Sigrún Davíðsdóttir's Icelog

The nature of investigations by Serious Fraud Office is that the matters investigated remain a secret until charges are brought. With Kaupthing it’s clear that Kaupthing Edge, the Kaupthing deposits in the UK, triggered the investigation. The money was, to a large extent, sent to Iceland where it was lent out on favourable terms to a chosen group of clients and used to finance a staggering amount of Kaupthing’s own shares. It could of course be argued that the clients were so enthusiastic about Kaupthing that they wanted to have a share, literally, in its success. However, it looks more like an organised share parking on behalf of the bank, often on terms almost too good to be true. The Icelandic Office of the Special Prosecutor is i.a. investigating Kaupthing for alleged market manipulation.

There are strict rules in the UK regarding loans from a subsidiary to a parent company. According to the Special Investigation Committee’s report, the FSA made frantic attempts towards the end for Kaupthing Singer & Friedlander to claim money back from Iceland. The managers of KSF had meetings with the FSA, promised the earth but delivered no money back (which is one of the reasons why the FSA closed Kaupthing down in the UK, as explained by Alistair Darling in a recent interview.)

The loans used were liquidity swaps. Just before the collapse of Kaupthing the swaps amounted to £1bn but it turned out the swaps weren’t all that liquid: KSF could in reality only, at most, get £300-400m, according to KSF director Armann Thorvaldsson’s report to the SIC.*

The SFO might want to know what happened to the deposits gathered in the UK. But since it arrested the bank’s biggest client Robert Tchenguiz, and his brother Vincent also a client but a lot less visible one, it must have its eyes on something else. In an earlier Icelog I pointed out that the SFO allegedly was interested in a loan to Oscatello, belonging to Robert, where Vincent has assets at stake as a collateral.

The SFO angle isn’t yet clear but since it’s turned towards the brothers, two employees of Robert’s company R20 as well as Kaupthing managers such as Thorvaldsson and chairman Sigurdur Einarsson, it might be that SFO views the brothers as ‘shadow directors,’ i.e. apparently unconnected to Kaupthing but making decisions that the board then acted on. Aaron Brown, one of the two R20 employees arrested, is at the heart of Robert’s operations and had close connections with Kaupthing. Gudmundur Thor Gunnarsson, arrested in Iceland and an earlier Kaupthing employee liaised closely with R20 and its owner.

Vincent was never much seen around Kaupthing but Robert was. I have heard from more than one source that Robert was in and out of Kaupthing all the time, as if he owned the bank. In Independent on Sunday, an entrepreneur in Cannes, asked on Thursday about Robert Tchenguiz state of affairs following the SFO raids quoted Shakespeare’s Hamlet which explains Robert’s situation perfectly: “As Polonius warned, neither a borrower nor a lender be, and it looks like Robert was both, to himself.”

In a Kaupthing credit risk report from 31.08.08 the loans to Robert Tchenguiz had blown the legal limit of 25% of the bank’s equity – his loans amounted to ISK235bn, now ca 1.2bn, or 26,2% of the bank’s equity. This didn’t dampen Kaupthing’s will to lend him yet more. At the board’s credit committee meeting 24.9.08 the committee agreed a loan of £5m to the Tchenguiz Discretionary Trust. This loan wasn’t a part of the Oscatello structure but had collaterals in Montzando Ltd and Santora Investment Ltd holding shares in Phase Eight and House of Fraser where another big borrower in Kaupthing, Baugur, was the majority shareholder. An interesting connection since Kaupthing’s favoured clients were inclined to be attracted by the same companies.

TDT was requesting these 5m to settle a margin call from KSF – in other words, KSF was lending TDT to meet KSF’s own margin call. This may seem weird but in the Wonderland of Icelandic banks this was common when the banks’ major shareholders and favoured clients were fighting margin calls.

Next day, the board seems to have gone through the bank’s largest exposure, the overview was leaked on Wikileaks in summer of 2009. According to that overview, Robert Tchenguiz wasn’t mentioned but two companies related to him were mentioned, holding loans of €250m, only a fifth of the debt mentioned in the credit report a few weeks earlier.

On the Kaupthing loan overview from Sept. 2008 the bank’s exposure to Vincent Tchenguiz is €208m, against two companies, Pennyrock Ltd and Elsina Ltd. The credit rating for both these companies is –BBB. These companies are connected to his real estate and ground rent emporium, the biggest of its kind in the UK.

Today, companies connected to Peverel, the holding company for Vincent Tchenguiz ground rent emporium, have gone into administration, as Bank of America Meryll Lynch demanded a loan of £125m repaid. Vincent Tchenguiz blames the bank’s demand on the SFO raid.

Be that as it may but BoA Merryl Lynch might also have taken a look at the collateral structure and wondered about its worth. In some of the Icelandic company structures there were real assets at the bottom of the structure. On top of these companies there were layers of other companies, also with loans but with only a slight downturn of value the equity of these companies could easily evaporate and the collaterals turn out to be worth not very much.

Following the SFO raids and arrests last week there has been a flurry of articles in the UK media on the Tchenguiz brothers and Kaupthing. The FT put the news on its Thursday front page. However, this weekend there was an article where the Tchenguiz brothers were allowed to vent their anger without the slightest attempt by the paper to indicate that this was a knee jerk reaction. As Eva Joly has so often pointed out in the Icelandic media the spin machines go into overdrive at the moment the authorities question the millionaires. They always claim that an action against them is a conspiracy to hit their business interests. Then there are legal threats. All of these standard reactions were paraded in the FT article. How disappointing that this otherwise so outstanding newspaper should let itself be used in such a transparent PR exercise.

The Tchenguiz brothers claim that they were mislead by Kaupthing but they aren’t suing its directors. In the Sunday Times the fashion tycoon Kevin Stanford claimed that the bank had lent him money to buy its shares, misleading him as to the bank’s dire problems. He alleges that the UK deposits were swapped for troubled loans held by Kaupthing Iceland, propping up the share price. This is abundantly clear from the SIC report and will not surprise any Icelander. However, Stanford doesn’t mention that according to the SIC report he himself was involved in deals, financed by Kaupthing, to influence Kaupthing’s credit default swaps. Further, Stanford claims that the bank used the deposits to lend so that some of the senior Kaupthing executives could sell of their own share holdings. – If this is correct it’s of great interest since the executives have always maintained they didn’t sell their shares. It is however clear, that the top executives can afford to hire the most expensive lawyers both in Iceland and the UK for their defense.

Whether and if something is criminal at the heart of Kaupthing’s operation, justifying the SFO raids last week, will only come to light when and if charges are brought. But it’s clear that the Tchenguiz brothers haven’t only constructed one of the most complicated offshore structures known in this country but they have also distributed debt high and low in these structures. According to Simon Appel partner at Peverel’s administrator Zolfo Cooper “…the business itself was profitable at an operating level, the level of debt in the holdings companies was unsustainable.”

In 2008, when no one was lending and Kaupthing showered its chosen clients and major shareholders with money from its only source, UK depositors (and to a lesser degree depositors in other countries), it seemed like a salvation to have Kaupthing as a generous lender. But it was a doubtful blessing since the temptation was to borrow more instead of selling assets. The Icelandic banks’ goodwill to lend far beyond rhyme and reason has killed many of the companies of the Icelandic banks’ main clients. Vincent Tchenguiz wasn’t one of Kaupthing’s largest clients but the fate of Peverel indicates the same pattern of addiction to debt.

*An attentive reader pointed out to me that if the FSA can prove that KSF transferred money to Iceland in breach of UK law there could be a basis for a course of action to recover that money. The question is against whom the recovery would be pointed.

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The 9th person arrested in the SFO investigation on Kaupthing and the Tchenguiz brothers is Aaron Brown, a trader and a close aid of Robert Tchenguiz and an employee of his investment vehicle R20. Aaron Brown is, according to Icelog sources, instrumental in Robert Tchenguiz businesses and usually among the first to show up in the morning at the Mayfair office. Brown isn’t a known name in the business pages but everyone familiar with R20 and Robert Tchenguiz businesses knows of Brown. Brown also had close connections to Kaupthing and Exista.

In addition to Brown Tim Smalley, another senior employee of R20, the Tchenguiz brothers,  Sigurdur Einarsson, Armann Thorvaldsson and Gudni Adalsteinsson were arrested in London on Wednesday. In Iceland, ex Kaupthing employees Bjarki Diego and Gudmunur Thor Gunnarsson were arrested. The investigation seem to have cost Adalsteinsson his job with the regulator, FSA. The FSA certainly didn’t do a brilliant job of regulating the Icelandic banks, was far too late in stopping them according to former Chancellor of the Exchequer Alistair Darling. The fact that Adalsteinsson was hired by the FSA raises further questions about the regulator’s mindset.

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According to a press release this morning, the SFO has conducted house searches in London and Essex this morning re the Kaupthing investigation. Seven people, aged between 42-54, have been arrested and brought in for questioning. I’m told that two of these people are Vincent and Robert Tchenguiz. Their homes and offices were searched this morning.

Who the other five are is still unclear. Two of Kaupthing’s managers are living in London, that’s Sigurdur Einarsson and Armann Thorvaldsson but it’s unknown if they are among the group arrested this morning. In Iceland, two men, aged 42 and 43, have been arrested, had their houses searched, and have been brought in for questioning.

It’s now been confirmed that Sigurdur Einarsson and Armann Thorvaldsson are among those arrested. – Further, Gudni Adalsteinsson chief treasurer and Bjarki Diego have also been arrested. Interestingly, Adalsteinsson is, since a few months, working for the UK Financial Services Authorities.

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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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“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 Icelog, the 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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The Icelandic SIC report and court cases in Iceland have made it abundantly clear that most of the questionable, and in some cases criminal, deals in the Icelandic banks were executed in their Luxembourg subsidiaries. All this is well known to authorities in Luxembourg who have kindly assisted Icelandic counterparts in obtaining evidence. One story, the Landsbanki Luxembourg equity release loans, still raises many questions, which Luxemburg authorities do their best to ignore in spite of a promised investigation in 2013. Some of these questions relate to the activities of the bank’s liquidator, ranging from consumer protection, the bank’s investment in the bank’s own bonds on behalf of clients and if the bank set up offshore companies for clients without their consent.

