Ship of Fools (9 page)

A last opportunity to launch a full investigation into Traynor's scheme arose in 1988 when a neophyte inspector, Terry Donovan, was sent to accompany two more senior colleagues on their visit to G&M. He quickly cottoned on to the very strange nature of G&M's business and raised his concerns, both with the bank itself and later with his superiors at the Central Bank. The details of what happened thereafter are contested, but Adrian Byrne told the Moriarty tribunal that ‘whatever Mr Donovan may have said or not said, concern was not triggered within the Central Bank'.

What is completely clear is that, as the Moriarty report put it, for the Central Bank as a whole, ‘the serious unfinished business of the back-to-back loans and Mr Traynor's undertakings was permitted to be ignored or forgotten'. Equally clear is that, apart from the detailed mechanics of the scheme's operation (such as the secret codes), the Central Bank had the strongest suspicions that Des Traynor was operating a large-scale scam. As the Moriarty tribunal concluded, ‘the Central Bank inspectors were made aware of the essential features of the back-to-back loan arrangements in question, whereby Irish residents were enabled to earn interest on offshore deposits free of tax.' Had it acted on what it knew, as Moriarty pointed out, it would not merely have put a stop to Traynor's swindle, ‘it would in all probability have accelerated the rate and level of response on the part of regulatory authorities generally to abuses within Irish banking that were not unique to Guinness & Mahon.' It might, in other words, have changed the broader culture of Irish banking.

Instead, the Central Bank didn't just keep its knowledge of the Ansbacher fraud to itself, it continued to do so even after the scam became public in 1996. In a letter written to the Minister for Finance, Charlie McCreevy, in November 1997,
and subsequently read into the Dáil record by McCreevy, the governor of the Central Bank, Maurice O'Connell, stated that ‘There is no record that the Bank had discovered the system for operating the Ansbacher accounts during its inspections and review meetings. Prior to publication of the [McCracken] tribunal report, the Central Bank had no knowledge of the existence of the “Ansbacher Deposits” referred to during the tribunal hearing or of the role played by G&M [Guinness and Mahon] in the management of those deposits.'

After it emerged that the Central Bank in fact had extensive knowledge of the Ansbacher deposits, McCreevy read out another letter from O'Connell in the Dáil on 30 March 2000. O'Connell claimed that his earlier letter meant that ‘the Central Bank had no knowledge of the system of numbered offshore deposit accounts known as the “Ansbacher deposits”. These appear to have been deliberately concealed and were maintained outside the normal books and records of G&M.' His claim of ignorance had referred only to the actual method of operating the accounts (which the bank did not in fact know about). The apparently definitive statement that ‘the Central Bank had no knowledge of the existence of the “Ansbacher Deposits”' - a claim that was, on the face of it, patently false - did not mean what it might seem to mean. McCreevy, moreover, threw his own weight behind this exercise in semantic escapology: ‘in respect of the issues which arose in the course of on-site inspections by the Central Bank in 1976 and 1978 concerning back to back loans secured by offshore deposits, it would seem that these activities formed part of the G&M accounting system and from the Governor's letter of 9 February 2000 it would appear that the term “Ansbacher accounts” or “Ansbacher deposits”, as used in the Governor's letter dated 11 November 1997, was not
intended to cover these accounts. My advice is that it would not be appropriate to enter into discussion on this distinction as this is a matter for the [Moriarty] tribunal.'

By the time of the High Court inquiry into Ansbacher in 2001, Adrian Byrne was declaring himself ‘very betrayed by a lot of people in Guinness and Mahon, particularly Mr Traynor'. There is no doubt that the complex mechanisms through which the fraud was operated were unknown to him and that he was lied to by Des Traynor, who had assured him that the scam would be wound down over time. It is clear that he was both skilled enough to detect the stench of corruption from the Guinness and Mahon accounts as early as 1976 and had the moral sensibility to know criminal tax evasion when he saw it. Byrne was a highly capable and moral public servant.

The fact remains, however, that Byrne, as he became more senior at the Central Bank, never managed to take any effective action against what was in effect a multi-million-pound criminal conspiracy. That a decent and intelligent public servant could fail in this way is indicative of the culture of banking regulation in Ireland: if the good guys were so weak, it is hard to imagine that the banks had anything to fear from the time-servers. Byrne himself became a key figure in banking regulation during the Celtic Tiger years, firstly as the Central Bank's head of banking supervision and then, until 2005, as the personal adviser to the chief executive of the Irish Financial Services Regulatory Authority. Even after his retirement from that role, he remained the confidant and golfing partner of the chief regulator, Pat Neary.

 

The DIRT and Ansbacher scandals had immediate implications for the way the subsequent economic boom unfolded and imploded. In the first place, their outcomes copper-fastened
a sense of impunity. Tens of thousands of people, including a large slice of the business elite, defrauded the Exchequer of hundreds of millions of pounds. The consequences ought to have been profound. Instead, they were simply non-existent. Although two huge criminal conspiracies had been uncovered, there were no prosecutions. The answer to the question asked by Michael McDowell in 1994, in relation to corruption in the beef industry - ‘Will any of these people hang their Armani jackets on the back of a cell door in Mountjoy [jail in Dublin]?' - was still a resounding ‘No'.

Not only was there no legal accountability, there was no managerial responsibility either. There was no clear-out of senior bank management. The blue chip accountancy firms whose audits had somehow missed the fact that their clients were colluding in large-scale fraud remained in business. The banking culture in which everyone raced towards the bottom of the ethical barrel for fear of losing business to a more unscrupulous rival remained entirely intact.

