Ship of Fools

by Fintan O'Toole

  In the minds of those who were raising money for Fianna Fáil (and Richardson was the party’s chief fundraiser), business people were not giving money because they wanted to support democracy but because they ‘perceived’ that otherwise their company would be playing on a pitch that was slanted against them. In many ways, it barely matters whether that perception was accurate or not. It served in itself to create both the fear of not being on the inside and the promise of being ‘sorted out’ if you were. It tilted relations between money and politics, business and the state away from the general public interest and towards a search for mutual benefits in which politicians got access to the money and business people got access to the politicians.

  The beauty of this dependence on ‘perception’ is that it is unquantifiable, unaccountable and therefore limitless. A system in which everyone knows that bribes have to be paid in return for favourable treatment from the authorities is obviously sleazy. But one in which everyone is trying to size up who’s in and who’s out is more insidious and in some respects even more corrosive. Because it is fluid and unspoken, it is also unbounded. For those who see themselves as insiders, it generates a sense of being untouchable. And for those who see themselves as outsiders, it creates a sense of fear. They never feel they quite know what’s going on. They believe there is a power that could, if it wished, do them harm. They learn to be cautious, watchful and discreet.

  On both sides of this equation, there were dire consequences. For those on the inside, the sense of being untouchable fed what would become a hysterical hubris. For those who were making big money in banking and property, the belief, as Bertie Ahern put it in 2006, that ‘the boom times are getting even more boomier’ (and would continue to get even more boomier still) was a potent enough drug, creating its own delusions of invulnerability. But its effect was greatly enhanced by the idea of having a special relationship with power.

  That relationship was ideological as well as financial. Besotted with the idea that the titans of free enterprise could do no wrong, Fianna Fáil politicians convinced themselves that their close alliance with the builders and developers was in fact a form of public service. The interests of the nation were those of the men who made the money and the men who made the money were those who gathered in the Fianna Fáil fundraising tent at the annual Galway races, a favourite meeting place for property developers, builders and party bigwigs. As Bertie Ahern told the Irish Times in 2004, ‘If there are not the guys at the Galway races in the tent who are earning wealth, who are creating wealth, then I can’t redistribute that.’

  The reality that Ahern’s governments made damn sure that the wealth of the guys in the tent was not redistributed anywhere does not mean that this statement was insincere. It perfectly encapsulated the mix of half-baked egalitarianism and crony capitalism that characterised Fianna Fáil’s governing style. Ireland was one big tent, but that tent was full of developers, builders and other rich men making substantial donations to the party.

  The sense of intimacy (or, in less attractive terms, incestuousness) that was epitomised in this relationship set the tone for a great deal else in Irish institutional and business culture. From banks run by board members who were directors of each other’s companies to regulators and civil servants going to work for the companies they had been supervising, the ethics of the small world permeated Irish business. The problem was that Ireland was no longer a small world, but an extremely open, fast-growing global economy in which the stakes were getting ever higher.

  On the other side of the equation, that of the outsiders, the consequences were less obvious but just as lethal. If the insiders felt untouchable, the outsiders worried about laying a glove on them. The sense of impunity enjoyed by those within the circle was tangible and obvious. Especially if you were in the business of attempting to regulate, control or supervise the massively growing areas of the indigenous economy like banking and property, you had to take notice of the fact that some people belonged to a circle whose circumference was never quite defined.

  The assumption that there were clear, unambiguous ethical and legal standards that could be upheld without fear or favour did not apply in an atmosphere where fear and favours were always in the air. Rules seemed to apply to some and not to others, and it was a matter of conjecture and surmise as why this should be so. The guesswork would have been foolishly incomplete if it did not include the question of political connections.

  Above all, ethics became irrelevant. The lines between thievery and patriotism, between private advantage and the national interest, became impossibly blurred. And if you were a public servant who was supposed to be guarding those borders and ensuring that they were not crossed, you were patrolling a minefield.

  3

  Ethitical Banking

  ‘For God’s sake, whatever you do, don’t rock the boat’

  - Maurice O’Connell, governor of the Central Bank

  It was rather apt that the Irish Central Bank literally could not spell the word ‘ethical’. One of its inspection reports on a small Dublin merchant bank, Guinness and Mahon, which was running a huge tax scam for its clients, expressed the view that ‘it is not, in our view, appropriate or ethitical [sic] for a bank to participate in, as distinct from advise on, tax avoidance schemes’. Stumbling over ethics was one of the bank’s specialities. A central cause of the disaster that hit the Irish financial sector in 2008 was a culture, both of banking and of bank regulation, in which right and wrong were strange and elusive concepts.