The Landsbanki Luxembourg equity release loans were issued to clients in France and Spain. Indeed, all these loans were issued to clients outside of Luxembourg. One intriguing fact emerged during the French trial in Paris last year against Landsbanki Luxembourg and nine of its executives and advisors: the French clients got the bank’s loan documents in English, the non-French clients got theirs in French.*

Landsbanki Iceland went into administration October 7 2008. The next day, Landsbanki Luxembourg was placed into moratorium; liquidation proceedings started 12 December. Over the years, Icelog has raised various issues regarding the Landsbanki Luxembourg equity release loans, mostly sold to elderly people (see here). These issues firstly relate to how the bank handled these loans, both the marketing and the investments involved and secondly, how the liquidator Yvette Hamilius, has handled the Landsbanki Luxembourg estate and the many complaints raised by the equity release clients.

A liquidator is an independent agent with great authority to investigate. There is abundant material in Iceland, both from the 2010 Report of the Special Investigative Commission, SIC and Icelandic court cases where almost thirty bankers and others close to the banks have been sentenced to prison. These cases have invariably shown that the most dubious deals were done in the banks’ Luxembourg operations.

Already by June 2015, liquidators of the estates of the three large Icelandic banks were ending their work, handing remaining assets over to creditors. In the, in comparison, tiny estate of Landsbanki Luxembourg there is no end in sight due to various legal proceedings. Yet, its arguably largest problem, the so-called Avens bond, was solved already in 2011. At the time, Már Guðmundsson governor of the Icelandic Central Bank paid tribute to the help received from amongst others Hamiliusfor “considerable efforts in leading this issue to a successful conclusion.”

The Landsbanki Luxembourg equity release clients have another story to tell, both in terms of their contacts with the liquidator and Luxembourg authorities. In May 2012, these clients, who to begin with had each and everyone been struggling individually, had formed an action group and aired their complaints in a press release, questioning Luxembourg’s moral standing and Hamilius’ procedures.

The following day, the group got an unexpected answer: Luxembourg State Prosecutor Robert Biever issued a press release. As I mentioned at the time, it was jaw-droppingly remarkable that a State Prosecutor saw it as his remit to address a press release directed at the liquidator of a private company in a case the Prosecutor had not investigated. According to Biever, Hamilius had offered the borrowers “an extremely favourable settlement” but “a small number of borrowers,” unwilling to pay, was behind the action.

In 2013 Luxembourg Justice Minister promised an investigation into the Landsbanki products that was already taking “great strides.” So far, no news.

The Landsbanki Luxembourg equity release scheme: high risk, rambling investments

In theory, the magic of equity release loans is that by investing around 75% of the loan the dividend will pay off the loan in due course. I have seen calculations of some of the Landsbanki equity release loans that make it doubtful that even with decent investments, the needed level of dividend could have been reached – the cost was simply too high.

If something seems too good to be true it generally is. However, this offer came not from a dingy backstreet firm but from a bank regulated and supervised in Luxembourg, a country proud to be the financial centre of Europe. And Landsbanki was not the only bank offering these loans, which interestingly have long ago been banned or greatly limited in other countries. In the UK, equity release loans wrecked havoc and created misery some decades ago, leading to a ban on putting up the borrower’s home as collateral.

Having scrutinised the investments made for some of the Landsbanki Luxembourg clients the first striking thing is an absolutely staggering foreign currency risk, also related to the Icelandic króna. Underlying bonds on the foreign entities such as Rabobank and European Investment Bank were nominated in Icelandic króna (see here on Rabobank ISK bond issue Jan. 2008), in addition to the bonds of Kaupthing and Landsbanki, the largest and second largest Icelandic banks at the time.

Currencies were bought and sold, again a strategy that will have generated fees for the bank but was of dubious use to the clients.

The second thing to notice is the rudderless investment strategy. To begin with the money was in term deposits, i.e. held for a fixed amount of time, which would generate slightly higher interest rates than non-term deposits. Then shares and bonds were bought but there was no apparent strategy except buying and selling, again generating fees for the bank.

The equity release clients were normally not keen on risk but the investments were partially high risk. The 2007 and 2008 losses on some accounts I have looked have ranged from 10% to 12%. These were certainly testing years in terms of investment but amid apparently confused investing there was indeed one clear pattern.

One clear investment pattern: investing in Landsbanki and Kaupthing bonds

Having analysed statements of four clients there is a recurring pattern, also confirmed by other clients and a source with close knowledge of the bank’s investments: in 2008 (and earlier) Landsbanki Luxembourg invariably bought Landsbanki bonds as an investment for clients, thus turning the bank’s lending into its own finance vehicle. In addition, it also bought Kaupthing bonds. The 2010 SIC report cites examples of how the banks cooperated to mitigate risk for each other.

It is not just in hindsight that buying Landsbanki and Kaupthing bonds as equity release investment was a doomed strategy. Both banks had sky-high risk as shown by their credit default swap, CDS. The CDS are sort of thermometer for banks indicating their health, i.e. how the market estimates their default risk.

The CDS spread for both banks had for years been well below 100 points but started to rise ominously in 2007 as the risk of their default was perceived to rise. At the beginning of 2008, the CDS spread for Landsbanki was around 150 points and 300 points for Kaupthing. By summer, Kaupthing’s CDS spread was at staggering 1000 points, then falling to 800 points. Landsbanki topped close to 700 points. The unsustainably high CDS spread for these two banks indicated that the market had little faith in their survival. With these spreads, the banks had little chance of seeking funds from institutional investors (SIC Report, p.19-20).

The red lights were blinking and yet, Landsbanki Luxembourg staff kept on steadily buying Landsbanki and Kaupthing bonds on behalf of clients who were clearly risk-averse investors.

Equity release investment in some details

To give an idea of the investments Landsbanki Luxembourg made for equity release borrowers, here is some examples of investment (not a complete overview) for one client, Client A:

Loan of €2.1m in January 2008; the loan was split in two, each half converted into Swiss francs and Japanese yens. The first investment, €1.4m, two thirds of the loan,was in LLIF Balanced Fund (in Landsbanki Luxembourg loan documents the term used is Landsbanki Invest. Balanced Fund 1 Cap but in later overviews from the liquidator it is called LLIF Balanced Fund, a fund named in Landsbanki’s Financial Statements 2007 as one of the bank’s investment funds).

Already in February 2008 Landsbanki Luxembourg bought Kaupthing bond for this client for €96.000. End of April 2008 €155.000 was invested in Landsbanki bond, days before €796.000 of the LLIF Balanced Fund investment was sold. Late May and end of August Landsbanki bonds were bought, in both cases for around €99.000. In early September 2008 Landsbanki invested $185.000 in Kaupthing bonds for this client. The next day, the bank sold €520.000 in LLIF Balanced Fund.

Landsbanki’s investments were focused on the financial sector that in 2008 was showing disastrous results. For client A the bank bought bonds in Nykredit, Rabobank, IBRD and EIB, apparently all denominated in Icelandic króna. In addition, there were shares in Hennes & Maurits, and a Swedish company selling food supplement.

A similar pattern can be seen for the other clients: funds were to begin with consistently invested in LLIF Balanced Fund but later sold in favour of Kaupthing and Landsbanki bonds. Although investment funds set up by the Icelandic banks were later shown to contain shares in many of the ill-fated holding companies owned by the banks’ largest shareholders – also the banks’ largest borrowers – a balanced fund should have been seen as a safer investment than bonds of banks with sky-high CDS spreads.

MiFID and the Landsbanki Luxembourg equity release loans

Landsbanki certainly did not invent equity release loans. These loans have been around for decades. Much like foreign currency, FX, loans, a topic extensively covered by Icelog, they have brought misery to many families, in this case mostly elderly people. FX lending has greatly diminished in Europe, also because banks have been losing in court against FX borrowers for breaking laws on consumer protection.

There might actually be a case for considering the equity release loans as FX loans since the loans, taken in euros, were on a regular basis converted into other currencies, as mentioned above. – This is, so far, an unexplored angle of these cases that Luxembourg authorities have refused to consider.

Another legal aspect is that the first investments were normally done before the loans had been registered with a notary, as is legally required in France.

The European MiFID, Markets in Financial Instruments Directive was implemented in Luxembourg and elsewhere in the EU in 2007. The purpose was to increase investor protection and competition in financial markets.

Consequently, Landsbanki Luxembourg was, as other banks in the EU, operating under these rules in 2007. It is safe to say, that the bank was far below the standard expected by the MiFID in informing its clients on the risk of equity release loans.

The following paragraph was attached to Landsbanki Luxembourg statements: “In the event of discrepancies or queries, please contact us within 30 days as stipulated in our “General Terms and Conditions.”– However, the bank almost routinely sent notices of trades after the thirty days had passed.

It is unclear if the liquidator has paid any attention to these issues but from the communication Hamilius has had with the equity release clients there is nothing to indicate that she has investigated Landsbanki operations compliance with the MiFID. MiFID compliance is even more important given that courts have been turning against equity release lenders in Spain due to lack of consumer protection – and that banks have been losing in courts all over Europe in FX lending cases.

Clients offshorised without their knowledge

The “Panama Papers” revealed that Landsbanki was one of the largest clients of law firm Mossack Fonseca; it was Landsbanki’s go-to firm for setting up offshore companies. Kaupthing, no less diligent in offshoring clients, had its own offshore providers so the leak revealed little regarding Kaupthing’s offshore operations. The prime minister of Iceland Sigmundur Davíð Gunnlaugsson, who together with his wife owned a Mossack Fonseca offshore company, became the main story of the leak and resigned less than 48 hours after the international exposure.

