The Financial Crisis: Five Years Later

Iceland Prosecutor Investigates, Convicts Bankers for Financial Crimes


Ólafur Hauksson

Photograph by Spencer Murphy for Bloomberg Businessweek

Ólafur Hauksson

Feb. 17, 2012: Iceland’s special prosecutor gets his first conviction

Ólafur Hauksson didn’t even apply for his job the first time it was offered. It was late 2008, and Iceland was in the early throes of financial meltdown. The island nation’s three largest banks had gone under, pulling in their wake an economy that had floated high on the back of a swollen financial sector. The króna was spiraling downward, kept from plummeting to the bottom only by emergency capital controls. Unemployment was surging. The population was riotous, pelting the parliament building in downtown Reykjavik with eggs, tomatoes, and yogurt.

The country’s panicked politicians responded by promising investigations. In December 2008, two months into the meltdown, Parliament appointed a three-member committee to study the cause of the crash and created a new legal body to look into suspicions of criminal activity related to the banks’ collapse. When a call for applications came for a leader of the new body, the Office of the Special Prosecutor, the government didn’t receive a single résumé.

“There were questions that had to be looked into”

On paper, Hauksson hardly seemed the ideal candidate. As police chief of Akranes, a bedroom community of 6,500 across the bay from Reykjavik, his duties mostly involved handling traffic violations, arresting drunk drivers, and collaring the occasional drug or sex offender. He had next to no experience with financial investigations. But he did have one critical qualification: He was willing to take the job. “If I had refused, I wouldn’t have been comfortable,” he says. “I thought there were questions that had to be looked into.” When the government opened a second round of recruitment, Hauksson was the only qualified applicant. “We were only two, and I think the other one wasn’t even a lawyer,” he says.

Hauksson’s expansive downtown headquarters is the third space he’s occupied in the four-and-a-half years since his appointment, and he looks out a picture window onto the bay and volcanic butte beyond as he recounts his office’s growth. His caseload has increased, his mandate has expanded, and the number of people working for him has multiplied. In February 2009, when Hauksson started the job, the prosecutor’s office had no telephones, no computers, no furniture—no office. “We actually got this table here from a garage somewhere,” Hauksson says. He had a staff of four. Today, the prosecutor’s office has 109 employees: police officers, lawyers, prosecutors, auditors, and former employees of the banks under investigation.

In September 2011, the scope of Hauksson’s duties was expanded to encompass all economic crimes. He has about 140 cases under investigation, a little more than half of them related to the 2008 economic crash. “When you blow all the smoke away, you find quite familiar behavior,” says Hauksson. “You see embezzlement, fraud, market manipulation, insider trading.” He has issued 13 indictments, involving some 45 defendants. Two cases have made it all the way to the supreme court, resulting in final convictions. Sometime next year, Hauksson expects the courts to take up his two market manipulation cases, which he believes could be the largest of their kind ever. More indictments are planned in the coming months. “Nobody expected, in the beginning at least, for this to turn out as big as it turned into,” says Hauksson.

Iceland is often cited as an example of a country that took a different approach to the global economic crisis, a nation that refused to rescue its banks from the consequences of their misbehavior. And while that’s not wrong, it’s also true that the country’s politicians had little other choice. Iceland’s banks were too big for the country to bail out. By the time of the meltdown, their assets had bloated to more than 10 times the country’s GDP—far beyond the capacity of the country’s central bank to intervene. “We simply couldn’t take the same path as other countries,” says Thordur Júlíusson, author of Iceland Incorporated, a book that charts the aftermath of the crisis. “The banks were so much bigger than what Iceland could handle.” And yet, by global standards, the banks weren’t so large that the world couldn’t afford to let them fail. The Icelandic economy is closely tied to Europe, but the country is not a member of the euro zone or the European Union, and so neither Brussels nor Berlin was compelled or interested to intervene.

What Iceland didn’t have to do was go after the bankers. Officials could have done what many other governments did: allow the investigations to be swept away with the receding tide of public anger. That it didn’t was due to a confluence of factors: a Nordic sensibility for rules and formality; a crisis-struck public’s unwillingness to forget; four years of support from a parliament dominated by left-wing parties; and, in no small part, the efforts of the former police chief of Akranes.

Hauksson is a large man with hair that sits uneasily on his head. He does not appear comfortable in a suit. In the early days of the job, Hauksson asked his friend and fishing partner, Magnus Gudmundsson, the general director for National Land Survey of Iceland, to watch him on television and tell him when he flubbed an interview or wore his tie crooked. “I was his secret criticizer,” says Gudmundsson. “I promised I’d be frank.”

