Financial Crime World

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Icelandic Bankers’ Loot: A Tale of Control Fraud and Cronyism

A scathing report by the Special Investigation Commission (SIC) has exposed the shocking extent of control fraud and cronyism that led to Iceland’s banking crisis in 2008. The investigation found that top bankers and politicians colluded to loot the banks, using methods similar to those used by convicted criminals who looted the American savings and loan industry in the late 1980s.

Conflicts of Interest

The SIC report revealed that the five largest shareholders in the failed banks were also their five largest customers. Many of these individuals sat on the banks’ boards or had representatives there, creating a “smörgasbord” of conflicts of interest. This allowed the bankers to engage in dubious practices, including:

  • Loans to finance purchases of their own equities with the equities themselves as sole collateral
  • Excessive spending and accumulation of wealth, such as:
    • Two Icelandic brothers who became bank shareholders using their newfound wealth to buy a yacht that once belonged to Giorgio Armani
    • Another banker purchasing a penthouse in Manhattan without providing adequate collateral

Culture of Excess and Cronyism

The SIC’s findings have exposed a culture of excess and cronyism among Iceland’s elite. The report notes that the bankers and politicians benefited from illegal activities, accumulating massive debts and assets.

Control Fraud and Looting

In one striking example, a single banker declared bankruptcy in 2009, owing $750 million, including $500 million to his own bank. This is not just a matter of reckless financial decisions; it is a clear case of control fraud, where the bankers used their power to exploit the system for personal gain.

Consequences and Implications

The SIC’s report has sent shockwaves through Iceland, raising questions about accountability and the need for greater transparency in the country’s financial sector. The investigation’s findings will likely have far-reaching implications for Icelandic politics and society, as the country seeks to rebuild trust in its institutions and ensure that such a crisis never happens again.

References

  • Akerlof, G.A., & Romer, P.M. (1993). Looting: The Economic Underworld of Bankruptcy for Profit. Brookings Papers on Economic Activity 2:1-73.
  • Black, W.K. (2005). The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. University of Texas Press, Austin, Texas.
  • Special Investigation Commission (SIC) (2010). Report of the Special Investigation Commission (SIC). Report delivered to Althingi, the Icelandic Parliament, on 12 April.

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