In September 2008, a Landsbanki Luxembourg client got an email from the bank with documents related to setting up a Panama company, X. The client was asked to fill in the documents, one of them Power of Attorney for the bank and return them to the bank. The client had never asked for this service and neither signed nor sent anything back.

In May 2009, this client got a letter from Hamilius, informing him that the agreement with company X was being terminated since Landsbanki was in liquidation. The client was asked to sign a waiver and a transfer of funds. Attached was an invoice from Mossack Fonseca of $830 for the client to pay. When the client contacted the liquidator’s office in Luxembourg he was told he should not be in possession of these documents and they should either be returned or destroyed. Needless to say, the client kept the documents.

Company X is in the Offshoreleak database, shown as being owned by Landsbanki and four unnamed holders of bearer shares. – Widely used in offshore companies, bearer shares are a common way of hiding beneficial ownership. Though not a proof of money laundering, the Financial Action Task Force, FATF, considers bearer shares to be one of the characteristics of money laundering.

This shows that Landbanki Luxembourg set up a Panama company in the name of this client although the client did not sign any of the necessary documents needed to set it up. Also, that the liquidator’s office knew of this. (This account is based on the September 2009 email from Landsbanki Luxembourg to the client and a statement from the client).

Other clients I have heard from were offered offshore companies but refused. The story of company X only came out because of the information mistakenly sent from the liquidator to the client.

Landsbanki Luxembourg clients now wonder if companies were indeed set up in their names, if their funds were sent there and if so, what became of these funds. This has led them to attempt legal action in Luxembourg against the liquidator. Only the liquidator will know if it was a common practice in Landsbank Luxembourg to set up offshore companies without clients’ consent, if money were moved there and if so, what happened to these funds.

The curious role of a certain Philomène Ruberto

Invariably, the equity release loans in France and Spain were not sold directly by Landsbanki Luxembourg but through agents. This is another parallel to FX lending characterised by this pattern. According to the Austrian Central Bank this practice increases the FX borrowing risk as agents are paid for each loan and have no incentive to inform the client properly of the risks involved.

One of the agents operating in France was a French lady, Philomène Ruberto. In 2011, well after the collapse of Landsbanki, the Landsbanki Luxembourg was putting great pressure on the equity release borrowers to repay the loans. At this time, Ruberto contacted some of the clients in France. Claiming she was herself a victim of the bank, she offered to help the clients repay their loans by brokering a loan through her own offshore company linked to a Swiss bank, Falcon Private Bank, now one of several banks caught up in the Malaysian 1MDB fraud.

Some clients accepted the offer but that whole operation ended in court, where the clients accused Ruberto of fraud and breach of trust. In a civil case judgement at the Cour d’appel d’Aix en Provence in spring 2013, the judge listed a series of Ruberto’s earlier offenses, committed before and during the time she acted as an agent for Landsbanki:

This case was sent on a prosecutor. In a penal case in autumn 2014 Ruberto was sentenced by Tribunal Correctionnel de Grasse to 36 months imprisonment, a fine of €15,000 in addition to the around €190,000 she was ordered to pay the civil parties. According to the 2104 judgement Ruberto was, at the time of that case, detained for other causes, indicating that she has been a serial financial fraud offender since 2001.

But Ruberto’s relationship with Landsbanki Luxembourg prior to the bank’s collapse has a further intriguing dimension: GD Invest, a company owned by Ruberto and frequently figuring in documents related to her services, was indeed also one of Landsbanki Luxembourg largest borrowers. The SIC Report (p.196) lists Ruberto’s company, GD Invest, as one of the bank’s 20 largest borrowers, with a loan of €5,4m.

In 2007, at the time Ruberto was acting as an agent in France for Landsbanki Luxembourg, she not only borrowed considerably funds but, allegedly, on very favourable terms. In March 2007, GD Invest borrowed €2,7m and then further €2.3m in August 2007, in total almost €5,1m. Allegedly, Ruberto invested €3m in properties pledged to Landsbanki but the remaining €2m were a private loan. It is not clear what or if there was a collateral for that part.

By the end of 2011, Ruberto’s debt to Landsbanki Luxembourg was in total allegedly €7,5m. In January 2012 it is alleged that the Landsbanki Luxembourg liquidator made her an offer of repaying €2,4m of the total debt, around 1/3 of the total debt. Ruberto’s track record of fraudulent behaviour from 2001, raises questions to her ties first to Landsbanki and then to Landsbanki Luxembourg liquidator. (The overview of Ruberto’s role is based on emails and court documents provided by Landsbanki Luxembourg equity release borrowers.)

Inconsistent information from the Landsbanki Luxembourg liquidator

From 2012, when I first heard from Landsbanki Luxembourg equity release borrowers, inconsistent information from the liquidator has been a consistent complaint. The liquidator had then been, and still is, demanding repayment of sums the clients do not recognise. There are also examples of the liquidator coming up with different figures not only explained by interest rates. The borrowers have been unwilling to pay because there are too many inconsistencies and too many questions unanswered.

As mentioned above, Landsbanki Luxembourg was put in suspension of payment, in October 2008 and then into administration in December 2008. As far as is known, people who later took over the liquidation were called on to work at the bank during this time. During this time, many clients were informed that their properties had fallen in value, meaning that the collateral for their loan, the property, was inadequate. Consequently, they should come up with funds. At this time, there was no rational for a drop in property value. This is one of the issues the borrowers have, so far unsuccessfully, tried to raise with the liquidator.

Other complaints relate to how much had been drawn. One example is a client who had, by October 2008, in total drawn €200,000. This is the sum this client want to repay. Mid October 2008, after Landsbanki Luxembourg had failed, this client got a letter from a Landsbanki employee stating that close to €550,000, that the client had earlier wanted transferred to a French account, was still “safe” on the Landsbanki account. This amount was never transferred but the liquidator later claimed it had been invested and demanded that the client repay it.

The liquidator has taken an adversarial stance towards these clients. The clients complain of lack of transparency, inconsistent information, lack of information and lack of will to meet with them to explain controversies.

The role and duty of a liquidator

By late 2009 the liquidator had sold off the investments. This is what liquidators often do: after all, their role is to liquidate assets and pay creditors. However, a liquidator also has the duty to scrutinise activity. That is for example what liquidators of the banks in Iceland have done. A liquidator is not defending the failed company but the interests of creditors, in this case the sole creditor, LBI ehf.

Incidentally, the liquidator has not only been adversarial to the clients of Landsbanki but also to staff. In 2011 the European Court of Justice ruled against the liquidator in reference for a preliminary ruling from the Luxembourg Cour du cassation brought by five employees related to termination of contract.

Liquidators have great investigative powers. In addition to documents, they can also call in former staff as witnesses to clarify certain acts and deeds. If this had been done systematically the things outlined above would be easy to ascertain such as: is it proper in Luxembourg that a bank systematically invests clients’ funds in the bank’s own bonds? Was the investment strategy sound – or was there even a strategy? Were clients’ funds systematically moved offshore without their knowledge? If so, was that done only to generate fees for the bank or were there some ulterior motives? And have these funds been accounted for? A liquidator can take into account the circumstances of the lending and settle with clients accordingly.

And how about informing the State Prosecutor of Landsbanki’s investments on behalf of clients in Landsbanki bonds and the offshoring of clients without their knowledge?

But having liquidators in Luxembourg asking probing questions and conducting investigations is possibly not cherished by Luxembourg regulators and prosecutors, given that the country’s phenomenal wealth is partly based on exactly the kind of dirty deals seen in the Icelandic banks in Luxembourg.

LBI ehf – the only creditor to Landsbanki Luxembourg

Landsbanki Luxembourg has only one creditor – the LBI ehf, the estate of the old Landsbanki Iceland. According to the LBI 2017 Financial Statements the expected recovery of the Landsbanki Luxembourg amounts to €84,3m, compared to €74,3m estimated last year. The increase is following what LBI sees as a “favourable ruling by the Criminal Court in Paris on 28 August 2017,” i.e. that all those charged were acquitted.

The only assets in Landsbanki Luxembourg are the equity release loans. The breakdown of the loans, in EUR millions, in the LBI 2017 Statements is the following:

Further to this the Statements explain that “LBI’s claims against the Landsbanki Luxembourg estate amounted to EUR 348.1 million, whereas the aggregate balance of outstanding equity release loans amounted to EUR 293.0 million with an estimated recoverable value … of EUR 84.3 million.”

As pointed out, the information “regarding legal matters pertaining to the Landsbanki Luxembourg estate is mainly based on communications from that estate‘s liquidator, and not all of such information has been independently verified by LBI management.”

Apart from the criminal action in Paris and the appeal of the August 2017 judgment, the Financial Statements mention other legal proceedings: “Landsbanki Luxembourg is also subject to criminal complaints and civil proceedings in Spain. … In November 2012, several customers in France and Spain brought a criminal complaint in Luxembourg against the liquidator, alleging that the former activities of Landsbanki Luxembourg are criminal and thus that the estate’s liquidator should be convicted for money laundering by trying to execute the mortgages. Other criminal complaints have been filed in Luxembourg in 2016 and 2017 based on the same grounds against the liquidator personally.”

This all means that “LBI’s presented estimated recovery numbers are subject to great uncertainty, both in timing and amount.”

What is Luxembourg doing?

It is not the first time I ask this question here on Icelog. In July 2013 there was the news from Luxembourg, according to the Luxembourg paper Wort, that there were two investigations on-going in Luxembourg related to Landsbanki. This surfaced in the Luxembourg parliament as the Justice Minister Octavie Modert responded to a parliamentary question from Serge Wilmes, from the centre right CSV, Luxembourg’s largest party since founded in 1944.

According to Modert both cases related to alleged criminal conduct in the Icelandic banks. One investigation was into financial products sold by Landsbanki. “…the deciding judge is making great strides,” she said, adding that in order not to jeopardize the investigation, the State Attorney was unable to provide further details on the results already achieved.”

Sadly, nothing further has been heard of this investigation.

