2nd May 2016
“Corruption and the role of tax havens” was the headline of the annual workshop of the Tax Justice Network – and the word Luxembourg was heard quite often there.
There were plenty of interesting talks, much to learn. Two things are still playing around in my head: an exchange on the offshore bubble inside, not outside, of our Western countries – and the destructive role of Luxembourg when it comes to both taxation and finance.
Offshore is actually onshore
I was on a panel today about “Stories of secrecy;” I gave a talk about “Iceland, the offshorisation of an economy” and Richard Smith from Naked Capitalism talkedabout the role of Scottish LPs in the Moldova bank robbery where $800 were syphoned off, into offshore companies. Nicholas Shaxson, author of “Treasure Islands,” was the moderator.
Shaxson mentioned the increasing focus on financial stability and the offshore universe, something that is very clear when it comes to Iceland and events in autumn 2008 – the offshorisation did not alone cause the banking collapse but it played its role in hiding money, connections, ownership, debt and everything else that can be hidden offshore.
One image I have been toying with lately, in order to explain the dangerous effect of offshorisation, is that each Western country is like a balloon where law and order, civil society seems to permeate the whole balloon. However, at a closer look, the offshore is like a bubble inside the balloon, where civil society is kept out, where bankers, accountants and other facilitators, together with companies and wealthy individuals act as if the rules of society, the social pact, didn’t exist; i.a. have created this safe haven from law and order.
What we should really be focusing on is that offshore isn’t outside of our countries, it is right within, creating a space immune to all the things the social pact otherwise touches, the social pact of taxation, rule of law etc. And it hugely undermines financial stability… as we saw in 2008, not only in Iceland.
Luxembourg: at the heart of dirty deals and tax destruction
Omri Marian is an assistant professor of law at the Irvine School of Law, University of California. He has studied 172 of the tax contracts the Lux Leaks brought into the open. His very illuminating point is that at first glance the Luxembourg tax laws looks just as sophisticated as tax laws normally do in Western countries. However, there is simply no execution of this convincingly looking legal tax code.
It sounds insane but one person, a certain Marius Kohl, was in charge of agreeing to all the privately negotiated “advance tax agreement,” effectively the tax for individual companies. The agreements, normally running to hundreds of pages, would often be signed off by the very hard-working Kohl on the day of application.
This reminded my of my experience with the Luxembourg financial regulator,Commission de Surveillance du Secteur Financier, CSSF. After the collapse of the Icelandic banks in October 2008 it slowly dawned on me that most of the banks’ dirty deals, especially in Kaupthing and Landsbanki, had been run through their Luxembourg operations.
Yet, when I asked lawyers and accountants I was told that all was in good order in Luxembourg, they had strict laws regarding the financial sector; the CSSF was there to keep an eye on things.
Listening to Marian it dawned on me that yes, this is how Luxembourg does it: it pays lip service to European rules and regulation and what you normally expect from a Western democracy by having a legal code on tax and the finance sector. But that’s all: the laws exist but only on paper – there is no execution to speak of.
Some years ago I visited the CSSF, got an audience with some six or seven people there. A very memorable meeting; we sat at the largest meeting table I have ever sat at; I on one side, the CSSF-ers on the other side. I told them what was slowly coming to light in Iceland: the alleged fraud and shenanigans, the loans with light covenants and little or no collaterals and guarantees, alleged market manipulations via the banks’ proprietary trading and share parking in companies the banks finances etc. – so, weren’t they going to look into the banks’ operations. There were darting eyes and down-cast faces: no, no need to do anything, all in good order in Luxembourg. D’accord…
I intend to write further on the thoughts above – but suffice it to say that if the European Union is at all serious about acting on the offshorisation of the European economies it has to make sure that Luxembourg not only adorns itself with all the correct-looking legal codes but actually enforces it, i.a. by having the staff needed to do so.
*Nicholas Shaxson blogged today on the Tax Justice Network on these aspects of Luxembourg and quoted some of my earlier blogs on Luxembourg, i.a. my observations that Luxembourg attract financial companies because they know full well that Luxembourg is a safe haven… from regulatory scrutiny.
