AIB stalls on compensation commitment

Ireland's largest bank is involved in yet another controversy – this time on its failure to meet its own commitment to pay €20.6m to charity, money that it wrongly took from its customers. And still nobody has ever lost their job at AIB or been prosecuted even though the bank has been mired in scandal for over a decade. By Frank Connolly

Allied Irish Banks (AIB) has stalled in its commitment to distribute to charity €20.6m from funds it overcharged its customers. The commitment was made in September 2006 when the bank disclosed that it had overcharged customers over €21m in the late-1980s and early-1990s.

It stated that it would repay customers it had identified a total of €11m in refunds including interest. It said that it had failed to identify those entitled to refunds of a further €20.4m and that this sum would be paid to unnamed charities.

Three months later, the bank is unable to say which charities have benefitted from this windfall. Asked on Tuesday 2 January the identities of those charities to which the funds had been disbursed, a spokesman for the bank said that it was not possible to do so as the full amount had not yet been distributed.

Asked what amount had been distributed and to whom, the spokesman for the bank said that he could not do so as “the information is not available because the funds have not been fully distributed yet”. Asked when the process would be complete, the spokesman said that it was not possible to say.

In 2004, the bank revealed it had overcharged its customers by €34.2m in foreign exchange transactions, bringing to €65.8m the total cost of the overcharging scandal.
The bank spokesman told Village that it had distributed €10m from this earlier sum of €34.2m to the Community Foundation of Ireland (CFI), a Dublin-based philanthropic agency that distributes monies to community and voluntary organisations.

A spokesperson for CFI confirmed that it had placed the €10m in its endowment fund from which it disburses monies to the various causes. The spokesperson said the AIB contribution increased the fund to €18m. The spokesperson said that the CFI was given the funds as it was an agency independent from government. The spokesperson confirmed that some of the funds provided by AIB are lodged with the bank.

The CFI has been a client of AIB since the foundation was formed in 2001. A member of the board of CFI, Brian Wilson, is a former managing director of AIB in Ireland and a former Group General Manager of AIB in the UK. Other members of the CFI board include businessman John Gallagher, Brian Geoghegan of IBEC and husband of Minister for Health Mary Harney, Sister Stanislaus Kennedy and Neil McCann of Fyffe plc.

After a two-year internal investigation, the bank confirmed in September 2006 that it had also overcharged customers on foreign exchange services, on lease contracts and on the stamp duty applied to ATM cards. It stated that it would take no action against any officials involved in covering up the overcharging scandal but said it would pay €20.6m to unnamed charities.

The bank's investigation was prompted following a claim by the Irish Financial Services Regulatory Authority (IFSRA) in 2004 that senior officials of the bank had withheld knowledge of the overcharging practices from the regulator for over eight years. Following a confidential agreement with the IFSRA it was agreed that the bank would pay the €20.6m to charity.

In reply to a query from Donal Buckley, an insurance broker from Moate, Co Westmeath, about the circumstances in which this private agreement was reached with the bank, the financial regulator, Patrick Neary, replied on 23 December 2006 that he is restricted under law from disclosing information about the deal with AIB.

Donal Buckley said that he was incensed that AIB, Ireland's most profitable financial institution, was allowed to escape any punishment for misappropriating customers' money while the financial regulator regularly pursued small businessmen such as himself.

“The bank misappropriated an amount of €65m from their customers in the overcharging scandal. They refused to disclose the facts about overcharging for eight years to the regulation authorities. Then the regulator cuts a secret deal allowing the bank to pay €20.6m to charities but won't tell the tax payer which charities are to receive the money and on what basis,” Donal Buckley said.

Donal Buckley said that he had been served with a threat of criminal proceedings by the same financial regulator if his mortgage brokerage authorisation is not returned by a fixed date each year. He claims that this amounts to a threat to his livelihood if the routine annual renewal is not returned on time every year.
“My concerns are about how decisions were made by the financial regulator to agree that AIB, the perpetrator of serial scandals, should distribute €20m of other people's money to a charity or charities of AIB's own choosing.

“There is also a question over the manner in which the regulator favours the large financial institutions while badgering the small businessman. In my view, he has allowed the AIB executives to go scot-free having been found with their hands in the till.” Donal Buckley said it was unclear on what legal basis the regulator came to the agreement with AIB.

