Iceland’s Second Largest Bank Defrauded British and Dutch Investors of $5.4 Billion

Iceland has been plunged into further economic and political crisis after President Grimsson postponed signing a reimbursement legislation, which approved a governmental promise to reimburse approximately 3.9 billion Euros to the United Kingdom and the Netherlands. The legislation was in essence a political “apology” on the part of the Icelandic Government after the failure of Iceland's second largest bank, Landsbanki, filed for bankruptcy in October 2008. Landsbanki is the parent company of Icesave, an on-line banking institution, which is alleged to have defrauded British and Dutch depositors of approximately $5.4 billion.

In Fall 2008, Iceland’s economy went into a meltdown when three of its largest banks including Landsbanki failed. The failure resulted in the International Monetary Fund suspending financial assistance to Iceland, and jeopardized Iceland’s efforts to join the European Union. Allegations of fraud and misrepresentation were launched against Iceland. The United Kingdom and the Netherlands remain at a political and financial impasse with Iceland. Dutch regulators, in particular central bank president, Nout Wellink, has accused Iceland of providing false assurances regarding the financial health of Iceland’s banks and Iceland’s natural resources as indicia of Iceland’s abundance and “richness" in natural resources to collateralize the strength of Iceland's banking institutions-- “[G]eysers, fish, everything was put on the table.” The United Kingdom has accused Iceland of “lying” to British government officials. The British and Dutch Governments have reimbursed depositors who lost money when Icesave's parent Landsbanki filed for bankruptcy. But both governments have put tremendous pressure on Iceland to reimburse the money. A spokesman for the United Kingdom Treasury stated that the United Kingdom was "obviously very disappointed" by the President Grissom’s postponement to authorize the reimbursement legislation.

Originally, the Icelandic Government agreed to reimburse the British and Dutch Governments. However, the good people of Iceland were outraged that the Icelandic financial elite had defrauded foreign investors, and yet no one was prosecuted in Iceland. As further insult, the good people of Iceland who had absolutely nothing to do with the banking fraud would be required to reimburse the loss, which would be approximately 12,000 Euros or approximately $17,000 per Icelander. In a surprising turn of events, a recent referendum determined that the good people of Iceland by a 93% margin refused to confirm the reimbursement legislation. The referendum is in direct opposition to the legislation adopted a few months earlier in which the Icelandic Government agreed to reimburse the British and Dutch Governments for the misconduct of Iceland’s private banking institution. Landsbanki is not a public bank, but rather it is an elite private bank that has been owned by certain wealthy Icelandic banking families for generations. President Grimsson in an interesting political pledge of allegiance has refused to veto the referendum, and has sided with the good people of Iceland. In a recent address President Grimsson stated, "[I]t is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law. It is...the responsibility of the president to ensure that the nation exercises this right."

Iceland is a very small country. Its total population is approximately 317,000, which is approximately the equivalent of the number of party-goers in South Beach, FL on any given weekend. To be fair to the good people of Iceland, they raise an interesting point, which is simply-- why should the British and Dutch Governments force the Icelandic people to underwrite the full burden of the losses suffered by British and Dutch depositors? Where were the British and Dutch banking regulators? Why did they not “regulate” Landsbanki, and ensure that it was a viable banking institution? More importantly, why doesn’t the fraud claim against Landsbanki terminate with Landsbanki’s bankruptcy? Why should approximately $5.4 billion loss be the burden of the Icelandic people to reimburse foreign investors?

The good people of Iceland’s position that reimbursement be shared on theory of shared-responsibility, is a valid one. The Icelandic people should not be the only ones held responsible for the losses of British and Dutch investors especially when British officials relied on misleading reports prepared by British academics, in particular Professor Richard Portes, President of the Royal Economic Society of Britain, which commended the "successful and resilient" banks of Iceland. Portes praised Iceland in the report stating that Iceland’s financial system was based on "an exceptionally healthy institutional framework. The banks have been highly entrepreneurial without taking unsupportable risks. Good supervision and regulation have contributed to that, using EU legislation." The findings in the report have turned out to be inaccurate. The good people of Iceland argue that Portes’ misleading report led to lax supervision and a "failure to regulate" Landsbanki by the British Government, the Dutch Government, and the European Union. Furthermore, this "failure to regulate” was the proximate cause of the British and Dutch depositors victimization by Landsbanki. The reality is that the British and Dutch depositors, in good faith, trusted the misguided judgment of British economist, and the lax supervision of British and Dutch regulators to their detriment.

Shared responsibility to reimburse defrauded depositors is not an unreasonable request. Perhaps what is needed is an acknowledgement on the part of the British, Dutch, and Icelandic officials that more should have been done across the board to regulate Landsbanki, and what is need now is shared responsibility. Reimbursement should be a shard responsibility. Punitive measures should not be taken to force reimbursement measures on a single group of people who had nothing to do with the fraud. It was a shared mistake; an error of judgment on many levels. As such, the burden of reimbursement should be shared. Regulators, whether British, Dutch, Icelandic, European or American should do the job that they have been entrusted by the people to do—“regulate the banking industry.” That is all that we ask.