Eava Joy: Hire Her To Investigate Wall Street ANd Subprime Loans

Investigating Iceland’s financiers

By Stanley Pignal and Andrew Ward

Published: November 13 2009 16:43 | Last updated: November 13 2009 16:43

Joly with Roland Dumas, following a search of the former minister’s home, 1998

From a top-floor conference room in Reykjavik’s Grand Hotel, the first snow of winter can be seen edging its way down the muddy-brown mountains and jagged black lava fields that encircle the low-rise Icelandic capital. In the distance, steam from a geothermal power plant merges into the low cloud, hinting at the powerful subterranean forces that shaped this rocky Atlantic outpost. In the foreground, through the quiet streets, pedestrians in thick coats walk hunched against the sleet-splattered wind.

The scene is much the same as it was before the financial crisis that transformed Iceland from one of the world’s richest countries per capita into an economic disaster zone. But inside the plush hotel suite, the trappings of pre-crisis wealth – the curvy designer furniture, the modern art, the flat-screen televisions – look like relics of a bygone era. This was once the kind of place where Iceland’s oligarchs received foreign investors to discuss the next deal. Today, the sharp suits are absent. The conference room is reserved for a diminutive, blonde woman quietly sipping coffee in an attempt to recover from the tortuous journey from her home in Paris.

Eva Joly, a 65-year-old Norwegian-born French lawyer, has none of the swagger that attended the deals made in Iceland’s heyday. Yet it is precisely because of high finance that Joly is in Reykjavik. As one of only a handful of investigators with any record of bringing corporate criminals to justice, she has been asked by the Icelandic authorities to help establish what role white-collar crime might have played in the island’s boom and bust.

It is a high-profile return to the front lines for Joly, once Europe’s most prolific corruption hunter whose investigation into Elf, the French national oil giant, brought her international renown in the 1990s. Now, nearly a decade on, she is at the epicentre of one of the most dramatic cases spawned by the global credit crunch. If there was any wrongdoing by financiers that propelled Iceland into virtual bankruptcy – and Joly is certain there was – she will help to unearth it. And nothing from past experience suggests she will keep quiet if she finds evidence of unlawful behaviour beyond Iceland’s shores – as she is certain she will.

The Elf affair, a corruption saga she spent eight years investigating, changed the judicial landscape in France and elsewhere. Areas of international business and political corruption that had once looked above the law were brought before the courts. It was an unexpected triumph for the power of the judiciary, and the Reykjavik affair will establish whether the feat can be repeated. Joly will not lead the charge here – her role is to advise an Icelandic prosecutor who will take the case forward – but, if successful, this could be the largest investigation into white-collar crime ever undertaken. If it fails, it will inevitably raise the question of whether anyone is capable of prosecuting sophisticated financial crimes, and whether offshore networks they often depend upon can resist concerted judicial scrutiny.

Joly knows the stakes are high. “This is so much larger than Elf,” she says later with relish, “but we don’t know just how much larger. Not yet.”

. . .

Just as the Elf case revealed a rot at the heart of the French political system, Joly believes her latest project will illuminate the darkest recesses of global finance. In the years before the crash, Iceland transformed itself into an international financial centre. The inquiry is focused on whether market manipulation was involved in pumping up Icelandic banks’ balance sheets until they reached 10 times the size of the country’s gross domestic product, while the clique who ran them doled out cheap credit to some of their biggest shareholders and to favoured foreign clients. Although the main suspects are believed to be Icelandic, Joly makes clear that ultimate responsibility lies as much with the culture of greed imported from Wall Street and the City of London.

Former French minister Bernard Tapie, convicted of tax fraud, with his daughter Sophie

That opinion seeps through as she waits in the Grand Hotel conference room, chatting with a pair of local documentary makers who are here to interview her about the crisis. The conversation wanders from Iceland into a tour d’horizon of the world’s problems as Joly delivers her verdict on everything from financial sector bonuses (immoral) to climate change (a grave danger) and the situation in Gaza (tragic).

“This is what you see all over the world,” she says, egged on by the documentary makers’ account of how ordinary Icelanders are paying for the crimes of the plutocracy. “The rules are not for the elite. The elite are always living above the law.”

Still off camera, she rails against bonuses paid by Wall Street institutions at the height of the credit boom that, she says, rivalled the entire global budget for international development aid. “That is craziness,” she protests. “We must be very vigilant. Many people in the market have one idea: to get back to business as usual. We must not forget that this system is very ill.” Moments earlier, her eyes had moistened as she recounted stories of sacrifice and courage from an international humanitarian award she had judged. “There are real heroes in the world,” she said, as if to underline her very different view of bankers.

