An icy lesson for banking's neo-Vikings

Iceland's post-GFC clampdown on banking misdeeds is unparalleled in the world, and while not without hiccups has been able to deliver onerous penalties for wrongdoing.

As scandals rain down thick and fast in the financial world, many are beginning to ask whether the penalties being imposed are enough to stop bankers from behaving badly.

Just over a week after the major Barclays rate-rigging scandal, HSBC has now conceded that it lacked adequate internal controls to prevent money laundering, with the funds potentially being used to finance terrorism and other criminal activity.

For its role in the Libor-rigging scandal, Barclays has agreed to pay a £290 million ($US450 million) fine – a record for the City of London. The bank has also cleared out its executive suite, with the resignations of chief executive Bob Diamond, his key lieutenant, Jerry del Missier, and the bank’s chairman Marcus Agius, although the latter will stay on to help the bank pick a new chief executive and chairman. Diamond has also generously agreed to give up deferred bonuses worth around £20 million, although he will still pocket around £2 million in severance and pension payments.

HSBC, meanwhile, is gearing up to provide a grovelling apology when it appears before the US Senate’s investigative panel next week. The bank will also be hit with a hefty fine that could be as high as $1 billion.

But many argue these penalties don’t go far enough. They believe that the ethos of greed is so strongly entrenched within the banking culture that the only way of ensuring ethical behaviour is to impose much more onerous penalties for wrongdoing – as Iceland is doing with its former banking idols.

As the French newspaper Le Monde notes, until mid-2008, economists around the world were lauding the Icelandic "economic miracle”. The country had embarked on an unbridled spree of liberalisation – privatising its financial sector, merging investment and commercial bank, deregulating its financial sector – making the country a paradise for investors.

But in the summer of 2008, the Iceland bubble exploded. Two weeks after the collapse of US investment bank Lehman Brothers, the country’s three largest banks – whose assets represented 923 per cent of the country’s GDP – failed. The country’s currency, the Icelandic krona, went into freefall. On October 6, 2008, on national television, the country’s then prime minister ended his speech by asking God to "save Iceland”.

With the economy plunged into crisis, Icelanders vented their anger against the politicians and the 'neo-Vikings' of finance who had betrayed them. Public outrage was so strong that the conservative government resigned.

Fresh elections swept the left into power. The new prime minister, Johanna Sigurdardottir, wanted to appoint a special prosecutor to investigate the causes of the crisis. But few were keen to take on the task. What’s more, as Le Monde notes, "in such a narrow society, the small circle of professionals who could have claimed the role were themselves too implicated in the system to judge it.” For example, the son of the country’s former Minister of Justice was the head of Kaupthing, one of the three banks at the heart of the problem.

Eventually, the Icelandic government appointed Olafur Hauksson, a police commissioner from Akranes, a small town about 50 kilometres from Reykjavik. Despite his complete inexperience in the area of economic justice, Hauksson was the sole applicant for the job, and even he only applied after government urging. Indeed, conspiracy theorists argued that the Icelandic authorities had deliberately chosen an inexperienced prosecutor to make sure that the inquiry failed.

More than three years after taking on his new job, Hauksson concedes that he’s only now beginning to feel comfortable. Initially, he had five members in his team, it’s since expanded to more than 100. International experts have also been brought in to help the enquiry.

The enquiry’s task is two-fold. It is responsible both for investigating financial frauds and offences committed before 2009, and also for launching legal action against those implicated. As Hauksson told Le Monde, this "completely new” approach ensures that the prosecutors have a detailed understanding of the actions, and can compete with the very well prepared defence lawyers. The Icelandic government also assisted the enquiry get full access to information by changing laws governing banking secrecy.

The main targets of the enquiry are the former senior executives and boards of the failed Icelandic banks, many of whom have gone to foreign countries – particularly Luxembourg – to further their careers.
And the enquiry has had some success in convicting wrong-doers. Two former executives of the Byr bank, who were the first to go to trial, were sentenced to four-and-a-half years in prison. The former permanent secretary of the finance minister at the time of the crisis, Baldur Gudlaugsson, was convicted of insider trading and sentenced to two years in prison. More recently, Sigurdur Einarsson, former head of the Kaupthing Bank, was ordered to repay 500 million Icelandic krona ($US 3.9 million), and had his assets frozen.

Others senior bankers are still awaiting their trials, including Jon Thorsteinn Oddleifsson, the former treasury head at Landsbanki, and Làrus Welding, the former boss Glitnir bank.

Last September, Iceland was captivated by the trial of former prime minister, Geir Haarde, who was accused of gross negligence and violation of ministerial responsibility for his handling of the financial crisis. But in April this year, Haarde was only found guilty of failing to hold emergency cabinet meetings in the lead-up to the crisis, and was cleared of three more serious charges, which could have seen him jailed for two years.

The Haarde verdict disappointed many Icelanders, and sparked a series of complaints over how long it is taking to bring wrongdoers to justice. The enquiry also suffered a set back in May, when two members of the team sold information for 30 million Icelandic krona ($US234,500) to a mysterious buyer.

Others claim that the enquiry has targeted scapegoats and is missing the real culprits. They point out that no charges have been brought against David Oddson, the former Conservative prime minister between 1991 and 2004, and then governor of the Icelandic central bank between 2005 and 2009. Oddson was one of the main drivers of Iceland’s economic transformation, pushing through major privatisations, and dissolving Iceland’s National Economic Institute, a regulatory body known for its independence.

Indeed, Oddson has now become the editor of Reykyavik’s leading newspaper, Morgunbladid, in a move that the Le Monde diplomatique tartly observed, was "a bit like Richard Nixon being appointed to the head up the Washington Post during Watergate”.

But others deem that Iceland’s purge of its financial sector has been a success. For his part, Hauksson, who hopes to finish his task by 2015, hopes that Iceland, whose economy is gradually recovering, will one day "look behind and be proud of being able to learn the lessons of the past.”

As he told Le Monde, "I don’t know of any similar procedure conducted in anywhere else the world, and our work has shown the extent to which the banking system that was put in place was a far cry from what we imagined it to be.”

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