Hauksson never targeted the Panamanians—he was laser-focused on Icelandic wrongdoing. Still, he noticed that the “Viking raiders”—as the media dubbed Iceland’s modern-day robber barons—had created hundreds of anonymous companies with Mossfon. The companies were an essential ingredient in the self-dealing and market manipulation Hauksson unearthed. Each company represented another layer of secrecy to deconstruct.
Mossfon “was a well-oiled machine,” says Hauksson with grudging respect.
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THE ICELANDIC ELITE could scarcely imagine their ruinous fate when they started privatizing the country’s banks in the late 1990s. Iceland’s finance minister, Geir Haarde, took the occasion of the 2002 sale of Landsbanki, a leading Icelandic bank, to offer a toast. Thoroughly indoctrinated in the cult of market efficiency, Haarde quoted Ronald Reagan: “The government is not the solution to our problems, the government is the problem.” He then delivered Landsbanki, which held the deposits of one in three Icelanders, into private hands.
With the krona strong and investment capital widely available, cheap money flooded Iceland in the early 2000s. The U.S. stock market doubled between 2003 and 2004, but in Iceland stocks grew by a factor of nine. Icelandic bank shares were particularly popular. The sleepy island of fishermen embraced living beyond their means. Icelanders took out loans to fund a nationwide buying binge, snapping up everything from fishing boats to cars to houses. A banker at the Luxembourg subsidiary of Iceland’s largest bank, Kaupthing, traces the onset of the mania to the summer of 2003, when he first noticed Icelanders arriving at the bank in new Ferrari sports cars.
Luxembourg was Iceland’s portal to the world. The newly privatized banks all had subsidiaries operating there. The Luxembourg subsidiaries helped their shareholders create offshore companies to buy and sell assets and bank shares. Once offshore, these transactions were hidden from Icelandic tax and banking authorities.
Not coincidentally, Luxembourg was the site of one of Mossfon’s busiest offices, run by the husband-and-wife team of Jost and Anabella Dex. Jost, tall, handsome, and German, had a background in physical education. His Panamanian wife, Anabella Ines Saez de Dex, petite, pretty, and wiser, was more experienced in financial services, having worked for Merrill Lynch as a stockbroker. She knew Ramón Fonseca from their school days and was close friends with one of his ex-wives. In 1996, the couple convinced Mossack and Fonseca to sell them the Luxembourg franchise, which had largely been an afterthought. The existing Mossfon franchisee had stopped recruiting clients. With nothing to lose, the partners agreed to sell five hundred shares of Mossack Fonseca & Co. Luxembourg to the couple for $1 a share, on the condition that they could only sell the company back to Mossfon.
Jost and Anabella divided their labor. He focused on the service side, employing a heavy dose of old-world charm to drum up business and keep customers happy. As the tougher, more street-smart of the two, Anabella kept the back office running and handled collections. Compared to her husband, Anabella’s name seldom appeared on correspondence or documents, but together they transformed the Luxembourg office into one of the firm’s biggest moneymakers, much of it built on the Icelandic business.
By 2004, Landsbanki alone was incorporating more than one hundred companies a year with Mossfon Luxembourg. A father-and-son team, Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson, had purchased a majority of the bank. Thor, the son, made his first fortune in the 1990s, with a brewery in Saint Petersburg, Russia. It was in Saint Petersburg that he realized that a little capital and a lot of debt could multiply one’s initial wealth many times over. Thor turned the hammer wielded by his namesake, the Norse god of thunder and lightning, into the Björgólfur corporate symbol, but what he and his father really worshipped was the god of leverage. The two men were typical of the Icelanders running amok in global finance at the time—brashly overconfident and out of their depth.
In September 2004, Landsbanki Luxembourg came to Jost Dex with a remarkable request. The bank typically purchased the services of Mossfon’s nominee directors for the Panama and BVI shell companies it acquired. The paper officers granted power of attorney to the Landsbanki clients or provided signatures to finalize loan and pledge agreements. These transactions often involved tens of millions of dollars. Mossfon usually demanded a letter of indemnity for the directors so they would be held harmless if the deals misfired. In this way, the partners hoped to avoid liability for problems arising from the directors’ consent.
