The Hafskip Affair

- Article by Örnólfur Árnason, in the compendium Ísland í aldanna rás 1900-2000


            The bankruptcy of the shipping line Hafskip, said to be the largest bankruptcy in the history of the Icelandic Republic, was likely the most hotly debated media issue this year. Útvegsbanki (the Fisheries’ Bank of Iceland) suffered greater setbacks than it could withstand. This, together with the fact that Albert Guđmundsson, an Independence Party minister in the cabinet, had been concurrently Chairman of Hafskip’s Board of Directors and of the bank’s Board of Governors, was used to make the Hafskip affair a political scandal. Newspaper rumours and gossip concerning Hafskip’s management were blown out of all proportion and in no time at all the Hafskip affair had become an extensive criminal investigation. Today it has to be regarded as one of the most shameful over-reactions of the Icelandic criminal justice system of recent decades.

            Seventeen individuals, including Hafskip’s management, the three managing directors and a deputy director of Útvegsbanki, together with its Board of Governors and the auditors of both companies, were charged with criminal offences. Six of them were, in fact, held in remand custody for weeks on end. When judgements were finally handed down, first in the District Court in 1990 and subsequently in the Supreme Court in 1991, the men were found to be completely innocent, with the exception of four individuals found guilty of rather trivial oversights compared to the list of charges and given mild sentences. Added to that was the fact that, by the time the Hafskip liquidator had concluded his work in 1993, all priority claims and over 50% of general claims were paid in full. It is rare for such a high proportion of general claims to be paid and by this time the opinion was heard not infrequently that Hafskip had not actually been bankrupt but had instead been forced into bankruptcy. By that time those who stood to gain from Hafskip’s bankruptcy had long since reaped their reward. The Iceland Steamship Co. (Eimskip) had rid itself of its strongest competitor and been presented with its assets, business and port facilities on a silver platter. And "the friend of the common man", Albert Guđmundsson, disappeared from the Icelandic political scene forever.

            The history of the shipping line Hafskip, originally established by members of the purchasing co-operative Verzlanasambandiđ in 1958, had its ups and downs. Some 20 years later, following a period of growth and profitability, the company was in difficult financial straits. This was due not least to the purchase of five new vessels, paid for with a loan taken abroad and guaranteed by Útvegsbanki, which was on the point of refusing the company further assistance. At the end of 1977, the bank intervened to have Björgólfur Guđmundsson, a man who had conclusively demonstrated his business acumen and was highly trusted and respected, appointed managing director of the company. New capital was injected into the company and at Hafskip’s AGM on 11 May 1978 a Board of Directors was elected, with wholesale importer and MP Albert Guđmundsson as Chairman of the Board. A headline in the afternoon newspaper DV read: “Hafskip Fires a New Broadside, A group of influential importers and exporters joins the company and could cause a major shake-up of cargo transport”. The newspaper’s prediction would prove correct. Soon afterwards Björgólfur enlisted the help of a second managing director, Ragnar Kjartansson, who resigned from his position as deputy CEO of Skeljungur (Shell Oil in Iceland) to assist in getting Hafskip back on its feet. During the ensuing years Hafskip grew and prospered, returning growing profits up until 1983. The company was rapidly closing in on Eimskip, Iceland’s largest shipping line, originally dubbed the “country’s favourite son”. No doubt there were many who were alarmed at Hafskip's success. As an indication of the scope of its activities, it had around 370 permanent employees in Iceland and 8-12 vessels in operation, including leased vessels. In 1984, Hafskip’s vessels docked 556 times in over 30 foreign ports and 199 times in 20 domestic ports. Hafskip had an indoor warehouse area of 23,000 m2 and an outdoor storage area of 53,000 m2. The company operated six regional offices abroad, in Copenhagen, Varberg, Hamburg, Rotterdam, Ipswich and New York.