  For more than thirty years before the Irish banking system collapsed, it had been colluding, on a massive scale, with fraud, tax evasion and routine breaches of exchange control laws. Large sections of the Irish business class, from strong farmers to chairmen of blue chip companies, were hiding money in offshore accounts or claiming to be living outside the country when they were in fact making that money in shops, pubs, property deals and companies within its borders. While pre-Celtic Tiger Ireland was suffering from mass unemployment, mass emigration, a squeeze of vital services in health and education and a persistent crisis in its public finances, many of its most respectable citizens were simply absenting themselves from society. The banks were helping them to do so, and the authorities in turn were scrupulously ignoring what was going on.

  The scale of the racket can be judged from the amount of tax that was eventually harvested after media investigations had prompted official inquiries. In all, the Revenue was eventually able to identify 34,000 people who had engaged in one or other of five major tax-dodging enterprises. By April 2009, it had recovered €2.5 billion from these individuals. To put this in perspective, €2.5 billion is almost a tenth of the entire Irish national debt in 1987. These people, of course, were simply those who were ultimately caught.

  The important point about these scams, however, is that they were not secret conspiracies, so wickedly brilliant that even the best minds in the public service could not penetrate their dark purposes. The truth is that, in the case of two of the largest scams - the widespread evasion of Deposit Interest Retention Tax (DIRT), and the elite Ansbacher con, in which wealthy individuals salted money in the Cayman Islands to evade tax - both the Central Bank and its political master, the Department of Finance, had a damn good idea of what was going on. To understand the sickness at the heart of the Irish banking system it is necessary to grasp the extraordinary fact that the state authorities knew about widespread organised crime committed by financial institutions and their customers and did essentially nothing to stop it.

  As the scandals unravelled in the late 1990s, the Central Bank, which regulated the system throughout most of the relevant period, would claim that its job was to make sure that the banks were solvent, and that issues like tax evasion were not really its business. It is worth noting that this claim was always patent nonsense. As the High Court inspectors who investigated the Ansbacher con put it, ‘from the very beginning of banking regulation the [Central] Bank was required to have regard to qual
itative factors. These factors included the quality of the management of a bank and the nature of the activities being carried on by a bank. Thus, whilst it has been emphasised . . . that the Bank is not principally concerned with Revenue matters, the Bank was and is statutorily obliged to concern itself with the proper regulation of banking. In this context, any evidence that a bank was facilitating tax evasion was at all material times a matter of concern for the Bank.’ To put it simply, if evidence that bankers were engaged in, or colluding with, financial crimes wasn’t the Central Bank’s concern, it is hard to imagine what would be.

  1 I’m Not There

  Deposit Interest Retention Tax (DIRT) was introduced in 1986. It obliged banks to withhold tax at source from the interest paid to borrowers and pass it directly on to the Revenue. Non-residents, however, could sign a form stating that they did not ordinarily live in Ireland and therefore requesting that DIRT not be taken from their interest payments.

  Ireland turned out to have an extraordinary number of non-residents with accounts in its banks. Almost immediately on the introduction of DIRT, the number of absentee depositors increased threefold. By the end of 1998, 17 per cent of all Irish-held deposits (amounting to IR£7.6 billion) was held by non-residents. The number of alleged expatriates was staggering: Allied Irish Bank alone had 88,000 of them in 217 branches - an average of over 400 per branch.

  Given that the country had, at the time, almost no immigrant population, and that the figure excludes all of the financial institutions that actually dealt specifically or mainly with non-residents, it was patently obvious that something was up. It was not hard to figure out what that something was: very large numbers of people were simply walking into their local branch, signing the forms, and claiming with a straight face to be resident outside the state. In many cases, these were people who must have been well known to bank staff. Equally, many of them were farmers, publicans, shopkeepers or small business owners tied to their towns and villages, and the banks knew damn well that they could not possibly be living outside Ireland. But the flow of money was good for business: in one branch of National Irish Bank in Killarney, for example, the angry manager complained to his superior that he had lost more than IR£1 million in deposits after he was instructed not to open bogus accounts. But this was not a question of one particular bank behaving badly: ‘the problem of DIRT evasion’, as the Dáil Public Accounts Committee (PAC) put it in its report on the affair, ‘was an industry-wide phenomenon’.

  Every single one of these account holders committed an act of fraud by filling out a form claiming to be a non-resident. Yet, even though the forms were simple enough, many of them were not filled out correctly. As late as 1999, over a quarter of the relevant forms were not properly completed. As Mark Hely-Hutchinson of Bank of Ireland explained of a typical example of non-residents: ‘Well, if he is a farmer, which means, by definition, he is a resident, part of his difficulty might be that he doesn’t know quite which answers he ought to give to make sure that he evades the tax.’

  Mostly, however, the banks didn’t even bother about incomplete or incorrect forms. As the internal auditor of Allied Irish Bank (AIB), Tony Spollen, put it, the ‘feeling was that once the declarations were complete or once the declarations were there, and in some instances even if they weren’t, that once the depositor said: “I am a non-resident”, then I think that was almost taken as good enough.’ As frauds go, this one was pathetically easy to pull off - it wasn’t even necessary to lie properly.