A spokesman for IFSRA told Village that as long as the regulator is satisfied that AIB did not benefit in any way from the funds it retained from overcharging it was up to the bank to decide on the disbursement to charities.

The 2004 IFSRA investigation into AIB's overcharging began when it emerged that the bank had been charging a rate of commission on foreign transactions above the rate approved by the regulator in 1996. The IFSRA inquiry discovered that some staff at the bank had been aware that AIB had been charging this higher rate for some years and that the bank “deliberately hid” this information from the regulator for eight years. Following the IFSRA report the bank accounced that it was setting up its own inquiry headed by the former governor of the Central Bank, Maurice O'Connell.

When the scandal first emerged in 2004 the then AIB group chief executive, Michael Buckley, described the overcharging scandal as “an administrative cock-up”. He was later forced to apologise to staff members when they suspected that the bank's senior executives were seeking to pass the blame to more junior officials. The former head of the bank's strategic development unit, Séamus Sheerin, was suspended in the wake of the revelations.

In 2005 he settled a high court action against the bank after claiming that knowledge of the overcharging went up to the level of its senior staff, including Michael Buckley, the UK managing director Aidan McKeon and the Irish managing director, Donal Forde. All three senior officials denied the allegations.

In September 2006 the current group chief executive Eugene Sheehy said that the bank was satifisied that all of the overcharging investigations were complete and that the bank had put new systems in place to ensure that such an embarassing episode would not be repeated. “However, the failings which they identified are deeply regrettable and I apologise for them on my own behalf and on behalf of the board... I can assure our customers that we have learned valuable lessons and have taken comprehensive action to prevent any of these issues arising again,” he said. The chairman of the bank, Dermot Gleeson, and its board members decided to take no action against any member of staff.

The bank stated; “In view of the lack of evidence, due primarily to the passage of time, it was concluded that disciplinary action could not be initiated against any member of staff.”

The bank statement confirming the scale of the overcharging scandal was released in late-September 2006 during the week that the Taoiseach, Bertie Ahern, dominated newspaper headlines with the revelations that he had received monies from friends in the early-1990s which had not been repaid. It was also the week of the Aer Lingus flotation and critics maintained that the bank was timing the release of the information in order to bury its bad news.

The AIB spokesman said that the €20.6m contribution would not substitute for existing charity programmes. Since August 2001 the bank has supported the Better Ireland Programme which has dispersed over €13m to over 1,300 charitable groups throughout the country. AIB also gave €3 for every €1 raised by staff to assist those affected by the tsunami in Asia in December 2004. A total of €4m was given to GOAL to help people in Sri Lanka, he said.


AIB scandals 

1. The buyout of Insurance Corporation of Ireland

The overcharging debacle followed in the wake of a series of banking scandals involving AIB, going back to the controversial state buy-out of its insurance division, Insurance Corporation of Ireland, in the mid-1980s. In March 1985 the then Taoiseach, Garret FitzGerald, was informed that the survival of the country's biggest bank was threatened due to massive losses at ICI.

On advice from the financial regulator, which feared the financial instability that would be caused if the country's largest bank was to go under, the government agreed to bail out ICI. The ultimate cost of the bail out was estimated at just under £100m (€127m), although the state subsequently retrieved almost 80 per cent of the rescue package from AIB £43m (€54.5m), a levy on other banks £6m (€7.6m) and from accountancy firm Ernst and Whinney. The latter's liability of £32m (€40.6m) arose from the settlement of a claim against it by AIB over the due diligence the accountancy firm carried out when the bank purchased ICI in 1983.

2. Charles Haughey's €1m debt

In that same year the bank had denied that the then Fianna Fáil leader, Charles Haughey, was €1m in debt to the bank. Following an article by journalist Des Crowley in the Evening Press in January 1983 that Charles Haughey had debts of this magnitude, the AIB issued a strongly-worded denial of the claim. In a press release the bank stated that the claim was “outlandishly inaccurate”. It subsequently emerged that Haughey had indeed accumluated debts to AIB of £1.2m (€1.5m) and repaid only £750,000 (€950,000) of the amount when he became Taoiseach in 1979. The bank wrote off the remainder on the basis that Haughey was a key business influencer (KBI), a description used to describe the former Taoiseach by the bank's former head, Gerry Scanlan, when he attended the tribunal investigating payments to Charles Haughey in 1999. He said a KBI was a term used by the bank to describe a prominent, affluent politician with influence whom the bank was happy to have as a customer. Tribunal chairman, Judge Michael Moriarty asked whether it was a correct interpretation of the banks position to state; “If you owe us £1,000 it is your problem; if you owe us £1m it is our problem.” Scanlan agreed.

