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Iris Erlingsdottir

Iris Erlingsdottir

Posted: May 28, 2009 02:21 PM

Special Prosecutor of Iceland Bank Crash: "The Idea Most People Have of Banking Has No Basis In Reality"


Ólafur Þór Hauksson may be the most important person in Iceland today. Toiling day after day with his growing team of investigators, Hauksson is responsible for investigating and prosecuting the events that led up to the spectacular collapse of Iceland's banking sector in 2008. The restoration of the financial world's confidence in Iceland's banking system may very well depend on the success of his work.
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Special Prosecutor Ólafur Þór Hauksson pictured here on a chilly spring day last week outside his office, which is located across the street from Höfði House, the site of the 1986 Reagan-Gorbachev summit. Photo credit: Ásdís Erlingsdóttir/Wish Photography

Few would have singled Hauksson out for such a position one year ago. He was serving as the district commissioner in the rural Akranes district, far from the tumult and the shouting in Reykjavik, where the country was enjoying the highest standard of living on the planet. He had never worked in the private sector, never investigated a complex financial crime, never hobnobbed with Iceland's elite.

This distance from the rich and famous was his main qualification. Once the national Ponzi scheme collapsed, everyone in the capital was tainted. In this tiny country of 310,000 souls, nearly everyone is related to everyone else. They all went to the same schools, ate at the same restaurants, frequented the same clubs. In fact, no one else even applied for the position. The top Icelandic attorneys were major participants in the wheelings and dealings that characterized Reykjavik. The country's major players, who until recently comported themselves as masters of the universe, can still make life miserable for any special prosecutor. The cry for blood from the defrauded Icelandic workers could easily turn against the prosecutor if the big fish get off the hook.

In Ólafur Þór, however, Iceland has an Atticus Finch, an Eliot Ness -- a patriot driven by his personal sense of morality and justice to clean up the mess that has nearly destroyed his country. What he lacks in experience, Jóhanna Sigurðardóttir's administration has made up for by increasing his staff from five to sixteen professionals, by hiring internationally famous financial crime fighter Eva Joly as a consultant, and by passing special legislation to ensure his access to all of the banks' records.

Now things are heating up. The Financial Supervisory Authority (FME) recently sent ten cases to Hauksson's office and expects to send at least 15 more cases before the end of the year, involving insider trading, market manipulation and high-risk lending. The fraud is in the hundreds billions ISK, which would go a long way to satisfying creditors' claims and relieving Iceland of the stigma it's been under since the banks collapsed.

Q. The organizational challenges for your mission must be overwhelming. You have been given the task of creating a multinational staff to investigate the propriety of some extremely sophisticated transactions undertaken by people who knew (or at least suspected) that their whole deck of cards was about to collapse. Are you fully staffed and up to speed yet? What challenges have you faced so far, and what challenges do you anticipate during this summer?

A. There were five of us when we started, now there are sixteen. As Eva Joly said, even if parts of the investigation stretch outside the country, we must start the investigation here in Iceland. We are not going to rush off to other countries and say that something terrible has happened here -- not sure what -- and demand information. It seems to me that people sometimes want to classify these offenses that possibly have taken place here differently than other violations. This is a criminal investigation and follows the same procedures as any other such investigation, even if it is connected to banks and businesses and a lot of specialized knowledge is involved.

We will most certainly run into all kinds of obstacles, and the ones I foresee will probably involve other countries and how fast we are able to procure information from abroad.

Q. If you could present Jóhanna with a wish list, what would be on it?

A. We already got additional staff and more money... I guess I'd just like to be able to get what we need in order to do this job honorably. We realize that this work is done on the taxpayers' bill, and that this country doesn't have a whole lot of money right now, so our demands must be reasonable. On the other hand, we cannot be sitting here in cases up to our necks or have the investigation suffer because we don't have staff or resources to tend to it. I think this investigation is a priority matter for the government, but these matters do take a very long time.

Q. Have the bank secrecy laws prevented you from accessing information you believe is important to your investigation?

A. Yes, in the beginning they did. That's why the law was changed, and we now have clear access, no questions asked. The banks, the regulatory bodies, the banks' investigative committees are to hand over to us any data or papers we request and can no longer plead bank secrecy. It was absolutely impossible for the Special Prosecutor's office to reach its goals without having wide access to all data, all information in the matter. We were surprised that there was any doubt as to whether or not the information or data had to be given to us. The law flew through Parliament; it reflected the will of the nation and Parliament that these matters are to be brought to light.

Q. Are you worried that some of the information you need has been destroyed?

A. This really concerns the Financial Supervisory Authority (FME). The banks save all this information, all emails; they usually are a part of the various financial deals and their genesis. The FME is procuring this information. We are not far enough ahead to say whether there are holes in these communications or not. But even if there are, the fact is that financial transactions always leave electronic fingerprints.

