Sigrún Davíðsdóttir's Icelog

Today, the EFTA Surveillance Authority, ESA, declared that it’s opening a formal investigation into the regional aid to Verne Holdings granted earlier by the Icelandic government. Verne is building a data storage centre at the Keflavik Base, previously a home to the US army force stationed in Iceland.

Verne Holdings is a company owned by the US venture fund General Catalyst, Novator, i.e. Bjorgolfur Thor Bjorgolfsson (major shareholder in Landsbanki, of Icesave fame, and the investmentbank Straumur, now in moratorium) and the UK Wellcome Trust.

The project is controversial in Iceland as many Icelanders feel that investments involving Bjorgolfsson shouldn’t receive any government aid. He is widely seen as one of those who caused the economic demise of the Icelandic banks and Iceland. Companies related to him borrowed heavily from the Icelandic banks, all of them public companies, most noticeably from the two banks where he himself was a major shareholder. His business dealings were scrutinised by the Althing Investigative Commission, giving an intriguing insight into his affairs and his Icelandic contacts.

The regional aid to Verne isn’t the only help that Verne has received from the Icelandic government, a coalition with the Left Green led by the social democrats. Earlier this year, Althingi passed a bill on tax etc for Verne. The given reason was that this had been done earlier regarding major foreign investment in Iceland. However, the Verne investment is nowhere near the scale of projects previously given such treatment. A few weeks later, Althingi passed new law setting out the general framework for foreign investment in Iceland. The new law is meant to put an end to laws on specific companies. The question still remains why Verne got its law when it was clear that there was a general framework in the making.

But now ESA has stepped in. There will be many in Iceland who think that it’s as well there is an independent organisation keeping an eye on Iceland in case the atavistic urge to give a helping hand to a friend gets too strong.

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There is the Eton mess, a delicious summer dessert of whipped cream, icecream, strawberries and meringue. The Magma mega mess is less delicious but it’s also a summer thing and is now all-consuming news in Iceland. There is suddenly a frantic political activity to stop the Magma deal but it’s not clear what will happen.

It was during summer last year that Magma Energy surfaced in Iceland as the potential buyer of one of the Icelandic energy companies, HS Orka, to begin with the share of OR, Reykjavik Energy, owned by the city of Reykjavik. This wasn’t the first move towards mixing private enterprise and public ownership. A year before the Icelandic banks imploded in October 2008 it emerged that some of the most risk-prone businessmen, notably Hannes Smarason of FL Group-fame, together with Bjarni Armannsson ex-CEO of Glitnir, a banker no less taken up by his own interest than the bank’s, had been planning a particularly cunning deal to buy OR. Part of the cunning was that the deal would immediately release zillions of Kronur for Armannsson, Smarason and their partners. Since the city of Reykjavik was incidentally aiding the instantaneous enrichment of the few chosen the news of this deal so enraged Icelanders that the deal collapsed.

Ever since, it’s been clear that Armannsson, together with other ex-Glitnir managers, has been looking for opportunities in the Icelandic energy sector. After all, energy and food was Glitnir’s speciality. Armannsson is now involved in one of the date centre projects in Iceland.

Favoured deals, like the OR deal, has been the chosen way of doing business in Iceland – a way that many Icelanders now hope will come to an end. After all, it’s clear that this was a major factor in the fall of the banks. Therefore, many in Iceland have a lingering feeling that ex-Glitnir bankers or other Icelanders are somewhere involved in the Magma affairs in Iceland.

There are some disturbing inconsistencies. Last year, Magma-CEO Ross Beaty, also Magma’s largest shareholder, sought to convince Icelanders that he wasn’t at all interested in buying the whole of HS Orka. Well, now nothing less will do.

Already last September I pointed out two major flaws in the Magma deal: firstly, when a public good is sold it has to be done in a transparent way – not the case here, there’s total opacity. Instead of a transparent deal where Magma pays outright and OR sells outright its coveted share in HS Orka the deal is convoluted with loans from the sellers. This is completely opposite to golden rules on privatisation laid out by the World Bank, OECD and others: if a public good is sold the sale should be transparent and bring plane cash to the coffers right away. All risk should be on the buyer, not the seller as is the case in the Magma deal.

Secondly, is so happens that Icelandic law prohibits non-EU/EEA companies to buy into the Icelandic energy sector. Magma found a way around this lay by setting up a subsidiary in Sweden as a holding company for its Icelandic assets. The Swedish company has, as far as is known, no purpose other than owning the Icelandic assets. It’s clear that if all it takes to own energy assets in Iceland is an off-the-shelf company in some EU/EEA country then the law is void and meaningless. – It’s difficult to belief that the Efta-court will let this pass since this would constitute an example in the other EEA countries.