In spring 2016 the Luxembourg financial regulator, Commission de surveillance du secteur financier, CSSF had set up a new office to protect the interests of depositors and investors. This might have been good news, given the tortuous path of the Landsbanki Luxembourg clients to having their case heard in Luxembourg – CSSF has so far been utterly unwilling to consider their case.

The person chosen to be in charge is Karin Guillaume, the magistrate who ruled on the Landsbanki Luxembourg liquidation in December 2008. As pointed out in PaperJam, Guillaume has been under a barrage of criticism from the Landsbanki clients due to her handling of their case, which somewhat undermines the no doubt good intentions of the CSSF. From the perspective of the Landsbanki Luxembourg clients, CSSF has chosen a person with a proven track record of ignoring the interests of depositors and investors.

So far, Luxembourg authorities have resolutely avoided investigating Landsbanki and the other Icelandic banks. In Iceland almost 30 bankers, also from Landsbanki, and others close to the banks have been sentenced to prison, up to six years in some cases (changes to Icelandic law on imprisonment some years ago mean that those sentenced serve less than half of that time in prison before moving to half-way house and then home; they are however electronically tagged and can’t leave the country until the time of the sentence is over).

In the CSSF 2012 Annual Report its Director General Jean Guill wrote:

During the year under review, the CSSF focused heavily on the importance of the professionalism, integrity and transparency of the financial players. It urged banks and investment firms to sign the ICMA Charter of Quality on the private portfolio management, so that clients of these institutions as well as their managers and employees realise that a Luxembourg financial professional cannot participate in doubtful matters, on behalf of its clients.  

Almost ten years after the collapse of Landsbanki, equity release clients of Landsbanki Luxembourg are still waiting for the promised investigation, wondering why the liquidator is so keen to soldier on for a bank that certainly did participate in doubtful matters.

*In court, the French singer Enrico Macias mentioned that all his documents were in English. I found this strange since I had seen documents in French from other clients and knew there was a French documentation available. When I asked Landsbanki Luxembourg clients this pattern emerged. All the clients asked for contracts in their own language. When the non-French clients asked for contracts in English they were told the documentation had to be in French as the contracts were operated in France. Conversely, the French were told that the language was English as it was an English scheme. I have now seen this consistent pattern on documents for the various clients. – Here is a link to all Icelog blogs, going back to 2012, related to the equity release loans. Here is a link to the Landsbanki Luxembourg victims’ website.

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The Bill passed by the Icelandic parliament in December 2008 on setting up an independent investigative commission, the Special Investigative Commission did not catch much attention at the time. The goal was nothing less than finding out the truth in order to establish events leading up to the 2008 banking collapse, analyse causes and drawing some lessons. The SIC report was an exemplary work and immensely important at the time to establish a narrative of the crisis. But in hindsight, there is yet another lesson to be learnt: its importance does not diminish with time as it helps to counteract special interests seeking to rewrite history.

There were no big headlines when on 12 December 2008 Alþingi, the Icelandic parliament, passed a Bill to set up an investigative commission “to investigate and analyse the processes leading to the collapse of the three main banks in Iceland,”which had shaken the island two months earlier. The palpable lack of enthusiasm and attention was understandable: the nation was still stunned and there was no tradition in Iceland for such commissions. No one knew what to expect, the safest bet was to not expect very much.

That all changed when the Commission presented its results in April 2010. Not only was the report long – 2600 pages in print in addition to online-only material – but it did actually tell the real story behind the collapse: the immensely rapid growth of the banks, from one GDP in 2002 to ten times the GDP in 2008, the stronghold the largest shareholders, incidentally also the largest borrowers, had on the banks’ managements, the political apathy and lax regulation by weak regulators, stemming from awe of the financial sector.

Unfortunately, the SIC report was not translated in full into English; see executive summary and some excerpts here.

With time, the report’s importance has not diminished: at the time, it clarified what had happened thus preventing those involved or others with special interest, to reshape the past according to their own interests. With time, hindering the reshaping of the past has become of major importance, also in order to draw the right lessons from the calamitous events in October 2008.

What was the SIC?

According to the December 2008 SIC Act (in Icelandic), the goal was setting up an investigative commission, that would, at the behest of Alþingi, seek “the truth about the run-up to and the causes of the collapse of the Icelandic banks in 2008 and related events. [The SIC] is to evaluate if this was caused by mistake or neglect in carrying out law and regulation of the financial sector in Iceland and its supervision and who could be held responsible for it.” – In order to fulfil its goal the SIC was inter alia to collect information on the financial sector, assess regulation or lack thereof and come up with proposals to prevent the repetition of these events.

In some countries, most notably in South Africa after apartheid, “Truth Commissions,” have played a major part in reconciliation with the past. Although the remit of the Icelandic SIC was to establish the truth, the SIC was never referred to as a “truth commission” in Iceland though that concept has been used in foreign coverage of the SIC.

The SIC had the power to make use of a vast array of sources, both by calling in people to be questioned and documents, public or private such as bank data, including data on named individuals, data from public institutions, personal documents and memos. Data, normally confidential, had to be shared with the SIC, which was obliged to operate as any other public body handling sensitive or confidential information.

Although the SIC had to follow normal procedures of discretion on personal data the SIC could “publish information, normally subject to discretion, if the SIC deems this necessary to support its conclusions. The Commission can only publish information on personal matters of named individuals, including their financial affairs, if the public interest is greater than the interest of the individuals concerned.” – In effect, this clause lift banking secrecy.

One source close to the process of setting up the SIC surmised the political intentions behind the SIC Act did not include lifting banking secrecy, indicating that the extensive powers given to the SIC were accidental. Others have claimed the SIC’s extensive powers were always part of the plan. I am in two minds about this but my feeling is that the source close to the process was right – the powers to scrutinise the main shareholders were far greater than intended to begin with.

Naming the largest borrowers, incidentally also the largest shareholders

Intentional or not, the extensive powers enabled naming the individuals who received the largest loans from the banks, incidentally their largest shareholders and their closest business partners. This was absolutely essential in order to understand how the banks had operated: essentially, as private fiefdoms of the largest shareholders.

In order to encourage those called in for questioning to speak freely, the hearings were held behind closed doors; there were no public hearings. The SIC had extensive powers to call people in for questioning: it could ask for a court order if anyone declined its invitation, with the threat of taking that person to court on grounds of contempt in case the invitation was declined.

Criminal investigation was not part of the SIC remit but its power to call for material or call in people for questioning was parallel to that of a prosecutor. As stated in the report, the SIC was obliged to inform the State Prosecutor if there was suspicion of criminal conduct:

The SIC’s assessment, pursuant to Article 1(1) of Act no. 142/2008, was mainly aimed at the activities of public bodies and those who might be responsible for mistakes or negligence within the meaning of those terms, as defined in the Act. Although the SIC was entrusted with investigating whether weaknesses in the operations of the banks and their policies had played a part in their collapse, the Commission was not expected to address possible criminal conduct of the directors of the banks in their operations.

As to suspicion of civil servants having failed to fulfil their legal duties, the SIC was supposed to inform appropriate instances. The SIC was not obliged to inform the individuals in question. As to ministers, the SIC was to follow law on ministerial responsibility.

The three members

The SIC Act stipulated it should have three members: the Alþingi Ombudsman, then as now Tryggvi Gunnarsson, an economist and, as a chairman, a Supreme Court Justice. The nominated economist was Sigríður Benediktsdóttir, then lecturer at Yale University (director of Financial Stability at CBI 2012 to 2016 when she returned to Yale). The chairman was Páll Hreinsson (since 2011 judge at the EFTA Court).

In addition to the Commission there was a Working Group on Ethics: Vilhjálmur Árnason professor of philosophy, Salvör Nordal director of the Centre for Ethics, both at the University of Iceland and Kristín Ástgeirsdóttir director of the Equal Rights Council in Iceland. Their conclusions were published in Vol. 8 of the SIC report.

In total, the SIC had a staff of around 30 people. As with the Anton Valukas report, published in March 2010, on the collapse of Lehman Brothers, organising the material, especially the data from the banks, was a major task. The SIC had access to the databases of the three collapsed banks but had only limited data from the banks’ foreign operations.

There were absolutely no leaks from the SIC, which meant it was unclear what to expect. Given its untrodden path, the voices expressing little faith were the most frequently heard. I had however heard early on, that the SIC had a firm grip on turning material into searchable databases, which would mean a wealth of material. With qualified members and staff, I was from early on hopeful that given their expertise of extracting and processing data the SIC report would most likely prove to be illuminating – though I certainly did not imagine how extensive and insightful it turned out to be.

Greed, fraud and the collapse of common sense

After the October 2008 collapse, my attention had been on some questionable practices that I heard of from talking to sources close to the failed banks.

One thing I had quickly established was how the banks, through their foreign subsidiaries, had offshorised their Icelandic clients. This counted not only for the wealthy businessmen who obviously understood the ramifications of offshorising but also people with relatively small funds. These latters had in many cases scant understanding of these services.

In the last few years, as information on offshorisation has come to the light via Offshoreleaks etc., it has become clear that Iceland was – and still is – the most offshorised country in the world (here, 2016 Icelog on this topic). Once the “art” of offshorisation is established, with all the vested interests accompanying it, it does not die easily – this might be considered one of the failed banks’ more evil legacies.

Another point of interest was how the banks had systematically lent clients, small and large, funds to buy the banks’ own shares, i.e. Kaupthing lent funds to buy Kaupthing shares etc. Cross-lending was also a practice: Bank A would lend clients to buy Bank B shares and Bank B lent clients to buy Bank A shares. This was partly used to hinder that shares were sold when buyers were few and far behind, causing fall in market value. In other words, massive market manipulation had slowly been emerging. Indeed, the managers of all three failed banks have in recent years been sentenced for market manipulation.

