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Criminal Proceedings in the Wake of the Icelandic Banking Crisis

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Abstract

Iceland was hit hard by the financial crisis in 2008. This article discusses the criminal case law handed down in Iceland following the collapse of the Icelandic banks in October 2008. As a result of the banking failure, important legislative measures were taken. A new office of a Special Prosecutor was established by law to deal with potential economic crimes committed during the years leading up to the collapse. The extreme nature of the banking failure paved the way for criminal proceedings. Moreover, as the banks had collapsed, they were not bailed out by the State. Rather, new banks were established under new management. This facilitated investigation. Three main categories of criminal behaviour have led to charges: insider fraud, market manipulation, and criminal breach of trust. The Supreme Court has pointed out that although the information might not, on its own, be held to make a significant difference for a reasonable investor, it may, when put in the context of a mosaic of other information, be deemed to have a significant impact on the share price. Market manipulation mostly concerned systematic manipulation of the share price of each of the banks, rather than a single event of manipulation. Reckless lending can be classified as criminal breach of trust. Criminal breach of trust was often the result of market manipulation, as banksʼ funds were put at enormous risk in order to finance the purchase of their own shares by lending to borrowers whose only substantial asset was often these same shares.

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Notes

  1. Aðdragandi og orsakir falls íslensku bankanna 2008 og tengdir atburðir [Events leading to, and the causes of, the downfall of the Icelandic banks 2008, and related events (the ‘SIC Report’)], Reykjavík 12 April 2010, Chapter 1, Volume 1, p 46 (p 17 in the English version).

  2. On the reasons for the progress of the financial crisis in Iceland, see SIC Report, Chapter 2, Volume 1 (pp 1-18 in English version). See further on the crisis Johnsen (2014); Jónsson and Sigurgeirsson (2016).

  3. See Case E-16/11 EFTA Surveillance Authority and the European Commission v. Iceland.

  4. There was a balance between the assets and liabilities transferred to the new banks.

  5. SIC Report of 12 April 2010..

  6. See further Parliamentary record 2008–2009, A-section, p 829.

  7. Act No. 135/2008 on the Office of a Special Prosecutor.

  8. In the years before the collapse of the banks the public authority responsible for economic crime had been criticised. In Parliamentary record 2008–2009, A-section, p 830, reference is made to a speech given by the Minister of Justice on 17 October 2008, where he spoke about attempts to harm the roots of the criminal justice system undertaken in the years before the collapse of the banks.

  9. See Art. 1, para. 1, of the Special Prosecutor Act. The Special Prosecutor’s Office handled 806 cases in 2009-2015, 208 of which were directly related to the 2008 financial crisis. See Skýrsla til Alþingis—Sérstakur saksóknari, Ríkisendurskoðun [Report to the Parliament—Special Prosecutor, The Icelandic National Audit Office], November 2016, p 3.

  10. See Art. 1, para. 2, of the Special Prosecutor Act.

  11. A similar rule is in place in Art. 42, para. 3, of Competition Act No. 44/2005.

  12. Parliamentary record 2008–2009, A-section, p 833.

  13. The total expenditure of the Special Prosecutor’s Office in 2009–2015 was about 6 billion ISK. According to the Icelandic State Audit, this was satisfactory funding. See Skýrsla til Alþingis—Sérstakur saksóknari, Ríkisendurskoðun [Report to the Parliament—Special Prosecutor, The Icelandic National Audit Office], November 2016, p 4.

  14. See comparison with Danish law, Werlauff (2017), pp 127–147.

  15. See e.g. for criticism in that respect Sigurðsson and Júlíusson (2014), pp 105–168; Björnsson (2015), pp 635–692; Harðarson (2017), pp 243–262. Further, it must be noted that some of the convicted parties have requested that the European Court of Human Rights review their case.

  16. The EFTA states are Iceland, Liechtenstein, Norway and Switzerland (not part of the EEA Agreement). The EEA was established on 1 January 1994 upon entry into force of an agreement between the Member States and the EU’s predecessors.

  17. See Act No. 20/1989.

  18. [2003] OJ L96/16.