Hauksson never seemed destined for the spotlight. He was born in Reykjavik in 1964, the fourth of five children. Hauksson’s older brother suffered from a lack of oxygen during his birth and was paralyzed. The family was solidly middle class—his father was a director in Iceland’s department of social security—but money was never abundant. “We were not poor,” says Hauksson’s sister Margret Hauksdottir, 51, deputy director of Registers Iceland, the country’s property and population registry. “We never really lacked anything. But we could not afford maybe the same things that our friends did. We had to buy our first bikes ourselves.” During summer vacations, when friends and neighbors would go abroad, the family would holiday in Iceland. Hauksson’s father was a passionate fisherman, and in his youngest son he found an eager partner. Every year, on the first day of the fishing season, in the frigid month of April, the two would spend the entire day together.

Hauksson distinguished himself with his dedication to work and thrift. He started his first job in elementary school, picking up a paper route. “I believe he’s been working ever since,” says Hauksdottir. She and Hauksson attended law school at the same time, during which Hauksson worked his way up the ranks of a downtown supermarket.

Until he was appointed special prosecutor, Hauksson’s career was respectable but not extraordinary: a slow rise up the ranks in regional offices, until he became police chief in Akranes. In the years before the bank collapse, he had been tapped for a couple of high-profile investigations, including an inquiry into the alleged phone tapping of a former minister of foreign affairs and a case in which a former member of parliament was charged with embezzlement. He applied to be the country’s prosecutor general, a position analogous to the U.S. Attorney General, but he wasn’t selected. Hauksson’s sister remembers that in the years leading up to the crisis he would sometimes worry about the flows of cheap and easy credit, the real estate bubble, Iceland’s increasing reliance on the ballooning financial sector. “He worried it wasn’t good for the country,” she says. “I think we’re both people who are more conservative than radicals.”

Iceland is a small, tight-knit nation—with just 320,000 residents it’s roughly as populous as St. Louis. At the end of 2008, its citizens were seething. “It was not a calm sea to sail in,” Hauksson recalls. “The public was extremely volatile. You knew you could be on top one day, and all of a sudden on the bottom the next.” In his new job, Hauksson would be working with slim resources, on a public salary, navigating a sea of public outrage to take on some of the most powerful people in the country. “Economic crimes are very difficult for all concerned,” says Björn Bjarnason, then Iceland’s minister of justice, who helped recruit Hauksson for the position. “They’re not usual court cases, because the people involved have lots of money. They have influence in the media, and they use their access to paint a picture in the press that they are being harassed and bullied.”

Parliament had endowed Hauksson’s office with police powers as well as those of prosecution, and Hauksson wasted no time in exercising them. He performed his first house search in March 2009, the month after he took office. “When we looked at the seized material, it was obvious it would take months and months to look into it,” he says. “We had in the beginning just a glimpse of what was actually happening. But we didn’t have any idea how high in the ranks we’d be looking.”

Hauksson had expected to find a few isolated cases of companies or individuals using the crisis as an opportunity to embezzle. But the evidence he uncovered compelled him to dig deeper. A pattern was emerging, in which officials in Iceland’s banks used a complex series of financial transactions—including loans to shareholders and close business associates—to prop up their institution’s share prices and mask weaknesses that could lead to a run on their stocks. “You can come to two conclusions: that a crime has been committed or not,” he says. “I think it’s useful to have a clear line between something called ‘business’ and something called ‘wrongdoing.’”

In one of the more high-profile cases, officials at Kaupthing Bank, including its chief executive officer, chairman, and second-largest shareholders, are alleged to have provided Sheikh Mohammed bin Khalifa al Thani, a member of the Qatari royal family, with millions of dollars in loans, which he used to buy a 5.01 percent stake in the bank, making him its third-largest shareholder. The deal took place in September 2008, just days before the bank collapsed. Most of the loans came with little requirements for collateral or guarantees. The deal was announced with fanfare, as an expression of the sheikh’s confidence in the bank. “Kaupthing’s position is strong and we believe in the bank’s strategy and management team, as Kaupthing has performed well in the current market turbulence and has proven it can change and adapt to a new reality in banking,” al Thani said in a statement at the time. What wasn’t disclosed in any of the press material was that the bank itself was the source of the sheikh’s funds. The bank’s CEO and the other defendants are fighting the charges; the bank sued the sheikh, but later settled. The Office of the Special Prosecutor has not accused al Thani of any wrongdoing.

In another big case, a judge in the Reykjavik District Court sentenced Larus Welding, the former CEO of Glitnir Bank, to nine months in prison in December 2012. Officials had been indicted for providing loans amounting to tens of millions of dollars without guarantees or collateral to a company that had a stake in the bank. The conviction has been appealed.