Landsbanki was doing so much business, it wanted to streamline the process. The bank asked Dex if it could sign a blanket letter of indemnity—“a smoother solution”—to cover all future transactions and companies created with Mossfon. “Like this we could provide our services much faster and would not have to keep cases open for weeks or months just waiting for letters to be signed and sent to you,” Dex wrote the partners in Panama when relaying the request. “It’s not that they are not willing to send us all these letters, but each time they have to get the client’s approval or even signature, and this is what bothers them and all of us.”
Dex reassured the firm that Landsbanki had in its records the complete due diligence of all the beneficial owners. He also noted that the Luxembourg banking regulator supervised the bank. Under this arrangement, Mossfon would forfeit an opportunity to exercise oversight into what its directors authorized. Still, the partners agreed in principle to the proposal. They were happy to off-load due diligence onto someone else, particularly a bank, providing it didn’t put the firm at risk.
Mossfon sent Landsbanki a draft indemnity letter to review. The bank removed a section vouching for the trustworthiness and creditworthiness of its clients. It also added language exempting the beneficial owners from actions taken under the power-of-attorney authorizations granted by Mossfon directors. In other words, once the company was operational, Landsbanki wanted any trouble the beneficial owner created to rest with Mossfon’s shell companies and nominee directors rather than the bank. This, of course, negated the entire purpose of the letter of indemnity.
When a lower-level Mossfon lawyer received the changes, she rejected them. Fonseca instructed her to figure it out with Dex and Landsbanki. The two sides went back and forth for almost two years before reaching an accord. In March 2006, Landsbanki finally accepted Mossfon’s initial draft. Both sides agreed to handle any disputes arising from the indemnity issue through international arbitration.
By that point, the bank may have been eager to resolve the matter. A month earlier, in February 2006, the rating agency Fitch issued a negative grade for Iceland’s economy, calling it “unsustainable.” Fitch stressed all the reasons that would eventually sink the island’s financial sector—excessive credit growth, huge deficits, too much debt. Yet despite Fitch’s forecast, Iceland’s profligate ways continued for two more years. The rating agency could not foresee that Iceland’s top banks would engage in a criminal conspiracy to keep the money machine chugging. As Mossfon companies were a key ingredient to this conspiracy, it was better for Landsbanki to avoid returning to the firm for new letters of indemnity for each and every questionable deal.
Ólafur Hauksson relates a colorful anecdote from this period that encapsulates the game the major Icelandic banks played. A junior banker at Kaupthing had a simple job in 2006. He awoke early each morning and bought the bank’s shares on the Swedish stock exchange. Kaupthing’s purchases of its own stock kept the share price artificially high, allowing the money machine to roll on. Shareholders stayed rich. Bankers reaped fees from continued lending. Until, one day, the junior banker overslept. Without his timely purchases, the stock tumbled 4 percent in a matter of hours while the market struggled to find its proper level.
In the year leading up to the financial crisis, Landsbanki created more than eighty companies with Mossfon. Bank shareholders and executives used many of these companies to enrich themselves through deals that gave the outward appearance that the bank was thriving. During the first six
months of 2008 alone, Landsbanki lent its own board members 40 billion kronur (about $562 million). From the outside, all the public could see were companies in places like the BVI and Panama receiving loans and buying and selling shares and assets. To all the world it appeared to be perfectly legitimate market activity.
In one example, the widow of a pharmacist, along with her two sons, owned substantial shares in a pharmaceutical company that Björgólfur and Thor had purchased. The family created eight Mossfon offshore companies through Landsbanki Luxembourg. These companies in turn borrowed millions of dollars from Landsbanki. The family then used the borrowed money to purchase shares in other assets owned by Thor and his father. While this kind of insider dealing could be construed as dangerously foolish banking because it concentrated risk in the same family of companies, it was not necessarily criminal. The same couldn’t be said for a scheme hatched by Landsbanki’s CEO, Sigurjón Árnason. In 2007, two Panamanian companies created by Landsbanki, one of which was registered by Mossfon, received tens of millions of dollars in loans from the bank. Árnason orchestrated these loans so that the companies could buy Landsbanki stock, thus fraudulently boosting the bank’s share price.
