Nick Shaxson ■ Lessons from Iceland, where offshore created an onshore bubble free of rules and regulations

Iceland's Prime Minister steps down

Iceland’s Prime Minister steps down

Lessons from Iceland, where offshore created an onshore bubble free of rules and regulations

A guest blog by Sigrún Davíðsdóttir

In a matter of a few years tiny Iceland became the world’s most ‘offshored’ country, both proportionally in terms of the number of clients the banks “sent offshore,” and in the pervasiveness of offshore companies in the business community. The Icelandic mini-cosmos provides some intriguing lessons on the offshore world. Most strikingly, offshore is in a profound sense onshore – a bubble that exists within the country: a free space to escape from the social compact.

And, as the recent TJN blog explained, it undermines financial stability. It is a myth that Iceland got away easily: the Icelandic banking collapse ranks among the costliest finance calamities since 1970, according to IMF economists.

“When you see a bowl of smarties you take a handful. That’s how offshore shell companies were used in the end by Icelandic banks and businesses: a handful thrown into every new venture,” said a lawyer working for one of the Icelandic companies making headlines in international media before the failure of the three largest banks – 90 percent of the Icelandic banking system – in early October 2008.

Unlike in many other Western countries hit by the 2008 banking crisis, Iceland’s collapse has been thoroughly documented: the events leading up to the collapse were carefully recounted and analysed in a 2010 report by a Special Investigative Committee, SIC (here are some excerpts in English). In addition, over twenty charges brought by the Special Prosecutor, investigating alleged crimes related to the collapse, have spelled out many stories in detail. Offshore figures in most of them.

The surprising aspect of the Icelandic offshorisation is the speed of its growth – it all happened in only around a decade – and how many small business owners and how many well-off but far from wealthy bank clients were “offshored” by the banks. Even a fisherman who sold his vessel for what then amounted to £125,000, was offshored: he didn’t ask for it, but his bank made him an offer he could not refuse.

What the Panama papers have added to earlier stories is information on the craft of offshore: the relationships shaping the offshorisation, and how offshore comes onshore. The secrecy havens themselves are far away, but they create a bubble at home in which the normal rules of democracy do not operate.

What Icelanders knew – and didn’t know

The introduction of transferable fishing quotas in the early 1990s meant that a quota, which earlier had just been the right to fish, could be sold for ready money. This released a flood of money into the Icelandic economy. In the late 1990s, Icelandic banks were discovering that now there was a moneyed class in Iceland, which could be offered wealth management services, as is done abroad.

“Just over a year ago, Landsbanki started offering a so-called offshore service.”

Thus began a January 2000 article on Landsbanki’s new service, run via Guernsey. The Landsbanki managers interviewed were bursting with pride: not every bank was welcome in Guernsey but the good reputation of Landsbanki had opened this door, according to a Landsbanki manager. Yes, they acknowledged that offshore was often linked to crime, but that couldn’t happen in Guernsey because of the island’s diligent authorities.*

In 2000, Landsbanki was still state-owned: its CEO a former private secretary in the Ministry of business and industry. By the end of 2002, all the Icelandic banks had been fully privatised. Their offshore services were already well developed, mostly organised through Luxembourg, truly the gateway to offshore Iceland. Only after the banking collapse did Icelanders realise how extensive the offshorisation was.

Between 2000 and 2008 Icelandic banks and businesses expanded abroad, mostly in Denmark – where the press remained sceptical – and in the UK where the press greeted them with greater adulation. Icelanders generally felt that the Danish attitude reflected envy towards the brilliant bankers and businessmen from the former Danish territory.

Luxembourg: make-belief regulations without enforcement

When rumours about alleged misconduct in the banks started to swirl around in the press in the weeks after the collapse I remembered having seen some Luxembourg documents related to Baugur owned by Jón Ásgeir Jóhannesson, who had bought up eye-catching UK high street chains including Iceland, Karen Millen and Goldsmith.

By searching through the Luxembourg Mémorial I came across dozens of companies set up offshore by Kaupthing bank, many owned by people unconnected to the big businesses. In the Panama Papers there are almost 600 companies related to Landsbanki alone.

When I turned my attention to financial regulation in Luxembourg experts told me that, just as had been stated for Guernsey, it was unlikely that anything dirty had gone on in Luxembourg. This upstanding European country, after all, houses the European Parliament when it’s not meeting in Brussels, along with the European Court of Justice. Luxembourg boasted that it had good financial regulation and a well-functioning regulator, Commission de Surveillance du Secteur Financier, CSSF.

Slowly, I realised that yes, there was indeed a regulator and a legal code but all of this was only a make-believe: there was neither the manpower nor the will to enforce the law.**

At the Tax Justice Network Workshop on “Corruption and the role of tax havens” Omri Marian from the UC Irvine School of Law gave on overview of his research into tax agreements, which surfaced thanks to the LuxLeaks scandal. He concluded that Luxembourg certainly has tax laws that look like the tax laws in any other Western country.

The difference is they are not enforced – not at all.

Instead, Luxembourg is prosecuting two journalists and an accountant for the Luxembourg leak exposing how Luxembourg grants companies special tax agreements.

Luxembourg: no enforcement, no consumer protection

According to the CSSF 2014 Annual Accounts, the most recent one, there are 144 credit institutions, 15 pension funds, 315 Personal Financial Specialists, 4,193 so-called Undertakings for Collective Investments and 32 Securitising Undertakings operating in Luxembourg. The banks’ combined balance sheet in 2014 was €737bn: other financial institutions had a combined balance sheet or assets amounting to €45bn.