Twelve clients of Landsbanki Luxembourg have placed a complaint in a French court against the bank, now in administration, and its administrator Yvette Hamilius.
This is the culmination of a struggle over many years where a group of Landsbanki Luxembourg’s clients, who took out equity release loans with the banks, have been claiming that in spite of overwhelming evidence, i.a. criminal charges in Iceland, about the bank’s operations Hamilius has done nothing to investigate these matters. In addition, the clients claim she has harassed and intimidated them.
Further, not only has she taken no notice of charges brought in France last September by Justice Renaud van Ruymbeke against the bank, its directors and employees but has indeed chosen to discredit them publicly in Luxembourg media. As reported in the Luxembourg paper PaperJam, the complaints against Hamilius also concern money laundering since the charges in the van Ruymbeke case refer to fraud.
The saga of Landsbanki Luxembourg, its equity release loans, its other operations, the behaviour of the bank’s administrator and the unwillingness of the Luxembourg financial regulator, Commission de Surveillance du Secteur Financier, CSSF, to investigate both the bank’s operations and then the administrators is a long and sad saga, which has often been brought up on Icelog (see earlier blogs here).
It can’t be said often enough – and I say it yet again – that it is impossible to understand the operations of the Icelandic banks without scrutinising their Luxembourg operations. Given the fact that managers and employees of all the three largest Icelandic banks have been investigated in Iceland and in some cases sentenced to prison and given that almost without exemption Luxembourg figures in these cases it is incomprehensible that the CSSF has not taken up a single case related to these banks.
The CSSF has recently set up a new office to protect the interests of depositors and investors. This may sound like 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. Interestingly, it’s the magistrate ruling on the Landsbanki administration Karin Guillaume who has been chosen to fill this post. 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.
In addition, there is of course now the insight via the Panama leak into the operations of other banks in Luxembourg. When will the authorities in Luxembourg acknowledge that the many stories of financial malfeasance in the Duchy are a huge and ugly stain on this pretty little state at the heart of Europe? And when will other European countries bring enough pressure on the Duchy to confront the facts of the financial sector in Luxembourg: part of it is placed exactly there full well knowing that nothing seems sordid enough to wake the CSSF up to this disgraceful reality.
After a French investigation, Landsbanki Luxembourg managers and Björgólfur Guðmundsson, who together with his son Thor Björgólfsson was the bank’s largest shareholder, are being charged in relation to the bank’s equity release loans. These charges would never have been made except for the diligence of a group of borrowers. Intriguingly, authorities in Luxembourg have never acknowledged there was anything wrong with the bank’s Luxembourg operations, have actively supported the bank’s side and its administrator and shunned borrowers. The question is if the French case will have any impact on the Luxembourg authorities.
In the years up to the Icelandic banking collapse in October 2008, all the Icelandic banks had operations in Luxembourg. Via its Luxembourg subsidiary, Landsbanki entered a lucrative market, selling equity release loans to mostly elderly and retired clients, not in Luxembourg but in France and Spain (I have covered this case for a long time, see links to earlier posts here). Many other banks were doing the same, also out of Luxembourg. The same type of financial products had been offered in i.a. Britain in the 1980s but it all ended in tears and these loans have largely disappeared from the British market after UK rules were tightened.
In a nutshell, this double product, i.e. part loan part investment, was offered to people who were asset rich but cash poor as elderly people and pensioners can be. A loan was offered against a property; typically, 1/4 paid out in cash and the remainder invested with the promise that it would pay for the loan. As so often when a loan is sold with some sort of insurance it does not necessarily work out as promised (see my blog post on Austrian FX loans).
The question is if Landsbanki promised too much, promised a risk-free investment. Also, if it breached the outline of what sort of products it invested in when it invested in Landsbanki and Kaupthing bonds. This relates to what managers at Landsbanki did. In addition, the borrowers allege that the Landsbanki Luxembourg administrator ignored complaints made, mismanaged the investments made on behalf of the borrowers. Consequently, the complaints made by the borrowers refer both to events at Landsbanki, before the bank collapsed and to events after the collapse, i.e. the activities of the administrator.
