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Iceland: Amendment to Law on Foreign Exchange Controls Adopted

(Mar. 22, 2012) On March 13, 2012, Iceland's Parliament (Althingi) adopted Act No. 17/2012 Amending the Foreign Exchange Act, No. 87/1992. (Amendments of the Foreign Exchange Act, Central Bank of Iceland website (Mar. 15, 2012).) It was reported that the Parliament had quickly passed the Act after highly secret meetings convened after the markets closed on March 12. The amendment is designed “to prevent a foreign-currency drain or flight from the country and avert the risk of an outflow of hundreds of billions of kronur in foreign currency.” (Icelandic Parliament Hurriedly Passes Law to Avert Foreign-Exchange Drain, RUV.IS (Mar. 13, 2012), Open Source Center online subscription database, No. EUP20120313004001.)

According to the Central Bank of Iceland, the Act has three important elements. First, it “rescinds the exemption for payments from a bankruptcy estate and payments of contractual claims in accordance with composition of creditors agreements (cf. Act no. 21/1991) in domestic currency when payment is disbursed from the payer's account with a financial institution in Iceland.” (Amendments of the Foreign Exchange Act, supra.) The aim of this change is to give the Bank the means necessary to control possible outflows from domestic estates, to prevent such outflows from threatening Iceland's balance of payment stability or undermining the country's strategy for liberalizing capital controls. (Id.)

Second, the Act amends article 13(j) of the Foreign Exchange Act to no longer allow the purchase of foreign currency “for the value of indexation on bond principal.” It also bans the purchase of foreign currency for any payment of principal. (Id.)

Third, the Act rescinds the exemption from the statutory prohibition against cross-border movement of foreign currency previously enjoyed by resolution committees and winding-up committees of the old banks. (Id.)

People had reportedly been taking advantage of a loophole in the law that had allowed the purchase of bonds with shorter terms than other securities, as a means to transfer capital abroad in the form of repayments, interest, and compensation for inflation without violating the law on currency control. The amendment bill's explanatory notes stated that such transfers “could cause a real drop in the exchange rate and destroy a large share of the country's foreign currency reserves.” (Icelandic Parliament Hurriedly Passes Law to Avert Foreign-Exchange Drain, supra.) The ban on such transfers does not apply to cash deposits in foreign currency held as of their status at the end of the day of March 12, 2012, or at midnight, by legal entities of foreign financial institutions or in the Central Bank of Iceland. (Id; see also Lög um breytingu álögum um gjaldeyrismál, nr. 87/1992, með síðari breytingum [Act on Amending the Foreign Exchange Act, No. 87/1992, as amended], Law No. 17/2012 (Mar. 13, 2012), Althingi website.)