Uncovering Icelands’s secret financial scheme

International financial investigator Jared Bibler was appointed by the Icelandic markets regulator, the Financial Supervisory Authority (FME), to uncover the truth behind the 2008 Icelandic financial crisis which saw three national banks collapse, plunging the country into unprecedented economic difficulties.

In this exclusive interview, Bibler, whose new book Iceland’s Secret: The Untold Story of the World’s Biggest Con provides a cautionary tale for the world, speaks out about his investigation and why the Icelandic scandal still matters to us all.

The Icelandic financial crisis happened more than a decade ago. Why have you now decided to write a book about it?

I didn’t want to write this book, because what person in his right mind would write a book? I had to write this book.

One reason it took so long is that many of the cases took years to go through the courts. Some updates to the judgments happened just this spring, for example, and others are ongoing. But the main reason it took so long is that I delayed writing it; I kept waiting for someone else to tell the story. Once I realized that was probably never going to happen, I felt a duty to get the story out before it was forever lost to the sands of time. When you read what happened there in Iceland, you simply won’t believe it.

What would you say are the root causes of white-collar crime within the financial sector?

This type of crime often starts small. Someone fudges an expense report and gets a few extra quid here and there, and nobody says anything. Then they are emboldened when the end of the reporting quarter comes and they don’t have the sales figures they’d promised. So they book some of the next quarter’s sales forward to this one. And on it goes like that: the next quarter, the problem is even bigger, so bigger steps are required.

In the case of the Icelandic banks, when their share prices started slipping in the early years, it seems they bought a few shares here and there with the banks’ own money. But once they had started this, it became impossible to stop it. And the schemes grew bigger and bigger each quarter, pulling in more and more bank departments, until arguably the whole banks’ business models revolved around the buying up and hiding of their own shares!

The impetus for such shenanigans often starts at the top: the fish rots from the head. A firm with aggressive growth targets and a leadership that indicates they’ll look the other way often quickly becomes a hive of internal corruption. Doublespeak from management is another good indicator: firms whose executives, for example, lie to their own employees on internal conference calls tend not to be the most lily-white, either.

Iceland’s Secret exposes white-collar crime on a staggering scale, and which led to the Icelandic financial crisis. Why was this not detected and addressed prior to the collapse of the three offending banks?

I have a feeling the share-price manipulation schemes were detected. Email evidence later showed that many in the banks knew about it. And I have a hard time believing the stock exchange did not know about it, either. But addressing it? That’s another issue. That relies on someone standing up to stop the merry-go-round—and such bravery is usually in short supply in the middle of an economic boom. In the case of Iceland, the poorest country in post-war Europe, it was suddenly a place where private jets streaked across the sky and a good number of people could buy a Range Rover. Addressing the fraud at the heart of the boom would have meant a challenge to the very DNA of the banks themselves. I don’t think that was in the offing.

Your book is full of shocking revelations about the scale of the crimes that were going on within the Icelandic banks. What, for you, was the most shocking discovery, and why?

There are so many to choose from, and in Iceland’s Secret I try to tell the stories of the cases I found ultimately most important. I think the most shocking revelation was that the oldest bank in the country, Landsbanki, appeared to have been buying up its own shares since the day it was listed on the stock market in 1998. There was never a time when the share price—that thing followed so closely by so many of the investing public (and in Iceland, that was much of the general public, too)—reflected a fair value for this bank. This bank raised literally billions in debt from investors all over the world based on a fraudulent share price. And when it collapsed, it took those investors’ money with it—but also the savings of a good number of average people. Some of my friends and family had put much of their life’s savings into the shares of this one bank—and they lost everything.

Your investigation was closed down in 2011. What do you think was the reason for this, and do you believe that there was more scandal left to uncover?

I think within the FME, the Icelandic financial regulator, there was little appetite for more investigation. There was a sense from some powerful voices that we had ‘done enough’— and also stunningly that no new financial crimes would ever be committed after 2008! This was despite evidence that perhaps some of the biggest crimes were ongoing, and had started up after the crisis.

Sadly, I estimate that we had only cracked open 5 or 10% of the total cases. We had so many more to go. For example, many smaller institutions, and many of the trades done by insiders, never got a look.

Today, the FME has been folded into Seðlabanki, the central bank of Iceland, in a further blow to independent action. To my knowledge, the agency never had, and does not have today, an enforcement department—a group of professionals to look into alleged crimes in the financial firms it supervises. Don’t seek and ye shall never find?

What are your thoughts on the outcome of the investigation, in terms of the penalties imposed on the offenders? Were they in line with the severity of the crimes or should there have been harsher consequences, and why?