The authorities in Luxembourg have shown a remarkable lack of interest in this case and certainly the borrowers have been utterly and completely shunned there. The most remarkable and incomprehensible move was when the Luxembourg state prosecutor, no less, Robert Biever Procureur Général d’Etat sided with the administrator as outlined here on Icelog. The prosecutor, without any investigation, doubted the motives of the borrowers, saying outright that they were simply trying to avoid to pay back their debt.
However, a French judge, Renaud van Ruymbeke, took on the case. Earlier, he had passed his findings on to a French prosecutor. He has now formally charged Landsbanki managers, i.a. Gunnar Thoroddsen and Björgólfur Guðmundsson. Guðmundsson is charged as he sat on the bank’s board. He was the bank’s largest shareholder, together with his son Thor Björgólfsson. The son, who runs his investments fund Novator from London, is no part in the Landsbanki Luxembourg case. In total, nine men are charged, in addition to Landsbanki Luxembourg.
According to the French charges, that I have seen, Thoroddsen and Guðmundsson are charged for having promised risk-free business and for being in breach of the following para of the French penal code:
(Ordinance no. 2000-916 of 19 September 2000 Article 3 Official Journal of 22 September 2000 in force 1 January 2002)
Fraudulent obtaining is the act of deceiving a natural or legal person by the use of a false name or a fictitious capacity, by the abuse of a genuine capacity, or by means of unlawful manoeuvres, thereby to lead such a person, to his prejudice or to the prejudice of a third party, to transfer funds, valuables or any property, to provide a service or to consent to an act incurring or discharging an obligation.
Fraudulent obtaining is punished by five years’ imprisonment and a fine of €375,000.
Attempt to commit the offences set out under this section of the present code is subject to the same penalties.
The provisions of article 311-12 are applicable to the misdemeanour of fraudulent obtaining.
(Act no. 2001-504 of 12 June 2001 Article 21 Official Journal of 13 June 2001)
(Act no. 2003-239 of 18 March 2003 Art. 57 2° Official Journal of 19 March 2003)
Natural persons convicted of any of the offences provided for under articles 313-1, 313-2, 313-6 and 313-6-1 also incur the following additional penalties:
1° forfeiture of civic, civil and family rights, pursuant to the conditions set out under article 131-26;
2° prohibition, pursuant to the conditions set out under article 131-27, to hold public office or to undertake the social or professional activity in the course of which or on the occasion of the performance of which the offence was committed, for a maximum period of five years;
3° closure, for a maximum period of five years, of the business premises or of one or more of the premises of the enterprise used to carry out the criminal behaviour;
4° confiscation of the thing which was used or was intended for use in the commission of the offence or of the thing which is the product of it, with the exception of articles subject to restitution;
5° area banishment pursuant to the conditions set out under article 131-31;
6° prohibition to draw cheques, except those allowing the withdrawal of funds by the drawer from the drawee or certified cheques, for a maximum period of five years;
7° public display or dissemination of the decision in accordance with the conditions set out under article 131-35.
(Act no. 2003-239 of 18 March 2003 Art. 57 3° Official Journal of 19 March 2003)
Natural persons convicted of any of the misdemeanours referred to under articles 313-1, 313-2, 313-6 and 313-6-1 also incur disqualification from public tenders for a maximum period of five years.”
As far as I know the scale of this case makes it one of the largest fraud cases in France. As with the FX lending the fact that the alleged fraud was carried out in more than one country by non-domestic banks helps shelter the severity and the large amounts at stake.
Again, I can not stress strongly enough that I find it difficult to understand the stance taken by the Luxembourg authorities. After all, Landsbanki has been under investigation in Iceland, where managers have been charged i.a. for market manipulation. – Without the diligent attention by a group of Landsbanki Luxembourg borrowers this case would never have been brought to court. Sadly, it also shows that consumer protection does not work well at the European level.
On this page we will link you to the latest articles on Sigrúns blog related to the affairs of Landsbanki Lu.
Sigrún Davíðsdóttir’s Icelog 20/03/2015
Landsbanki Luxembourg liquidator ignores French investigation
As reported earlier on Icelog, the French investigative judge Renaud van Ruymbeke is conducting an investigation of Landsbanki Luxembourg activities in France regarding the bank’s equity release loans. With the investigation ongoing it was assumed that the bank’s liquidator Yvette Hamilius would suspend recovering assets by sending bailiffs to the bank’s customers in France.
