Are we talking about a duty levied on importing something back into Iceland after it had been exported temporarily? If so, I think there are probably a few waivers and/or outright exemptions applicable. At least that's what I think after reading a couple of pages of Iceland's customs laws. At the risk of continuing this disagreement, I would be interested in what support there is for "fraud."
EDIT: If you guys could post a link to whatever law purportedly was violated, I would be interested.
EDITEDIT: As an example, Chapter IV, Article 6, para 6 of Iceland's Customs Law (I'll post a link in a bit) permits the duty free importation of goods returned from abroad for just about any reason provided that proof is available that the goods were exported from Iceland. Unclear as to whether this means the goods must have been manufactured in Iceland, but there are other provisions that are helpful, too.