            In 1983, however, there were clouds on the horizon for merchant shippers. As container technology became more dominant, Hafskip’s vessels began to drop in price while at the same time foreign debt rose steadily in ISK terms due to unfavourable exchange rate developments. It was at this time that Hafskip undertook a joint venture with Eimskip. The companies established a joint limited-liability company, Farskip, to operate a Polish lease vessel, a car ferry christened Edda which sailed between Iceland, the UK and Germany for 16 weeks in the summer of 1983. A loss of ISK 40 million on this venture, divided equally between the two owners, was a major setback for Hafskip, as the book value of its equity at year end was only ISK 13 million. Hafskip was also struggling to withstand stiff competition from other shipping lines, Eimskip in particular, which in contrast to Hafskip had a strong equity position and was thus better situated to meet temporary opposition. The price war between the two companies, which had actually begun some time earlier, worsened. In December 1983 Eimskip announced it was lowering its colis tariff and in the early months of 1984 a veritable price war had developed on the market. That year both Hafskip and Eimskip lost their cargo transport business for the US military base in Keflavík, which had been a good and secure income source. For the first time in many years, Hafskip faced a loss on its regular operations, and a situation calling for urgent action.

            Following its AGM in 1984, Hafskip’s Board of Directors [and alternates] that year was comprised of Ragnar Kjartansson, Chairman, Ólafur B. Ólafsson, Vice-chairman, Bjarni Magnússon, Daviđ Sch. Thorsteinsson, Guđlaugur Bergmann, Gunnar Ţ. Ólafsson, Hilmar Fenger, Jón Helgi Guđmundsson, Jón Snorrason, Jónatan Einarsson, Páll G. Jónsson, Pétur Björnsson, Sveinn R. Eyjólfsson and Víđir Finnbogason, all of them well-known and prominent Icelandic businessmen. The response of Hafskip’s leaders was to launch scheduled North Atlantic sailings, i.e. cargo transport between North America and Europe without putting into port in Iceland. Björgólfur Guđmundsson made an assessment of Hafskip’s organisation abroad, gathered information and ideas which could be used, for instance, by the company in establishing itself as an international shipping company. Following this agency offices were set up on both sides of the Atlantic. The ambitious plans of Hafskip’s management were regarded with suspicion in 1985 but their intentions would hardly have seemed out of line 10-15 years later. Ragnar Kjartansson was the first chairman of the Union of Icelandic Cargo Shippers (Samband íslenskra kaupskipaútgerđa), established in 1982. At the end of that year he wrote an article in the Reykjavík daily Morgunblađiđ with the title: “Icelandic Internationalism – Major Expansion Abroad”. In 1983 he was one of the keynote speakers at the Independence Party National Congress and dealt with new avenues of endeavour and possibilities in Icelandic business and industry. When the company’s difficulties began to pile up in 1984, Hafskip’s management decided to respond with a new offensive, “increased expansion”.

North Atlantic sailings began on 15 November 1984. Shortly before that, yet another setback had struck the company, a strike by the public employees’ union BSRB, which paralysed shipping transport for the entire month of October. Early that month, the Board of Útvegsbanki had refused to grant any further credit to Hafskip. Despite this situation, it is evident that Hafskip's leaders were convinced that profit from the new transport would put the company back on its feet. In news items and interviews, however, management declared that Hafskip was fighting for its life. Concurrent to this struggle there was some tentative examination of the possibility of merging the company with Eimskip, which came to nothing, as Eimskip’s management saw no reason to hurry. Efforts got underway to solicit additional share capital and ISK 80 million was collected at a rousing shareholders' meeting held in February 1985, with the slogan "At the Crossroads". The meeting appears to have unanimously agreed to call for a new offensive.

            As spring approached in 1985, two things occurred: in the first place, the company’s 1984 performance proved to be poorer than expected, so that the increase in share capital was not sufficient to put the company back into calm waters. Secondly, the North Atlantic sailings were not returning a profit, at least not yet. The marketing of the transport routes appears to have been successful, as the income they returned was for the most part in line with Hafskip’s budget for the operations, but expenses proved to be much more extensive and exceeded its budget consider­ably. On 6 June, the day before Hafskip’s AGM, the weekly Helgarpósturinn began a vicious smear campaign against the company and its management, which gradually gained support throughout the entire community. Business competitors, political opponents and other enemies of Hafskip’s leaders soon recognised that here was an opportunity they could take advantage of. Most of Hafskip’s directors and management were prominent in the Independence Party. Björgólfur Guđmundsson, for instance, was chairman of the Reykjavík chapter, Vörđur, the largest IP chapter in Iceland, while Ragnar Kjartansson was the managing director of the Reykjavík IP parties’ council.