This however has not been the case as the Luxembourg Paperjam reports (yet again by Véronique Pujoul who has followed this case diligently) and Icelog has heard. Lawyers for the clients are now asking if this could be seen as both harassment from the administrator and also constitute a contempt of the French Courts with an ongoing investigation where charges have been brought.
Icelog has earlier reported extensively on this saddest part of the Icelandic banking collapse saga. What is truly shocking is the utter and complete disregard Luxembourg authorities have shown the clients who have at length described their dealings with the bank and administrator, i.a. conflicting messages from the administrator on outstanding debt. Part of the scheme were investments, which the clients have questioned as they got more understanding of them as well as being kept in the dark about the administrator’s handling of the investments.
Instead, the Luxembourg state prosecutor has, without any investigation, placed himself firmly on the side of the administrator by claiming that the clients were only trying to evade paying back their loans. This behavior by a public prosecutor in a European country is utterly inconceivable.
Although investigations into the banks are ongoing in Iceland, with serious charges and severe prison sentences, Luxembourg has done nothing to investigate the Icelandic operations in Luxembourg, i.a. that of Landsbanki. Yet, the Icelandic investigations show that in many of the worst cases, such as in the so-called the al Thani case, the schemes were partly planned and carried out in the Icelandic banks in Luxembourg. In many cases, the alleged and proven criminal wrongdoings by the Icelandic banks could not have been done without their Luxembourg operations. Yet, Luxembourg ignores the banking problems in its own front yard.
February 12th 2015, JUSTICE IS AT LAST HAPPENING
“The results today that it is possible to bring complicated financial cases to court and get conviction,” Ólafur Hauksson head of Office of the Special Prosecutor said toIcelog, now that the Supreme Court has ruled in one of the OSP’s major cases, the al Thani case. “Building up the expertise has been a long process but the ruling today demonstrates that setting up an office, which didn’t not exist earlier, was fully justified. No society can tolerate that certain parts of it are beyond law and justice.”
Those four charged were Sigurður Einarsson chairman of Kaupthing board, Magnús Guðmundsson manager of Kaupthing Luxembourg, Kaupthing CEO Hreiðar Már Sigurðsson and Ólafur Ólafsson the bank’s second largest shareholder. Reykjavík District Court had earlier ruled in the case where Einarsson was sentenced to 5 years in prison, Guðmundsson 3 years, Sigurðsson 5 1/2 years and Ólafsson 4 1/2 years. The Supreme Court has confirmed the ruling over Sigurðsson whereas Ólafsson has now been sentenced to 4 1/2 years, Einarsson to 4 years instead of 5 years and Guðmundsson to 4 years.
As detailed in an earlier Icelog the core of the al Thani case were loans to Ólafsson and Sheikh Mohammed bin Khalifa al Thani, a Qatari investor from the country’s ruling family. It is important to notice that the issuing of these loans was the criminal deed in the case – the three Kaupthing managers broke law by doing it and Ólafsson was complicit in that criminal deed.
The story behind the case is that in in September 2008 Kaupthing made much fanfare of the fact that Sheikh al Thani bought 5.1% of Kaupthing’s shares. The 5.1% stake in the bank made al Thani Kaupthing’s third largest shareholder, after Olafsson who owned 9.88%. This number, 5.1%, was crucial, meaning that the investment had to be flagged – and would certainly be noticed. Einarsson, Sigurðsson and Ólafsson all appeared in the Icelandic media, underlining that the Qatari investment showed the bank’s strong position and promising outlook.
What these three didn’t tell was that Kaupthing lent the al Thani the money to buy the stake in Kaupthing – a well known pattern, not only in Kaupthing but in the other Icelandic banks as well. A few months later, stories appeared in the Icelandic media indicating that al Thani was not risking his own money. More was told in SIC report and the SIC recount indicated a fraudulent behaviour. The ruling today has confirmed the doubts, which have surrounded this investment from early on.
Although the case draws its name from Sheikh al Thani he has not been accused of any wrongdoing. He was one of the witness in the case, gave a statement over the phone.