  19. Directive 2003/125/EC [2003] OJ L339/73, Directive 2004/72/EC [2004] OJ L162/70 and Commission Regulation (EC) No. 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments [2003] OJ L336/3 were implemented into Icelandic law by Regulation No. 630/2005. Furthermore, the Financial Supervisory Authority enacted rules No. 670/2005, based on the Icelandic Securities Transactions Act regarding the handling of insider information and insider trading.

  20. Jónasson (2009), pp 397–402 and Stefánsson (2013), pp 528–531.

  21. Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) [2014] OJ L173/179.

  22. Jónasson (2009), p 514 and Stefánsson (2013), pp 530–535.

  23. The Regulation was based upon (1) Directive 2003/124/EC [2003] OJ L339/70, which provided further clarification of the concept of market manipulation, (2) Directive 2004/72/EC regarding accepted market practices, and (3) Regulation 2273/2003/EC, which detailed exemptions in connection to buy-back programmes and the stabilisation of financial instruments. Regulation No. 630/2005 was later replaced by Regulation 887/2008. See Stefánsson (2013), pp 530–531.

  24. Jónasson (2009), p 516.

  25. It is based on Art. 1(2)(a–c) of MAD.

  26. Jónasson (2009), p 519 and Stefánsson (2013), p 531.

  27. Þórmundsson (2007), pp 175–176.

  28. The Icelandic Penal Code of 1940 was based on the Danish Penal Code of 1930. See explanations regarding Art. 280 of the Danish Penal Code, Nielsen (2017), pp 621–625. In Swedish law, the criminal breach of trust provision can be found in Chapter 10(5) of the Penal Code (brottsbalken).

  29. See Art. 266 of the Strafgesetzbuch.

  30. Unofficial translation by the authors.

  31. Þorleifsson (2009), pp 410–411.

  32. Pursuant to Art. 261 of the Penal Code, criminal breach of trust is nonetheless punishable by imprisonment for up to one year even if the purpose of enrichment is unproven.

  33. Þórmundsson (2007), p 186.

  34. See e.g. Þorleifsson (2015), pp 589–609.

  35. Þorleifsson (2009), pp 405–406. Incautious lending was, among other things, at issue in the wake of the Swedish banking crisis of the 1990s. See Lundkvist (1998).

  36. Supreme Court Judgment No. 279/2011.

  37. Landsbankiʼs London and Amsterdam branches offered electronic deposit accounts intended for retail customers under the name Icesave. In September 2008, deposits in the London branch amounted to GBP 4.8 billion and in the Amsterdam branch to EUR 1.7 billion. When the banks collapsed, the government of Iceland declared, on 6 October 2008, that all deposits in domestic banks and their branches in Iceland would be guaranteed. The day after, the Icelandic Financial Supervisory Authority removed ‘domestic’ banking from the collapsed banks and established new state-owned banks on the basis of the ‘Emergency Act’. This led to an international dispute between Iceland, on the one hand, and the United Kingdom and the Netherlands, on the other hand. The dispute was resolved by a ruling of the EFTA Court on 28 January 2013 in Case E-16/11 EFTA Surveillance Authority and the European Commission v. Iceland.

  38. Jónasson (2017), p 228.

  39. The ECHR has taken investors’ background into account in evaluating insider dealing. See ECHR Soros v. France, 6 October 2011, App. no. 50425/06. George Soros was convicted by a French court for insider fraud in connection with the acquisition of Société Générale shares. He took his case to the European Court of Human Rights, arguing that his conviction violated Section 7 of the European Convention on Human Rights, which says that no crime has been committed and no punishment can be meted out unless an existing law has been violated. The majority of judges found that Soros’ status and experience meant that he would have been aware that his decision to buy the shares brought with it the risk that he might be committing insider trading.

  40. The Securities Transactions Act draws a distinction between primary insiders, secondary insiders (‘temporary’ insiders) and accidental insiders (‘any other’ insiders).

  41. For another point of view, see Þorláksson (2013), pp 5–27.

  42. Supreme Court Judgment No. 193/2013.

  43. Jónasson (2017), p 228.

  44. Supreme Court Judgment No. 145/2014.

  45. Supreme Court Judgment No. 842/2014.

  46. The District Court split up this case. Convictions for part of the over-the-counter trading discussed here were handed down for SÞÁ and two other Landsbanki employees in Supreme Court Judgment No. 456/2012 (Imon ehf.), where SÞÁ was sentenced for criminal breach of trust and market manipulation.