            Helgarpósturinn claimed that Hafskip’s leaders had long since known where things were headed and had doctored the company’s accounts and budgets to deceive Útvegsbanki into providing credit and to convince shareholders to provide additional capital. Although these and other serious accusations concerning the scandalous extravagance of Hafskip’s management and misuse of company funds were only backed by rumours and gossip, some of it from employees who had been dismissed, and spiced with fantastic nonsense of profligacy abroad by Hafskip’s leaders, they were echoed by other newspapers, and eventually repeated and expanded upon with dramatic effect by speakers in the Icelandic parliament Althingi.. The debate was so negative that once it picked up speed, Hafskip’s fate was sealed. The company’s problems were too great for its management to have a chance to try and overcome the difficulties faced in its North Atlantic transport, although it could be claimed that an oil price increase [sic] at the end of the year would have made the situation considerably easier.

            The key aspect of the scandal and debate surrounding Hafskip at this time was the fact that Albert Guđmundsson, former Minister of Finance and then Minister of Industry, had since the beginning of 1981 and until June 1983 served concurrently as Chairman of the Board of Hafskip and Board of Governors of Útvegsbanki, the company's major creditor. The bank’s capital ratio was low and it was in no position to withstand a major setback. Albert Guđmundsson was one of the most controversial politicians of his time, enjoying widespread popularity since his former days as one of Europe’s star soccer players. It was difficult to make him toe the party line, and there were plenty of people, not least in the IP’s more traditional and bourgeois power base, who were anything but fond of him, as he generally came out far above the favourites of the party leaders in voting to select its candidates. Most of Hafskip’s senior management were close party supporters of Albert Guđmundsson and, to add insult to injury, some of them had made the mistake of supporting another party rebel, Gunnar Thoroddsen, in internal party conflicts. Either of these would have been reason enough do deter the party from any efforts to save the sinking Hafskip. After several attempts to sell Hafskip’s assets to Eimskip, or reach an agreement with Samskip, the company was finally declared bankrupt on 6 December, five days after Útvegsbanki had sold Eimskip all the assets of the company, its major competitor, for a price that many persons have since called a gift. No representative of Hafskip came anywhere near the sale, although it concerned the interests of many more parties than just Útvegsbanki. On the other hand, the Central Bank Governor, Jóhannes Nordal, attended the meeting held in the Eimskip boardroom on Saturday night, 30 November 1985, together with Eimskip’s Chairman of the Board Halldór H. Jónsson, Vice-chairman Indriđi Pálsson and CEO Hörđur Sigurgestsson. Útvegsbanki’s three directors were present plus one deputy director.

            The bankruptcy, however, only concluded the first chapter of the Hafskip affair. After this events took a turn which took many people completely by surprise, despite the serious accusa­tions which had been directed at Hafskip’s management in the newspapers and in parliament. During a question period of the Althingi, several MPs strongly attacked Útvegsbanki and Hafskip’s management, led by the left-wing People’s Alliance MP Ólafur Ragnar Grímsson. The Prime Minister, Steingrímur Hermannsson, of the centrist Progressive Party, declared that he had been in contact with the liquidator and that the case would be investigated thoroughly and with all expedition. The Hafskip affair had thereby become a criminal case. As it happened, most of the leading judicial figures of that time, including the State Prosecutor, the director of the police Criminal Investigation section (RLR) and the Reykjavík Chief Magistrate, were also Progressive Party members. The last-mentioned, Jón Skaftason, appointed two of his young assistants, Markús Sigurbjörnsson and Ragnar Hall, to supervise the liquidation. As the Hafskip estate was the juiciest morsel ever to land on the magistrate’s table, he engaged his son, Gestur Jónsson, along with two other lawyers, as liquidators to carve it up. The supervisors called in accountants from N. Mancher, led by Valdimar Guđnason, to examine Hafskip’s accounts. Valdimar Guđnason’s damning condemnation of the company’s management and auditors, in particular concerning their budgets and accounts, where every aspect was interpreted as negatively as possible and made to look suspicious, was the main substance of the report sent to the State Prosecutor on 6 May 1986. It states, for instance, that seven of the leaders of the bankrupt company "may have been guilty of actions punishable under the Criminal Code". State Prosecutor Ţórđur Björnsson immediately forwarded the case to RLR and on the morning of 25 May six men were arrested and held in remand custody in the Síđumúli prison in Reykjavík for several weeks. The men were company CEO Björgólfur Guđmundsson, Chairman of the Board Ragnar Kjartansson, Páll Bragi Kristjónsson, who had been Hafskip’s CFO until year-end 1984 when he took over as CEO of Skrifstofuvélar hf., Helgi Magnússon, Hafskip’s auditor, Sigurţór Charles Guđmundsson, Hafskip’s comptroller and Ţórđur H. Hilmarsson, its director of finance and operations. One other man, Árni Árnason, Hafskip’s CFO from 1985 onwards, was also to be arrested but was abroad at the time. While the six men sat in custody, the media were ablaze with preposterous claims, for instance, that they had begun to confess to various crimes, which the case documentation demonstrates were completely untrue. The spotlight was now focused on the head of RLR, who appeared on television and listed the crimes of which the prisoners were accused. On 23 May, the daily Ţjóđviljinn quoted him as saying: “The embezzlement of which Hafskip’s leaders are suspected amounts to hundreds of millions of krónur.” On 5 June, Helgarpósturinn wrote: “RLR Director Hallvarđur Einvarđsson confirmed in a conversation with HP on Wednesday that investigation into the case had provided further support for the alleged violations which the State Prosecutor had requested be investigated.”