As I have pointed out earlier there is an echo of this investment story in the ongoing investigation into Qatari and Middle East investment in Barclays, which saved the bank from seeking state support in autumn 2008.
The ruling in Iceland is i.a. in stark contrast to how Irish courts have tackled financial crimes related to the Irish collapsed banks. In April last year a court ruled that two former Anglo Irish managers, who had been convicted of issuing loans to prop up the bank’s share price, should not be imprisoned in spite of being found guilty. The judge ruled it was unjust they should go to prison for a criminal deed because they believed they had acted lawfully. Sean FitzPatrick, the bank’s former chairman, was cleared in this case. I find this Irish ruling truly incredible. This loan saga – loans to the so-called “Golden Circle” – has striking parallels in other Icelandic cases, which are being processed.
Icelandic law on financial fraud is in most respect similar to law on these issues in Northern Europe. There is nothing special about the Icelandic situation – except the will to carry out investigations and bringing cases to court. As Hauksson pointed out financial crimes need not be too complicated to be successfully prosecuted – and no part of society should be beyond the reach of the law.
November 23rd 2014
Three ex-Landsbanki bankers have been sentenced (in Icelandic) at Reykjavík County Court in an extensive market manipulation case. The bankers were charged with manipulating Landsbanki share price almost a year up to the collapse of Landsbankinn October 7 2008. The action was judged to have influenced the share price of the bank, i.e. slowed its fall and prevented the shares falling in price. Consequently, price movements were not properly reflected and the share price appeared stronger than it would have been without the intervention.
Landsbanki ex-CEO Sigurjón Árnason was sentenced to a 12 months imprisonment, of which nine months are suspended. Two others, Júlíus Steinar Heiðarsson and Ívar Guðjónsson both working on the bank’s proprietary trading desk, were sentenced to nine months imprisonment, six of which are suspended. The fourth charged, Sindri Sveinsson, was acquitted.
*The judgement is not yet on the Court’s website but will be attached here when published. – Published here.
Updated: an addition now that I have read the judgment (Nov 23 2014):
The OSP brought the case following charges to the OSP made by the FME in October 2010. The original charges were against 18 ex-Landsbanki employees for market manipulation since May 2003 (nothing less) until the collapse of the bank in October 2008.
This means that according to the regulator, Landsbanki shares were actually manipulated for over five years.
In the end, the OSP charged 4 ex-Landsbanki managers for market manipulation from beginning of November 2007 until the last day Landsbanki shares were traded on the Icelandic Stock Exchange October 3 2008.
The sentences are far more lenient than the prosecutor had asked for. The judges (three in all) thought there were two mitigating circumstances: the deeds took place at a time of great turbulence in the markets and the bankers might be seen as having tried to save the bank (as they had claimed themselves) – and the deeds took place in 2008, i.e. a long time ago.
Re the first, buying the bank’s shares and risking the bank’s own capital is not the standard reaction (or even a creative one) in turbulent times and credit crunch.
Re the long time: financial crimes are rarely visible with bare eyes. Staff at the Icelandic Stock Exchange did indeed notice some of the actions taken and reported them to the FME, which resulted in an FME investigation and charges later on.
Interestingly, the day after the Landsbanki judgment three British businessmen were convicted for fraud in a case brought by the SFO. The fraud took place in 2007 and 2008, as in the Landsbanki case. The case was referred to the SFO, which opened an investigation in August 2009. One of those convicted is Chris Ronnie, known in Iceland as a client of Kaupthing.
28th March 2014
Iceland pre-and post-collapse
Justice Renaud van Ruymbeke has today ruled in favour of former clients of Landsbanki Luxembourg, as already reported in Le Quotidien Luxembourg and the French La Tribune. Justice van Ruymbeke had previously charged three non-Icelandic former Landsbanki employees of fraud. Now he has ruled that Landsbanki Luxembourg cannot enforce collaterals placed against the equity release loans. If this turns out to be the end of the Landsbanki Luxembourg cases against those who placed French assets as collaterals this will surely be of huge interest to those with assets in Spain, where some former LL clients have managed to halt the enforcement by going to court.
