareholder, peaking with a shareholding of just under 10%. HNA Group announced in September 2018 it would sell its stake of 7.6% over the coming 18 months; it is no longer among the largest shareholders in Deutsche.

The Chinese interest in European banks has been a cause for concern and controversy, both in terms of political ties to Chinese authorities and in terms of management issues.

Deutsche Bank – more is needed, again the Qataris stand ready to invest

The 2014 purchase of Deutsche Bank shares was at the time seen as Sheikh Hamas bin Jassim Bin Jabr Al Thani’s most important strategic investment so far in European banks. In 2016, there had been rumours that the Qataris aimed at owning anything up to 25% of shares in Deutsche and were interested in exerting greater influence on the bank, which was not run to their taste. However, no such drastic steps were taken though the Sheikh showed support for Deutsche’s chairman, Paul Achleitner who faced criticism after the bank’s shares lost 50% of their value in early 2016.

The position of the largest shareholder in Deutsche has been wandering between a few firms. BlackRock had long been the largest shareholder until the investment by two Qatari-owned companies. In May 2017, the order changed as Deutsche raised capital. Although the two Qatari companies had been rumoured to be willing to increase their shareholding, they did not. Not then.

This was when the Chinese HNA Group replaced the two Qatar companies as the largest shareholder, holding just under 10%, a stake worth approximately €3,4bn. Shortly after the investment in Deutsche Bank, Hanan Group’s chairman Chen Feng visited Doha and met with Qatar dignitaries.

Now, BlackRock is again Deutsche’s largest single shareholder with 4.88%. However, the two Qatari companies, Paramount Services Holdings and Supreme Universal Holdings, each hold respectively exactly 3.05% and should for all practical purposes be seen as operating together, again making them the largest shareholder with 6.10%.

For years, Deutsche insiders have been searching for a turn-around plan for the bank without a clear success. Deutsche is now at a critical point: the echelons of power in Deutsche and the German government have come to the conclusion that the problem of two weak large banks – Deutsche and Commerzbank – will best be solved by merging them.

Again, Deutsche is in need of capital. It now seems that the public Qatar entity, QIA, stands ready to invest in Deutsche. A strategic investment as Qatar’s deputy prime minister and minister of foreign affairs Sheikh Mohammed bin Abdulrahman Al Thani, also chairman of QIA, has stated that Qatar is interested in further investments in Germany.

Recently, Deutsche reluctantly disclosed a hidden loss of $1.6bn, stemming from municipal bond-investment from a run-up to the 2008 crisis, which does little to strengthen the bank’s position prior to the merger with Commerzbank. – And then there is the latest scandal: Deutsche’s involvement in Danske Bank’s laundering of €230bn through its Estonian branch. In the end, Deutsche might be not only need capital but also moral vision, which might not necessarily come with Qatari funds.

Credit Suisse and the Qataris

The Qatari investment in Credit Suisse in 2008 was definitely a turning point for the bank and saved it from needing a state bailout. Though Qatar Holding has lowered its shareholding in the bank, it is still the largest shareholder with 5.21%, followed by Harris Associates, Norges Bank, the Olayan Group, owned by a Saudi family investing in the West since the 1950s and BlackRock.

The investment in Credit Suisse 2008 did not come cheaply for the bank: as in Barclays, the investment was more complicated than just buying shares. It was designed as convertible bonds in Credit Suisse, with a coupon of between 9 and 9.5%. This means that while regular shareholders have seen meagre dividends, Qatar Holding collects CHF380m each year from Credit Suisse.

Until February 2017, an Al Thani of the younger generation, Sheikh Jassim bin Hamad Al Thani, son of Sheikh Mohammed Bin Khalifa Al Thani, was on the board. When the young Sheikh stepped down, apparently without explanation, he was not replaced by another Qatari. His departure did not make much difference on the board except there would be fewer cigarette breaks without him.

At the time, there were speculations that Qatar Holding would be selling its stake in the bank, that Credit Suisse might be cutting the ties to the Qataris and would possibly use the opportunity to replace the convertible bonds with less expensive options as they came callable in 2018.

The bank did indeed do that at first opportunity, October 23 2018. In order to cut funding cost, it bought back around CHF5.9bn of debt issued after the financial crisis to QIA and the Olayan family; Qatar held just over CHF4bn, Olayan Group the rest, both being entitled to 9.5% on the securities.

The Qatar shareholding in Credit Suisse briefly dipped below 5% last year but then rose again to the present 5.21%. Some changes were made to the board in February 2019 but it is as if the Qataris have lost interest in the bank: in spite of being the largest shareholder they have not had a representative on the board since 2917.

Who learns what from whom?

