Billionaire brothers Vincent and Robert Tchenguiz arrested in Fraud Office raid

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Two of Britain's wealthiest and most colourful businessmen vowed to clear their names yesterday after they were arrested as part of an international fraud investigation into the multibillion-pound collapse of an Icelandic bank.

Vincent and Robert Tchenguiz, who built up vast property and leisure empires financed by cheap credit and complex debt deals, were among seven men arrested during dawn raids by 135 officers from City Police and the Serious Fraud Office (SFO) at addresses across London – including the brothers' headquarters in the heart of Mayfair.

The swoop, which was accompanied by simultaneous arrests in Reykjavik, followed a 14-month investigation into the failure of Kaupthing Bank, one of the Icelandic banks that failed during the credit crunch in 2008.

The entrepreneurs, renowned as much for their socialising as their hard-headed business deals, had extensive dealings with Kaupthing and were left heavily exposed by its failure. Last month, the brothers filed lawsuits reportedly claiming that they should be recognised as creditors of the bank to the tune of nearly £2bn.

SFO investigators declined to disclose the grounds for the brothers' arrests. But the fraud watchdog has previously said its inquiry was focusing on the "decision-making processes" that led to substantial funds flowing out of Kaupthing in the weeks before its collapse in October 2008.

Robert Tchenguiz, 50, was a particularly heavy borrower from the bank. He took out loans of around £1.7bn which were used to finance deals to buy stakes in British companies, including the supermarket giant Sainsbury's and the pub chain, Mitchells & Butlers. By the time of Kaupthing's collapse, loans to the London-based magnate covered 25 per cent of the bank's capital base.

Mr Tchenguiz was also in an unusual situation because he was a shareholder in the bank and a board member of Exista, an investment company which was the largest shareholder in Kaupthing. In a highly unorthodox move, Mr Tchenguiz used his shares in Kaupthing as collateral for some of his loans from the same bank.

In a statement released while police teams continued their searches of homes and business addresses associated with the brothers and former Kaupthing employees, the brothers said they had been detained "with regard to matters relating to our relationship with Kaupthing Bank". They added: "Both of us are co-operating fully with the investigation and are confident that, once concluded, we will be cleared of any allegation of wrongdoing." They were released on bail last night.

There was a heavy police presence at the brothers' offices close to the Dorchester Hotel yesterday, with workers at other businesses in one building told it was likely to be off limits for the entire day. Officers were seen coming and going from two premises with black bin liners containing seized material.

SFO sources said the raids were for the "purpose of gathering evidence" and that charges were unlikely to be brought immediately against any of those arrested. It is understood that questioning of the suspects would continue into today. The implosion of Kaupthing provided one of the most dramatic and unsettling incidents in the banking crisis. Through its high-interest Edge internet accounts, the bank attracted more than 160,000 British savers, including private individuals, charities and local authorities.

The British Treasury paid £2.5bn to bail out the UK customers, money which the Government is still waiting to be repaid after sometimes acrimonious negotiations with the Icelandic authorities.

The SFO said part of its investigation was to establish whether there had been "false representations" by Kaupthing to attract British investors. The SFO inquiry, which is being carried out in co-operation with Icelandic prosecutors, is also investigating claims that the bank made excessive loans to individuals without securing sufficient collateral, and was carrying out market abuse and committing fraud.

A special committee set up by the Icelandic government in 2008 found that Robert Tchenguiz was one of Kaupthing's biggest debtors and used its loans "fairly often" to meet a shortfall in the value of investments that had decreased in value.

The committee said: "The big increase in loan facilities to Tchenguiz from January 2007 until October 2008 is noteworthy, in light of the fact that in late 2007 many of Tchenguiz's companies started going downhill."

The Tchenguiz brothers, through family trusts that control many of their investments, have, however, not been slow to make their own claims against Kaupthing. Their £1.8bn writ, first issued in Iceland last year, alleges the trusts were duped into loan and collateral deals because Kaupthing failed to disclose the parlous state of its finances.

The SFO investigation

The enmeshed relationship between Robert Tchenguiz and Kaupthing Bank has already been noted by the Special Investigative Commission set up by the Icelandic authorities into the collapse of its three biggest banks in 2008. While Mr Tchenguiz was one of the bank's largest customers, he was also one of its investors. In turn, Kaupthing also took minority stakes in many of the property baron's ventures, binding their fortunes tightly together.

The Icelandic commission was critical of the extent of loans between Kaupthing and Mr Tchenguiz, finding that "rules on large exposures were not followed".

Both brothers claim they have lost heavily from their dealings with Kaupthing. Vincent is claiming damages of £600m while Robert has forfeited assets to Kaupthing liquidators including the £137m proceeds of the 2009 sale of his stake in Somerfield supermarkets.

Explainer: Why did Iceland's banks collapse?

Iceland's banking sector boomed at the start of the last decade. An economy rich from aluminium smelting and a healthy pension system based on the country's valuable fishing industry provided large reserves of cash, and a desire to invest in equities. A deregulated banking sector and improvements in information technology led to an inflation of Iceland's housing and stock markets.

When the bubble burst, the ratings agencies downgraded Iceland's big three banks. The banks, which at their peak had controlled assets worth nine times the country's total GDP, responded by increasing overseas expansion.

Landsbanki launched Icesave, its internet bank in the UK, while Kaupthing launched Kaupthing Edge. In 2008, the credit crunch hit home, and Gordon Brown, then Prime Minister, controversially stepped in, using anti-terrorism legislation to rescue British savers' deposits.

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