It’s also interesting to note that Magma didn’t set up an Icelandic holding company. Most likely, a Swedish company brings some tax benefits. The ownership of Magma itself is an interesting case: a charitable foundation, Sitka Foundation, owned by Beaty, is the major shareholder. This has all the characteristics of a tax speculation and hidden ownership.

Consequently, Magma has been able to buy up ever-greater parts of HS Orka and now owns 43% and is buying Geysir Green Energy’s 55% in HS Orka. As if all this weren’t enough the truly scary part is that whereas it was at first trumpeted that Magma would bring much needed investment to Iceland it’s now liaised with a fund owned by the Icelandic Pension Funds that will invest in HS Orka. It also seems that Magma was allowed to buy offshore Kronur, no doubt at a favourable rate, instead of bringing foreign currency to Iceland. This weekend, it transpired that Magma’s CEO is himself lending money to Magma – a rather surreal course of events in a company that was supposed to be a strong investor bringing foreign investment to Iceland.

An ever-present element in discussion on foreign investment in Iceland is the atavistic Icelandic xenophobia, the fear of foreign barbarians at Icelandic shores. However, in the case of Magma there is a firm and solid ground to doubt the soundness of this investment. Foreign investment is of course painfully necessary in Iceland. It beggars belief why politicians are so prone to make elementary mistakes when it comes to foreign investment and the sale of public good. The fearful danger is that this proneness will create one mess after the other, certainly no Eton mess – and that this proneness will perpetuate itself by attracting the wrong kind of foreign investors to Iceland.

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(Part I)

By guest contributor Michael Schulz. A social scientist who has worked for 30 years as a humanitarian manager in development, natural disasters and conflict on missions for the Red Cross in Africa, Asia, the Middle East, Russia and Trans-Caucasus and was i.a. based in Ramallah for two years. The last 5 years Michael was a diplomat with a Red Cross delegation in New York, accredited to the UN. – His Icelandic connection is through his partner who gives Michael an ‘Icelandicness’ and the authority to speak of Iceland though seen through his European eyes. Michael takes a keen interest in all aspects of the ‘Kreppa’ (Icelandic for ‘crisis’) in a philosophical, historical, political, socio-economic and cultural context.

Rambling in Iceland these days, physically or virtually, it seems the island is out of space and time, that it is all about speed. Not least this Icelog’s entries are testimony to daily Kreppa news, news breaking at ever shorter intervals. For observers or social commentators it is at times not easy to keep abreast.

The Office of the Special Prosecutor (OSP) has in earnest started to reach out for suspects, those deemed most instrumental in the undoing of Iceland’s financial sector and, subsequently, the entire economy. Individuals are kept in custody while investigations continue, arrest warrants have been issued for others. Court decisions are appealed. Appeals against temporary detention have been turned down by the Supreme Court. Suspects are released from custody but banned from leaving Iceland. Some returned voluntarily to Iceland for interrogation, others are sought after by Interpol while resisting extradition from abroad or have gone into hiding. Elsewhere, voluminous bills of indictment have been brought before courts. And, as is reported convincingly, more of the same is to come. Calls are on for more white-collar-crime prison cells.

Thus the suspects, so to speak, are on the run. This acceleration of actions had been longed for by the public and it came with somewhat a sigh of relief. Not least the recently published Black Report by the Special Investigation Commission (SIC) had delivered the contextual understanding of the deeply intertwined larger issues and details and who the actors were. It has not been the SIC’s mandate to deliver, as if it were, (legalistic) indictments or verdicts. These are matters of the OSP, public prosecutors, lawyers and courts.

As things stand today the SIC and OSP have exercised professional standards to the highest degree. Thus far it appears that irrespective of elite allegiances no actors or facts have been spared and the OSP, very laudably, is exposing the higher echelons of the banking sector not merely the lower ranks or dogs body. In following this path both special organs are making an important, albeit yet small, contribution towards the public’s belief in and the rehabilitation of credibility of public service institutions.

The Kaupthing wind-up Committee takes steps to salvage retroactively some of the loot. And, after long last, it seems even the tax authorities seem to realise that where fabulous wealth had been generated, irrespective of fraudulent means, revenues to the treasury might have been due.

Not to forget, after a new government has taken power in the UK and once by mid June elections are over in The Netherlands we are likely to watch another sequel of the Icesave saga. To be sure, a group of international banks is making legal claims on Landsbanki assets intended to cover roughly 90% of Icesave debts. If those claims succeed, only 25% might be covered ripping open another hole in the government’s vaults. At the same time, perhaps no coincidence, EFTA (the European Free Trade Association) reiterated that Iceland is legally bound to cover the minimum deposit guarantee to the tune of Euro 20000 per Dutch or British account holder.