“A sham agreement is one that does not mean what it says,” said Justice Jay to the jury recently at the trial against the four Barclays bankers. “It requires two parties. The counterparty to the [advisory services agreements] was a Qatari entity. The logic of the prosecution case that these defendants were dishonest must be that one or more individuals comprising or connected with the Qatari entity was equally dishonest in the criminal sense. There’s no getting around that.”

There was a sham agreement with Qatari investors at the core of the Icelandic criminal case against the three Kaupthing bankers and the bank’s second largest shareholder parallel to the sham agreement with Qatari investors at the core of the Barclays case.

It is not surprising to hear of corrupt business practices in the Middle East – it is known as a thoroughly corrupt part of the world with fabulously wealthy rulers where neither democracy nor transparency is a priority. As can be seen from the billions of pounds, dollars and euros, paid in fines by systemically important Western banks in less than a decade, partly for criminal activity, these banks do not have the highest of moral standards either.

The belief, perhaps a naïve one, was that when businessmen from corrupt parts of the world would do business with Western banks they would have to adhere to Western standards. Apart from the moral standards in Western banks clearly being shockingly low in too many cases, it seems that bankers at Barclays – and Kaupthing – were ready to meet the Middle Eastern investors at the level set by the investors. The question is how other banks have met the requests for the special treatment Middle Eastern investors seem prone to demand.

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Written by Sigrún Davídsdóttir

March 1st, 2019 at 8:19 pm

Posted in Uncategorised

Deutsche Bank, Kaupthing and alleged market manipulation

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“It’s not unlikely that an international bank wants to avoid being accused of market manipulation,” said Prosecutor Björn Þorvaldsson in Reykjavík District Court on October 11, 2017. The “international bank” was Deutsche Bank and the court case was the so-called CLN case. Deutsche was not charged with anything – the criminal case was against Kaupthing managers, charged with fraudulent lending of €510m into a scheme concocted with Deutsche. However, both Kaupthing administrators and liquidators of two BVI companies saw a way of using alleged market manipulation in these transactions to recover from Deutsche the €510m, Kaupthing had paid to Deutsche. In December 2016, Deutsche eventually concluded that paying €425m was preferable to having to recount the ignominious saga in court. All parties to the agreement are unwilling to divulge further facts but a UK court document throws light on Deutsche’s part in the alleged market manipulation, affecting not only Kaupthing’s CDS spreads but also the bond market. – The question is if this really was the only scheme of alleged market manipulation that Deutsche instigated. Further, the case throws light on how tension between Deutsche’s staff working on the scheme and those responsible for legal and reputational risk was dealt with, potentially explaining the same in other Deutsche schemes.

In January 2009, Kaupthing’s ex-chairman Sigurður Einarsson felt compelled to send a letter to family and friends to counter claims in the Icelandic media regarding Kaupthing’s activities in the months before the bank failed in October 2008. One was that in 2008 the bank had traded on its own credit default swaps, CDS, linked to credit-linked notes, CLN, to bring down the bank’s CDS spreads and thus lower the bank’s cost of financing.

Einarsson wrote that Kaupthing had indeed funded such transactions, via what he called “trusted clients” in cooperation with Deutsche Bank; the underlying assumption was that a reputable international bank would not have done anything questionable – those were the days before international banks like Deutsche were being questioned and fined for criminal actions.

The Icelandic 2010 Special Investigations Committee, SIC, report told the CDS saga in greater detail, documenting Deutsche’s full knowledge from the beginning. A 2012 London court decision added to the story: in order to recover documents related to the transactions, Stephen Akers and Mark McDonald from Grant Thornton London – appointed liquidators of two BVI companies, Chesterfield and Partridge, used in the CDS transactions in the names of the “trusted clients” – had brought Deutsche Bank to court.

The CDS saga was summed up in 2014 charges in a criminal case in Iceland: Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of the bank’s Luxembourg operations Magnús Guðmundsson were charged with breach of fiduciary duty, causing a loss of €510m to Kaupthing, some of which Kaupthing paid to Deutsche literally as Kaupthing was failing. – All of this has earlier been reported in detail on Icelog(most notably here, December 2015 and here, November 2017).

The latest addition to the CDS saga is in another court document, consolidated particulars* from 2014, as the liquidators of the two BVI companies sought to recover funds from Deutsche in a civil case by suing Sigurðsson, Einarsson, Venkatesh (or Venky) Vishwanathan the Deutsche senior banker who liaised with Kaupthing on the CLN trades and, most importantly, the liquidators sued Deutsche Bank. The fifth defendant was Jaeger Investors Corp., BVI, a director nominee for Chesterfield and Partridge.