Likewise, in November 1993 former Taoiseach Garret FitzGerald had debts of £130,000 (€165,000) written off by the bank after investing in a disastrous share flotation by airline leasing company GPA in 1992.

3. Bogus non-resident accounts

In 199,1 it emerged that 53,000 of the 87,000 non-resident accounts held in AIB were bogus. The bank had helped depositors who lived in Ireland invest over £600m (€760m) in accounts with false foreign addresses. The system was employed by all the major banks in order to help depositors avoid Deposit Income Retention Tax (DIRT). In 1999 AIB paid a total of £90m (€114m) in the largest tax settlement in the history of the state, arising from its involvement in the DIRT scandal.

4. Rogue trader John Rusnak

In 2002 it emerged that Allfirst, a US subsidiary of AIB, had incurred losses of $691m (€524m)as a result of the activities of rogue trader John Rusnak. Rusnak, an employee of the bank, had invested heavily in foreign exchange options and had incurred losses of $300.8m (€227m) by the end of 2000, which had gone unnoticed by the bank's senior executives. In February 2002, Rusnak admitted that he had been hiding trading losses for years and in 2003 was sentenced to seven years for covering up his trading losses at Allfirst. The fraud wiped out AIB's profits in 2001 and it is still facing law suits from investors defrauded by Rusnak's activities.

5. The Faldor scandal

Two of the executives involved in the ICI debacle of the mid-1980s, Gerry Scanlan and Tom Mulcahy, later became implicated in what is known as the Faldor scandal. In May 2004 the bank announced that five former senior executives had benefitted from an offshore investment company, Faldor, based in the British Virgin Islands. The executives had used Faldor in a way that breached Irish tax laws.

The five executives included the bank's former chief executive, Gerry Scanlan, who was head of the bank during the ICI scandal and Roy Douglas, the former chairman of Irish Life and Permanent and a former AIB group general manager in Britain. The late Paddy Dowling (pictured below with Garret Fitzgerald), the bank's former deputy chief executive, and Diarmuid Moore, the former director of corporate strategy, were also among the Faldor Five. Dowling was a key figure in negotiating the settlement by Garret FitzGerald with the bank in 1993.

The fifth executive was Tom Mulcahy, a former chief executive of the bank, who was also central to the ICI debacle in the mid-1980s. When the news of the Faldor tax haven broke, Tom Mulcahy was serving as the chairman of Aer Lingus, a position from which he promptly resigned. The Faldor scandal also uncovered other “unacceptable deal allocation practices” in nine transactions by AIB Investment Managers, the investment arm of the bank.

6. AIB and the Mahon Tribunal

In 2005 the Mahon tribunal set out its opening statement in the Quarryvale 2 module of the inquiry.

Among those called to give evidence when, and if, oral hearings begin in the Spring 2007, are several current and former executives of AIB. Among many other issues the tribunal is investigating are claims by Tom Gilmartin that he was de-frauded by the bank in the manner in which he was removed from control of his company, Barkhill Ltd.

He claims that he was de-frauded by the bank in collusion with developer Owen O'Callaghan and senior politicians. Barkhill subsequently developed the Liffey Valley retail centre in west Dublin and the tribunal is investigating allegations of corrupt payments to councillors surrounding the re-zoning of lands at Liffey Valley in the early-1990s.

The tribunal has already heard of an account opened for the benefit of lobbyist Frank Dunlop at an AIB branch in Terenure in Dublin from which monies subseqently paid to politicians were withdrawn. Substantial sums of money in the account were withdrawn from Barkhill while Gilmartin was the principal of the company but without his knowledge and placed in the Terenure account, Shefran Ltd. Shefran was a name derived from the first names of Frank Dunlop and his wife, Sheila.  Among those called to give evidence at the tribunal hearings is the Taoiseach, Bertie Ahern, whom is alleged to have received two payments totalling £80,000 from Owen O'Callaghan between 1989 and 1993 in connection with Quarryvale.

Further information Something Rotten: Irish Banking Scandals by Simon Carswell