Ship of Fools (7 page)

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 the 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.'

If keeping the boat steady meant winking at widespread and flagrantly criminal tax evasion, then the winkers were serving ‘the national interest'. Here, for example, is the general secretary of the Department of Finance from 1987 to 1994, Seán Cromien, explaining to the PAC why, in spite of knowing about the large-scale evasion of DIRT, he never recommended that the tax authorities be given more powers to deal with the problem:

In this bizarre logic, the ‘national interest' came to be identified with the interests of those who were fleecing the
nation. The way to get the rich to pay their taxes was to make it easy for them to evade their taxes.

Given the close relationship between the Department of Finance and the Central Bank, it is unsurprising that these assumptions should have been held in common. Maurice O'Connell, who had discussed the banks' concerns about DIRT and disclosure in his role as a senior Department of Finance official, became the governor of the Central Bank. In that role, he oversaw a virtually complete failure to pursue the widespread criminality that was evident in the evasion of DIRT. This is how he justified that failure to the PAC:

Here is what the PAC concluded in this regard:

Throughout all of this, the banks themselves never got around to discussing the ethics of what they were doing. The boards of the banks, often made up of leading members of the business community and of the legal and accountancy professions, made almost no effort to stop the institutions which they ran from colluding with criminality. As the PAC report put it, ‘Boards of directors of financial institutions generally betrayed an overly relaxed attitude towards discharging their statutory and fiduciary duties in respect of the operation of DIRT . . . Given the eminence of many of the members of the boards . . . it is surprising that they did not bring a greater weight to bear on the enforcing of ethical standards either within their organisations or the banking sector generally.'

The Ansbacher scam was a high-level, elite version of the bogus non-resident accounts. It was established in 1971 by the small Dublin merchant bank Guinness and Mahon (G&M) and initially run as Guinness Mahon Cayman Trust. After 1988, it became the responsibility of the Irish branch of the Ansbacher group, and was known as Ansbacher (Cayman) Limited.

These changes in ownership had little impact - at all times the operation was under the control of Des Traynor, even
after he ceased to run the bank itself in 1984. Traynor was not just a highly regarded financier and businessman (from 1987 until his death in 1994 he was chairman of one of Ireland's most successful companies, Cement Roadstone), he was also widely known as a close friend of Charles Haughey. (Traynor and Haughey had met in the early 1950s at the accountancy firm Haughey Boland.) He was also, in reality, the bagman for the voraciously corrupt Haughey, raising funds and managing them to support the Fianna Fáil rajah in the grand manner to which he believed his status as national hero entitled him.

Traynor's Ansbacher Cayman scam was simple in principle, if rather less so in practice. Essentially, members of Traynor's circle - the eventual Revenue haul would take €105 million from 137 people - would give him money, which he would deposit, through front companies, in the bank's Cayman Island accounts (and to a lesser extent in similar accounts in the Channel Islands). These deposits would be unrecorded in Ireland except on secret coded files held by Traynor (Haughey himself, for example, was S8 and S9). The same clients would then ‘borrow' money from G&M in Dublin. The security for these ‘borrowings' (the offshore funds) was not listed on G&M's accounts. The ‘loans' were merely described as ‘suitably secured' or ‘adequately secured'.