Kaupthing did the same but on a larger scale. In September 2008, a month before Iceland’s financial collapse, Kaupthing made a major announcement. Sheikh Mohammed bin Khalifa al-Thani, an investor from Qatar, was buying 5.1 percent of the bank. At a time when international lending was severely constricted, it was a remarkable show of confidence in a financial institution whose solvency was under question. The percentage was no coincidence. Any amount over 5 percent had to be publicly declared. The purchase made al-Thani, a friend of Kaupthing’s CEO, Hreiðar Már Sigurðsson, the bank’s third-largest shareholder. Sigurðsson and the bank’s second-largest shareholder took to the airwaves, proclaiming the investment a sure sign that the bank was healthy and growing. The al-Thani stock purchases were proof.
Behind the scenes, a tangle of Mossfon companies created through its Luxembourg office told a different story. In July 2008, Jost Dex sold a BVI company, Brooks Trading, to another intermediary working on behalf of Kaupthing. Brooks Trading quickly opened a bank account with Kaupthing. The hidden owner of Brooks was another Mossfon company, which in turn was held by Al-Thani. On September 19, 2008, Kaupthing put $50 million into the Brooks account. The loan carried no guarantee or collateral and would have raised alarms in any properly run bank. Ten days later, Kaupthing issued more loans, worth a combined $125 million, to two additional Mossfon BVI companies controlled by Al-Thani. The money found its way to a Cyprus company, which then purchased the sheikh’s 5.1 percent of Kaupthing. What appeared from the outside to be a stunning show of confidence was in fact a fraud perpetrated by Kaupthing to disguise the purchase of its own shares.
* * *
THE U.S. FINANCIAL crisis sent Iceland’s banks into meltdown. On September 15, Lehman Brothers declared bankruptcy. The global financial system seized up. Within three weeks, the Icelandic government nationalized its three largest banks, Glitnir, Landsbanki, and Kaupthing. When Eva Joly arrived to help Hauksson in early 2009, there were still only inklings of the extent of the criminal conspiracy.
“They went off the cliff but there were no skid marks,” says Hauksson, noting the absence of the gradual decline one might expect to see. The banks were healthy one day and bankrupt the next—a financial illusion achieved with the aid of Mossfon and the Dexes.
While the machinations leading up to the financial crisis could be kept secret, the aftermath was inevitably public and bloody. The global financial crisis bit deep into Mossfon’s profits. The firm’s incorporations in the BVI, its most popular jurisdiction, dropped by 35 percent. In early 2009, Fonseca informed Jost Dex that Mossfon was raising its annual fee on offshore companies by $18. Dex protested. The financial crisis was the worst time to raise fees, he argued. He and his wife refused to comply; in a letter to the partners, they characterized the unilateral action as a breach of their contract. Instead they kept the prices the same for their 6,658 active companies, deducting $18 from each invoice Mossfon sent, before forwarding the money on to the firm. That translated into an annual shortfall of nearly $120,000.
In February, the couple offered to sell the Luxembourg franchise back to Mossfon for 10 million euros, a proposal the partners rejected as too expensive. Rather than provide a counteroffer, they forced the couple into an arbitration proceeding in Panama. The arbiter ruled against the Dexes, who appealed. Mossfon next sent letters to all the Luxembourg clients notifying them that the Dexes no longer had the right to sell the firm’s companies. The Dexes countersued, accusing Mossfon of fraud and tax evasion in both Luxembourg and Panama. The cases dragged on for years, transforming the former business associates into implacable enemies.
