When the Panama Papers leak broke last year, then-Prime Minister Sigmundur Davíð Gunnlaugsson wasn’t the only Icelander revealed to be involved in some shady dealings. In fact, Iceland featured most prominently of all in the leak, which uncovered how the global rich use shell companies and offshore entities to avoid paying taxes. While it may have been over a year and a half since the Panama Papers, all the mechanisms are still in place for the rich to hide their money. Iceland’s financial world, it turns out, has a few unique qualities that led to its prominence when it comes to cheating on your taxes, and making a lot of money.
When the banks help you hide your money
In order to tackle this subject properly, we spoke with Þorður Snær Júlíusson, the editor of online magazine Kjarninn and a journalist who has delved deeply into the world of Icelandic finance. He traces the origins of the tax shelter problem to way back before the 2008 financial crash (although plenty of people got rich off the crash, as we will see).
“Taxes on businesses were quite high in the late ’90s, early 2000s,” he explains. “When the banks set up shop in Luxembourg, they started inviting their clients to create these offshore entities so they could pay a little bit less tax on the yield of their finances. But then, those taxes went down in Iceland, so that wasn’t really a reason anymore. So after that, the reason was to hide away money, to avoid taxes completely. Nothing else really makes sense. All three Icelandic banks were encouraging their clients to move their money into these offshore entities.”
How to get rich off a tanking economy
When the financial crash of 2008 struck, most of us saw our wages lose a tremendous amount of purchasing power. The value of the króna tanked, and ordinary Icelanders struggled to make ends meet. However, Iceland’s super-rich not only did just fine; they actually turned a profit, due to policies designed to protect the economy.
Capital controls went into effect shortly after the crash. This included a Central Bank policy whereby, if you wanted to buy foreign currency with krónur, you had to do so at a 20% discount, e.g., buying a 100,000 krónur worth of euros could only be done for 80,000 krónur. At the same time, if you wanted to buy krónur with foreign currency, you were given a 20% premium, e.g., you could get €120,00 worth of krónur for €100,000.
This policy may have been intended to keep krónur in Iceland, but it also had an additional effect: all those rich Icelanders who kept their money in offshore entities, in dollars or euros, now stood to increase their assets by 20% simply by moving their money back home.
Just the tip of the iceberg
Nothing has really changed much since, except for the lifting of all capital controls. Some Icelanders are still squirreling away money in offshore accounts. It’s difficult to determine just how much revenue we lose from tax cheats. What we do know is that we’ve only seen a small portion of the problem.
“What we saw in the Panama Papers was first and foremost the most prominent clients of Landsbanki,” Þorður says. “That’s just one bank of three. They had the largest portion of clientele with offshore entities, and that hasn’t really been revealed to the extent Landsbanki was. I would imagine we’ve just seen the tip of the iceberg.”