            Útvegsbanki suffered extensive losses when Hafskip’s activities were brought to an end and the bank had to write off part of its debt. It has later been claimed that Hafskip’s fate had proved advantageous for various parties when the banking sector was reorganised and a new private bank established. Althingi appointed a commission headed by Supreme Court Attorney Jón Ţorsteinsson to scrutinise the dealings between Hafskip and Útvegsbanki. In November 1986 this commission delivered its report, which harshly criticised the leaders of Útvegsbanki. The bank’s directors protested loudly, pointing out for instance that practically all of the credit granted to Hafskip had been decided upon prior to their stewardship of the bank, and that exchange rate developments and the drop in vessel prices had to a large extent created the problems. But this was to no avail, they were the next scapegoats. Hallvarđur Einvarđsson, who had been appointed State Prosecutor in 1986, laid charges against 11 men in April 1987. These were Hafskip’s CEO, its Chairman of the Board and former CFO, the company's auditor, plus all three directors of Útvegsbanki, its three former directors and one deputy director. These charges were dismissed by the Supreme Court in July 1987, when Hallvarđur Einvarđsson was declared ineligible to prosecute the case, not because he had previously directed the investigation, as the accused had pointed out, but because of family ties to one of the governors of Útvegsbanki. This would prolong the case.

            The prosecution did not give up, however. Criminal law professor Jónatan Ţórmundsson was appointed Special State Prosecutor and he took his time, waiting until November 1988 to lay charges. Charges were now brought against six former employees of Hafskip and the company’s auditor, as well as three directors of Útvegsbanki, one deputy director, the bank’s Board of Governors and its auditor. In other words, the bank’s former directors were spared but replaced in the dock by its Board of Governors. The Reykjavík District Court pronounced its verdict in July 1990, found 14 of the 17 accused not guilty, but sentenced the other three. Björgólfur Guđmundsson received a five-month suspended sentence, Páll Bragi Kristjónsson a two-month suspended sentence and Helgi Magnússon a fine of ISK 100,000. In 1996, Supreme Court Attorney Guđmundur Ingi Sigurđsson wrote of the not-guilty verdicts: “[The verdicts] clearly demonstrate that those who drew up the charges were infected by the furore surrounding the Hafskip affair, let themselves be deluded and ended up in a legal labyrinth with their charges."

            Jónatan Ţormundsson resigned after the verdict was pronounced. The prosecution appealed the verdicts of the three men found guilty and the verdict of not guilty against Ragnar Kjartansson. Attorney Páll Arnor Pálsson pleaded the case before the Supreme Court, which handed down its verdict on 5 June 1991, which held the verdict and added to the sentences of the District Court. Three men received suspended prison sentences: Björgólfur Guđmundsson of 12 months, Ragnar Kjartansson five months and Páll Bragi Kristjónsson two months. Helgi Magnússon’s fine was increased to ISK 500,000. One of the Supreme Court judges delivered a separate opinion. In his estimation, Björgólfur Guđmundsson should have been sentenced to seven months’ imprisonment and that a suitable punishment for Ragnar Kjartansson would be ISK 200,000. This was the conclusion of the case. Of the 450 charges which the State Prosecutor had originally set out with in his first list of charges, only five were substantiated by the District Court and 20 in the Supreme Court. As the old Latin saying goes: “parturient montes, nascetur ridiculus mus”.