Tuesday, September 27, 2011

No Questions Asked : Why were UK Local Authorities so keen to invest in Iceland’s Landsbanki Bank ?

sbclogoJudgement lacking : Tory-Libdem controlled Scottish Borders Council invested & lost millions of pounds of taxpayers money in Icelandic Banks with links to Russian organised crime gangs. In the wake of a distinct lack of political will to ask tough questions of local authorities up and down the land, particularly in the case where millions of pounds were lost in now bankrupt Icelandic banks by Scottish Borders Council, renowned Scotsman journalist William Chisholm, who was awarded an MBE for his services to journalism and is now retired, asks why were the UK’s local authorities so eager to invest in a bunch of dodgy banks in Iceland, some of which appear from other online sources & reports, to have enjoyed connections to & investors from, the Russian mafia.


By William Chisholm.

A total of 91 UK local authorities and other public bodies have claims in excess of £400 million against Landsbanki Bank in its winding up in Iceland. Between 5th May 2006 and 25th July 2008 my local authority (Scottish Borders Council) deposited a total of £58 million in Landsbanki in 31 separate transactions. These were short-term deposits. When Landsbanki went bust in October 2008 my council had £5 million of council taxpayers’ money trapped in the bankrupt bank.

No-one seems able or willing to produce copies of the credit checks and background checks made on Landsbanki, its owners and its executives before many of this country’s local councils rushed headlong into a multi-million pound gamble with council taxpayers’ money. Why did none of the highly paid officials in charge of treasury management or the specialist advisers such as Butler’s – Scottish Borders Council’s advisers - know about the serious flaws in the management and make-up of Landsbanki as outlined in the report below? Questions were being asked about this bank as early as 2005. It had only been “privatised “in 2002, so surely extra safeguards should have been sought before any money was deposited.

Landsbanki’s new owners from 2002 were father and son BjorgolfurGudmundsson (BG) and Bjorgolfur Thor Bjorgolfsson (BTB). They were joint owners of Samson Holding Company, the largest shareholder in Landsbanki.

If Scottish Borders Council’s treasury management team (or any other council’s finance officers for that matter) had run a check on BG they would have discovered that after amassing his vast wealth from shipping in the 1980s he faced 450 charges relating to the 1985 collapse of a shipping company. He denied the charges, claiming they were politically motivated.

But a few years later he was convicted of five bookkeeping (surely a vital requirement when running a bank) offences which carried a 12-month suspended prison sentence. After that conviction BG left Iceland for Russia where he founded the Avion brewery in St Petersburg.

When BG and BTB returned to Iceland from Russia they had sold their brewery to Heineken for $400 million. It is claimed that when in Russia they had to make a deal with the Russian mafia in order to survive. In a radio interview in Iceland BG said that they had made a deal with the Russian mafia which meant they had to pay mafia members “a protection fee” as a part of running the brewery. Apparently this is normal practice in Russia.

The acquisition of Landsbanki allowed father and son to make full use of other people’s money. It is now clear beyond question that money deposited with Landsbanki funded massive loans to BG and BTB via companies they controlled. So that is where Scottish Borders Council’s money went along with deposits made by other local authorities.

The father and son also had the luxury of being able to channel money into two off-shore companies owned by Landsbanki which were conveniently based in the British Virgin Islands. The assets of these two companies represented 13.2% of Landsbanki’s shares by 2006.

By the time of Landsbanki’s collapse in October 2008 the money owed by the pair to their own bank was phenomenal. The eye-watering statistics are contained in a report prepared for the Icelandic Parliament by a Special Investigation Commission (SIC).

There were sizeable loans to both BG and BTB and companies they owned like Eimskip which BG controlled. These loans amounted to 850 million Euros from mid-2007 alone. And just before the collapse of the bank Landsbanki extended a loan to BTB for 153 million Euros. This brought the total debts of BTB and related companies to Landsbanki to almost 1 billion Euros in October 2008.

In a letter dated 22 March 2007 Iceland’s financial watchdog (FME) reached the conclusion that Landsbanki’s exposure to BTB and related parties amounted to at least 51.3 billion Icelandic krona (ISK) or 49.7% of the bank’s equity at that time.

But BG was also looking after at least one other member of the family. Landsbanki loaned just under two billion ISK to employees and their holding companies. Around 40% of those loans went to GudmunderPeturDaviosson. He just happens to be BG’s nephew. The loans to Daviosson and his holding company Brimholt totalled just under 800 million ISK by the end of September 2008.

Landsbanki –like every other bank – liked to make lavish bonus payments to its top staff. In the autumn of 2007 bonus payments to security brokers totalled 194 million ISK but the department’s earnings for the same period were only 178 million ISK. Was anyone in the UK checking Landsbanki’s accounts on behalf of those UK local authorities who were depositing vast sums of money in this bank? It would appear not, for many councils continued with multi-million pound transactions well into 2008.

On 30th September 2008 – just a week before Landsbanki collapsed – the bank granted that loan of 153 million Euros to BTB. According to the SIC report: “It is therefore apparent that the principal owners of Landsbanki were not interested in or capable of helping the bank out of the difficult situation that had arisen.”

Previous coverage of Scottish Borders Council’s Icelandic Banking losses can be viewed on Scottish Law Reporter here : Icelandic Banks and Scottish local authorities losses - The story so far

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