The 2014 document shows, in extensive quotes from emails etc., that contrary to Deutsche’s version in its Annual Reports etc., the bank was fully aware of the fact that Kaupthing set up these trades and funded them in order to influence its CDS spreads, i.e. allegedly the scheme was effectively a market manipulation. In addition, the Icelandic criminal case related to the CLN transactions documented that Deutsche was on the other side of the bet, thereby effectively creating a hedge for itself.

Thus the Icelandic SIC, the Icelandic Special Prosecutor, the Kaupthing administrators and of course the liquidators of the two BVI companies have all come to the same conclusion: Kaupthing and Deutsche colluded in market manipulation.

This goes a long way to explain why Deutsche, by the end of 2016, chose to settle with Kaupthing – Deutsche Bank was not going to be dragged into court to explain the discrepancy between its public statements and internal Deutsche documents, in addition to profiting from being a counterparty in the transactions. The liquidators alleged Deutsche took part in criminal activity. This has however not been tested in court; the SFO had as early as 2010 looked at these transactions but later apparently dropped its investigation as so many others.

One intriguing aspect of the CLN transactions is that Deutsche staff took measures to hide facts from staff working on legal and reputational risk. This has immense ramification for so many other questionable transactions in the bank, which have come to light over the last few years, inter alia Deutsche’s involvement in the largest known case of money laundering of all times: Danske Bank money laundering in Estonia 2007 to 2015, a saga still in the making.

The Deutsche version of the CDS saga (is very short)

Deutsche first mentioned the CLN claims in its 2015 Annual Report (p. 340). As an introduction to the bank’s 2016 Annual Report, Deutsche CEO John Cryan sent out a message to the bank’s employees on February 2 2017 where the settlement with Kaupthing was one of four legal issues the bank had resolved and chose to emphasise.

Deutsche has consistently presented the CDS transactions as if it had only learned of the realities well after the CLN transactions, as here in 2017 (the text is the same in Deutsche’s 2015 and 2016 (p. 369) Annual Reports):

Kaupthing CLN Claims

In June 2012, Kaupthing hf, an Icelandic stock corporation, acting through its winding-up committee, issued Icelandic law claw back claims for approximately € 509 million (plus costs, as well as interest calculated on a damages rate basis and a late payment rate basis) against Deutsche Bank in both Iceland and England. The claims were in relation to leveraged credit linked notes (“CLNs”), referencing Kaupthing, issued by Deutsche Bank to two British Virgin Island special purpose vehicles (“SPVs”) in 2008. The SPVs were ultimately owned by high net worth individuals. Kaupthing claimed to have funded the SPVs and alleged that Deutsche Bank was or should have been aware that Kaupthing itself was economically exposed in the transactions.Kaupthing claimed that the transactions were voidable by Kaupthing on a number of alternative grounds, including the ground that the transactions were improper because one of the alleged purposes of the transactions was to allow Kaupthing to influence the market in its own CDS (credit default swap) spreads and thereby its listed bonds. Additionally, in November 2012, an English law claim (with allegations similar to those featured in the Icelandic law claims) was commenced by Kaupthing against Deutsche Bank in London (together with the Icelandic proceedings, the “Kaupthing Proceedings”). Deutsche Bank filed a defense in the Icelandic proceedings in late February 2013. In February 2014, proceedings in England were stayed pending final determination of the Icelandic proceedings. Additionally, in December 2014, the SPVs and their joint liquidators served Deutsche Bank with substantively similar claims arising out of the CLN transactions against Deutsche Bank and other defendants in England (the “SPV Proceedings”). The SPVs claimed approximately € 509 million (plus costs, as well as interest), although the amount of that interest claim was less than in Iceland. Deutsche Bank has now reached a settlement of the Kaupthing and SPV Proceedings which has been paid in the first quarter of 2017. The settlement amount is already fully reflected in existing litigation reserves and no additional provisions have been taken for this settlement.

As can be seen from the text, the wording is carefully calculated. Inter alia, Deutsche has never in its public statements mentioned when and how it learned of the realities of the scheme, i.e. it was funded by Kaupthing in order to manipulate its CDS spreads.

Deutsche sent Venky Vishwanathan on leave in the spring of 2015 because of his involvement in the Kaupthing scheme. In 2016, Reuters reported that Vishwanathan was suing Deutsche for unfair dismissal. The status of his case is unclear; he has not responded to my queries on LinkedIn.

An overview of the Kaupthing CLN transactions

In February 2008, at the time of the first meeting regarding the CDS spreads with Deutsche bankers, the Kaupthing management was smarting from steadily increasing financing cost; Kaupthing managers insisted the bank was unfairly targeted by hedge funds and were trying to figure out how Kaupthing could erase the image of weakness implied by the CDS spreads. Already at the first meeting with Venky Vishwanathan it was abundantly clear that Kaupthing was seeking to use own funds to influence the CDS spreads; that was the plan from the beginning – the question was just how to structure it in order to influence the CDS spreads most effectively.