It had also emerged, that the banks’ largest shareholders/clients and their business partners had indeed been what I have called “favoured clients,” i.e. enjoying services far beyond normal business practices. One side of this came to light in the banks’ covenants in lending agreements: in the case of the “favoured clients,” the lending agreements tended to guarantee clients’ profit, leaving the banks with the losses. In other words, the banks took on far greater portion of the risk than these clients.

Icelog blogs I wrote in February 2010, before the publication of the SIC report, give some sense of what was known at the time. Already then, it seemed fair to conclude that greed, fraud and the collapse of common sense had been decisive factors in the event in Iceland in October 2008.

Monday morning 12 April 2010 – when time stood still in Iceland

The excitement in Iceland on Monday morning 12 April 2010 was palpable. The press conference was transmitted live. All around Iceland employers had arranged for staff to watch as the SIC presented its conclusions.

After Páll Hreinsson’s short introduction, Sigríður Benediktsdóttir gave an overview of the main findings regarding the banks, presenting “The main reasons for the collapse of the banks,” followed by Tryggvi Gunnarsson’s overview of the reactions within public institutions (here the presentations from the press conference, in Icelandic).

The main reason for the collapse of the three banks was their rapid growth and their size at the time they collapsed; the three big banks grew 20-fold in seven years, mainly 2004 and 2005; the rapid expansion into new/foreign markets was risky; administration and due diligence was not in tune with the banks’ growth; the quality of loans greatly deteriorated; the growth was not in tune with long-time interest of sound banking; there were strong incentives within the banks grow.

Easy access to short-term lending in international markets enabled the banks’ rapid growth, i.e. the banks’ main creditors were large international banks. With the rapid expansion, also abroad, the institutional framework in Iceland, inter alia the Central Bank and the FME, quickly became wholly inadequate. The under-funded FME, lacking political support, was no match for the banks, which systematically poached key staff from the FME. Given the size of the humungous size of the Icelandic financial system relative to GDP there was effectively no lender of last resort in Iceland; the Central Bank could in no way fulfil this role.

This had no doubt be clear to the banks’ management for some time. In his book, “Frozen Assets,” published in 2009, Ármann Þorvaldsson, manager of KSF, Kaupthing’s UK operation, writes that he “always believed that if Iceland ran into trouble it would be easy to get assistance from friendly nations… despite the relative size of the banking system in Iceland, the absolute size was of course very small.” (P. 194). – A breath-taking recklessness, naivety or both but might well have been the prevalent view at the highest echelons of the Icelandic financial sector at the time.

The banks’ largest shareholders and their “abnormally easy access to lending”

When it came to “Indebtedness of the banks’ largest owners” the conclusions were truly staggering: “The SIC concludes that the owners of the three largest banks and Straumur (investment bank where the main shareholders were the same as in Landsbanki, i.e. Björgólfur Thor Björgólfsson and his fater) had abnormally easy access to lending in these banks, apparently only because their ownership of these banks.”

The largest exposures of the three large banks were to the banks’ largest shareholders. “This raises the question if the lending was solely decided on commercial terms. The banks’ operations were in many ways characterised by maximising the interest of the large shareholders who held the reins rather than running a solid bank with the interest of all shareholders in mind and showing reasonable responsibility towards shareholders.” – Creative accounting helped the banks to avoid breaking rules on large exposures.

Benediktsdóttir showed graphs to illustrate the lending to the largest shareholders in the various banks. It is worth keeping in mind that these large shareholders all had foreign assets and were all clients of foreign banks as well. In general, the Icelandic lending shot up in 2007 when international funding dried up. At this point, the Icelandic banks really showed how favoured the large shareholders were because these clients were, en masse, getting merciless margin calls from their foreign lenders.

In reality, the Icelandic banks were at the mercy of their shareholders. If the large shareholders and/or their holding companies would default, the banks themselves were clearly next in line. The banks could not make margin calls where their own shares were collateral as it would flood the markets with shares no one wanted to buy with the obvious consequence of crashing share prices.

Two of the graphs from the SIC report, shown at the press conference in April 2010, exposed the clear drift in lending at a decisive time: to Björgólfur Thor Björgólfsson, still an active investor based in London and to Fons, a holding company owned by Pálmi Haraldsson, who for years was a close business partner of Jón Ásgeir Jóhannesson, once a king on the UK high street with shops like Iceland, Karen Millen, Debenhams and House of Fraser to his name.

The lending related to Fons/Haraldsson is particularly striking since Haraldsson was part of the consortium Jóhannesson led in spring of 2007 to buy around 40% of Glitnir: after the consortium bought Glitnir, the lending to Haraldsson shot up like an unassailable rock.

Absolution of risk

The common thread in so many of the SIC stories was how favoured clients – and in some cases bank managers themselves – were time and again wholly exempt from risk. One striking example is an email (emphasis mine), sent by Ármann Þorvaldsson and Kaupthing Luxembourg manager Magnús Guðundsson, jokingly calling themselves “associations of loyal CEOs,” to Kaupthing’s chairman Sigurður Einarsson and CEO Hreiðar Sigurðsson.

“Hi Siggi and Hreidar, Armann and I have discussed this (association of loyal CEOs) and have come to the following conclusion on our shares in the bank: 1. We set up a SPV (each of us) where we place all shares and loans. 2. We get additional loans amounting to 90% LTV or ISK90 to every 100 in the company which means that we can take out some money right away. 3. We get a permission to borrow more if the bank’s shares rise, up to 1000. It means that if the shares go over 1000 we can’t borrow more. 4. The bank wouldn’t make any margin calls on us and would shoulder any theoretical loss should it occur.We would be interested in using some of this money to put into Kaupthing Capital Partners [an investment fund owned by the bank and key managers] Regards Magnus and Armann”

This set-up, where the borrower is risk-free and the bank shoulders all the risk, has lead to several cases where bankers being sentenced for breach of fiduciary duty, i.e. lending in such a way that it was from the beginning clear that losses would land with the bank. (Three of these Kaupthing bankers, Guðmundsson, Einarsson and Sigurðsson, not Þorvaldsson, have been charged and sentenced in more than one criminal case).

The “home-knitted” crisis

Due to measures taken in October 2008 in the UK against the Icelandic banks, there was a strong sense in Iceland that the Icelandic banks had collapsed because of British action. The use of anti-terrorism legislation by the British government against Landsbanki greatly contributed to these sentiments.

A small nation, far away from other countries, Icelanders have a strong sense of “us” and “the others.” This no doubt exacerbated the understanding in Iceland around the banking collapse that if it hadn’t been for evil-meaning foreigners, hell-bent on teaching Iceland a lesson, all would have been fine with the banks. Some leading bankers and large shareholders were of the opinion that Icelanders had been such brilliant bankers and businessmen that they had aroused envy abroad: British action was a punishment for being better than foreign competitors (yes, seriously; see for example Þorvaldsson’s book “Frozen Assets”).

The story told in the SIC report showed convincingly and in great detail how wrong all of this was: the banks had dug their own grave. Icelandic politicians and civil servants had tried their best to fool foreign countries and institutions how things stood in Iceland. Yes, the turmoil in international markets toppled the Icelandic banks but they were weak due to bad governance, great pressure by the largest shareholders and then weak infrastructure in Iceland, as I pointed out in a blog following the publication of the SIC report.

This understanding is at times heard in Iceland but the convincing and well-documented story told in the SIC report has slowly all but eradicated this view.

Court cases and political controversies

Some, but by far not all, of the dubious deals recounted in the SIC report have ended up in court. The SIC brought a substantial amount of cases deemed suspicious to the attention of the Office of Special Prosecutor, incidentally set up by law in December 2008. However, most if not all of these cases had also been spotted by the FME, which passed them on to the Special Prosecutors.

CEOs and managers in all three banks have been sentenced in extensive market manipulation cases – the bankers were shown to have directed staff to sell and buy shares in a pattern indicating planned market manipulation. In addition, there have been cases involving shareholders, most notably the so-called al Thani case (incidentally strikingly similar to the SFO case against four Barclays bankers) where Ólafur Ólafsson, Kaupthing’s second largest shareholder, was sentenced to 5 1/2 years in prison, together with the bank’s top management.

In total, close to thirty bankers and major shareholders have been sentenced in cases related to the old banks, the heaviest sentence being six years. The cases have in some instances thrown an interesting light on operations of international banks, such as the CLN case on Deutsche Bank.

The SIC’s remit was inter alia to point out negligence by civil servants and politicians. It concluded that the Director General of the FME Jónas Fr. Jónsson and the three Governors of the CBI, Davíð Oddsson, Eiríkur Guðnason and Ingimundur Friðriksson, had shown negligence as defined in the law “in the course of particular work during the administration of laws and rules on financial activities, and monitoring thereof.” – None of them was longer in office when the report was published in April 2010 and no action was taken against them.

The Commission was of the opinion that “Mr. Geir H. Haarde, then Prime Minister, Mr. Árni M. Mathiesen, then Minister of Finance, and Mr. Björgvin G. Sigurðsson, then Minister of Business Affairs, showed negligence… during the time leading up to the collapse of the Icelandic banks, by omitting to respond in an appropriate fashion to the impending danger for the Icelandic economy that was caused by the deteriorating situation of the banks.”

It is for Alþingi to decide on action regarding ministerial failings. After a long deliberation, Alþingi voted to bring only ex-PM Geir Haarde to court. According to Icelandic law a minister has to be tried by a specially convened court, which ruled in April 2012 that the minister was guilty of only one charge but no sentence was given (see here for some blogs on the Haarde case). Geir Haarde brought his case to the European Court of Human Rights but the judgment went against him. Haarde is now the Icelandic ambassador in Washington.

The SIC lacunae

In hindsight, the SIC was given too short a time. With some months more, the role of auditors in the collapse could for example have been covered in greater detail. It is quite clear that the auditing was far too creative and far too wishful, to say the very least. The relationship between the banks and the four large international auditors, who also operate in Iceland, was far too cosy bordering on the incestuous.