The Dexes weren’t the only ones skirmishing as a result of the crisis. In downtown Reykjavík, daily demonstrations called for the resignation of the government. More than fifty thousand Icelanders had lost their savings. Unemployment jumped from 2 percent to 10 percent in six months. Protesters banged on pots and pans and pelted official buildings with splattering foods. Throughout the world, governments drastically cut back on services in response to the economic crisis. The austerity fed a popular movement focused increasingly on the role tax havens played in stripping public treasuries of needed revenue.
For years, a committed group of activists, Eva Joly among them, had campaigned against the political corruption and tax evasion enabled by the offshore system. The Norwegian government gathered these activists together behind the idea that chasing down money stolen by elites could help eradicate poverty. It invited them to Oslo to tackle the problem. Among those who took part in the initial meeting of what was called the Task Force on the Development Impact of Illicit Financial Flows was John Christensen, the former economic adviser from Jersey.
Christensen’s interest in the topic of tax havens predated his pariah status as a whistle-blower. Born into a well-to-do Jersey family and educated at Oxford University and the London School of Economics, Christensen was by all appearances a pillar of the British establishment when he returned to the island in the mid-1980s. In reality, he harbored a secret. He took a job at a Jersey trust management company with the goal of researching the industry from the inside to expose its flaws.
Jersey was growing as an offshore destination, warping the political culture and crowding out other businesses. At his new job, Christensen learned how to layer trusts, companies, and foundations together to hide a client’s money. Etiquette required that he never directly ask what his customers were doing but “you would have to be a moron to not realize that the vast majority were about tax evasion,” he says. As part of his job, he became acquainted with other intermediaries, including Mossfon. He remembers the Panamanians as competent, fast, and cheap.
Christensen left the trust company to take the powerful post of economic adviser to the island’s government. It was in this position that he received a call late one evening from a Wall Street Journal reporter who told him about allegations of governmental corruption in Jersey. With Christensen’s help, the Journal published a front-page story labeling Jersey an “offshore hazard.”
“That was the end of the road,” Christensen says. “I could no longer pretend.”
He spirited his files off the island to a safe-deposit box in London. Facing animosity from his former colleagues, he and his family followed the files into a self-imposed exile in 1998. Christensen opened a small publishing house and helped Oxfam write a report on how tax havens affected international development. Four years after leaving Jersey, he was contacted by a special-needs teacher working in Jersey’s only prison. She visited Christensen in London for tea, bringing along two retirees, a merchant seaman and a nun. The group hoped to fight against what they saw as the harmful impact of the industry.
From this small beginning, in 2003 Christensen launched the Tax Justice Network. It spread across the world from Washington, D
C, to Africa. Christensen developed a presentation that revealed how Jersey trust companies enabled bribery, embezzlement, and fraud. The network’s organizing and educational work kicked into high gear after the financial crisis. In 2009, it also unveiled an index that evaluated laws, regulations, and practices of different jurisdictions to reveal the most prolific purveyors of financial secrecy. The release of the first index created a stir. Topping the list was not the BVI, the Cayman Islands, or some other sunny tax haven island, but Delaware and the United States. Second was Luxembourg.
This growing opposition to tax haven abuses was met with an equally committed and largely American-backed movement hostile to the very idea of taxation. With names like the Center for Freedom and Prosperity, the Coalition to Protect Free Markets, and Citizens for Limited Taxation, a coalition of well-funded advocacy groups solicited money from Mossfon and other offshore providers for their campaigns. They portrayed tax havens as beleaguered bastions of freedom. The secrecy world was all that was preventing Western governments from violating the privacy of their citizens in a relentless pursuit to confiscate taxable wealth.
One group that served as a particularly effective conduit between American libertarians, wealthy business interests, and the offshore world was the Florida-based Sovereign Society. Ostensibly a publishing outfit, it hosted conferences that connected Americans with offshore providers like Mossfon. The objective, according to its own website, was to prevent “the plunder of onerous taxation and frivolous lawsuits.” Mossfon kicked in a 10 percent commission to the Sovereign Society for any new business it brought to the firm. According to the law firm’s files, the Sovereign Society was responsible for at least sixty-nine Mossfon companies.
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