Kviabryggja Prison in western Iceland doesn't need walls, razor wire, or guard towers to keep the convicts inside. Alone on a wind-swept cape, the old farmhouse is bound by the frigid North Atlantic on one side and fields of snow-covered lava rock on another. To the east looms Snaefellsjokull, a dormant volcano blanketed by a glacier. There's only one road back to civilisation.

This is where the world's only bank chiefs imprisoned in connection with the 2008 financial crisis are serving their sentences. Kviabryggja is home to Sigurdur Einarsson, Kaupthing Bank's onetime chairman, and Hreidar Mar Sigurdsson, the bank's former chief executive officer, who were convicted of market manipulation and fraud shortly before the collapse of what was then Iceland's No. 1 lender.

The only road leading to or from Kviabryggja Prison. Tomas Van Houtryve for Bloomberg

They spend their days doing laundry, working out in the jailhouse gym, and browsing the Internet. They and two associates incarcerated here - Magnus Gudmundsson, the ex-CEO of Kaupthing's Luxembourg unit, and Olafur Olafsson, the No. 2 stockholder in the bank at the time of its demise - can even take walks outside, like Kviabryggja's 19 other inmates, all of whom were convicted of nonviolent crimes.

It may not be hard time, but it's a far cry from the giddy days when the Kaupthing bankers hosted parties for clients aboard yachts in Monte Carlo and hired the likes of pop legend Tom Jones to serenade guests at London galas. In sentencing these financiers to serve terms of up to five years, the Icelandic courts have done something authorities in the world's two great banking capitals, New York and London, haven't: They've made bankers answer for the crimes of the crash.

Kviabryggja Prison's single-story barracks Tomas Van Houtryve for Bloomberg

Bankrupted banks

"The Icelandic banks went overboard," says Olafur Hauksson, the onetime small-town police chief who in January 2009 was appointed special prosecutor to investigate the banking cases. "They were basically bankrupt."

Hauksson is still at it. In March his office indicted five others for market manipulation and fraud. In all, there have been 26 convictions of bankers and financiers since 2010.

Holding its most powerful bankers accountable should have been a satisfying result for Iceland's 333,000 residents. But a brewing scandal involving a secret share sale by the country's biggest lender, Landsbankinn, has raised fears that the crony capitalism that marked the pre-crash era still lingers. The soaring popularity of an insurgent political movement called the Pirate Party, meanwhile, shows that anger continues to simmer beneath the surface of Iceland's recovery. "The mood of society is still fairly dismal," says Stefan Olafsson, a professor of sociology at the University of Iceland.

Iceland may be a faraway country with a population the size of the Maldives, but it's experiencing the same type of populist revolt that's rocking governments across the West. In Spain the rise of the Podemos and Ciudadanos political movements has ended 40 years of two-party rule and prevented the formation of a government following the December general election. British voters will decide on June 23 whether to quit the European Union. And in America's presidential contest, firebrands Donald Trump and Bernie Sanders - who favours prosecuting Wall Street bankers - won over voters fed up with the status quo.

Olafur Hauksson, special prosecutor to investigate the banking cases Spencer Murphy/Bloomberg

Fed up with the status quo

Just a decade ago, the status quo in Iceland was very different. The country's top three banks, having thrown off decades of fiscal discipline in a spasm of deregulation in the 2000s, tapped international debt markets like never before. Blessed with stellar credit ratings and access to the European Economic Area, the trio borrowed €14 billion ($20.8 billion) in 2005 alone, double their intake in 2004. But they only paid about 20 basis points, or 0.2 per cent, over benchmark interest rates. It was an easy moneymaker. As the banks lent the funds back out at high interest rates, they raked in huge profits and recorded a whopping 19.7 per cent return on equity in 2007.

Flush with credit themselves, Icelandic households bought flats in London, took shopping trips to Paris, and jammed Reykjavik's streets with Range Rovers. By 2008 the banks' assets had swollen to 10 times the nation's $US17.5 billion ($22.9 billion) economy.

Then came the fall of 2008 and paralysis in global markets. The banks lost their short-term funding and could no longer service their own debts. The krona's value fell, making loans denominated in foreign currencies far more expensive. Kaupthing and its two rivals, Landsbanki Islands and Glitnir, defaulted on $US85 billion in debt in October of that year, and households lost more than a fifth of their purchasing power. Citizens pelted the 135-year-old stone parliament building with eggs and rocks.