In March 2013, Hauksson’s office filed its biggest charges yet, accusing 15 top officials at Kaupthing and Landsbanki, formerly the country’s two largest banks, with manipulating the market in order to keep the price of their stocks from falling. According to the indictment, officials, including CEOs at both banks, artificially boosted shares by making purchases on the stock market, often just before the closing bell, and by lending money to outsiders to buy shares in the bank. (The accused deny the charges.) “All the top managers of the three Icelandic banks have now been charged,” says Sigrún Davíðsdóttir, an Icelandic journalist who has been following the cases on her blog, Icelog.

Often the shares served as the only collateral for the loan—in essence making the banks the ultimate owners of the stock. According to Hauksson’s office, on Aug. 31, 2008, just over a month before the collapse, Kaupthing owned 32.1 percent of its own stock, through direct or indirect ownership—far above the 10 percent allowed by Icelandic law. (The accused maintain they did nothing to violate the law.) As a result, when the crisis arrived, the banks were even more vulnerable to collapse. “The reasons for the crisis are many, and they affect each other,” says Hauksson. “This, at the very least, didn’t help.”

As expected, Hauksson’s efforts have pitted him against Icelandic’s financial and legal establishment. The methods he has employed in pursuing his cases would not be unusual in the context of an investigation into a drug ring or smuggling operation: house and office raids, phone taps, eavesdropping with shotgun microphones, property seizure, stints in solitary confinement. But in the jacket-and-tie world of Icelandic bankers, they have been received as an unnecessary affront. “They’re investigating economic crimes,” says Reimar Pétursson, a lawyer with several clients in Hauksson’s sights. “The facts should readily be available in the records of the companies and in the books of the banks.”

Hauksson acknowledges that his office, on at least one occasion, has crossed the line. In early 2013, two accused bankers, Magnús Guðmundsson, the former CEO of Kaupthing Luxembourg, and Hreiðar Már Sigurðsson, the former CEO of Kaupthing, visited the special prosecutor’s office to listen to the recordings of their phone taps and discovered that Hauksson’s office had captured five calls between them and their defense lawyers. “We have tried to find the reasons why they weren’t erased,” says Hauksson. “When you are tapping many phones at the same time, this can happen. We actually didn’t know that we had those calls.” He says that none of the evidence from those phone calls was used in court, and that after they were discovered they were deleted.

Hauksson’s most prominent critic, a defense lawyer named Gestur Jonsson, questions the ability of the Icelandic judicial system to deliver a fair trial, with the country still in the shadow of the financial crisis. “The simple truth is that when you’re angry you shouldn’t make important decisions,” he says. “In my opinion there’s no doubt that the anger, the wind blowing through society, has an effect on the judges as well.” In April, Jonsson and another lawyer resigned from the case regarding the Qatari sheikh just as hearings were about to begin, arguing that his team had not been given sufficient time to submit their arguments to the court. Among the aggravating factors, Jonsson cited the discovery of the recorded phone calls. Hauksson, in response, puts a different spin on the resignation, which caused the trial to be delayed until November. “Every trick in the book,” he says. “It’s a heavy defense. They have the resources. They have very skilled defense lawyers. It’s a battle along every step.” He adds: “Almost every case that we put through the district court has been appealed to the supreme court.”

Hauksson continues to live in Akranes, a 40-minute drive from his office on a road that runs between the bay and hills of volcanic rock. Officially he’s still on leave from his position as police chief. Last fall, in an effort to stay in shape, he started to climb one of the buttes on the outskirts of town. Once or twice a week, in summer or in winter, he makes his way 600 meters up the steep slope. From the summit, he can look across the bay at the tall buildings of Reykjavik. The cases he’s overseeing have months, if not years, before they will come to a conclusion. The Icelandic public, never patient, has expressed exhaustion and disappointment at the pace of the proceedings. There’s worry in his office that Iceland’s recently elected government, made up of the same parties that governed during the runup to the crisis, may not be as supportive as its predecessor.

Even as Hauksson conducts a life that’s never far from the public spotlight, he prefers the streams and campsites of Iceland’s hinterland to the high society of the capital. “He’s usually the first one to go up to the lake or the river and the last to return,” says his sister. In the winter, he and his fishing partner, Magnus Gudmundsson, spend the months tying their own flies. During the season, they head out whenever time allows. “He’s very good at reading the light, the water, and calculating what it means,” says Gudmundsson. “He’s a hunter, and when he’s telling you the stories about the big fish, you can see it in his eyes.”

Faris is a Bloomberg Businessweek contributor.

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