Eventually, the formal interview begins. More than 40 cases of suspected criminal wrongdoing are under scrutiny but no charges have yet been brought nor any individuals formally named as suspects. Why is it taking so long, the interviewer wants to know. “The public feels like nothing is happening. But I can tell you that, while it may not be visible, a lot is happening and we are making progress,” Joly responds. “It is very important not to prosecute until you have the bigger picture.”

. . .

Joly had already been investigating financial fraud for two years when the Paris stock market regulator asked her to look into an unusual investment made by Elf, France’s largest company at the time. It was the summer of 1994. Joly’s role as ajuge d’instruction, or examining magistrate, was to probe complex cases before passing them on to prosecutors. Here, the energy group’s Gabonese subsidiary had pumped FFr787m (now about €120m) into a failing fashion textiles business. There was no commercial rationale for the move. Early suspicions were that Elf’s recently departed chief executive had somehow benefited from this largesse.

The discovery that the textiles group had been paying a stipend to the chief executive’s estranged wife to placate her during a messy divorce was an early breakthrough and led to several convictions. In retrospect, it turned out to be only the opening salvo in an investigation that spanned eight years and shook France.

Accused Elf executive Alfred Sirven flanked by his lawyers, 2004

Joly was one of a new class of Parisian magistrates who disregarded the convention that financial misdemeanours in France’s state-funded industries should be overlooked for the greater good of the country. She did not hesitate to haul in this or that grandee to demand explanations of an unclear set of accounts. And despite limited resources, cases came to her offices thick and fast. The public questioned why these scandals had taken so long to emerge. How could Bernard Tapie, a colourful sporting goods tycoon and former minister, get away with listing a luxury yacht as the working asset of one of his companies (for which he was subsequently convicted, on tax fraud charges)? ­Elsewhere, how could auditors sign off manifestly false accounts?

In the Elf case, a picture started to emerge of a company that was as happy corrupting politicians at home as abroad. “Every document we got our hands on led us to further impropriety,” Joly says today. Many of the company’s most senior executives were placed in preventative detention, some of them for weeks at a time. Together with colleagues, Joly worked her way up the chain. When Alfred Sirven, one of Elf’s most senior executives, was captured in the Philippines in 2001 after four years on the run, reports emerged that he had swallowed his mobile phone’s sim card as soon as he saw the net closing in on him, rather than let it fall into Joly’s hands. When, before his trial, he said he “had enough information to blow up the republic” should he start squealing, few doubted him.

The Elf affair eventually drew in the highest circles of French diplomacy, too. Roland Dumas, president of the Constitutional Council and a former foreign minister, stepped down after it emerged his mistress had been paid by Elf to lobby on its behalf. The scandal also crossed borders: Helmut Kohl, the German chancellor, was touched by it when it later emerged that Elf had reportedly contributed to his party’s coffers as part of a deal involving its takeover of an east German refinery. Kohl vehemently denied any knowledge of this, describing it as “part of a smear campaign against me”.

. . .

When Joly first heard, back in February, that Iceland was taking on the issue of white-collar criminality, she was pondering a move back to Paris from her native ­Norway. She had exiled herself in Oslo after the Elf affair was wrapped up in 2002. She said at the time that she feared some sort of unspecified “revenge” for what she had done. She may have meant she feared being discredited; many over-reaching magistrates in France have subsequently been humbled by their own actions. Joly’s own popularity had waned as the public questioned some of her methods. The once-adoring press turned hostile, asking whether examining magistrates’ powers should be curtailed (as has since happened).

Or she may have meant something more sinister: in Oslo, she no longer needed the bodyguards who had been by her side for six years. She no longer received threatening letters warning her not to delve into this or that.

Joly had spent most of her adult life in Paris. It was as Gro Farseth that she had arrived in France in 1964 to work as an au pair, a 20-year-old from a country far less developed than it is today, hailing from a middle-class family with few intellectual ambitions for her. A romance ensued with her new employers’ eldest son, Pascal Joly. Eva – her middle name, and one more amenable to the French language – supported him as he finished medical school, taking on secretarial work. She had once hoped to go to medical school herself, but the payback period for such a career was beyond her. She went to law school in the evenings instead.

She started off her career far from the financial sector, as a legal adviser to the mentally ill in a psychiatric hospital outside Paris. Only at 38 did she join the magistrature, an institution she did not much like at first. In 1989, after nine years as a provincial judge, she was hired by the finance ministry to work in the department that considered requests for state bail-outs from failing companies. Despite her modest financial experience, she rose to become its deputy head, a first for someone who had not graduated from the École Nationale d’Administration, the haughty institution that trains most of France’s elite. She left the finance ministry in 1992 to become an examining magistrate, specialising in financial investigations.