The crux of the matter is that as some other foreign banks in Luxembourg Landsbanki used its Luxembourg operation to issue equity release loans, sold to clients in France and Spain on questionable grounds, where the client is effectively both a borrower and an investor: part of the loan is paid out in a lump sum, typically 20-25%, the rest was invested by the bank.
As Icelog has already written about several times there are grave questions unanswered regarding these loans: Icelog has seen documents that show there are good reasons to doubt the soundness of the issuance of the loans and of the investments done by Landsbanki Luxembourg before it collapsed. After the collapse the administrator has, contrary to i.a. Landsbanki administrators in Iceland, apparently been unwilling to scrutinise the Landsbanki Luxembourg operations although clients have come forward with well reasoned and well motivated arguments about the loans. In addition, information has been unclear, communication poor and clients have not been acknowledged as having been both debtors and investors.
An incredible part of this long saga is the fact that the Luxembourg state prosecutor issued a press release in favour of the administrator, without having at all investigated the matter. The fact that a state prosecutor can issue such statements is a scary indication of the state of justice in this tiny country that because of its monumentally, relative to population, big financial sector has become holden to the interests of this same sector.
The Landsbanki Luxembourg clients have been fighting a heroic battle. These loans were mostly sold to elderly people and sadly some of the clients have died during these years of battling an unyielding justice system in Luxembourg where even getting a lawyer in a case, non-favourable to the state and/or the financial sector, seems to be a hindrance to seeking justice. It therefore comes as no surprise that a step towards victory for the clients has been taken not in Luxembourg but abroad, in France.
24th January 2014
“… when it comes to unified European financial sector it only works for banks, facilitating cross-border operations. For clients and consumer protection this sector has as many holes as a Swiss cheese. A food for thought: if cross-border operations only work for banks and not for clients they should not be allowed.”
As often mentioned earlier on Icelog a group of Landsbanki Luxembourg clients have been trying to attract the attention of Luxembourg authorities as to the nature of the bank’s operations and to the handling of the bank’s administrator of their cases. Contrary to Icelandic authorities and the Landsbanki winding-up board, busy investigating the bank in Iceland and charging/suing its managers, Luxembourg – the tiny country dwarfed by its towering financial sector – has shown no appetite for any such undertaking.
Now there are two new and very different developments which might be of interest for the Landsbanki clients, all of whom are foreigners, mostly elderly people, with properties in France and Spain. Labour MP Huw Irranca-Davies has drawn attention to the Rotschild bank, which also sold equity release products, causing default and loss of property, to a similar group of clients. And creditors in the long failed Luxembourg bank, Bank of Credit and Commerce International, BCCI also, like the Landsbanki Luxembourg clients, think that Luxembourg authorities are difficult to deal with.
MP Irranca-Davies raised the equity release issue in a House of Commons debate and had some harsh words for the Rotschilds: “… you have badly deviated from your core values, badly served your brand and reputation, badly served people who regarded themselves as your clients – not the clients of some intermediaries as they claim – and who are now facing penury after investing in products which your name, Rothschilds, your integrity, your values were used as a key selling point.”
Interestingly, conservative Treasure minister offered to raise the matter with counterparts in Spain and Guernsey. Should he do that someone should tell him not to leave out the Landsbanki Luxembourg cases since they also concern equity release loans.
One aspect of the equity release loans is that they have been sold by banks not operating in the country where the products have been sold. Rothschild, Landsbanki and several Scandinavian banks, all active in this business, sold the products to people in Spain and France, not from their operations there but from their Luxembourg operations. An interesting aspect, which has created a sort of vacuum around these operations: when the clients felt they had things to complain about Luxembourg authorities have not really listened as the products were not sold there; and authorities in France and Spain have so far not really taken the issue seriously since the banks were operating abroad.
This case has shown that when it comes to unified European financial sector it only works for banks, facilitating cross-border operations. For clients and consumer protection this sector has as many holes as a Swiss cheese. A food for thought: if cross-border operations only work for banks and not for clients they should not be allowed.
For anyone following the world of finance for some decades BCCI is a familar name. The bank was operating – yes, in Luxembourg for two decades from the 1970s. Founded in Luxembourg in 1972 by a Pakistani financier, Agha Hasan Abedi, it eventually failed in 1991 after financial regulators in several countries feared it was badly regulated.