I think the penalties in terms of jail time were probably well in line with Nordic standards, although they can appear light, especially to English-speaking audiences. We are talking about a handful of months in prison for crimes that sometimes counted in the billions. On the other hand, unlike in the UK and US, bank CEOs did have to serve at least some time behind bars. That alone was a big accomplishment—and one I feel Iceland can rightly feel proud of, at least by comparison.

On the economic side, most of the financial benefits that had accrued to the convicted executives while they were committing the crimes were still theirs to keep. I think this is an area where we could do better in the future. The message to future executives here might be that crime pays: it might well be worth the risk of a few months in a white-collar prison to take home millions in ill-gotten gains. The decision to commit crime often comes down to a cost-benefit analysis.

Why do you think it is important for professionals within the wider business, financial and legal sectors to understand the Icelandic financial scandal?

I think that this is a scandal for the ages, and a cautionary tale about what might be brewing today in the much bigger economies: US, China, UK, Germany, and so on. We see little indications here and there that fraud is afoot: Wirecard, Theranos, Archegos, Greensill, to name a few smaller stories recently in the headlines. But what if much of market capitalism is somehow tainted by fraud? How would we know? And are we sure it isn’t?

This is a book that’s about questioning the assumptions we make about our economic system today. We base so much on market solutions, but do we commit enough resources to policing those markets?

Poor financial regulation led to both the global financial crisis and the Icelandic financial crisis. In the intervening years have lessons been learned?

To a degree, yes. I think the updates to, for example, the Basel banking standards to reduce counterparty risk was a good step. The Basel committee attempts to learn from past crises and lock in those lessons in the form of codified changes. In addition, there was new legislation in both the US and EU that attempted to curb the worst abuses uncovered during the 2008 crisis.

I think the lesson that hasn’t been learned is the importance of prosecuting criminal trials against those who violated existing laws in the run-up to 2008. We have thought we could get away with box-ticking exercises within our regulators, rather than embarking on risky and costly trials of those who really did break the law. But, ultimately, we need to go after criminals of all stripes if we are to uphold the rule of law. We can’t punish small-time drug dealers with years in prison and then let executives who misappropriate billions live out their lives in peace. I mean—we can and we do—but this does not augur well for the cohesion of our societies in future.

What would be your key recommendations to reduce levels of financial white-collar crime going forward?

I think a lot of this comes down to incentives. The incentive for stealing an extra million via an inside trade is . . . a million bucks! But what is the incentive to those who are supposed to catch that person? In my experience now in a few different countries, those incentives often point in the other direction. These inside trades are often super easy to discover—but for the person who discovers that trade and wants to investigate it further, there are often multiple levels of bureaucratic roadblocks. These could be inside of the stock exchange itself, or within a regulator, or even at the prosecutor’s office. Sometimes these staff don’t even have the necessary training for financial crime cases, and their salary remains the same whether or not they bring in a case, so what’s the incentive to stick their head above the parapet?

More common is that regulators and prosecutors take on smaller and simpler cases, in order to grab sufficient headlines to show they are earning their keep—but leave the biggest stones unturned.

So it’s ultimately up to us as citizens: do we believe this is a real issue? (I hope you will after reading Iceland’s Secret!) And, if so, how can we apply political pressure to ensure that our white-collar ‘police’ are as well-funded and well-staffed as the police who handle our street crimes? Based on the magnitude of the misdeeds, the white-collar police should have an even larger share of the budget—and a bigger presence in the news.

That brings me to the last point: how do we incentivize journalists to expose these big problems? Curious journalists are often some of our best market regulators.

What advice would you give to professionals who may stumble upon white-collar crime within their company?

First, I am not a lawyer and nothing here should be construed as legal advice. If in any doubt, contact an attorney in your local jurisdiction.

There are some basic questions you can keep in mind here. Does your supervisor know about the issue and will they support you? Do you feel your job would still be secure? What is your responsibility to the firm itselfand its owners or shareholders?

You can think about whom you might trust, either on the outside or within your organisation, to get advice. Ideally, your firm has an anonymous tip line or whistleblower hotline. Failing that, perhaps you can reach out to someone in internal audit or compliance.

Often it can be a good idea to go on the record in an email with your concerns. This does two things: it makes sure others are aware of the situation, and can also help to protect you. Of course, you should keep paper copies of this correspondence for your own records if you are able.

The final recourse can sometimes be going to the press. Use this one with caution, but in certain situations it can work wonders.

Iceland’s Secret: The Untold Story of the World’s Biggest Con (Harriman House) is out now on Amazon in hardcover, eBook, and audiobook formats, priced £22.99, £14.99, and £16 respectively. Visit www.icelandssecret.com.