by Shane Ross
Business was booming – but then in the mid-eighties the insurance market hit a downturn. Reinsurance and underwriting claims started to snowball at exactly the moment when premiums began to drop off. ICI, with its high-risk projects, was the most vulnerable insurance company in London.
AIB had initially taken a laissez-faire approach to Grace’s strategy. The home team was happy to see mushrooming premiums in 1983 and early 1984. But by summer 1984 the government’s industry minister, John Bruton, had become alarmed at the size of the claims. He was given assurances by AIB that they were pumping in £40 million to strengthen ICI’s balance sheet. At the same time AIB sent in a team of investigators to ascertain ICI’s real losses. These turned out to be on such a scale as to threaten to bring down not only ICI, but AIB itself.
AIB decided to pull the plug. They left it to the eleventh hour to warn the government of the impending calamity. In a series of meetings between AIB bosses and top politicians, the leaders of Ireland’s biggest bank put a gun to the head of the government. They told Taoiseach Garret FitzGerald, finance minister Alan Dukes and Bruton that AIB would go to the wall if the government did not ride to the rescue immediately. The government blinked first, agreeing to underwrite all ICI’s debts. That was bad enough. It was worse still that this was a blank cheque. No one knew the extent of the losses at ICI. The Irish government bailed out a bank in distress rather than let it go to the wall.
AIB had pulled a coup in the ICI crisis. Its representatives at the talks with ministers were led by chief executive Gerry Scanlan and his deputy Dermot Egan. Scanlan was the rough diamond of the pair – robust and brash. Egan was a smoother creature, the good cop in the negotiations, an old-style banker who relished membership of the directors’ circuit. He was in the mould of many of the later AIB board. He would have fitted in comfortably at the Dublin 4 dinner tables of later chairmen such as Peter Sutherland, Lochlann Quinn, or Dermot Gleeson.
A story is told of Egan which sums up the attitudes of many of his breed. Sometime in the early nineties Egan, recently retired from AIB, met Charlie Haughey, recently retired as Taoiseach. They compared notes on retirement. Charlie, polite as always, asked Dermot what he was doing, now that he was retired. The ex-banker pulled himself up to his full height. Looking down on the little politician, he puffed out his chest: ‘Well, I am on the council of the Irish Management Institute; I chair the National Concert Hall; I am a Companion of the Institute of Personnel Development; I am chairman of the Philately Advisory Council; I am on the board of the Glucksman Gallery and have a host of other interests. Busier than ever. And, Charlie, what are you doing now?’
Charlie looked the silver-tongued ex-AIB chief straight in the eye. ‘Same as yourself, Dermot. Shag all.’
Egan was an effective advocate for AIB in 1985. AIB walked away from the ICI debacle, landing the baby in the government’s lap. It was not the last time that the banks would hold a government to ransom. The prospect of a collapse of AIB was too catastrophic for ministers to contemplate.
Eventually AIB did grudgingly agree to pay over some money for its part in the fiasco: it consented to pay €5.5 million a year while the other banks were forced to pony up much lesser amounts. But AIB astonished FitzGerald and Dukes by carrying on as if nothing had happened. A few weeks after the rescue was completed the bank announced profits of £85.4 million, plus a dividend, without batting an eyelid. It was two fingers from the bank to the government. The taxpayer picked up the poisonous part of the package while the shareholders walked off with a dividend as though nothing had happened. In the end the taxpayer did not lose out, partly due to a 1992 deal done by commerce minister Des O’Malley, who insisted that AIB should pay more. But the entire affair left a sour taste in the mouths of politicians who felt outplayed and threatened by a bank that had taken advantage of its size.
The sourest taste of all was left by Gerry Scanlan. The man ultimately responsible for the sorry episode was one of the principal beneficiaries. Scanlan bought 50,000 AIB shares at a depressed level during the ICI crisis; not long after the government bailout his purchase was showing a paper profit of more than £80,000. He had received clearance for the purchase from AIB chairman Niall Crowley and the board.
The failure of ICI, together with AIB’s need for a government bailout, was due to a bad, but arguably pardonable, commercial decision. The DIRT scandal was worse. Nearly all the banks were caught up in this massive scam, but AIB was the one that blazed the DIRT trail.