The largest gap in the SIC collapse story stems from the fact that the SIC had little access to the banks foreign operations. Greater access would not necessarily have altered the grand narrative. But court cases have shown that some of the banks’ criminal activities, were hidden abroad, notably in the case of Kaupthing Luxembourg. – As I have time and again pointed out, it is incomprehensible that authorities in Luxembourg have not done a better job of investigating the banking sector in Luxembourg. The Icelandic cases are a stern reminder of this utter failure.

As mentioned above, only excerpts of the report were translated into English. To my mind, this was a big error and extremely short-sighted. Many of the stories in the report involve foreign banks and foreign clients of the Icelandic banks. The detailed account of what happened in Iceland throws light on not only what was going on in Iceland but also in other countries where the banks operated. The excerpts are certainly better than nothing but by far not enough – publishing the whole report in English would have done this work greater justice and been extremely useful in a foreign context.

Why the SIC report’s importance has grown with time

It is now just over eight years since the publication of the SIC report. Whenever something related to the collapse is discussed the report is a constant source and the last verdict. The report established a narrative, based on extensive sources, both verbal and written.

Some of those mentioned in the report did not agree with everything in the report. When they sent in their own reports these have been published on-line. However, undocumented statements amount to little compared to the report’s findings. Its narrative and conclusions can’t be dismissed without solid and substantiated arguments to counter its well-documented conclusions.

This means the story of the 2008 banking collapse cannot easily be reshaped. This is important because changing the story would mean undermining its conclusions and lessons to be learnt. In a recent speech, Tory MP Tom Tugendhat mentioned the UK financial crisis as the “forces of globalisation.” These would be the same forces that caused the collapse of the Icelandic banks – but from the SIC report Icelanders know full well that this is far too imprecise a description: the banks, both in the UK and Iceland, collapsed due to lack of supervision and public and political scrutiny, following year of lax policies.

Lessons for other countries

In order to learn from the financial crisis, countries need to know why there was a crisis – with no thorough analysis no lessons can be learnt. Also, not only in Iceland was criminality part of the crisis. Though not a criminal investigation, many of these stories surfaced in the SIC report, another important aspect.

Greece, Cyprus, UK, Ireland, US – five countries shaken and upset by overstretched banks, which needed to be bailed out at great expense and pain to taxpayers. However, all of these countries have kept their citizens in the dark as to what happened apart from some tentative and wholly inadequate attempts. The effect of hiding how policies and actions of individuals, in politics, banking etc, caused the calamities has partly been the gnawing discontent and lack of trust, i.a. visible in Brexit and the election of Donald Trump as US president.

Although Iceland enjoyed a speedy recovery (Icelog Sept. 2015), I’m not sure there are any particular economic lessons to be learned from Iceland. There were no magic solutions in Iceland. What contributed to a relatively speedy recovery was the sound state of the economy before the crisis, classic but unavoidably painful economic measures, some prescribed by the IMF, in 2008 and the following years – and some luck. If there is however one lesson to learn it is the importance of a thorough analysis of the causes of the crisis.

The SIC was, and still is, a shiny example of thorough investigative work following a major financial crisis, also for other countries. It did not alleviate anger; anger is still lingering in Iceland. An investigative report is not a panacea, nothing is, but it is essential to establish what happened and why, with names named.

There are never any mystical “forces” or laws of nature behind financial crisis and collapse. They are caused by a combination of human actions, which can all be analysed and understood. Without analysis and investigations it is easy to tell the wrong story, ignore the causes, ignore responsibility – and ultimately, ignore the lessons.

This is the second blog in “Ten years later” – series on Iceland ten years after the 2008 financial collapse, running until the end of this year.

Follow me on Twitter for running updates.

Deutsche Bank has studiously tried to hide some transactions with Kaupthing in 2008 – and in December 2016 probably thought it had succeeded when it agreed to settle for €425m to Kaupthing and two now bankrupt BVI companies set up in 2008 by Kaupthing. The story behind these deals figured in two Icelandic court cases and one of them, the so-called CLN case, has now taken an unexpected turn: the Supreme Court has ordered the Reykjavík Country Court to scrutinise the transactions as it reopens the CLN case. But what is Deutsche Bank hiding? “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.

In early 2008 Kaupthing managers were rightly worried about the sky-rocketing credit default swap, CDS, spreads on the bank; in spring of 2008 the spreads had crept up to 900 points, a wholly unsustainable rate for any bank. According to multiple sources over the years, Deutsche Bank came up with a simple plan: Kaupthing should buy CDS on itself linked to credit linked notes, CLNs, Deutsche Bank would issue. Except Kaupthing should not be seen doing it: finance it, yes – but through two BVI companies owned by trusted clients in deals set up by Deutsche Bank. Thus, the market manipulation was neatly out of sight.

Only later did it transpire that Deutsche Bank was not only the broker in deals it knew were set up to manipulate the market – hence the remark by Prosecutor Björn Þorvaldsson – but it was actually on the other side of the CDS bets, a player in that market. Consequently, the bank profited handsomely, both from fees and from the actual CDS deals.

In the Deutsche Bank universe this unglorious saga of transactions to manipulate the market etc is however not at all true. Yes, Deutsche Bank admits it was the broker but it knew nothing of the purpose of the transactions, had no idea Kaupthing did finance the two BVI companies and certainly was not on the other side of the bets. This is what Deutsche Bank has stated in a London court and in witness statements in criminal proceedings Iceland (where Deutsche Bank is not being charged).

However, outside of the Deutsche Bank universe (and well, probably in some hidden corners inside Deutsche given the email trail that has surfaced in Icelandic court) there is abundant evidence showing the Deutsche Bank involvement. Certainly, Icelandic prosecutors are in no doubt Deutsche Bank was involved in the planning, knew of the Kaupthing funding and made money from the funds.

Kaupthing had poured €510m into the CDS bets. Early on, the administrators of Kaupthing and the two BVI companies eyed an interesting opportunity to claw these funds back. Until December last year, the administrators, in separate actions, have been suing Deutsche Bank in various places over these transactions.

When the legal fights were about to come up in court Deutsche Bank relinquished: to avoid having the whole well-documented saga exposed in court, with evidence running counter to the Deutsche Bank version of the CDS saga, Deutsche Bank finally agreed to pay €425m, around 85% of the millions that went through Deutsche Bank into the CDS schemes.

Intriguingly, in 2010 the Serious Fraud Office, SFO, had its eyes on Deutsche Bank’s CDS transactions with Kaupthing but this case seems to have evaporated as so many of the suspicious deeds in UK banks.

The story of these CDS transactions is a central part in the still on-going so-called CLN case. Kaupthing bankers have been charged for fraudulent lending and breach of fiduciary. Below, the focus is on the role of Deutsche Bank in the CDS transactions – what its real role was and why Deutsche Bank was in the end so keen to settle when nothing in the original 2008 agreements obliged it to pay anything back.

DB’s own version

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. (Emphasis here and below is mine).

This is Deutsche Bank’s very brief story of the CNL saga and the settlement in the bank’s 2016 Annual Report. – Not admitting anything and yet, for no reason at all judging from the Annual Report, it paid Kaupthing an undisclosed sum, now known to be €425m.

Sigurður Einarsson’s letter to friends and family January 2009: the first tangible evidence of the CDS transactions

As recounted in an earlier Icelog there were rumours soon after the October 2008 banking collapse that Kaupthing had funded transactions connected to the bank’s CDS in order to manipulate the spread, thus lowering the bank’s ominously high financing cost.

At the end of January 2009 former chairman of the Kaupthing board Sigurður Einarsson told his side of the various stories swirling in the media. Yes, it was true that Kaupthing had funded transactions by what he called Kaupthing’s “trusted clients” to influence the bank’s CDS spread but it had done so on advice from Deutsche Bank.

The SIC report April 2010, the CDS story in some details

The story was told in greater detail in the 2010 report by the Icelandic Special Investigations Committee, SIC (p. 26-28, Vol. 2; in Icelandic). It was clearly stated and documented that Deutsche Bank came up with and concocted the plan. Summarised, the SIC recount of the CDS transactions is the following:

Kaupthing set up two BVI companies, Chesterfield and Partridge, for the sole purpose of carrying out the CDS transactions. Chesterfield was owned by three companies, in turn owned by four Kaupthing clients: Antonios Yerolemou, Skúli Þorvaldsson and the fashion entrepreneurs Karen Millen and Kevin Stanford, respectively owning 32 %, 36% and 32%. The Icelandic businessman Ólafur Ólafsson owned Partridge, also through another company.

Kaupthing lent funds to the four companies owning the two BVI companies that acted in the CDS transactions – all the companies were in-house with Kaupthing, which carried out all the transactions. The beneficial owners were only asked for consent to begin with but were not involved in the transactions themselves.

All of the owners were, as Einarsson said in his letter, longstanding and “trusted clients” of Kaupthing. In 2001, Yerolemou, a Cypriot businessman prominent in the UK Cypriot community and a Conservative donor, had sold his business, Katsouris, to Exista, Kaupthing’s largest shareholder and stayed close to Kaupthing, also briefly as its board member. Stanford had a long-standing relationship with Kaupthing as with the other Icelandic banks and Ólafsson was the bank’s second largest shareholder.

Like Einarsson, the SIC report traced the origin of the transactions to Deutsche Bank:

“At the beginning of 2008, Kaupthing sought advice from Deutsche Bank as to how it could influence its CDS spreads. In a presentation in early February, Deutsche Bank advised Kaupthing, for instance, to spend all liquid funds it received to buy back its own short-term bonds in an attempt to normalise the CDS curve. In the summer the idea of a credit-linked note transaction appeared in an email communication from an employee of Deutsche Bank. It states that this would mean a direct impact on the CDS spreads rather than an indirect one, as in the case of buy backs of own notes. It also states that this transaction will be financed. The message concludes by stating that the issue has to be timed right to get the ‘most “bang” for the buck’. In e-mail messages exchanged by Sigurdur Einarsson and Hreidar Mar Sigurdsson following this, the two agree that they do not need to involve pension funds, but that there is ‘no question’ that they should do this. 