Q. Do you have questions regarding the partiality of the regulatory personnel from the FME? Are you aware of communications between FME personnel and the targets of your investigation?

A. Let's say... We know that they (the FME) are a part of a certain process, and we always assume that they had a certain role during the time when everything was up and running. But on the other hand, today there is nothing in our relationship with them so far that would give us any reason to doubt their integrity. But perhaps not then? Well, we didn't exist then, so I cannot say. But we realize that they played a part in the course of events that took place prior to the collapse. Let's just say that we are aware, conscious of their position.

Q. There have been rumors that FME staff received various "perks" and gifts from the banks. Do you think stricter rules will be set to govern the conduct of staff who work for these regulatory bodies?

A. I think that, following such monumental events as happened here last fall, people will view the past much more critically, and when we take stock of events, ethical questions will arise so that something that perhaps was considered "normal" and within limits when things were up and running will now be regarded as improper.

If something good comes out of this, it will be that these relationships will be characterized by more "puritanism," and that goes for business relationships in general. There's looking at what behavior is illegal and culpable, and what is unethical, even if no punishment or penalty is involved. The public discussion about these things really revolves around ethics and morality, about how people conducted themselves, how society reacted -- or didn't react -- and how everything danced to the drum of Mammon. Perhaps things weren't illegal, but when do you cross the line from a framework of standard marketing practices and into bribery? This fine line was somewhat muddled for a while, but I think following events like this, people will set a higher standard and be conscious of the fact that there is no such thing as a "free lunch."

Q. There have been numerous reports in the media regarding large cash transfers from the banks to various tax-havens, such as Tortola, immediately before the banks collapsed and were taken over by the government. Have you uncovered any evidence of such transfers?

A. I cannot discuss particular cases, but the Parliamentary Investigative Committee is looking into these matters, as are the Icelandic tax authorities.

Q. There were transfers of assets to "holding companies" -- were these fronts to move money?

A. The purpose of these companies isn't clear yet. These businesses are fronts for certain transactions and that is only one part...It is a little dangerous to have tunnel vision when looking at these things. You have to ask why were these companies established and then narrow the investigation according to what you see. You don't go in assuming that they were started for a certain purpose; you never assume anything, never go in with a foregone conclusion. That is very dangerous.

Q. There are also reports that bank personnel were purchasing shares of bank stock using loans from the bank in order to prop up their books. Have you been able to substantiate these reports?

A. I refer to what has been discussed about this matter publicaly. This discussion started early on and in connection with the decision by KB bank to revoke personal liability of its staff members for loans they had taken to buy stock in the bank. Isn't that, per se, illegal? And wasn't the purpose of the loans to manipulate the bank's stock price? This was to have the capital position higher. And yes, it is not legal to manipulate the market. This really involves a few different matters, the market manipulation, the debt concession; this is combination of violations. So, regarding the debt concession by the bank? Like I said... we are very well aware of this staff case at KB bank. This is a pot of something more than just one possible violation, and you can't give a simple answer to this; this is not a black and white case.

Q. If you reach the conclusion that fraudulent transfers of assets did happen, what resources do you have?

A. This is a twofold matter, concerning the criminal matter on the one hand and then the banks' receivers on the other hand, which are working on converting the banks' assets into cash to pay creditors. You could say this is where asset tracing has come into play the most. We have lots of resources in this area, and I don't think we will lack experts in money tracing and forensic accountants. However, we have to have something specific to look into. You don't just send a forensic auditor to Tortola and tell him to investigate anything and everything. But the bank receivers are and should be the party looking into these matters.

Q. The FME has also turned over to you evidence of possible violations in the management of pension funds. Is there any evidence that these violations were widespread, or were they limited to a single Landsbanki employee, as preliminary reports indicated?

A. There are five pension funds... I can tell you that we are looking into these pension fund matters, but I cannot discuss the status of that investigation. The general answer is that when you investigate, you keep your eyes open for all violations.

Q. What has surprised you the most in this job?

A.

How much time do you have?! Let's just say that the idea I had -- that the general public had -- of banking in this country was completely different from the reality. What we think banking is, this picture was incorrect, it had no basis in reality. This collapse last fall surprised most Icelanders. Even if there were a few warning voices, I think it absolutely caught the nation off guard. We just had a totally different view of this, and the more I look into things here, the more certain I am that things were completely different from what people thought they were.

For example, the bank employees... many people took their life savings and bought stock in the banks, and I'm not talking about this KB bank stock, I'm just talking about employees on the floor. The bank employees bought stock -- believing it to be a 100% safe investment -- and lost everything. These people were closer to the operation than the general public, but they didn't have an inkling about where this was headed.