By 2002, with the Elf case winding down, her family ties to Paris had eroded. Her children had moved out – Julien, now 34, is an architect, Caroline, 39, a lawyer – and Pascal Joly, from whom she was estranged, had committed suicide in 2001 after a long battle with depression. That year, the Norwegian government offered Joly a tailor-made role as an anti-corruption advocate, and agreed to finance “The Network”, a loose grouping of about 25 investigators and prosecutors dotted around the world who shared her zeal for fighting white-collar crime. It was a good offer at the right time: after almost 40 years abroad, she headed home.

. . .

Joly insists she was not looking for a new assignment when an Icelandic broadcaster invited her to appear on its primetime news show in March. She was reluctant to travel to Reykjavik because she was in the midst of her election campaign for the European parliament (she was comfortably elected on a Green ticket in June). But she felt a vague sense of kinship with Icelanders stemming from her Nordic roots, and the producer floated the possibility of meeting the singer Björk, whom Joly admires.

It turned out that Björk would be in New York, but Joly made the trip anyway. Within hours of the interview appearing, a Facebook group had amassed hundreds of members pushing for her to join the investigation into the financial crisis. The following day, she found the justice minister and finance minister waiting for her when she went to give a speech to an audience of university students. They asked for her help and she accepted.

The groundswell of support for Joly’s appointment reflected an acute lack of faith among Icelanders in the ability of their own leaders to do the job. “The Icelandic authorities had no experience in investigating this sort of case – how could they?” she asks. Beyond the issue of competence were the inevitable conflicts of interest in such a tight-knit community. The son of the country’s attorney-general, for example, was chief executive of the company that controlled Kaupthing Bank – one of the three big lenders that crumbled in October 2008.

It was decided to appoint an independent special prosecutor to overcome the conflict of interest, but finding someone without ties to the banking industry – or someone willing to take it on – proved difficult. An initial request for candidates yielded no one. Eventually, the authorities turned to Olafur Hauksson, a police commissioner from a small fishing town whose biggest previous cases were two attempted murders and a sexual assault.

Joly was brought in to advise Hauksson and his small team of investigators based in a drab concrete office building on one of Reykjavik’s shabbier streets – a contrast to the modern, glass-fronted headquarters of Kaupthing a block away. “The infrastructure was not at the level of the public expectations,” she says. It wasn’t unlike her first days as a financial investigator in Paris in 1992, when she had to borrow her daughter’s computer so she didn’t have to use the standard-issue Olivetti typewriter allocated to judges, and had to share a photocopier with 62 other investigators.

. . .

Joly’s presence in Iceland was felt immediately. Within weeks, she issued a public threat to quit unless the government committed more resources to the probe. She got what she wanted: the special prosecutor’s budget was increased and more investigators were hired.

For Hauksson, the arrival of a hotshot foreign lawyer to look over his shoulder was an awkward experience. “She is a very strong character,” he says. “We are agreed on some parts and not agreed on others but that is the natural way.” Joly admits the relationship was “not easy” at first but insists they are now working well together.

To the public, her presence provides reassurance that the probe is under adult supervision even though she readily admits her hands-on involvement is limited. “My work here is not to go into the details of the cases,” she says. “My work is to make people believe that they can do this, to help them see the traps and make the strategy.” Six French specialists with whom she has worked on previous cases are assisting her.

While Iceland is culturally Nordic, it broke decisively from its welfare-orientated Scandinavian cousins over the past two decades to become a laboratory for unfettered Anglo-Saxon capitalism. With her Norwegian and French background, Joly seems to relish the chance to expose the flaws in a system alien to both her native and adopted countries. “Iceland was well on its way to becoming a tax haven before the crisis,” she says disapprovingly. Here is her chance – along with continental European help – to bring it back from the edge of that moral abyss.

Launch of the Declaration of Paris, a global anti-corruption manifesto, 2003

Joly has visited Reykjavik roughly once a month since her appointment, usually staying two days at a time. She bills €2,000 for every day she is there – but does not bill travel days or preparation work – in line with top legal practitioners. A central element of her role is public relations. A recent poll suggests two-thirds of Icelanders trust her, compared with half for Hauksson and only a third for the attorney-general. Her name also lends credibility beyond Reykjavik: her attacks on the British and Dutch government’s tough stance on Iceland’s failed banks received widespread media coverage last August. But her active involvement is less than many people imagine.

Perhaps her most valuable contribution is the leverage she has over the investigation’s political masters. Her presence reduces the risk of the probe being suppressed. But she is wary of her involvement automatically being taken as a seal of approval: “I promised when I agreed to become an adviser that I would only stay as long as I believed in the investigation.”

Perhaps her biggest achievement so far is to ensure that any prosecutions are on the agenda at all. Parallel to the criminal investigation, a sort of “truth and reconciliation” commission guided by parliament is also looking at the events of the past year, and is due to report its findings early next year. Joly has warned that political hearings are no substitute for prosecutions. “Icelanders were very discouraged when I arrived,” she says. “Lots of newspaper articles were saying that what happened was just bad luck, that a new page had to be turned and that was that. But before reconciliation, before forgiveness, you must first establish responsibilities, you must find out the truth.” Partly because of Joly, only 27 per cent of Icelanders say they trust the parliament’s investigation committee.