The CDS scheme was developed further in the coming months as the pressure on Kaupthing increased: in spring 2008, the CDS spreads stood alarmingly at 900bp. Deutsche advised against Kaupthing’s original idea of its own direct involvement in the transactions. The solution was to find trusted clients of Kaupthing – Kevin Stanford and his wife Karen Millen, Tony Yerolemou and Skúli Þorvaldsson, all large clients of Kaupthing – who would in name own Chesterfield, the BVI company, entirely funded by Kaupthing; the transactions would be done via Chesterfield.

The Chesterfield transactions were done in August 2008. According to the SIC Report (p.26-28; in Icelandic), the CDS spreads changed on 10 August 2008, following the transaction, from 1000bp to 700bp. Though the spread diminished only for some days, it was deemed success, which should be repeated. For the second round, in September, the CLN transactions were done via another BVI company, Partridge, owned by Ólafur Ólafsson, domiciled in Switzerland, still a wealthy businessman, then Kaupthing’s second largest shareholder and a major borrower in Kaupthing. Again, the Partridge transactions were wholly funded by Kaupthing, organised by Deutsche on behalf of Kaupthing.

In total, Kaupthing paid €510m to Deutsche for the Chesterfield and Partridge trades, the last millions transferred to Deutsche from Kaupthing just as the bank teetered; it formally failed 9 October 2008. Emergency funding from the Icelandic Central Bank to Kaupthing of €500m was partly used to pay Deutsche as part of the Partridge transactions although the funding had been issued to safeguard Kaupthing’s UK operations (See the longer version on Icelog.)

Kaupthing accordingly lost the €510m because the two BVI companies had no assets to speak of, which made it clear from the beginning that should the trades go awry, the loans would be non-recoverable; a fact the liquidators noted, as did the Special Prosecutor in Iceland.

Al-Thani and the CLN trades that never happened

A very intriguing part of this story surfaced in the SIC Report (p.26-28): there had been plans for a third round of Kaupthing-funded CLN transactions through Brooks Trading Ltd, owned by a Qatari investor, Sheikh Mohamed Khalifa al Thani. Kaupthing agreed to a loan of €130m to Mink Trading, an al Thani company, in addition to a loan of $50m to Brooks Trading Ltd, another al Thani company, as up-front profit from the trades.

Again, the purpose of the loan to Mink Trading was to invest in CLN linked to Kaupthing’s CDS, again via Deutsche Bank in transactions structured as the Chesterfield and Partridge transactions. But Kaupthing ran out of time; the loan to Brooks Trading was paid out according to the SIC Report, not the loan to Mink Trading; the al Thani CLN transactions never happened.

Sheikh al Thani is a well-known name in Iceland from his role in another Kaupthing criminal case, the so-called al Thani case; although the case is commonly named after the Sheikh he was not charged (the $50m loan to Brooks Trading might have been connected to the real al Thani case, not the CLN transactions, according the the SIC Report). In the al Thani case the three Kaupthing managers, charged in the CLN case, and Ólafur Ólafsson were sentenced to three to 5 ½ years in prison. As in the CLN case, the bankers were charged for fraudulent lending, breach of fiduciary duty and market manipulation; Ólafsson was sentenced for market manipulation.

According to the SIC Report Kaupthing also agreed to lend Ólafsson €50m against profits from the Partridge trade but SIC documents do not show that the loan was issued.

The doggedly diligent liquidators

The liquidators of the two BVI companies, Stephen Akers and Mark McDonald, quickly seem to have sensed a potentially intriguing story behind the CDS transactions and had some impertinent questions for Deutsche Bank. When Deutsche was remarkably unwilling to answer their questions the liquidators took legal action against the bank in order to obtain documents, as seen in this UK court decision in February 2012.

In his affidavit in the 2012 Decision, Akers said: It is very difficult to see how the transactions made commercial sense for the Companies.” ­– As the liquidators were to uncover the short answer here is that the transactions did not make sense for the companies, which were only a tool for Kaupthing managers, as Deutsche full well knew.

This can be gauged in detail from the 2014 consolidated particulars. Well documented, it recounts the whole saga behind the CLN transactions, inter alia the following:

Already at the initial meeting in February 2008 it was clear that Kaupthing’s only reason for setting up the schemes was to bring down its CDS spreads and Kaupthing would fund the transactions; Kaupthing was willing to pay Deutsche for reaching this goal and Deutsche agreed to assisting Kaupthing in reaching it, i.e. bringing down its CDS spreads; from Kaupthing, its most senior managers were involved; at Deutsche, senior staff in London worked on the plan (para 56). A larger group were kept informed by emails, amongst them Jan Olsson managing director of Deutsche and CEO of Deutsche in the Nordics.