It took years to get the Luxembourgians to act but when they did it turned out that its operations were not only mundane lending and borrowing but money laundering and other criminal activities. One interesting aspect, in light of development in the three failed Icelandic banks is that the BCCI administrator, Deloitte, sued the bank’s auditor, Ernst & Young. The case never came to court but was settled for $175m in 1998.
All of this has turned into a long saga, which quite remarkably is still ongoing. The latest is that some of its creditors are now fighting authorities in Luxembourg, claiming it is blocking money from creditors. Though the BCCI creditors certainly with deeper pockets than the Landsbanki clients, they are no less upset and do not intend to drop their case any time soon. One of them is dr. Adil Elias, whose story has earlier been told by the WSJ.
Quite intriguingly the two gropus – the Landsbanki Luxembourg victims and the BCCI creditors – have one thing in common: both had cases ruled on right up to Christmas in Luxembourg and in both cases those complaining lost. Maybe a coincidence – or this is the time Luxembourg courts feel is the best time to rule on “unruly” bank clients ready to take on Luxembourg authorities.
Iceland pre-and post-collapse
(French version in Francais section)
Three Kaupthing bankers and the bank’s second largest shareholder were recently sentenced to 3 to 5 1/2 years in prison for market manipulation and breach of fiduciary duty. The story behind the case is a share purchase in Kaupthing in September 2008. At the time, all four now convicted – then chairman of the board Sigurður Einarsson, CEO Hreiðar Már Sigurðsson, Kaupthing Luxembourg manager Magnús Guðmundsson and investor Ólafur Ólafsson – were interviewed in the Icelandic media where they underlined the strength of Kaupthing by pointing out that a Qatari investor, al Thani, had bought 5.1% in the bank.
What they failed to mention was that al Thani was not so much risking his own money as Kaupthing money: via an intricate scheme based on a few offshore companies the funds for the share acquisition came from Kaupthing itself. And where was the master plan carried out? In Luxembourg.
Kaupthing subsidiary in Luxembourg was at the centre of the al Thani saga. That was were the idea was brought into action, money into one vehicle and out into another. It is a well known fact in Iceland that most of the banks’ most questionable deals were indeed carried out in Luxembourg. It is an intriguing thought that Luxembourg was time and again chosen at the preferred place for these deals.
In early 2011 I was in Luxembourg and had a meeting at the Luxembourg financial services authorities, Commission de Surveillance du Secteur Financier, CSSF.* I met with a few people in a meeting room. I was on one side of a huge table, four or five people on the other side. Already then it was clear that the Icelandic banks had been doing some rather “inventive” banking in Luxembourg. I presented some of the cases I knew of. On the other side of the table there were only expressionless faces and then I was told that rules and regulations were strict in Luxembourg. Nothing contrary to laws could take place in Luxembourg banks.
In the CSSF 2012 Annual Report its Director General Jean Guill writes:
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.
“… cannot participate in doubtful matters…” – If only matters were that simple. Now four people have been sentenced to prison in Iceland for participating in doubtful matters that violate Icelandic laws, according to the Reykjavík District Court, but were carried out in Luxembourg, by using Luxembourg expertise and the so very favourable circumstances created in Luxembourg over decades.
A group of Landsbanki Luxembourg clients have for several years been trying to catch the attention of the Luxembourg authorities, a saga that Icelog has reported on time and again. This group had taken out equity release loans at Landsbanki. These clients have asked 1) serious questions about the dealings of Landsbanki Luxembourg before it went bankrupt – such as evaluation of property, calculations on loans breaching the collateral limit, investments related to the loans and how products were sold; 2) serious questions as to how the estate has been run, its misleading information or lack thereof, numbers that did not add up.
None of this has been addressed by the CSSF or other Luxembourg authorities so far. However, the Luxembourg paper Wort has reported that two cases related to Landsbanki Luxembourg are now being investigated, quoting minister of justice Octavie Modert. (*see the article at the end)
So far, and to great cost and immeasurable emotional distress the bank’s clients – mostly elderly citizens living in France and Spain – have been left to battle on their own. In Luxembourg the State Prosecutor issued a press release in support of the Landsbanki Luxembourg administrator – unthinkable in most other European countries – thereby making it look as if the Landsbanki Luxembourg clients were trying to evade paying their debt. – Through court cases in Spain and France the group has made some advances but none of this is taken into any consideration at all in Luxembourg.
