by Shane Ross
Tony Spollen, who had preceded McErlean as an AIB internal auditor by eight years, became Ireland’s first celebrity whistleblower. Spollen left in 1991, but in 1998 Liam Collins of the Sunday Independent published Spollen’s top-secret report to the board about DIRT tax dodging at AIB. McErlean was one of Spollen’s successors as internal auditor in the same bank. He had parted company with AIB in 2002. He knew where the bodies were buried.
McErlean had a good CV. He had been a lawyer with British Airways before returning to Northern Ireland with his wife Niamh and family in 1991. Over the next eleven years he gradually worked his way up the AIB ladder, to the key post of internal auditor. He was the second internal auditor to know too much, throw down the gauntlet to his employers and decide that the only honourable road was to leave.
McErlean carried a promising-looking briefcase, stuffed with documents. He had a slightly haunted look about him – not surprisingly, as he had bottled up a galaxy of banking secrets for six years.
I sensed a scoop.
Our conversation started off stiffly. The fifty-year-old Roman Catholic from Belfast, educated at St Malachy’s and with a law degree from Queen’s University, was not a nat ural soulmate for a TCD Prod; but his whole demeanour, while reserved, was profoundly impressive and engaging.
McErlean had made life awkward for the banking establishment back in 2001 when he had reported to his bosses at AIB that the culture of overcharging at AIB was endemic. We know now that his report also revealed sharp – and possibly illegal – practices in other areas of AIB. The report had gone to the Central Bank.
Liam O’Reilly was assistant director general at the Central Bank at the time. (Two years later, in 2003, he would take over the top job at the Financial Regulator when it assumed the regulatory powers of the Central Bank.) In early 2002 O’Reilly met McErlean to discuss the allegations contained in his internal audit report. The Central Banker promised to consider all McErlean had said and to take appropriate action. AIB had already committed itself to addressing McErlean’s report and to restoring money to those who had been overcharged.
Soon after his first meeting with Liam O’Reilly in 2002, McErlean found himself in the departure lounge at AIB. Within a few months he was an ex-employee. He remains convinced to this day that his pursuit of these thorny topics is the reason why AIB wanted to see the back of him.
After McErlean’s departure, O’Reilly asked to meet him again, and the two sat down in October of that year. According to McErlean, at this meeting O’Reilly asked him to withdraw all his allegations against AIB, but he refused. According to the Central Bank, however, he withdrew them. Not much common ground there.
In May 2004 RTÉ broke a fresh overcharging scandal at AIB. Another whistleblower within the bank had tipped off the regulator several weeks earlier; fed up with waiting for action, the whistleblower had then spilled the beans to the RTÉ newsroom. The Financial Regulator, not for the first time bounced into action by a whistleblower, launched a clever public relations offensive, vowing remedies for consumers and insisting that it had already been probing the issue when RTÉ went big on the story. Perhaps, but was it ever going to tell anyone? McErlean, meanwhile, was indignant: he felt that the new revelations had striking echoes of the contents of his internal audit report in 2001, and that the impression had nevertheless been given that this was the first time the regulator had ever heard these allegations. His withdrawal of his case against AIB had, he believed, given the regulator a chance to lose interest in a scandal at Ireland’s biggest bank. He wondered if the Central Bank and AIB were tick-tacking each other.
McErlean had delivered quite a big fish for me to fry. His conflict with AIB was over, but the credibility of the Financial Regulator was at stake. McErlean felt he could not feebly let the regulators duck the issue just because he had settled his battle with AIB. He had spent two years in search of minutes of his 2002 meetings with Liam O’Reilly. The Financial Regulator refused to release them; the Data Protection Commissioner released some documents but withheld bits that McErlean required. That day in my office he wanted advice on how to secure the key documents from O’Reilly – now head of the Financial Regulator – that would resolve the dispute about whether McErlean had really withdrawn his allegations of overcharging.
That Wednesday morning in June 2008, I was frustrated by McErlean’s refusal to blow the lid on AIB. He insisted that he had a ‘confidentiality’ agreement with them, agreed as part of the terms of his departure from the bank. The prospect of breaching it, either clandestinely or up front, horrified him. My subversive reassurance that these behind-closed-doors agreements were regularly honoured in the breach cut no ice with him.