After a slow start, the urgency increased in summer 2008: on 18 June 2008, Vishwanathan sent an email to the Kaupthing managers proposing a concrete strategy: “Kaupthing should fund the purchase of a CLN referenced to itself. DB, as the vendor of the CLN, would then hedge its exposure under the CLN, by selling Kaupthing CDS in the market, and this would have the desired effect of lowering Kaupthing’s CDS spread.” (para 62.)

A flurry of emails followed, also because Deutsche’s legal department was hard to please (para 68-69). The bank’s Global Reputational Risk Committee was involved. Kaupthing managers understood that Deutsche staff was “bit stressed about this from a ‘reputation’ point of view.” In July, Deutsche invited Hreiðar Már Sigurðsson and his family on a trip to Barcelona, i.e. paid for flights and hotel, where Sigurðsson attended DB’s Global Markets Conference and discussed the CDS scheme (para 75).

The conclusion was that Kaupthing could not be seen to go directly into the market in transactions linked to its own CDS. The solution was to set up a Luxembourg company for the CDS trades, as Sigurðsson explained in an email to Vishwanathan during the conference: Kaupthing’s lawyer would be “setting up the lux company for our trade” (sic), also offering to discuss further “the right structure that you (i.e. Deutsche) would be comfortable with.” (para 79). That same day, Vishwanathan sent an email to a colleague informing him he was working on “putting together a bespoke ETF for some of (Kaupthing’s) close high net worth clients to take a view on (Kaupthing) CDS…” (para 80).

Late July, Kaupthing’s lawyer in Luxembourg presented an overview in an email to Deutsche’s Shaheen Yusuf, including the ownership structure with the names of the four Kaupthing clients who owned Chesterfield. The presentation clearly stated that the funding, €125m, would come from Kaupthing and that the CLN used was part of a wider scheme where Deutsche would offer CDS for sale with a total nominal value of €250m (para 89). – This document included everything regarding the planned transactions, also the funding.

As all of this is documented in email exchanges between Kaupthing managers and Deutsche staff it is clear that when Deutsche claims, inter alia in its 2015 and 2016 Annual Reports it did not know a) that the funding came from Kaupthing – and – b) that the aim of the transactions was to lower Kaupthing’s CDS spread, it goes against documents, which Deutsche had on its system at the time and should still have.

Avoiding a paper trail

Given that Deutsche’s legal department and its Global Reputational Risk Committee had been worried, the overview and its detailed information on funding etc. was unavoidably a strong dosis for Deutsche to stomach. Yusuf called Kaupthing – it’s not clear if she spoke to Hreiðar Már Sigurðsson or Magnús Guðmundsson – but her mission was to ask Kaupthing to withdraw the presentation and replace it with a new one where the fact that Kaupthing was funding the transactions would be omitted. The Kaupthing Luxembourg lawyer quickly followed her instructions, sending another presentation, with the requested changes: Kaupthing was no longer referenced as the lender.

The BVI liquidators point out that there was a phone call and not an email, concluding this was done in order to avoid a paper trail at Deutsche (para 92-93).

When the Chesterfield trades were executed in August 2008, the effect was immediate, just as Deutsche bankers had promised (para 114). In an email to Vishwanathan Hreiðar Már Sigurðsson said it seemed “our Barcelona trip paid of” (sic) – the trip where the plans were finalised (para 115-116).

Indeed, so pleased were the Kaupthing managers that they decided to do another trade of the same kind (in spite of a very short-lasting effect) (para 117). This time, it would be through a company owned by Ólafur Ólafsson, very much a part of the Kaupthing’s inner circle and a close friend of the Kaupthing managers.

“Are u not paid to work for us?”

Due to force majeur, the second CDS transactions hardly registered: Lehman Brothers collapsed on the 15 September 2008, shaking the world’s financial system to its core. Two days later, Kaupthing’s CDS spread had deteriorated further and stood at record 1150bp. As if nothing had happened in the world of finance, Magnús Guðmundsson, clearly less than pleased, wrote in an email to Vishwanathan: “How can the CDS spread be were they are compare to our trade(.) Are u not paid to work for us? (sic)” (para 128).

This exchange clearly shows how Kaupthing saw Deutsche’s role – Deutsche was acting on behalf of Kaupthing, not for the owners of the two BVI companies. Both Kevin Stanford and Tony Yerolemou have stated they had no idea how the BVI companies in their name were used – they had no idea of the funds that flowed through their companies as Kaupthing strove to meet margin calls. – Interestingly, these are not the only examples of Kaupthing using clients’ companies without the owners’ knowledge.