One client has shown me a set of calculations regarding one specific loan portfolio. Landsbanki Luxembourg, prior to its collapse, had claimed that this portfolio no longer covered the loan so the borrower was obliged to pay a certain amount in cash as a cover. As far as I could see, the number from the bank was wrong: the client was not in breach and should not have been obliged to pay. I could of course well be wrong. I sent this calculation to someone from Landsbanki Luxembourg with whom I had been in touch and whom I had told of this. I know for certain that this person got the calculation but I never heard back.
Only Luxembourg authorities can access documents regarding the operations of Landsbanki Luxembourg. Although the bank’s managers have been charged with criminal offenses in Iceland (case pending but due in the new year) by the Icelandic Office of the Special Prosecutor as well as being sued in a civil case by the Landsbanki Winding-up Board for misleading reporting Luxembourg authorities have not been willing to listen to well-founded claims by the Landsbanki Luxembourg clients: unanswered questions about the Landsbanki Luxembourg operations before the bank’s demise in October 2008 – as well as the administrator’s operations.
Noticeably, an administrator has the duty to investigate operations, as indeed the Landsbanki Winding-up Board has done. The administrator, Yvette Hamilius and lawyers working for her, have stated in Luxembourg media that everything the administrator has done is according to the law.
In one case that the Landsbanki Luxembourg administrator took to court, the administrator caused delays of, in total, 200(!) days. And on it goes.
The fact that the numerous authorities in Luxembourg, such as the CSSF and the State Prosecutor have either ignored pleas from clients or outrightly sided with the administrator, without any chance of the claims actually being heard or looked at, shows a horrendous lack of care for clients and a sound protection for the financial industry. And everyone can pretend that it is, as Director General Guill points out: that professionalism and transparency is such in the financial sector in Luxembourg that financial players “cannot participate in doubtful matters.”
One way to supervise financial institutions is by box-ticking: to look at each item in its narrow and isolated meaning, never look at connections or behaviour, never try to understand meaning and context. The institutions know this and prepare their material accordingly. Then there is little to fear. One reason why so little was seen and caught before 2008 was this attitude by regulators. Judging from the lack of interest in claims by Landsbanki Luxembourg clients this still seems to be the attitude among Luxembourg authorities. Authorities in Cyprus have announced that banks in Cyprus will be investigated, a little bit is being done in Ireland and the UK. When will Luxembourg follow suit? From anecdotal evidence there have been things going on in Luxembourg that merit investigations.
Here is the article from Wort:
BUSINESSPublished on 10.07.13 09:10
Landsbanki investigation making “great strides” in Luxembourg
A Luxembourg investigation into financial products sold by Icelandic bank Landsbanki before its collapse is making “great strides”, according to Luxembourg’s Justice Minister.
Responding to a parliamentary question by CSV MP Serge Wilmes, Ms Modert said that there were currently two cases, relating to different aspects of criminal conduct regarding the Icelandic banks were being treated by the Luxembourg authorities.
“In one case, 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.
When Landsbanki collapsed in 2008, scores of investors involved in the Equity Release mortgage scheme obtained through the bank, lost their homes and their livelihoods.
Their lawyers claim that the financial product was a scam and have attempted to dispute the decision of the Luxembourg liquidator to hear the case in court.
A 24-page report, released by the victims’ legal representatives lawyers, Mr Benjamin Bodig of Diekirch and Me Bernard Maingain of Brussels, calls the case “the most important affair concerning banking delinquancy treated at a judicial level within the EU.”
The report also includes a study commissioned from university professor Eric Briys, which suggests the scheme was not as transparent as it appeared. He wrote: “They presented ERP products in the innocuous form of investment savings tailored to the needs of the target audience. The aim was different: they ultimately wanted to capture the mortgage and securities portfolio to hedge receivables at the end of the operation.”
Translated from an article by Thierry Labro
Yet again a good article from Sigrun with some interesting comments.