McErlean bore no grudge against AIB. Ireland’s biggest bank, for all its wrongdoings, was not his target. He even spoke in complimentary terms of its chief executive Eugene Sheehy. This gritty Northerner was keen to tackle an arguably even more formidable foe, Ireland’s Financial Regulator, and he suggested that he should give evidence to the Oireachtas Committee on Economic and Regulatory Affairs.
I introduced him to my fellow committee members – Fine Gael TD Fergus O’Dowd and the chairman, Michael Moynihan of Fianna Fáil. They too were impressed by his story. We all knew that McErlean’s unhappy experience had the capacity to chip further into the watchdog’s diminishing credibility.
We encountered delays in finding a slot for a hearing. Constantly unfolding banking scandals were occupying a lot of the committee’s time. McErlean himself was not the easiest to bring to the committee. The first time he was due to appear he suddenly developed a health problem, possibly brought on by stress. Michael Moynihan, a man of great humanity, had doubts about calling him again if the ordeal threatened his well-being. But McErlean recovered and insisted that he was fit to appear.
He was equally insistent that he could not give detailed evidence about AIB, because he had sworn confidentiality. We decided that such a restriction left little to talk about and stopped pressing for a hearing. Eventually McErlean agreed to contact AIB to request release from the gagging clause, but we held out little hope.
Out of the blue McErlean received a reply from AIB. He was released from the confidentiality condition for the purposes of the Oireachtas committee. It was an unexpected gesture from a bank that had a lot to lose. We were back on course.
On 24 March 2009, nine months after he had first walked into my office with his strange tale, McErlean gave evidence. It was worth the wait. His credibility was enhanced. He told of how he had warned the Central Bank about overcharging in 2001 and how it had failed to act. The newspapers bought into the story, and Pat Kenny gave McErlean a full half-hour on his RTÉ radio show.
The Financial Regulator was stung into a reply. Its acting chief executive, Mary O’Dea, fired with ambition to be appointed to the position on a permanent basis, sprang to its defence. A statement was issued suggesting that McErlean was confusing his complaint about overcharging of ‘management’ time with other more wide-ranging overcharging; that the complaint had been referred to the Office of the Director of Consumer Affairs, which had found an overcharge of €255,000 (and not the tens of millions that McErlean had audited); that McErlean was comparing chalk and cheese; that it was all a terrible misunderstanding.
The regulator’s response was careful not to question McErlean’s bona fides. All neutral observers had formed the opinion that he was telling the truth. The ‘misunderstanding’ route was one of the few avenues left open to the retreating watchdog.
Apart from his testimony about overcharging, McErlean had also dropped a bombshell at the committee. Suddenly released from his seven-year oath of confidentiality, he testified that AIB’s subsidiary Goodbody Stockbrokers had, back in 2000 and 2001, been dealing in AIB shares while hiding behind the anonymity of secret accounts based in exotic offshore tax havens, most notably the Pacific Island of Vanuatu and the red-hot Caribbean island of Nevis. Nevis was blacklisted by many reputable brokers. According to McErlean
, his internal audit team reported these activities to the regulator at the time. The trades ran into multi-millions. McErlean believed the dealings were illegal. Goodbody maintained the opposite.
The Financial Regulator did not deny McErlean’s assertions. A spokesman claimed that the regulator had fulfilled its duties and boasted that ‘significant personnel and operational changes took place at Goodbody’ following McErlean’s warnings.
Once again the Financial Regulator was under scrutiny. In the overcharging case it had discovered nothing. In the Goodbody case it had discovered nothing. Discovery had been left to someone else. Only when confronted with the problem had the watchdog begun to bark. It had been noticeably reluctant to inform the public of the goings-on at one of Ireland’s top stockbrokers, a company that enjoyed a reputation for straight dealing. The lid had been kept on this volcanic story for eight years, right up to the day that McErlean surfaced before the committee. McErlean had been acting in the interests of the consumer when he warned the regulator of AIB’s overcharging and the malpractices at Goodbody. Perhaps that was why he was banished into the wilderness for six years.