In a country of 542,000 people 44,000 people work in the Luxembourg firms regulated by the CSSF; the CSSF had 555 employees in 494 full-time jobs in 2014. That year, 99 people had been on CSSF ad hoc committees: fourteen of them were from ministries or universities; intriguingly, 85 came from banks, accountancy and law firms, and other firms servicing the offshore industry.

According to a TJN report on Luxembourg, victims of Bernie Madoff found no help among Luxembourg authorities. It is the same story with a group of Landsbanki Luxembourg clients who took out so-called “equity release” loans: Luxembourg authorities have cold-shouldered claims that its court-appointed administrator ignored pleas for an investigation, in spite of investigations in Iceland, prison sentences for some Landsbanki managers and lastly, criminal investigation in France into the Landsbanki Luxembourg operations in France (extensively covered on my blog).

The Panama papers and the craft of offshore

There is much material on Iceland in the Panama papers adding more names and further insight into the mechanisms of the Icelandic offshorisation. The operations can be seen from emails and other documents recording contacts between Mossack Fonseca and their clients. So far, six Icelanders have resigned because of the revelations.

On April 3 international media published the first Panama stories: an interview with Sigmundur Davíð Gunnlaugsson, then prime minister of Iceland, where he denied owning offshore company Wintris, garnered international fame. Within 48 hours of the interview being broadcast, Gunnlaugsson was forced to resign.

In the infamous interview, recorded on March 11 but embargoed until April 3, he lied about Wintris. Knowing that his ownership of Wintris would be made public he had in the meantime attempted damage control by feeding Icelandic media false and misleading information on Wintris. As the media grew more suspicious, he attacked journalists who didn’t swallow his version.

It was bad enough that in a country with capital controls he chose to keep his family wealth offshore. In addition, Wintris was a creditor in the three failed banks, creating a conflict of interest for Gunnlaugsson: he led efforts to resolve issues regarding the failed banks without ever mentioning Wintris.

Icelandic media has also done some intriguing reports on the on- and offshore ventures of the chair of Gunnlaugsson’s party, the Progressive party, Hrólfur Ölvisson. He resigned, as have two pension fund CEOs. A conservative member of the Reykjavík Council resigned when the Panama papers exposed his ownership of an offshore company set up as late as 2014. There might well be further unexplained stories here on money and politics. The sixth to resign following Panama reporting was a cashier to the Social Democrats and an investor in Kjarninn, a media company.

The offshore effect in Iceland

The offshore effect on Iceland has been as in other countries: less tax, and opaque business environment: inter alia, undermining competition.

The Icelandic banks sold their “offshore solutions” with promises of less tax. Anecdotal evidence from owners of small businesses lured by these offers indicates that if they ended up both paying tax and paying the offshore fees the offshoring was a losing proposition. According to officials from the Inland Revenue in Iceland their investigations show that offshore companies were seldom included in tax statements; in other words, taxes were rarely paid. In other words: taxes were not part of the offshore package.

From 2003, by which time the banks had been entirely privatised, Icelanders quickly became nonchalant about sales of assets with escalating prices where the only obvious reason for the rising prices was the willingness of other buyers to pay; and this was based on banks willing to fund the extravaganza. Those involved in the most staggering deals were the banks’ largest shareholders.

Offshore companies were widely used to hide ownership. All form of such hiding was common in the febrile business activities around the big shareholders in the banks, resulting in a hugely distorted business environment.

Also, the offshore galaxies owned by some of the largest shareholders came in handy when bankruptcies were on the horizon. Assets could be separated from debt – offshore companies are good for the pulling assets and debts apart, leaving the debt in companies that go bankrupt, making others carry losses – while the assets migrate elsewhere unscathed.

In a small offshorised economy the effect is both visible and strong.

Offshore, onshore

The Icelandic experience of a rapid offshorisation over just around a decade, and the subsequent crash, highlights how destabilising the lethal combination of tax evasion and harmful – often criminal – business practices can be.

The collapse also exposes the nature of offshorisation. The word ‘offshore’ implies something taking place abroad, far away. At a closer look, this is actually misleading. The planning of offshore practices takes place onshore: in Iceland’s case by bankers, lawyers and accountants for businesses and businessmen living in Iceland, assisted by experts abroad.

The wealthiest Icelanders could in effect behave as if the rest of the country didn’t matter. In this bubble they were outside the social compact, beyond tax and democracy. They paid taxes as suited them and practiced business as was best for their businesses and their own personal gains.

Offshore splits society in two.

On the one hand, there are those who follow the rules, partly through the deterrent effect of rules and regulations, and partly because they see it as reasonable behaviour.

On the other hand, there are those who, aided by lawyers, bankers and accountants – the offshore industry’s experts – can live outside the social norm even though they live onshore. When their bubble expands, as it had done by 2008, it threatens financial stability and democracy because democratic tools such as investigations and punishment don’t apply in the offshore bubble inside our Western countries.


*Guernsey figures in some Icelandic-related offshore companies, see here.

**I have written extensively on the use of Luxembourg in cases of fraud and alleged misconduct, e.g. here and here.

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Comments • 1

  • AvatarJanet Morris
    July 6, 2016 - 10:30 pm

    What is being done at the moment in recovering money owed to ordinary investors in offshore Iceland investments following the crash? Something was expected to happen by 2016 but all is quiet

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