  47. The penalty for SÞÁ was imposed in the form of an additional penalty beyond the earlier sentence in Case No. 456/2014 (Ímon ehf.) for criminal breach of trust and market manipulation. By the term additional penalty is meant the increase in penalty that would have been ordered if a judgment relating to all the offences had been rendered in the previous case.

  48. The facts of this case resemble the instances named in Art. 4(a) of Directive No. 2003/124/EC, which provides that the extent to which orders to trade given or transactions undertaken represent a significant proportion of the daily volume of transactions in the relevant financial instrument on the regulated market concerned, in particular when these activities lead to a significant change in the price of the financial instrument, shall be taken into account when transactions or orders to trade are examined by market participants and competent authorities. See now Art. A(a) in Annex I to the Market Abuse Directive (MAR). Art. 1(1) of Annex II to Commission Delegated Regulation (EU) No. 2016/522 lists various types of practices considered to indicate market manipulation under this provision.

  49. Supreme Court Judgment No. 498/2015.

  50. Art. 78 of the Penal Code states that if someone who has been sentenced for one or more offences is convicted of having committed other offences before being sentenced, an additional punishment shall be imposed corresponding to the additional punishment that would have been imposed if sentence had been passed in respect of all the offences in the former case.

  51. Since BÞ was convicted of attempted criminal breach of trust which proved incapable of leading to completion of the offence, she was, by analogy with Art. 20(3) of the Penal Code, not subjected to a penalty.

  52. Supreme Court Judgment No. 442/2011.

  53. Supreme Court Judgment No. 135/2013.

  54. Supreme Court Judgment No. 88/2013.

  55. Supreme Court Judgment No. 456/2014.

  56. Supreme Court Judgment No. 478/2014.

  57. Supreme Court Judgment No. 781/2014.

  58. Supreme Court Judgment No. 74/2015.

  59. In the judgment, KW, SW and GÓ were also convicted of major violations of the Accounting Act and the Act on Annual Accounts. Furthermore, two accountants were charged and convicted for major violations of the Act on Annual Accounts and the Act on Accountants.

  60. Supreme Court Judgment No. 525/2015.

  61. Supreme Court Judgment No. 830/2016.

  62. Reykjavík District Court Judgment 24 November 2016 in Case No. S-906/2012.

  63. Their penalty was imposed in the form of an additional penalty, cf. Art. 78 of the Penal Code.

  64. See Case No. 32/2018.

  65. Supreme Court Judgment No. 156/2016.

  66. Reykjavík District Court Judgment in Case No. S-192/2014.

  67. See Case No. 140/2018.

  68. Reykjavík District Court Judgment 4 July 2017 in Case No. S-591/2014.

  69. See case No. 90/2018.

  70. Reykjavík District Court Judgment 2 March 2018 in Case No. S-193/2016.

  71. See Sects. 4.3.2 and 4.3.3 above.

  72. Share capital, financed by the company itself, is not the protection against loss it is intended to be. It is referred to as ‘weak equity’ in the SIC Report, Chapter 1, Volume 1, p 34 (p 4 in English version).

  73. SIC Report, Chapter 1, Volume 1, p 34 (p 4 in English version).

  74. In this respect the Prime Minister, in a report submitted to Althingi on 15 September 2008, said that ‘[i]f there is the slightest suspicion that crimes have been committed, it is clear that the parties involved will be made accountable’. In his comments on the speech, the Minister of Justice said that after the collapse of the banks it was important from the perspective of equilibrium and equality in society that law be enforced by all necessary means. See Parliamentary record 2008-2009, A-section, p 829.

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Authors and Affiliations

  1. Professor of Law, School of Social Science, Faculty of Law, University of Iceland, Reykjavík, Iceland

    Eyvindur G. Gunnarsson & Stefán Már Stefánsson

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  1. Eyvindur G. Gunnarsson
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Correspondence to Eyvindur G. Gunnarsson.

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Gunnarsson, E.G., Stefánsson, S.M. Criminal Proceedings in the Wake of the Icelandic Banking Crisis. Eur Bus Org Law Rev 21, 415–451 (2020). https://doi.org/10.1007/s40804-019-00144-0

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