The liquidators conclude that the nature of the transactions of Chesterfield and Partridge were unlawful as “they were intended to, and did, secretly manipulate Kaupthing’s CDS spreads and thereby the market for CDS referenced to Kaupthing, and the market for Kaupthing bonds.” (para 142-148, further 149-176.)

According to the liquidators, Deutsche Bank broke laws on market manipulation and market abuse not only in the UK but also in other countries where financial products, influenced by Deutsche’s unlawful activities, were traded. (para 143-145).  This abuse and manipulation did not only affect Kaupthing’s CDS but also Kaupthing’s bonds as the manipulated CDS affected the pricing of Kaupthing bonds.

Further questions regarding the CDS transactions

In addition to market manipulation and being counterpart to trades Deutsche itself set up, the Kaupthing CLN transactions have other interesting aspects to ponder on.

Emails between Deutsche staff show how employees involved in the Kaupthing transactions were allegedly prepared to withhold information on the owners of the BVI companies from Deutsche’s own know-your-customer team. Also, the staff was aware of the reputational risk from being involved in transaction where a bank tried to influence its own CDS spreads.

There is nothing to indicate that this was done because the Deutsche bankers engaging with Kaupthing were less ethical than other colleagues or more prepared to stray away from the straight and narrow road of regulation – rather, that this was a way of working at the bank. It can only be assumed that in a case like this there was no guidance from the echelons of power at Deutsche, relevant to keep in mind given the enormous sums Deutsche has paid out over the years in fines, also in cases with criminal ramifications.

The CLN saga shows the inner workings of Deutsche, relevant to understand how the bank’s internal safeguarding against illegal activities were side-lined when up against the possibility of profit. Relevant for so many other cases of questionable conduct that have surfaced in the last few years. Intriguing to keep in mind regarding the latest Deutsche scandal: it’s role in Danske Bank’s money laundering in Estonia where $230bn were laundered in 2007 to 2015, where Deutsche seems to have handled around $180bn.

Another aspect is how keenly the Kaupthing managers honoured the agreement with Deutsche. Money was tight in August 2008 when the Chesterfield transaction was done. In September, money was quite literally running out and no doubt the three managers had a lot on their mind. Yet, they never lost focus on these transactions with Deutsche, diligently though with great effort meeting margin calls, even making use of the emergency lending from the Icelandic Central Bank. The managers have explained that Kaupthing’s relationship mattered greatly. Yet, given what was going on at the bank, the question still lingering in my mind why these transactions were apparently so profoundly important to the Kaupthing managers.

Deutsche Bank – the bank that paid €14.5bn(!) in fines March 2012-July 2018

Over the last few years, Deutsche Bank has been fighting regulators on all continents. In total, Deutsche paid fines of €14.5bn from March 2012 to July 2018 for criminal activity ranging from Libor fixing to money laundering, according to ZDF. And there might well be more to come as Deutsche is now involved in the largest money laundering saga of all times, Danske Bank’s laundering of $230bn from 2007 to 2015 where Deutsche allegedly handled close to $180bn of the $230bn.

Intriguingly, in June 2010 the SFO was looking at Deutsche’s role in the CDS trades, according to the Guardian. But as with so much of suspicious activities in UK banks around 2008 (and forever!) nothing more was heard of SFO’s investigation.

Deutsche has refuted having known about the realities of the CDS transactions – that Kaupthing was indeed funding the trades and doing it in order to lower its CDS spreads. However, the paper trail within the bank tells a very clear story, according to the liquidators: Deutsche full well knew the realities and thus took part in market manipulation that in the end affected not only the CDS spreads but, much more seriously, the price of Kaupthing’s bonds. The same was clear already from the SIC Reportand from the CLN criminal case in Iceland.

As mentioned earlier on Icelogthe CLN charges (in Icelandic) support and expand the evidence of Deutsche’s role in the CDS trades. The charges show that Deutsche made for example no attempt to be in contact with the Kaupthing clients who at least on paper were the owners of the two companies; Deutsche was solely in touch with Kaupthing. Inter alia, the owners were not averted regarding margin calls; Deutsche sent all claims directly to Kaupthing, apparently knowing full well where the funding was coming from and who was making the necessary decisions.

Another interesting question is who was on the other side of the CDS bets, i.e. who gained in the end when the Kaupthing-funded companies lost so miserably?

According to the Icelandic Prosecutor, the three Kaupthing bankers “claim they took it for granted that the CDS would be sold in the CDS market to independent investors and this is what they thought Deutsche Bank employees had promised. They were however not given any such guarantee. Indeed, Deutsche Bank itself bought a considerable part of the CDS and thus hedged its Kaupthing-related risk. Those charged also emphasised that Deutsche Bank should go into the market when the CDS spread was at its widest. That meant more profit for the CLN buyer Chesterfield (and also Partridge) but those charged did not in any way secure that this profit would benefit Kaupthing hf, which in the end financed the transactions in their entirety.”