Now, there are signs of economic renewal throughout central Reykjavik. Laugavegur, the main drag through town, is bustling with window shoppers. In the last few years, numerous boutiques, art galleries, and restaurants offering Icelandic delicacies such as smoked puffin have opened to serve the locals and tourists taking advantage of the devalued krona. "

It's a rebound other European nations would envy. Iceland's gross domestic product is set to expand almost 4 per cent this year, according to forecasts compiled by Bloomberg. The unemployment rate of 2.8 per cent is about one-third the average of the European Union. As the state prepares to lift capital controls later this year, the banking sector continues to strengthen. "Before the crisis, the banks grew too fast and too much," says Unnur Gunnarsdottir, director general of the Financial Supervisory Authority, which oversees the lenders. "That will not happen again."

History repeating?

But a deal involving Iceland's top bank and a relative of Bjarni Benediktsson, minister of finance and economic affairs, is marring this feel-good story. In November 2014, state-owned Landsbankinn sold a 31.2 per cent stake in Icelandic payment processing company Borgun for 2.2 billion kronur ($23.3 million) in a private placement. A company controlled by Einar Sveinsson, the cabinet minister's cousin, was part of a group that bought the shares. While there's nothing unlawful about a private stock sale, crisis-weary Icelanders didn't appreciate a state-owned bank under the finance minister's jurisdiction executing a deal behind closed doors.

It didn't help that Sveinsson's company is domiciled in Luxembourg. Shell companies based in the secretive European duchy were a hallmark of the criminal cases Hauksson brought against the Kaupthing Four, court records show.

The plot thickened last November when Visa agreed to acquire Visa Europe in a deal valued at as much as €21.2 billion. Borgun is one of 3033 banks and payment companies that own Visa Europe. That means Sveinsson and his fellow investors are poised to more than double the value of their stake, to $US12 million, when Visa completes the deal. Outraged citizens protested in front of the lender's headquarters in central Reykjavik in January. Someone recently hung a sign on a highway overpass: "Borgun investors: Return what you stole!"

From parking fines to corporate crime

Meanwhile, Hauksson, a bear of man with a fighter's jaw, is pressing ahead with a half-dozen more cases related to the crash. The former top lawman in Akranes, a port town up the coast from Reykjavik, Hauksson was one of only two applicants for the job of special prosecutor - and the only lawyer. "It was important for the country to look carefully at what happened in the months that led up to the banking collapse," he says. Few expected him to succeed in untangling the web of self-dealing that stretched from Reykjavik to Luxembourg to London. "He was used to issuing parking fines and breaking up drunken brawls," says Sigrun Davidsdottir, a journalist who writes about the bank cases on her website, Icelog. "It's earth-shattering what he's accomplished."

In contrast to the Icelandic saga, no bank CEOs in the US, the UK and other Western markets have been convicted for their roles in the subprime mortgage crackup and related disasters. Bringing white-collar criminal cases may be easier in Iceland because courts don't use juries. Rather, they employ neutral experts to help judges understand the intricacies of finance.

The US Department of Justice has refrained from prosecuting individual bankers after a Brooklyn jury in 2009 acquitted two former hedge fund managers at Bear Stearns accused of securities fraud. "Washington wasn't willing to take the risk of another stinging defeat, so they slowed down a host of other prosecutions," says John Coffee, a professor of securities law at Columbia in New York.

In 2013 then-US Attorney General Eric Holder told Congress that Wall Street banks are so big that prosecuting them might harm the economy. He later stressed no institution is above the law. Some watchdogs are appalled the feds chose only to extract big civil fines from institutions. "There's no justification over what appears to be a lack of effort to identify individuals engaged in misconduct and to bring charges," says Phil Angelides, chairman of the Congress' Financial Crisis Inquiry Commission. "It sends a signal that if you do wrong on Wall Street, there's really no consequences. That's bred cynicism about the justice system, and it's bred anger."

Back at Kviabryggja Prison, the tumult in the capital seems worlds away. It's dead quiet around the single-story barracks, and in the distance rise massifs that form Iceland's western fjords. The Kaupthing convicts are marking time in different ways. A couple of them are tutoring fellow inmates. The subjects: math and economics.

Bloomberg