She warns that, while momentum is building, the investigation is still only just beginning. She sees the first cases being prosecuted by the end of next year, but thinks the whole inquiry is likely to last five years. It has to, she thinks, if it is to be done properly. “This is huge. It will involve other European banks,” she says. “It will show that what happened in Iceland is not just an Icelandic problem.”

Joly hopes she won’t be needed in Iceland for the whole of the investigation. The journeys to and fro are exhausting, and while the prosecutions take off, she simultaneously has to learn the ropes of legislative politics at the European parliament in Brussels, where she chairs the committee on development. In her eyes, it is another pulpit from which she can attack unbridled capitalism.

Ideally, her interventions will become less and less useful as the local prosecutors gain experience. Despite her relish at once more tackling financial corruption at the highest level, she knows she can only be a bit-player in Reykjavik’s sorry saga. “I am here to help. The people of Iceland have invested me with a great hope, great expectations,” she says. “But it is their country. Only Icelanders can lead this inquiry.”

Stanley Pignal is the FT’s Brussels correspondent; Andrew Ward is the FT’s Nordic bureau chief

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Elf: the named and shamed

The executives
● Loïk Le Floch-Prigent, CEO from 1989 to 1993. Sentence: 5 years prison, €375,000 fine.
● Alfred Sirven, Elf head of general affairs, tracked down in the Philippines after four years on the run. Sentence: 5 years, €1m fine. Died before appeal was heard.
● André Tarallo, head of Elf Africa, “personal friend” of former Gabonese president Omar Bongo and Congo president Denis Sassou-Nguesso. Sentence: 4 years, €2m fine.
● Alain Guillon, head of refining activities. Sentence: 3 years, €3m fine.
● Jacqueline Baroz, Guillon’s ex-wife, received a 10-month suspended sentence and €150,000 fine.

The middle-men
● André Guelfi, former sports car driver and fishing magnate, married to the niece of Georges Pompidou, former French president. Had reportedly helped Elf in its dealings with Russia. Sentence: 3 years (2 suspended), €1.5m fine.
● Maurice Bidermann, fashion textiles entrepreneur. A friend of Le Floch-Prigent, his company paid for the Elf CEO’s costly divorce in exchange for large investments. Sentence: 3 years (2 suspended), €1m fine.
● Dieter Holzer, German lobbyist, prominent member of Helmut Kohl’s CDU party. Helped facilitate the sale of the Leuna refinery to Elf in 1992. Sirven claims Holzer was paid DM100m in commissions on the understanding it would be used to bribe CDU members. Sentence: 15 months, €1.5m fine.
● Nadhmi Auchi and his right-hand man Nasir Abid: 15 months suspended sentence, €2m fine.
● Pierre Lethier, former spy: 15months sentence, €1.5m fine.
● Jeffrey Steiner, businessman: 1 year suspended sentence, €500,000 fine.
● Stéphane Valentini, insurance broker: 3 years sentence, €1m fine.
● Hubert Leblanc-Bellevaux, consultant: 2 years prison (1 suspended), €300,000 fine.
● Claude Richard, lawyer: 3 years sentence (2 suspended), €300,000 fine
● Daniel de Busturia, Spanish lobbyist: 9 months sentence, €100,000 fine.
● Emmanuel Flichy: 1 year suspended sentence.

The related parties
● Fatima Belaïd, ex-wife of Le Floch-Prigent: Elf paid for her divorce settlement, including cash payments and property valued at more than FFr30m. Sentence: 3 years (2 suspended) €1m fine.
● Yves Verwaerde, former member of European parliament: 18 months (10 suspended), €200,000 fine.
● Laurent Raillard, old friend of François Mitterrand: 1 year suspended, €100,000 fine.
● Daniel Leandri, former adviser to Charles Pasqua, interior minister: 10 months, €200,000 fine.

Those who were affected
● Dominique Strauss-Kahn resigned as finance minister in 1999 after questions were raised over his links to Elf – among others – dating back to 1993-1995, when he was not in government. He denied wrongdoing, and was absolved in 2001.
● Roland Dumas, former foreign minister, resigned as president of the Constitutional Council in 1999 after being questioned by magistrates. An initial conviction was overturned on appeal.
● Christine Deviers-Joncour, his mistress, who had been paid by Elf to help convince Dumas to make decisions favourable to Elf. Sentenced to 3 years prison (18 months suspended), FFr1.5m fine.
● Note The final appeal in the Elf case was heard in the Paris Cour de Cassation, 31 January 2007.