A couple of decades ago McErlean’s challenge might have been dismissed as a hopeless attempt to fell a colossus; but in the Ireland of 2009, awareness was growing that the financial policeman had a flawed pedigree. Volumes of evidence that it had a history of being a servant of the banks, not a master, helped to explain its behaviour during the deepening banking crisis. Eugene McErlean arrived in Leinster House bang in the middle of this awakening.
The wake-up call had taken a long time. Ireland’s Central Bank had carefully cultivated a forbidding profile. For most members of the public, the Central Bank was a dull institution, but probably beyond reproach. A retired Central Bank director told me that when architect Sam Stephenson was given his brief for the design of its headquarters in Dame Street, he was told to make the building ‘a statement of power’. In political circles it was sometimes considered dangerous, if not downright disloyal, to challenge the Central Bank’s methods or question its integrity.
No longer. Ordinary citizens of Ireland were beginning to realize that banks had run amok because they had been allowed to do so. Anglo Irish, AIB and Bank of Ireland had been competing suicidally for high-risk lending business and had not been pulled up. Overcharging was chronic in the retail banks. AIB was not the only culprit. Statistics from Belfast bank auditing firm Bankcheck confirm that the Bank of Ireland, Ulster Bank, National Irish Bank and Irish Nationwide were all guilty of numerous overcharging offences.
The regulator never caught them in the act, but would move against them if they were unmasked by a nosey third party, such as RTÉ in the overcharging scandal or the Sunday Independent’s Liam Collins in the DIRT swindle. Once caught by someone else, the guilty bank was likely to be forced to repay the money it had stolen from customers or the state, but banks were never fined.
The Central Bank and its successors had a long tradition of being protectors and allies of the banks, a tradition that included some noble names in the annals of Irish banking. Central Bank directors had often moved comfortably on to the boards of commercial banks once their terms of office in the service of the state were over. Professor James Meenan, an early Central Bank director, moved to the Bank of Ireland. So did legendary and distinguished bankers like Dr Ken Whitaker and Professor Louden Ryan. At one point the relationship between the regulator and the regulated was so close that there were instances of AIB and Bank of Ireland directors sitting simultaneously on the board of the Central Bank. The Bank of Ireland’s Donal Carroll and Ian Morrison pulled off the double. AIB managed to place Liam St John Devlin and Joseph McGlinn on both boards at the same time. In the eighties retired Central Bank secretary Bernard Breen was spirited on to the board of the Bank of Ireland. And in 1998 accountant Billy McCann moved from a stint on the Central Bank’s board to become a director of Sean FitzPatrick’s Anglo Irish Bank. Finally, McErlean’s nemesis, Liam O’Reilly, saw his talents recognized in his retirement as chief executive of the Financial Regulator by an appointment to the board of Irish Life & Permanent.
Given the existence of such a well-oiled revolving door between regulator and regulated, it is not surprising that the two often found time to socialize together. Golf, as ever, was the glue. AIB regularly held a lavish golf outing at Portmarnock, Dublin’s most exclusive golf club, specifically to butter up central bankers. One AIB source told me that they gave away free balls with the AIB logo and that it was ‘customers’ golf, meaning that they always let the regulators win.
Eugene McErlean told me that his bank used to wine and dine regulators from the Central Bank in the 1990s and later: ‘AIB would roll out a five-star lunch with all the bells and whistles’ to satisfy the palates of the watchdog’s head honchos. The hospitality was never returned by the regulators. It was all one-way traffic.
McErlean also said, ‘From my experience [as AIB’s head of compliance in the UK], no one from the Bank of England, or the UK’s Financial Services Authority would ever accept such opulent hospitality. In the UK, regulators had a code about accepting hospitality from banks, ensuring there was no appearance of being compromised.’
But things were done differently in Ireland.
The occasion when Ken Bates slipped through a very lax Central Bank vetting procedure to become the kingpin of Irish Trust Bank was embarrassing enough. The failure to spot DIRT, overcharging and other abuses was incomprehensible, and Sean FitzPatrick’s ability to doctor the Anglo books without coming to the notice of the Financial Regulator is deeply disturbing. But by far the most alarming example of the Central Bank’s craven behaviour in the face of bankers’ skulduggery was the regulator’s capitulation to one of Ireland’s most cunning white-collar crooks, banker Des Traynor.