Q. How has this job affected you personally? This must be a tremendously demanding job, one that completely changes your life?

A. Yes, it is. Look...I've worked in the public sector since I graduated in '89, about 20 years and more or less in connection with police work; I was chief of police for over a decade. Then this crisis happens, this post is advertised and no one applied. The question arose for me -- as chief of police, one is supposed to prosecute people for crimes and seek justice and get punishment for crimes -- and I had to ask myself, should I be concerned that someone drives drunk or sells drugs, but isn't it my concern that there is the possibility that huge economic crimes have been committed without my thinking that I'm supposed to do anything about that? I was encouraged by the Ministry of Justice to apply for the job and was offered to take a leave of absence from my old job, so that made things easier, but I saw that if I didn't at least apply or indicate that I was willing to do so, then I'd have a bad taste in my mouth prosecuting other smaller cases in the future.

Q. Were you surprised, shocked, that nobody applied for the job?

A. Yes, I was enormously surprised. I assumed there would be candidates for the job. This didn't really call out to me at first, I didn't feel that I had worked that closely to this particular crime category that I should respond to it, but when I realized that nobody was going to answer this, then it was obvious that something had to be done, there had to be some response. I realize that many in the media and others have questioned that someone like me, from the job I had, what business I have in this job. But I have tried to surround myself with the most experienced people from other offices to make up for what I lack in knowledge.

Q. How long do you estimate this investigation will take? People are impatient, they complain that "nothing is happening," they want to see blood, when will something happen?

A. This is a very dangerous drive in criminal investigations. You cannot be governed by a thirst for revenge, or you will make mistakes. This matter must be investigated absolutely according to the letter of the law with no changes in the way of form and procedures, because that will weaken the case and make it vulnerable when it comes before the courts. One of the things that judges will most certainly look for when they get this case is that it wasn't affected by pressure from the public. I understand very well that it is difficult for the general public to look at it this way, but this is the way it must be. On the other hand, I can assure people that we are doing this job with complete commitment and earnestness, and we work extremely hard. But the history of economic criminal prosecutions tells us that we cannot compromise in any way; we must proceed according to the law. Examples throughout our judicial history have shown that when you are overly zealous, mistakes are made.

Q. Iceland has suffered enormous damage to its reputation. What can we do to convince other nations that we will proceed correctly, do the right things, to restore our reputation?

A. There are no instant solutions or quick fixes here. Business relationships are founded upon trust that people build up over a long period of time. So there is nothing we can do today that will result in everybody wanting to all of a sudden do business with us. I will say this; we [Icelanders] should just realize -- with complete candor -- that in business we are graded lower than Nigeria. Nigeria at least can buy stockfish and salt cod here in Iceland using a letter of credit; Icelanders cannot get a letter of credit from foreign banks. So we are not in a good position. But the rashness of Icelanders is such that we think we can do something for just one week, and then everything will be fine again.

In the discussion here in Iceland, many people seem to think that good times are just around the corner, that things will be fine in just a matter of months. I can assure you that nothing like that is going to happen. We will not spin off of this collapse, which was years in the making, with some instant solutions or a two-week marketing plan. We must take these cases, this matter, and investigate according to the law, get sentences where the law has been broken and slowly and surely build up the trust we had and do better than we did before.

I have a sense that here in Iceland people have not understood how far down we fell, last fall in the community of nations, how enormous the fall was, and that the way back up will also be long. This worries me greatly. I went abroad shortly after the collapse and I felt it, the atmosphere... It hangs together with our attitude toward obligations. In most other countries, if you owe money, there is a very strong ethical expectation that you repay it, regardless of collections. Here in Iceland, people have been borrowing money to acquire things, and they don't really want to have to pay anything back.

This attitude enjoys some kind of a recognition or acceptance that I just find very difficult to understand, this attitude that you should get something for nothing. The notion that you really have to work for what you acquire, it has somehow died out in our society. We seem to think it's natural that some super-profit can be made that we can skim off, without thinking that at the same time there is someone else who has lost when we profited, that this is all without consequences. This is a totally absurd notion.

We have to approach business from the standpoint that we are building up long-term relationships, not like we're going to have just one business transaction that only benefits us, one time and then never again.

And Icelanders must take stock -- not just by this criminal investigation, because that is not the largest part of this whole thing -- but of the morality of this, how we squared the ethics with which we did business, and no criminal investigation or punishment is going to help that. We must now show that our word is worth something when it comes to business, and we don't do that by throwing five bankers in jail. We have to realize that what we borrow we must repay, and no monkey business about it.

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