Lets allow a short breath before events will rush us on and ponder a few questions that might have risen along the way:

The SIC and OSP are special organs. They have been purposefully placed outside the established judicial systems, in parallel or as an independent extension. One might therefore ask: what was the purpose? Was it not (also) a lack of trust and confidence in the established system? A lack of trust especially in those actors who built and governed the system? A lack that springs from the full knowledge of the partisan political patronage that governed the system and compromised and corrupted its independence?

The authorities had no real choice. It was at no point a realistic option to task the established system with the investigation and/or persecution. At the time the public was alert, up in arms (cooking pots and pans) and fully aware of the legal system’s deficiencies.

The repercussions from the onset of Kreppa were reverberating internationally and international scrutiny demanded – if not expressis verbis – transparency and independence of the process.

The authorities could not but meet mounting expectations and, to some surprise, went farther still and recruited internationally respected legal counsel (Eva Joly) also adding much needed extra legal expertise.

Adherence to those demands was, of course, implicit also an admission of systemic dysfunctions in the establishment.

If those system deficits were true would it not be legitimate to wonder how the traditional, established system can now be expected to manage independently and lawfully the impending onslaught of court cases, complex and with multiple international, political and legalistic, implications exposing powerful and well connected representatives of the local elite?

The OSP is scaling up, increasing its staff from 30 to 90, giving an indication that the case load will be quite massive. Reportedly it is not an easy task to find that many qualified persons in a small society of ca. 300.000. And, where to find the personnel to process the legal cases through courts, judges, assistants, prosecutors and defense lawyers, qualified and experienced to steer through a maze of fiercely fought arguments?

Yes, in a most recent appeal case the Supreme Court upheld a judge’s decision for the continued detention of two suspects under investigation. But was that simply a case in practice or a ruling to be subjected to critical scrutiny along political fault lines? Have not past appointments to courts raised eyebrows as selection criteria for judges other than qualification and merit prevailed?

Perhaps it is raising a question in hindsight as impending court cases seem headed for a course through the established system. But as a matter of principle one could wonder whether or not special courts, somewhat in analogy to the succeeding special organs SIC and OSP, seemingly (so far at least) uncompromised and independent, could do justice best to all parties concerned, including the public at large?

In fact, the question had been raised in the past albeit without much of a tangible conclusion. Some argue against, citing the lasting undermining effects on the old system. Precisely for that reason others argue in favour as change was the order of times.

Beyond the numbers of staff, etc.: What if the independence and confidentiality of the legal system doesn’t hold? What if justice will not be done and cases are perpetuated endlessly on technical grounds, appealed time and again?

Not by any measure an easy question to answer. But law, legislature and the judiciary system, including prosecutors and lawyers, are a matter quintessential to the fabric and functioning of any society including Iceland. Perhaps questions should be answered prior to action?

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ESA, the Efta Surveillance Authority, has sent a letter of formal notice to Iceland. According to ESA, Iceland is obliged to ensure payment of the minimum compensation to Icesave depositors in the UK and the Netherlands. The letter, in all 15 pages, clarifies ESA standing on these vital issues. ESA monitors non-EU members of the European internal market.

Earlier, the Icelandic Government had argued in a letter to ESA that setting up a guarantee scheme had been enough to fulfill its obligations under the EU Directive on deposit guarantees. Hence, the government seems to be of the opinion that having very little funds in the guarantee scheme didn’t matter; it was enough to set up the scheme. ESA points out that the aim of having a guarantee scheme is to guarantee 20.000 EUR, not just setting up the scheme.

The Icelandic government had also argued that that the Directive might not be applicable if deposits are unavailable because of a major and general banking crisis. ESA argues that this is clearly not the case. – Consequently, ESA counters Iceland principal arguments, actually shreds them to pieces.

More ominously, the letter warns that the Icelandic so-called ‘emergency law’, passed Oct. 6 2008, that declared that Iceland guaranteed all deposits in Iceland but not in foreign branches, runs counter to EU principles of non-discrimination. ESA points out that it’s possible to make exceptions for particular types of deposits but that Iceland didn’t make any use of these possible opt-outs.

ESA points out that since negotiations are ongoing between Iceland, the UK and the Netherlands nothing further will be done for the time being. If however the dispute isn’t resolved the case might be brought to the Efta Court.

Is this good news for Iceland? Hardly – it shreds Iceland’s arguments for not paying the Icesave bill. The official Icelandic stance has been somewhat schizophrenic: that it needn’t pay but was going to, if the right terms were offered. It will be painful to swallow but the Icesave bill is really the price paid for the past sins of omission, omitting to fetter the banks but dreaming of Wall Street on the Atlantic.

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