  Senior management in the banks knew that their branches were assisting in fraud, tax evasion and breaches of the exchange control laws. In AIB, for example, a senior executive, Henry O’Brien, wrote in an internal letter that sample audits in branches had shown that ‘In general there is not a major problem in Dublin or the East Coast Area, but from West Cork to Donegal the position is bad in a large number of Branches’ - meaning that it was clear at high levels within AIB that branches throughout the western half of the country were colluding in the fraud.

  The second largest bank, Bank of Ireland, does seem to have adopted a policy of complying with the tax laws when DIRT was first introduced. In the first year of the tax, it lost IR£120 million in so-called ‘non-resident’ deposits, primarily because it was insisting on evidence that account holders were actually non-residents. Bank of Ireland quickly got the message and joined the other banks in facilitating their customers’ crimes. When its chief executive, Mark Hely-Hutchinson, who suffered from the affliction of moral scruples, proposed to the Central Bank that there should be a common code of conduct among all the banks that would stop them undercutting each other’s standards to get business, he received, as he recalled it, ‘a very sort of warm, polite response, “What a pity these other people don’t have the same ethics as you do.” But the Central Bank simply didn’t see it and it wasn’t, within the legislation, within its function to police these things.’ It says much about the ethical climate in Irish banking that a patently decent man like Hely-Hutchinson was left with little choice but to continue to oversee practices he clearly despised.

  As we have seen, it was in fact a key part of the Central Bank’s function to ensure that banks were behaving lawfully. The very existence of these bogus non-resident accounts, moreover, was itself a breach of the exchange control laws. The Central Bank, which was specifically charged with implementing those laws, as the PAC found, ‘took no action’.

  Even on an extremely conservative view of the role of the Central Bank - that it was there to ensure that the banks remained solvent - the fiddling of the DIRT tax should have been extremely alarming. In the case of AIB, the internal auditor, Tony Spollen, estimated in 1991 that the amount of money in bogus accounts was of the order of IR£300-400 million - which would mean that the unpaid tax was around IR£100 million. The chief executive of the bank, Gerry Scanlan, dismissed these calculations as ‘infantile’, but they were in fact a decent guesstimate. IR£100 million was, at the time, about the size of AIB’s annual profits - the liability could in principle have pushed the country’s biggest bank into the red.

  This massive fraud was so obvious that even the authorities could not help noticing. The official files of the Department of Finance are seasoned with statements like ‘half the non-resident accounts are thought to be bogus’ and ‘at least IR£1 billion of non-resident deposits are thought to be held by Irish residents’. By 1993, the Department’s own internal estimates were that the amount of money in bogus accounts was IR£2 billion.

  Why was nothing done? One reason is that the state saw its job as supporting the banks rather than controlling them. The Public Accounts Committee, in its report on the scandal, concluded baldly that ‘There was a particularly close and inappropriate relationship between banking and the state and its agencies. The evidence suggests that the state and its agencies were perhaps too mindful of the concerns of the banks, and too attentive to their pleas and lobbying.’

  Thus, for example, when DIRT was being introduced, the Irish Bankers Federation lobbied the Department of Finance to ensure that the powers of the Revenue to look into the status of bogus accounts would be limited. The banking lobby was particularly concerned that the Revenue might inform foreign tax authorities about Irish accounts held by people claiming to be their citizens. It received an assurance from Maurice O’Connell, a senior Finance official who was later to become governor of the Central Bank, that ‘there would be no “en bloc” disclosure’.

  Beyond this tendency to see the interests of the banks as a paramount concern, however, there were broader assumptions at play. Deeply embedded within the state were two related beliefs. One - never openly articulated but clearly assumed at the level of unconscious instinct, and therefore especially potent - was that the rich in Ireland could not be expected to have any sense of social or patriotic responsibility. Misty-eyed nationalism may have come easily to the Irish high bourgeoisie, but the financial policy-makers knew better. They assumed that the Irish rich were similar to t
he elites of developing countries in Latin America or Africa. Given any level of pressure, they would evade their taxes and salt their money away offshore.

  Secondly, the conclusion to be drawn from this was not the obvious one that the law would therefore have to be enforced with rigour and consistency. It was, rather, that the lawlessness of the rich would have to be indulged. Enforcement would become another art of avoidance, steering clear of anything that might scare them into hiding their money. Maurice O’Connell, then governor of the Central Bank, told the Comptroller and Auditor General that ‘We were broadly aware of the fact that people were avoiding tax. And all this had to be corrected, this was wrong. Everybody agreed it was wrong. [But] for God’s sake, whatever you do, don’t rock the boat.’