Deutsche’s fees for the two CLN transactions amounted to €30m for the total CDS transactions of €510m. In addition, Deutsche will have profited from going into the market buying “a considerable part of the CDS” thus hedging its risk related to Kaupthing.

Effectively, Deutsche was not interested in having the realities of the case tested in court – it did not want to spell out in court its part in the Kaupthing market manipulation and it did not want to spell out it had itself been a counterpart in the trades. After years of legal wrangling, it chose to settle with Kaupthing and agreed to pay back €425m of the €510m Kaupthing paid to Deutsche for these transactions. – Another case of alleged banking fraud buried in the UK.

*Published by Kjarninn Iceland as an attachment to an open letter (in English but the attachments are linked to the Icelandic version) to Hreiðar Már Sigurðsson and Magnús Guðmundsson from the well-known UK retailer, Kevin Stanford. He and his ex-wife Karen Millen were clients of Icelandic banks, also of Kaupthing. – All emphasis above is mine.

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Written by Sigrún Davídsdóttir

February 5th, 2019 at 12:22 pm

Posted in Uncategorised

Rowland’s Banque Havilland fined €4 million by CSSF

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The year of 2018 did not end on a happy note at Banque Havilland: on 21 December 2018 the Luxembourg financial authority, CSSF, fined the bank €4m for non-compliance regarding law on money laundering and terrorist financing, “severe findings” according to the CSSF statement, discovered because of an on site inspection:

Banque Havilland S.A. did not comply with professional obligations with regard to the implementation of a robust central administration and sound and prudent business management and to internal governance arrangements as well as the fight against money laundering requirements.

It is worth remembering that Havilland is the bank David Rowland and his son Jonathan, via the Rowland’s investment fund Blackfish Capital, set up after buying the Kaupthing Luxembourg operations, following the default of the Icelandic Kaupthing.

It was intriguing to see that the Rowlands kept the Kaupthing management in place, this was a smooth transition at the time, nourishing speculation in Iceland that the Kaupthing top management was not far away from it all. However, the Blackfish Capital employee Martyn Konig, who became the  CEO of Havilland when the bank opened in 2009, only stayed in the job for a few days before resigning. After his resignation, Jonathan Rowland has been in charge of the bank.

It’s also been duly noted in Iceland that in the many criminal cases in Iceland regarding Kaupthing (all concerning action before the bank defaulted in October 2008), where the Kaupthing top management has been found guilty in several cases as well as large shareholders such as Ólafur Ólafsson, all the questionable deals, without exception, were carried out in Luxembourg. Indeed, the Icelandic Prosecutor, investigating these cases, has conducted several house searches at Banque Havilland, searching for material concerning its previous incarnation as Kaupthing Luxembourg.

As I’ve pointed out time and again, the Luxembourg authorities are fully informed on all investigations going on in Iceland. One case re Kaupthing has been investigated in Luxembourg, the so-called Lindsor case. Lindsor was a BVI company, owned by some Kaupthing employees.

Amongst other things, Lindsor seems to have bought bonds from Skúli Þorvaldsson, a Luxembourg-based businessman and a large client of Kaupthing, and from key employees on the “bank collapse day” 6 October 2008. On that day, the Icelandic Central Bank issued an emergency loan to Kaupthing of €500m, then ISK80bn – of these funds, ISK28bn were used in the Lindsor transaction, effectively moving this sum to Kaupthing insiders and Þorvaldsson (see my blogs concerning the Lindsor case).

So far, no news of the Lindsor investigation have come forth in Luxembourg, while some of those involved have been sentenced to long prison-sentences in Iceland. Incidentally, tomorrow 16 January, a Kaupthing-related case, the so-called Marple case, is coming to appeal court in Iceland, the Country Court (see my blogs concerning the Marple case).

Considering the history of Banque Havilland and the reputation of the Rowlands, it is very interesting to notice the severe fine from the CSSF. If this indicates any turn of events remains to be seen. We are still waiting for the Lindsor investigation (not to mention the Landsbanki Luxembourg equity release loans, another Luxembourg saga extensively covered on Icelog).

 

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Written by Sigrún Davídsdóttir

January 15th, 2019 at 10:04 am

Posted in Uncategorised

Wow Air – uncertainty and unanswered questions

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Wow Air, the bold newish privately owned air company on the Icelandic aviation market had planned to be done by now with a bond offering, organised by Pareto Securities, Norway. Closing the offering has been postponed, indicating the bond market is sitting on its hands. The news over the last two weeks has been of a flurry of meetings with no outcome. A presentation on Pareto’s website indicated a weak financial position, which makes the attempt to sell bonds rather unconvincing – and the planned IPO in 18 months more a wishful than a realistic aim.

