British Fraud Office Arrests 7 in Inquiry of Icelandic Banks

LONDON – The arrest here of two well-known property tycoons and five other men in connection with the 2008 collapse of Iceland’s Kaupthing Bank is the latest in the unraveling of the economic ties between Britain and Iceland.
In the years leading up to the credit crisis, Iceland’s banks, hoping to expand beyond their tiny domestic market, look abroad for growth. Britain offered one of the largest opportunities in the region with an attractive clientele of self-made millionaires with global interests. The British government, in turn, welcomed the cheap and easy credit from Iceland as a way to bolster the economy.
Robert Tchenguiz and his brother Vincent — well-known London property moguls who are fixtures on the Monaco scene — had especially strong ties with Kaupthing. Robert Tchenguiz was one of Kaupthing’s biggest retail borrowers and sat on the board of Exista, the bank’s biggest shareholder.


On Wednesday, the brothers were arrested and taken to a London police station for questioning on Wednesday morning about their ties to Kapthing as part of an investigation. The largest of three failed Iceland institutions, Kaupthing collapsed in 2008, owing creditors, including local authorities, more than $50 billion.

“We were arrested earlier this morning and are being questioned with regard to matters relating to our relationship with Kaupthing Bank,” the brothers said in a joint statement on Wednesday. “Both of us are cooperating fully with the investigation and are confident that, once concluded, we will be cleared of any allegation of wrongdoing.”

A spokesman for the Serious Fraud Office said it was “unlikely” that the seven men arrested would be charged but that they would instead be “interviewed and released.”
Britain’s Serious Fraud Office searched 10 residential and business addresses at 5:30 a.m. in London, including the offices of the Tchenguiz brothers’ property company, the Rotch Property Group, in London’s Mayfair district.
Officials in Reykjavik, the capital of Iceland, searched two residential properties and arrested and interviewed two men. Among those arrested were Sigurdur Einarsson, Kaupthing’s former executive chairman, and Armann Thorvaldsson, the former chief executive of the bank’s British unit, according to Icelandic news reports. Ian Burton, a lawyer for Mr. Einarsson in London, did not immediately respond to a request for comment. Efforts to locate Mr. Thorvaldsson’s lawyer were unsuccessful.

The Serious Fraud Office started to work with the Icelandic Special Prosecutor’s Office in December 2009 to establish whether Kaupthing lied to win clients for a specific deposit account. It is also investigating how some creditors, shareholders or executives benefited financially weeks or days before Kaupthing collapsed.
The loosening of bank regulation created a banking boom in Iceland that allowed financial institutions to grow beyond their means. Kaupthing’s profit had increased fiftyfold over five years as it took on more debt. When it finally imploded along with Giltnir Bank and Landsbanki Islands, the three banks combined owed the equivalent of about 12 times Iceland’s gross domestic product. In the aftermath, the International Monetary Fund had to bail out Iceland.
One of Kaupthing Bank’s largest operations outside Iceland was in Britain, where the bank helped facilitate corporate takeovers, among other deals. The bank financed Robert Tchenguiz’s bid for the British supermarket chain Somerfield and the purchase of a stake in a retailer, J Sainsbury. He also sat on the board of Exista, an Icelandic holding company that was Kaupthing’s biggest shareholder. Kaupthing showcased him in its 2006 annual report in front of London’s Royal Albert Hall in a two-page photograph, saying how he had picked Kaupthing “time and again.”

The Tchenguiz brothers built much of their wealth on the back of the 2000 London property boom. Starting with buying and selling one-bedroom apartments in London, the brothers’ property group soon invested in commercial real estate, benefiting from some well-timed investments, like Polish petrol stations and a Scottish whiskey distillery.
Once millionaires, the brothers became a fixture of the Monaco jet set and were often pictured in glossy society magazines. While Vincent Tchenguiz shunned the spotlight, Robert Tchenguiz made headlines in the British tabloid press for dating models and a lavish 40th birthday party with 500 guests, a Louis XIV theme and a show by Cirque du Soleil acrobats.
With the help of Kaupthing, Robert Tchenguiz had borrowed heavily to buy a 10 percent stake in J Sainsbury and a stake in the pub chain Mitchells & Butlers. When the financial crisis hit, many of Robert Tchenguiz’s investments soured. And when Kaupthing collapsed and Iceland called in the loans, he was forced to sell many of his assets at a loss.
In an interview with the London newspaper Evening Standard in 2009, Robert Tchenguiz effectively blamed banks for the problems he and his brother incurred in business.

“I don’t think anybody foresaw the extent of the problems,” he said. “In our case, for instance, two of our banks went under — Kaupthing and Lehman. If your business partner is a bank and it goes bust, that can be in nobody’s calculation.”