Des Traynor was chairman of Guinness & Mahon Bank. He was also Charlie Haughey’s accountant – that relationship should have been a warning sign in itself. Yet in the late 1990s High Court inspectors were appointed on the application of the government to probe into Traynor’s Ansbacher accounts in the Cayman Islands. Irish customers of the bank had deposited money beyond the reach of Irish law and the taxman. The inspectors discovered that the Central Bank had known about the accounts since 1976.
The list of Ansbacher account holders was a who’s who of the great and the good in Irish business. Several of them were associates of Charlie Haughey, who was Minister for Health at the time. Among them was none other than Sam Stephenson, designer of the Central Bank building in Dublin’s Dame Street. Another Ansbacher account holder was Liam McGonagle, a well-known solicitor. But the name that must have devastated the Central Bank’s investigator, Adrian Byrne, struck closer to home.
Ken O’Reilly-Hyland was not a household name in Ireland in 1978. He was chairman of the oil company Burmah (Ireland). A cigar-smoking plutocrat, he lived in one of Dublin’s finest residences, in Ballsbridge. He had made a fortune in property deals in the sixties and seventies and was a leading light in the glory days of Taca, the collection of businessmen who forked out for Fianna Fáil. More significantly, he was originally one of Haughey’s magic circle when the ambitious young Fianna Fáil leader-in-waiting was Minister for Finance in the late sixties. At the time of the Arms Trial – Haughey’s lowest ebb, in 1970 – O’Reilly-Hyland switched allegiance to Jack Lynch. He was rewarded for his volte-face by Haughey’s arch-enemy, Lynch loyalist George Colley, who was Minister for Finance in 1973. Colley gave O’Reilly-Hyland a plum appointment to the board of the Central Bank.
Despite falling out with Haughey, O’Reilly-Hyland continued to share business interests with Traynor and McGonagle.
In 1976 an on-site inspection of Guinness & Mahon by Central Bank official Adrian Byrne hit upon some unsavoury activities designed to evade tax. Byrne must have frozen when he spotted O’Reilly-Hyland’s name on the Ansbacher list. He passed the details up the line. O’Reilly-Hyland had a £400,000 loan from Guinness & Mahon secured by a deposit of
£230,000 in the Caymans. Byrne reported to his Central Bank bosses that ‘the fact that the bank [Guinness & Mahon] takes such extreme precautions to keep the existence of the deposits secret from the Revenue Commissioners indicates that the bank might well be a party to a tax evasion scheme’.
Byrne’s charge was staggering. It challenged the Central Bank, as regulator, to take action immediately. The Central Bank responded all right, but the response was dumbfounding. An official deleted the word ‘evasion’ from Byrne’s report and substituted the word ‘avoidance’. The difference is vital. Evasion is illegal. Avoidance is above board. With the stroke of a Central Banker’s pen, Traynor was in the clear, on the right side of the law. He promised to run the Ansbacher accounts down, but he did nothing of the sort. The tax dodge continued until 1997.
In 2000 the Central Bank’s then deputy general, Tim O’Grady-Walshe, tried to explain the bank’s failure to act against the Ansbacher scam, pleading that they feared a run on Guinness & Mahon that would have caused the collapse of the bank. He also told the tribunal that Des Traynor was ‘a very clever and very skilful man’ and that he was convinced that Traynor would not break the law. Adrian Byrne spoke to Mr Justice Moriarty of the high esteem in which Traynor was held in banking and accountancy circles, adding: ‘We thought he would work his way out of this.’ He went on somewhat smugly: ‘The fact is the bank didn’t collapse and depositors didn’t lose money; that was our prime objective.’
It was not the Central Bank’s finest hour.
Ken O’Reilly-Hyland’s appearance before the Moriarty Tribunal lasted five minutes. He claimed that he had told Minister for Finance George Colley of his need to protect his family assets with the Cayman offshore trusts. Mr Colley was dead, so unable to corroborate the story. Similarly, O’Grady-Walshe testified that he was sure that O’Reilly-Hyland would have declared his offshore trust to the Central Bank governor of the day, Charlie Murray.