Sigurdur Einarsson said that the initiative for the transaction had come from Deutsche Bank. ‘It involved getting parties to write CDSs against those who wanted to buy them. This was to create a supply of CDSs, of which there were none. Because what we saw was happening on the market, or what we thought we saw, was that the screen price was always rising and there were certain parties, certain funds that put in a specific bid, no transaction, raised the bid, no transaction, raised it, raised it, raised it, raised and raised.‘” (As translated in Akers and Anor v Deutsche Bank AG 2012.)

According to the SIC the CLN transactions “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.” The SIC report came up with the total amount lost by Kaupthing on these trades: €510m, all of which had been paid to Deutsche Bank as the broker of the underlying deals.

The administrator of Partridge and Chesterfield also wondered about Deutsche Bank’s role

Further information came up in a London Court in 2012: soon after Kaupthing failed, Partridge and Chesterfield unavoidably went bankrupt; after all, their only assets were the CLN linked to the failed CDS bet. Their administrators, Stephen Akers from Grant Thornton London and his colleague, quickly turned to Deutsche Bank to get answers to some impertinent questions regarding the two companies. When Deutsche Bank was not forthcoming Akers took a legal action demanding from Deutsche Bank documents related to the transactions. A decision was reached 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. This request for information is in part to explore how the Companies might have expected to benefit from the transactions, to identify what the Companies’ purposes and objectives in entering into the transactions were and how the Companies were expected to repay the loans from Kaupthing if there was movement in the market in the ‘wrong’ direction (as transpired). … The Joint Liquidators are keen to understand, through requests for information and documents from key parties, why these particular transactions were entered into by these particular companies. 

46. From the information that the Joint Liquidators have been able to gather about the transactions …, it seems possible that the Companies were involved in a wider package or scheme, although it is too early to comment definitively on the purpose of such scheme, contemporaneous reports and documents suggest that the purpose might have been to manipulate the credit market for Kaupthing.“

In his Decision, Justice Newey holds up the “possibility of market manipulation” quoting the above statement from the SIC report, noting the report’s conclusion “that the CLN agreements “can be assumed to have actually made an impact on the CDS spreads on Kaupthing.””

In the 2012 Decision it’s pointed out that “Deutsche Bank strongly denies any suggestion that it entered into the CLN transactions in order to manipulate the market. In other respects, too, it takes issue with the picture painted in the Icelandic report. Among other things, it says that the CLNs were not in any way unusual or commercially unreasonable transactions; that it was not aware that Kaupthing was itself financing the purchase of the CLNs, if that is what happened; and that it did not act as adviser to Chesterfield, Partridge or Kaupthing.”

DB was right that the CLNs were not in any way unusual – but the CLNs per se were not the problem that drove Akers to collect information but the whole transactions. However, there is abundant documentation, inter alia emails to and from Deutsche Bank etc. to show that Deutsche Bank was indeed aware that Kaupthing was financing the two companies’ bet on the Kaupthing CDS. And Deutsche Bank definitely advised Kaupthing in this set up, again born out by emails.

The “bang for the buck” email, quoted in the SIC report was written by Venkatesh Vishwanathan, a senior Deutsche Bank banker who oversaw the CDS deal with Kaupthing. In his witness statement in the Akers 2012 case he gave his interpretation: “I say the way to proceed would involve ‘hitting the right moment in the market to get the most bang for the buck’ because an investor investing in a CLN product would want the best return and the coupon available over the term of the CLN, should it run to maturity, is set when the CLN is issued. That was why market timing was important. I was not suggesting, as Mr Akers says, that Kaupthing would get ‘bang for its buck’ by Deutsche selling CDS protection.”

Vishwanathan’s interpretation runs contrary to what Akers claimed and other sources support: that the transactions were set up for Kaupthing, via the two companies, in order to influence the market.

DB placed Wishwanatahn on leave in 2015, in autumn 2016 he had sued the bank for unfair dismissal. According to his LinkedIn profile, Wishwanathan now lives in Mumbai (he has not responded to my messages).

Additional evidence: the Icelandic CLN case

In 2014, Sigurður Einarsson, Kaupthing’s CEO Hreiðar Már Sigurðsson and head of Kaupthing Luxembourg Magnús Guðmundsson were charged of breach of fiduciary duty and fraudulent lending to the two BVI companies, Partridge and Chesterfield, causing a loss of €510m to Kaupthing.

The charges (in Icelandic) support and expand the earlier evidence of Deutsche Bank role in the CDS trades. Deutsche Bank 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 Bank was solely in touch with Kaupthing. When the two companies needed for example to meet margin calls its owners were not averted; Deutsche Bank sent all claims directly to Kaupthing, apparently knowing full where the funding was coming from and who needed to make the necessary decisions.

But who was on the other side of the CDS bets, 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 bough 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 no way secure that this profit would benefit Kaupthing hf, which in the end financed the transactions in their entirety.”

DB fees amounted to €30m for the total CDS transactions of €510m.

The oral hearings in the CLN case were in Reykjavík in December last year. I attended the hearings, which further not only supported the story of Deutsche Bank’s involvement but provided ample tangible evidence as witnesses were questioned and emails and other documents projected on a screen.

The side story in the al Thani case

A short chapter in the CDS saga is the fact, already exposed in the SIC report, that Kaupthing had indeed planned with Deutsche Bank to set up yet another company to trade on Kaupthing’s CDS. Kaupthing issued a loan of $50m to Brooks Trading Ltd, via another company called Mink Trading, both owned by Sheikh Mohamed Khalifa al Thani. The purpose was to invest in CLN linked to Kaupthing’s CDS, via Deutsche Bank, identically structured as the CDS transactions through Chesterfield and Partridge. CDS transactions through Brooks were however never carried out.

Sheikh al Thani played a role in another Kaupthing case, the so-called al Thani case; the Sheikh was not charged but the three Kaupthing managers, charged in the CLN case, and Ólafur Ólafsson were sentenced to three to 5 ½ years in prison. The bankers for fraudulent lending, breach of fiduciary duty and market manipulation; Ólafsson was sentenced for market manipulation.

The 2008 last minute CBI loan to Kaupthing

The evidence brought out in the CLN case – the tracing of the transactions, emails, phone calls etc. – shows that the Kaupthing managers were extremely focused on exactly these transactions. Kaupthing was teetering and yet they never wavered from paying to Deutsche Bank, the agreed sums and the margin calls that followed. It almost seemed as if nothing else mattered in their world, a sense further strengthened by some back-dated documents related to the CDS transactions.

The last payments were made just as the bank was collapsing, 7 October 2008; the bank went into administration 8 October. During these last weeks, foreign currency was scarce at the bank in Iceland where the payments originated. On 6 October, prime minister Geir Haarde addressed the stunned nation on radio and television at 4pm, to announce the Emergency Act enabling Icelandic authorities to deal with collapsing banks in an orderly manner. – Hreiðar Már Sigurðsson, then CEO of Kaupthing but only for 48 more hours, has said in court that when he heard of the Emergency Act he knew it was over for the banks.

At noon of 6 October, Geir Haarde and the governor of the Central Bank, CBI, Davíð Oddsson, who both knew the Emergency Act was coming later that day, agreed the very last lending to the banks: Kaupthing would be given a loan of €500m. This, to permit Kaupthing to meet payments the Bank of England and the FSA were demanding as a guarantee for the bank’s UK subsidiary, Kaupthing Singer & Friedlander.

The reasons for this loan have never been completely clarified (see Icelog on this story): documents and an audio of the phone call between Oddson and Haarde remains classified in spite of valiant attempt by the Icelandic media to unearth this evidence. The CBI has promised a report on the Kaupthing loan “soon” but so far without a publication date.

Whatever the motivation, the CBI issued the loan directly to Kaupthing without securing it would be used as promised, i.e. to strengthen Kaupthing’s UK subsidiary. Instead, part of it was used 7 October when Kaupthing paid, via the two BVI companies, the last €50m CDS transactions to Deutsche Bank.

This is how much the CDS transactions mattered to the Kaupthing managers who never, not even in the mid of the cataclysmic events engulfing the bank these early days in October 2008, took their eyes off the CDS transactions with Deutsche Bank.

When the Deutsche Bank December 2016 agreement surfaced…

In January 2016, the Reykjavík District Court acquitted the three Kaupthing managers of the fraudulent lending and breach of fiduciary duty they had been charged with in the CLN case. In February this year, the Office of the Special Prosecutor (now Office of the District Prosecutor, encompassing the earlier OSP and other duties), appealed that decision to the Supreme Court.

In March 2016, I reported on Rúv (in Icelandic) that Deutsche Bank had indeed come to an agreement with Kaupthing: on-going legal cases, mentioned in Deutsche Bank’s annual reports 2015 and 2016 (but not in earlier reports), had now been settled with Deutsche Bank agreeing to pay Kaupthing more than €400m.

The agreement had been sealed in December 2016. Kaupthing made no big deal of the millions accruing from Deutsche Bank – no press release, just silence.

I pointed out that what Deutsche Bank had stated in the 2012 court case in London was not in accordance with other sources. Also that the bank had mentioned the Kaupthing claims in its 2015 Annual Report but stated it had filed defence and continued to defend them.

I concluded that Deutsche Bank 1) refuted it knowingly participated in transactions knowing set up to mislead the market 2) refuted that Deutsche Bank planned the transactions 3) denied knowing Kaupthing was itself financing the transactions aimed at lowering its CDS spreads. Further, I pointed out that statements from the Prosecutor in the CLN case showed that Deutsche Bank was not only the broker in these transactions but was actually on the other side of the bet it set up for Kaupthing and gained handsomely when Kaupthing failed.

I did at the time send detailed questions to Deutsche Bank regarding the bank’s statements in the 2012 London court case and its version of the case in its annual reports. Deutsche Bank’s answer to my detailed questions was only that bank was not commenting “on specific aspects of this topic,” only that “Deutsche Bank has reached a settlement over all claims relating to credit-linked note transactions referencing the Icelandic bank Kaupthing. The settlement amount is already fully reflected in existing litigation reserves.”