Tourism is now the largest contributor to balance of payment in Iceland. At the same time, tourism is a major risk factor in the Icelandic economy. Part of that risk is related to aviation – two air companies dominate the aviation market, Icelandair and Wow Air. The news of Wow’s shaky bond offering has rattled the Icelandic króna and the stock market.

Wow Air is privately owned but is now clearly in major financial difficulties. The Icelandic media seems tongue-tied, plenty of rumours but little clarity. One thing seems certain: the bond offering that Pareto Securities launched in August did not seem to be going as hoped.

After silence and then upbeat statements from Wow many questions remain unanswered. Wow has now promised a statement today, Tuesday 18 September.

The much announced bond offer

Over the years, news as to what Wow would do has been a bit here and there. Last year, Skúli Mogensen said to Bloomberg the airline might be sold within the next two years. Finding other shareholders has also been in the air. Now, he aims at an IPO in 18 months. The losses last year were ISK2.4bn, that is around €19m or $22m.

In the meantime, Wow needs to stay in the air. The bond offering now was supposed to give a financial boost of around ISK12bn, €94m or $110m, but half that would be a minimum. After the offering opened the conditions were changed, making the bonds convertible. And the minimum proved elusive. The Icelandic banks and pension funds were courted and apparently put under serious pressure, as there were fears of reputational damage and a nose-diving króna.

Part of the problem is that equity is next to none, something that Wow’s owner nonchalantly mentioned in an interview with the Icelandic Morgunblaðiðin spring. In addition to losses last year and this year, with rising oil prices. Wow does not own any airplanes, which makes it difficult to find any tangible collateral.

In an interview yesterday with the Financial TimesMogensen did not mention the bond offering, only that Wow Air was aiming to raise $200m to $300m in an IPO within 18 months. Those who have studied Wow’s available financial information scratch their head – it is hard to see anything that indicates a turn-around except for Wow’s own very optimistic forecast.

From Oz to Wow

With his predilection for short and sassy company names, Skúli Mogensen had his second coming in the Icelandic business community as the owner of Wow Air in 2012. The first one was in the 1990s as one of the founders of the Icelandic dotcom sputnik Oz. Oz crashed but the experience spawned many other IT companies in the following years as Oz founders and staff kept going elsewhere.

Mogensen however left Iceland and ran Oz Communications in Canada, selling it in 2008 to Nokia. Since it was a private deal little information is available. However, it seems that in spite of rapid and bold, some might say hubristic, expansion the company has been under-financed from the beginning, according to an Icelog source. In may ways, the Wow saga is similar in audacity to the Icelandic banks expansion after 2000.

One of the unanswered questions regards Wow’s debt to Isavia, the state-owned company that runs Keflavík Airport. Morgunblaðið claims Wow’s debt to Isavia is ISK2bn; the number I’ve heard is ISK1bn. If it’s the case that Wow has been allowed to run up a debt to Isavia or has secured more favourable terms than its competitors that is a serious issue. Sadly, that will remind Icelanders of how certain large shareholders in the collapsed banks were allowed to bank on wholly unsustainable terms.

Low-cost carriers are feeling the strain. The business model of offering stop-over in Iceland is also being tested. All of this is at play in the Wow cliff-hanger saga.

*According to Wow Air statement at 3pm Icelandic time, the bond offering has now been closed. Wow Air issuing €60m, €50m of which have already been sold:

*** WOW air – New Bond Issue – Book is closed ***

Tenor…………………3yrs

Issue Size……………EUR 60mm

Coupon………………3m Euribor +9% (Euribor floor at zero) + warrants

Update: Recently, Icelandair made a bid to buy Wow Air. The offer was dependent on due diligence ending this week, in time for Icelandair shareholder meeting on Thursday. According to unconfirmed Icelog sources, the state of affairs at Wow Air is not looking very promising, making it less likely that the sale will go through. Were that to happen, Wow Air would go into receivership. Today, the Icelandic Stock Exchange stopped trade in Icelandair shares, on demand of the FME, the Icelandic financial regulator.

Update 29 November, 9:30: Icelandair has just announced that it’s not going ahead with buying Wow Air, as it had announced, due diligence pending, November 5. Wow CEO Skúli Mogensen recently announced there were other possible buyers. I doubt they will materialise, more likely this is the end of Wow…

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Written by Sigrún Davídsdóttir

September 18th, 2018 at 8:48 am

Posted in Uncategorised