It worked like this: depositors were informed that if they used bogus offshore addresses they would not have to pay Deposit Interest Retention Tax (DIRT). Bogus non-resident accounts became the rage. AIB managed to build up a base of 53,000 customers signing declarations that they lived in the US, the UK – anywhere except the Irish Republic. Tax cheating was the business. And it was obviously fine if your local bank manager was promoting it.
Luckily for the nation, not everybody in AIB was happy to co-operate with this organized tax evasion. Internal auditor Tony Spollen blew a whistle that led to the famous Dáil Committee hearings into this institutionalized illegality. At the hearings Spollen fingered many of his former colleagues and clashed with Gerry Scanlan in at least one bitter exchange. AIB unconvincingly claimed that they had done a deal with the Revenue, which had granted them an amnesty. The Revenue strenuously denied this claim. The Committee found against the bank.
At the end of the inquiry it was clear that bankers were not the only players aware of shady activities. Central bankers, politicians, civil servants and other powerful forces must have known what was going on. Bankers were competing against each other to create bogus offshore business. When Liam Collins broke the story in the Sunday Independent he revealed that AIB had secured over £600 million in customer deposits for this racket.
When settlements were eventually reached, AIB agreed to hand over £90 million to the state in tax, interest and penalties. Bank of Ireland took the runner-up position, paying £30 million. Even the ACC – a taxpayer-owned bank – had to pay £18 million. In total the state recouped over £225 million.
Not a single member of the staff of any of the banks is known to have paid more than a cursory price. In at least one case the manager of a branch that had been top of the DIRT bogus account league found himself promoted.
The regulator was made a monkey of again in 2004, when AIB made a clean breast of several other breaches. One of these – a tax evasion scheme being run, not for customers, but for top people in the bank – became known as the Faldor scandal.
Faldor was an investment company set up in the Virgin Islands for the benefit of senior AIB executives. The funds in the company were managed by Allied Irish Investment Managers (AIIM) on their behalf. AIB admitted in 2004 that top brass at the bank – Gerry Scanlan, Roy Douglas (formerly of AIB and latterly of Irish Life), the one-time AIB deputy chief executive, Patrick Dowling, and the former director of corporate strategy, Diarmuid Moore – had benefited from this scheme located far away from the prying eyes of the Irish taxman.
Sensationally and simultaneously AIB decided to hang its last chief executive, Tom Mulcahy, out to dry for an unrelated tax offence. An AIB statement revealed that five top executives had ‘tax issues’. The first four were the Faldor quartet and the fifth was Mulcahy. Following his retirement from the bank Mulcahy had taken up the prestigious post of chairman of the state-owned Aer Lingus. After a brief conversation about his ‘tax issue’ with his political boss, transport minister Seamus Brennan, Mulcahy resigned. He also stepped down from the board of the publicly quoted insulation company Kingspan.
Scanlan, Douglas, Moore and Dowling pleaded innocence of any wrongdoing in the Faldor case. They said they had been led to believe by AIB’s investment managers that their investments in Faldor were part of a legitimate scheme. They were astonished; they were shocked; they blamed AIB. All four appeared on the tax defaulters list. Gerry Scanlan paid up €206,000 in settlement of his tax liabilities. Roy Douglas f
orked out €53,000. Moore coughed up €51,000 and Dowling made a settlement of €13,000. They were embarrassed but bit the bullet and brazened it out.
Worse still for AIB was its confession that AIIM had used Faldor for ‘misallocating’ profits. Favoured clients in Faldor had been allocated artificial profits while ordinary clients had been deprived of those due to them. AIB agreed to pay compensation to any clients who had lost out on the allocation of profits.
It was a devastating admission. It implied that AIB had been playing ducks and drakes with clients’ discretionary money. Behind closed doors in the Virgin Islands its investment managers had been allocating profits to their favourite sons in preference to other clients. Trust in the bank’s investment arm was shattered.