In my email exchange with Deutsche Bank I mentioned that this matter had wider implications – Deutsche Bank has stated in court and in its annual reports that it had nothing to do with the CDS trades except selling the CLN related to it. Thus, it could be argued that the stance taken by Deutsche Bank, compared to abundant evidence, has been misleading and that has much wider implications than just being a matter between Deutsche Bank and Kaupthing. – The answer was, as before: settlement reached, no further comments.

It’s interesting to note that at the time Deutsche Bank reached an agreement of paying €425m to Kaupthing it was struggling to reached its required capital level, looking for €8bn. That did allegedly force the bank to finish several outstanding cases, the Kaupthing case being one of them.

Why did Deutsche Bank change its mind and meet 85% of the Kaupthing claims?

Following my March reporting on the agreement between Deutsche Bank and Kaupthing where Kaupthing did indeed recover around 85% of its CDS transactions with Deutsche Bank the three Kaupthing managers charged in the CLN case, now fighting an appeal by the Prosecutor, turned to the Supreme Court asking for the case to be dismissed: according to them, the basis of the claims had been the €510m loss to Kaupthing – and now that there was apparently hardly any loss the case should be dismissed.

Their demand for dismissal came up at the Supreme Court 11 October where the Court stipulated that in order to understand the demand for dismissal the Court needed to get a deeper understanding of the Deutsche Bank agreement with Kaupthing. The District Prosecutor had obtained a copy of the agreement handed to the Court but not made public in its entirety.

During the oral hearings that day Prosecutor Björn Þorvaldsson maintained that the agreement did not change the charges in the CLN case to any substantial degree: the loans had been illegal, no matter if the money was then much later clawed back. He said that according to the agreements in 2008, Deutsche Bank had been entitled to the funds and Kaupthing had no claim for clawing them back.

So what did then change, why did Deutsche Bank decide to meet the Kaupthing claims and pay back €425m of the original €510m it got from the CDS transactions?

The Prosecutor said one could only guess: 1) Perhaps Deutsche Bank wanted to hide that the Kaupthing loans to the two companies did indeed end up with Deutsche Bank 2) Did Deutsche Bank see it as harmful to the bank’s reputation that the details of the transactions would be exposed in a court case? 3) Was it accusation of being part of market manipulation that irked Deutsche Bank?

As Þorvaldsson said in court 11 October: “It’s not unlikely that an international bank wants to avoid being accused of market manipulation.”

The Supreme Court ruling on issues related to the Deutsche Bank Kaupthing agreement

The Supreme Court decided on the dismissal request 19 October. According to the Decision, Deutsche Bank signed two agreements in December 2016 regarding the 2008 CDS transactions. One was an agreement with the two companies involved, Chesterfield and Partridge. The other one is with Kaupthing.

The aim was to effectively end three court cases where Kaupthing was suing Deutsche Bank in addition to cases brought by the two companies against Deutsche Bank. According to the agreement the two companies and Kaupthing agreed to put an end to their legal proceedings against Deutsche Bank – and Deutsche Bank concurred to pay €212.500.000 to Kaupthing and the same amount to the two companies, in total €425m. Further, the agreement stipulated that Kaupthing (as the largest creditor of the two companies) would get 90% of the Deutsche Bank payment to the two companies. In total, Deutsche Bank paid €425m to end all dispute, whereof over €400m would go to Kaupthing.

The thrust of the arguments, on one side the Prosecutor, on the other side the three defending bankers was that the Prosecutor said that issuing the loans was the criminal deed, that’s what the three were being charged for – whereas the three defendants claimed that since Deutsche had now paid most of the transactions back it showed that the bank felt legally obliged to pay on the basis of the 2008 contracts.

In its Decision the Supreme Court scrutinised the final settlement of the CDS transactions concluded at end of October 2008, which indicated that Deutsche Bank did indeed not feel obliged to pay anything back to the owners of the CLNs. Same when Icelandic police interrogated two (unnamed) Deutsche employees: nothing that indicated Deutsche Bank thought it was obliged to pay anything back.

The Supreme Court concluded that based on the information at hand on the December 2016 settlement it was neither clear “why the bank (DB) agreed to issuing these payments, what the arguments were nor what material was the basis for the claims by Kaupthing and the two companies in their legal actions against Deutsche Bank. It is also not clear what was the nature of the (December 2016) payments, if they related to earlier contracts (i.e. the 2008 contracts) or if they were damages and if they were damages then what was their nature.

Based on this, the Supreme Court then decided against dismissal, as demanded by the three bankers, sending the case back to the Reykjavík District Court for a retrial where questions regarding the December 2016 settlement should be clarified in addition to the charges brought by the District Prosecutor.

This means that although Deutsche Bank settled with Kaupthing and the two companies the actions of Deutsche Bank will be scrutinised by Icelandic Court, probably already next year.

A short revision of dodgy Deutsche Bank transactions

As other international banks, Deutsche Bank has had a lot to answer for over the last few years and paid billions in fines for its rotten deeds. Contrary to Iceland, bankers in the UK and the US, have mostly been able to wipe the cost of their criminal deeds on shareholders (and why on earth have shareholders such as as pension funds and other public-interest organisations been so patient with banks’ criminal deeds?)

In April 2015 Deutsche Bank settled LIBOR manipulation cases with US authorities, paying $2.175bn and £226.8m to the UK Financial Conduct Authority, FCA as mentioned in the bank’s 2015 Annual Report.

In January this year it paid £163m to the FCA, the largest fine ever paid to the FCA, for “serious anti money-laundering controls falings” in the so-called mirror trades, where $10bn were sent out of Russia to offshore accounts “in a manner that is highly suggestive of financial crime.” At the same time, US authorities fined the bank $425m for the same offense, pointing out that “Deutsche Bank and several of its senior managers missed key opportunities to detect, intercept and investigate a long-running mirror-trading scheme facilitated by its Moscow branch and involving New York and London branches.” – Many years ago, a source said to me Deutsche Bank really should be called Russische Bank.

In May, the US Fed fined Deutsche Bank $41m “for failing to ensure its systems would detect money laundering regulations.”

In additions, there have been fines for violating US sanctions. Lastly, there is focus on Deutsche Bank and its tight connection to US president Donald Trump. And so on and so forth.

Summing it up – seen from Iceland: why Deutsche Bank would want to settle

In this context it is interesting that Deutsche Bank has decided to pay €425m to Kaupthing, a high sum in any context, even in the context of fines Deutsche Bank has had to pay over the years.

From all of these various sources it is easy to conclude as did the State Prosecutor in October that yes, one reason why Deutsche Bank would want to bury it involvement in Kaupthing’s CDS trades in the summer of 2008 is that this looks like a market manipulation by a major international bank. Further, Deutsche Bank has questions to answer regarding its own involvement in the market, i.e. it did not only broker the CDS deals, knowing full well who financed the two BVI companies, but it was actually a player in that market, making a lot more from the deal than only the fees.

Updated 14.6.2018: a retrial has been ordered, the case will come up next winter. This time, there will also be some focus on DB’s role in order to understand the context better though neither DB nor any DB bankers are charged. 

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“If bankers who act fraudulently are not put in jail with their bonuses returned, assets confiscated and banned from future practice, we will only give a green light to similar risk-laden behaviour in new forms.”

According to The Guardian, Gordon Brown adds, in a convoluted way, that if the conduct of bankers was dishonest judging from what would be considered reasonable and honest, then there was a case for Britain following the example of Ireland, Iceland, Spain and Portugal and in launching prosecutions.

So, now we know: Gordon Brown former prime minister and leader of the Labour Party now thinks banks and bankers should have been investigated and prosecuted in connection to the financial crisis; the crisis that struck in August 2007, when Brown had been prime minister for only a few months. He had however been Chancellor of the Exchequer for a decade.

We know of his change of heart because this is what he writes in his coming memoir, My Life, Our Times.

He’s right that something has been in Ireland, Spain and Portugal but only in Iceland were the banks investigated in a fairly concise way. So far, over twenty bankers and others connected to financial wrongdoing in the months and years up to the 2008 banking collapse have been sentenced to imprisonment.

Better late than never – but this is a staggering admission from the man who more than anyone formed that atmosphere that allowed the banks to act with impunity. From his seat of great power he watched the crisis unfold and followed its aftermath until the Labour party lost the elections in the spring of 2010: Brown first had ten years as a Chancellor and then three years as prime minister to shape the banking environment.

Soon after the events in the UK in early October 2008, when the Icelandic banks, also operating in the UK, collapsed and British banks like RBS, HBOS and Lloyds TSB were bailed out, the Serious Fraud Office, SFO, started scrutinising the ongoings. It did look at the Icelandic banks but it had its eyes also on the interaction between the Icelandic banks and international banks operating in London. One case was mentioned in The Guardian in June 2010, focusing on an intriguing connection between Kaupthing and Deutsche Bank. Nothing has apparently come of that investigation.*

We know that the SFO was suffering at the time from lack of funds which in turn led to difficulties in attracting highly skilled people who would always be able to get better paid jobs elsewhere. Gordon Brown, as Chancellor and as prime minister, did little to nurture the SFO.

It’s good that Gordon Brown has seen the error of his earlier days, an error that profoundly shaped the atmosphere of impunity the banks operated in – but it’s very very sad that he totally wasted the opportunities he had to stimulate a healthy atmosphere where banks, like any other business and bankers, like any other persons, would be scrutinised, investigated and, if needed, prosecuted, without fear or favour.

*This case touched an Icelandic criminal case, the so-called CLN case. More evidence has come up on this lately, more coming soon on Icelog.

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

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

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

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

What Berezovsky really said

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

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

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

The funding of the Icelandic banks – yet again

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

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

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

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

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

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

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

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

Money laundering outside the banks?

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

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

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

The Icelandic banks – the most investigated banks

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

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

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

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

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