There was not even a loss of prestige for those grand figures at the top of Irish banking who had failed to take the DIRT scandal seriously. One example was Peter Sutherland, who was chairman of Allied Irish Bank when it emerged internally that the bank held hundreds of millions of pounds in deposit in bogus accounts. Sutherland was, among other things, a former pillar of the state's legal system, as attorney general from 1982 to 1984. Yet, as Sutherland told the PAC inquiry, he did not really see the DIRT fraud as a matter for him: ‘The issue of non-resident accounts and DIRT was an issue which was essentially one for management. Management, as I understand it, believed that the issue was under control . . .' Sutherland passed the whole unpleasant business to the bank's audit committee, headed by the man who
would succeed him as AIB chairman in 1993, Jim Culliton. Though Sutherland was presumably unaware of the fact, Culliton was the holder of an Ansbacher Cayman account. Yet this passivity on Sutherland's part did him no harm at all. He continued to be a hugely admired figure in Irish business, the man most Irish bankers aspired to be.

More broadly, Irish banking did nothing to create a collective ethic, a set of common standards that would ensure that nothing like the DIRT and Ansbacher scandals could happen again. Even at the time of the DIRT inquiry, the chief executive of one major financial institution, Roy Douglas of Irish Life and Permanent, could not bring himself to regard the Ansbacher scam as anything out of the ordinary:

As the PAC put it, ‘the contention by Mr Roy Douglas of Irish Life and Permanent (now owners of Guinness & Mahon) that the Ansbacher device “is the simple straightforward set of relationships that exist between a depositor and a bank” is astonishing and lacking in any credibility'. The problem was that, within the world of Irish banking, it was less astonishing than it seemed to ordinary mortals outside that world and was, in fact, perfectly normal.

Irish banking created for itself a cosy narrative of the scandals: they had been unfortunate, they had been dealt with and we had all moved on. Seán FitzPatrick, then chief executive of Anglo Irish Bank, and as it later turned out, a master himself of ethitical banking, put it best in 2005: ‘My own industry of banking had the issue of DIRT to deal with and, as an industry, our actions were clearly wrong in the past. We failed to deal with the issues appropriately; we were wrong, and we have paid the price for our misjudgement. However, what's important in this context is that the issue of DIRT was capable of being dealt with under existing legislation and under existing procedures. We did not need any new [regulatory] powers.'

This was self-serving nonsense. The DIRT scandal was not a misjudgement, it was a criminal conspiracy. The bankers had not ‘paid the price', they were left serenely alone. And the issue was not ‘dealt with' under existing procedures, unless dealing with it meant some handy manoeuvres with a brush and a carpet. But FitzPatrick's view was that of both the regulators and the bankers: nothing had really happened.

It was hardly surprising therefore that there was no
change in the regulatory culture. The Central Bank's apparent denial in 1997 that it had known about the Ansbacher scam kept pressure off it at a crucial period when regulatory reform was being considered. Supervision of the banks was still shaped by the mindsets that allowed the scandals of the 1970s, 1980s and 1990s to unfold without interference. Those scandals had shown the regulators to be at best too timid to act on their moral principles and at worst actually complicit in the anarchy of the bankers. There ought to have been a revolution in the whole approach to the supervision of a rapidly growing financial services industry. Instead of transformation, there was almost complete continuity.

Two particularly toxic elements remained in place. One was an extremely conservative notion of the purpose of banking supervision. The apparatchiks of the Central Bank and of its successor, IFSRA, never shook off the belief that regulation was overwhelmingly prudential, which is to say that it should concern itself in a narrow way with the fiscal stability of the banks. So long as a bank seemed to have sufficient assets to meet its obligations, everything else was of minor importance. They never grasped the idea that ethics also mattered, that the ability of managers to adhere to basic moral and legal standards was a good test of the sustainability of their institutions. This habit of seeing decent and responsible behaviour as, at best, a side-issue was to have fatal consequences in the years of turbo-charged growth.

The other disastrous habit of mind was less easily identified but, if anything, even more lethal. What is clear from the Central Bank's fitful and pitiful attempts to deal with the Ansbacher Cayman scam is that politics mattered. It is not that any of the Central Bank inspectors or their superiors were themselves part of a political conspiracy or cover-up.
There is nothing to suggest that any of them were motivated by anything other than a desire to do their jobs in difficult circumstances. But those circumstances were immensely complicated by the knowledge that officials were dealing, not just with bankers over whom they held regulatory power, but with bankers connected to politicians who in turn held power over the regulators.

There is, in the Ansbacher case, an unmistakable correlation between political power (in effect, Fianna Fáil) and regulation, with the Central Bank's level of scrutiny rapidly diminishing after Charles Haughey came to power. What is important about this correlation for subsequent events is that it was entirely unspoken. There is absolutely no evidence of direct political interference in the workings of the Central Bank. There are no threatening phone calls and no Fianna Fáil moles on the bank's staff. Things are much subtler, and much more insidious, than that. In the very small and overlapping worlds of Irish banking, business, politics and public service, people knew who Des Traynor was and for whom he worked. They knew that there was a system of networks and connections, with the ruler of the country at its centre. This knowledge did not disappear after the scandals emerged in public. It was reinforced by the utter impunity from legal consequences of those who had engaged in flagrant fraud. Inchoate, instinctive and perhaps even unconscious, that awareness was all the more powerful because it did not require those who held it to do anything. On the contrary, it required them to do precisely nothing. And so, when it came to regulation the Irish tricolour became an idiosyncratic set of traffic lights: orange for ‘hang on a minute', white for ‘oh dear, my mind's gone blank' and green for go.