In admitting the ‘tax issues’ of the five, AIB seemed to have made a break with the past. Was it dumping on its former employees to draw a line in the sand? Perhaps, but it subsequently emerged that the Faldor investment scheme was only rumbled because Roy Douglas had decided to disclose a tax debt owed from his Faldor exploits. He informed the Revenue Commissioners and AIB. The can of worms would have opened, with everything leaking out eventually. Like all good spinners, AIB took control of the bad news and put it into a single press release. They hoped the latest bombshells would be a one-week wonder.
When AIB was challenged by politicians, the governments bottled it. When confronted by the press, the bankers clammed up, pleading confidentiality. When challenged by the regulator… they were never challenged by the regulator. AIB’s size was the most obvious explanation for this, but the distinguished make-up of the bank’s board over the years may also have been a factor. In the early eighties the board of AIB featured blue-blooded names like Niall Crowley of the famous Dublin accountancy family – the ‘Crowley’ in Stokes Kennedy Crowley – Sir Peter Froggatt, former Vice Chancellor of Queen’s University Belfast, and Maurice Abrahamson, a pillar of the stockbroking community.
Gonzaga-educated Peter Sutherland took over as chairman in 1990. He was succeeded by Jim Culliton, whose distinguished business reputation was destroyed when it was revealed that he had been a secret investor in the illegal Ansbacher investment scheme run by Haughey’s bagman, Des Traynor. The same AIB board included former rugby international Ray McLoughlin, who admitted to the Moriarty Tribunal investigating Haughey’s finances that he had composed the infamous thirty-six-page memo to John Furze, the man who operated the Ansbacher accounts for banker Des Traynor in the Cayman Islands, outlining a strategy for tax avoidance.
Lochlann Quinn, who succeeded Culliton as chairman, was a Blackrock College boy who went on to UCD. He was a great friend and near neighbour of Sutherland in Balls-bridge. Quinn’s successor in the chair was drawn from the same pool: Dermot Gleeson, like Sutherland, was a former Fine Gael Attorney General. Like Quinn, he was educated at Blackrock and UCD. He too lived in Ballsbridge.
Gleeson had ingratiated himself with Quinn and AIB when he mounted a sterling legal defence of the indefensible at the DIRT hearings. Soon afterwards he was parachuted on to the board and later into the chair.
The difference on the scandal scale between AIB and Bank of Ireland – the other pillar of the duopoly – was remarkable. Bank of Ireland were no angels but they did not run amok.
Apologists for the Bank of Ireland sometimes explain its lower level of offences through its recruitment policy, which targeted employees from affluent backgrounds; according to this theory, Bank of Ireland was less hungry. Tom Mulcahy of AIB was once asked the question about the difference between the two banks’ cultures and answered: ‘When chasing a client, Bank of Ireland would politely knock at the front door and wait for an answer. AIB salesmen would head straight for a back window with a crowbar.’
Certainly the Bank of Ireland seems more genteel in its traditions. In the seventies and eighties its board and management was peppered with names like Harvey-Kelly, Lewis-Crosby and Hely Hutchinson.
Bank of Ireland flaunts its history. In 1802 it bought the Irish parliament building in College Green, Dublin – redundant after the Act of Union – for £40,000. The building remained its headquarters until 1970. It has preserved the House of Lords chamber for display to the public to this day, and the building remains a flagship for the bank. It was the banker to the Irish government from the foundation of the state in 1922 until 1971; as a consequence it was often confused with the Central Bank, a confusion that it probably benefited from.
The Bank of Ireland’s traditions were reflected in its governors (i.e. chairmen) and directors. As recently as the 1960s they often sat on the board to represent the bank’s biggest customers. Paddy McGrath looked after the multiple interests of his famous family, which included the Irish Sweepstakes and the Irish Glass Bottle Company. Jameson’s whiskey propelled Uppingham-educated Alec Crichton into the governorship in the early sixties, while Powers whiskey boss, Ampleforth-educated John Archibald Ryan, was twice governor in this earlier period. Don Carroll of the Carroll’s tobacco family also did two turns in the governor’s seat, finishing his second term in 1985. Carroll came via Glenstal and later Trinity College Dublin.
The governors plucked from the ranks of the captains of industry were interspersed with academics. Two professors of distinction, Bill Finlay from the UCD law faculty and Louden Ryan from the Trinity economics department, served five-year terms. Two of the last three governors, Howard Kilroy and Laurence Crowley, have been part of an inner circle of Irish businessmen who seem to land on the boards of public companies with uncanny ease. The last governor, Richard Burrows, spent many years as chief executive of Irish Distillers, a stock-market leader before it was taken over by French drinks giant Pernod Ricard. The French company employed Burrows as joint managing director until his retirement. His insider status was confirmed when he was made president of Ireland’s insiders’ big business club, IBEC, in 1998.
In the mid-eighties the Bank of Ireland was deeply embarrassed by one of its board members. Russell Murphy landed on the board of the Bank of Ireland when it bought Hibernian Bank, where he had been a director. He was that unusual animal, a colourful accountant. He was generally regarded as eccentric but brilliant. A daily communicant, he was given to fits of generosity, supplying theatre tickets and flowers to friends and acquaintances at the drop of a hat. He regularly took pilgrimages to Lourdes. He was a convincing character when regaling listeners on the topic of money or investments. Several high-profile celebrity figures allowed him to manage their finances.
In 1986 Russell Murphy died. Within days of his funeral it emerged that his affairs were in chaos. Ireland’s premier broadcaster of the eighties, Gay Byrne, had entrusted Murphy with his life savings, but Murphy left nothing in the kitty. The late playwright Hugh Leonard lost at least £250,000.
The Bank of Ireland had let a cowboy into the holy of holies. The board was deeply embarrassed. Russell was explained away as the exception to the otherwise untainted integrity of the ‘Court’, as the bank’s board grandly styled itself.
Russell Murphy was not the only board member to upset the apple cart in the eighties. Entrepreneur Tony Ryan, the founder of Guinness Peat Aviation, was then at the height of his powers. Ryan used much of his wealth to buy 5 per cent of the Bank of Ireland’s share capital. He caused consternation by forcing his way on to a board that was accustomed to selecting fellow members from among its friends in Dublin’s inner circle of favoured businessmen. Ryan was an outsider. Old hands on the board looked on him with deep suspicion, suspecting that he wanted to take over the bank. One contemporary board member told me recently that Ryan was a difficult director: ‘He wasn’t used to not being in the chair.’ Another told me, ‘Tony was a hugely divisive influence. He was quite obviously linking up with outsiders whose interest in the Bank of Ireland was questionable. There were multiple leaks to the media about what was happening at the Court during his period there… Once Howard Kilroy took over as governor from Louden Ryan in 1991, the game was up for Tony. Howard made it clear
that he was in charge and was set for a six- or even nine-year term. Tony left and the leaks ended.’
Ryan left long before the DIRT scandal made the rest of the board blush to their patrician roots. Even to this day the Bank of Ireland finds the issue of DIRT tax evasion difficult to face. The bank that was formed by Royal Charter was up to its eyeballs in defrauding the Revenue Commissioners.
The Bank of Ireland had scored some spectacular own goals in the DIRT affair. The name of Miltown Malbay will be remembered for generations as the star performer in the Irish DIRT championship stakes. The Bank of Ireland’s outlaw activity in the sleepy Clare town put it on the map for all the wrong reasons. A former Bank of Ireland director told me: ‘The managers in the branches would have known of the disapproval from the top of the bogus non-resident account activity. But [then chief executive] Mark [Hely Hutchinson]’s morality would not have been understood down in Cahirciveen or Miltown Malbay. Dublin is a long way away. Local managers would invariably respond that customers were telling them that unless their deposits had non-resident status they would go across the road to AIB.’
Bank of Ireland chiefs eventually came out with their hands up over DIRT evasion. They paid €30 million over to the taxman, much of it in penalties and interest. They wriggled and squirmed. A spokesman used weasel words to claim that they ‘had a lesser scale of issue’ than AIB; but they had swallowed their moral scruples and joined the other banks in the scam. They would have been aware that it was highly unlikely that anyone in the bank would have to pay a penalty.
Bank of Ireland’s weak defence – the competitive need to break the law – held less water in one of its other rackets. By the mid-nineties they had discovered a more sophisticated way of ducking DIRT. Bank managers identified high-net-worth individuals and persuaded them to move their secret hoards to Jersey to avoid DIRT and to ensure confidentiality.
