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Friday, April 18, 2014

Anglo Irish Bank, accounting fraud, and targeting domestic firms

Days after Ireland shocked Europe on September 30, 2008, with a blanket guarantee of Ireland's bank deposits and debts, Patrick Neary, the financial regulator, was interviewed on Irish television but he may as well have been regulator of banking in Freedonia:

The trial of former executives of Anglo Irish Bank on the issue of the bank supporting the share price through an illegal scheme, wouldn't have occurred but for the collapse of the Irish banking system.

In contrast with a case like Guinness plc in the UK in the 1980s, where company funds were used to boost the share price during a takeover battle, here we had the Central Bank of Ireland in the information loop on the efforts to prevent a rerun of the Northern Rock bank collapse situation when it became known in September 2007 that Seán Quinn, a then billionaire, had built up in the period 2006/07 a secret CFD (contracts for difference) holding of more than a quarter of the shares in Anglo Irish Bank.

When Seán FitzPatrick and David Drumm, Anglo’s chairman and chief executive, discovered in September 2007, that Quinn had then a 24% stake in Anglo through contracts for difference (CFDs), they told the bank's board and Drumm was instructed to inform Patrick Neary, the financial regulator.

Neary told the trial that at a meeting that month, he didn't ask Drumm what was Quinn's stake nor did Drumm tell him. In early 2008 when Seán Quinn visited Neary's office at the Central Bank, Neary told the trial that he didn’t think it would be “fair or appropriate” to have asked about the stake that Quinn had in the bank.

Neary had also told the trial that after meeting with Drumm, a colleague had given him a document explaining CFDs.

This could evoke the Marx Brothers' 'Duck Soup' (1933) but the 'Nightmare on Dame Street' drama was set in a Trappist monastery.

One of the most striking illustrations of the dysfunctional nature of the office of the financial regulator, was that for most of 2008 Patrick Neary was unaware of the discovery by his staff, that Irish Nationwide Building Society had provided loans of up to €122 million to Anglo Irish Bank's Seán Fitzpatrick, over an eight-year period, enabling him to move his director loans at Anglo Irish, off the bank’s books at each September 30th year end, to avoid disclosing them publicly. What amount would have triggered some office gossip or a whisper in a pub?

Ruadhán Mac Cormaic of The Irish Times has reported that in two days in the witness box, Neary said “I don’t recall” 30 times, “I don’t know” 23 times, “I can’t recall” 12 times, “I can’t/don’t/cannot remember” 12 times, “That’s a complete blank to me” once, and “I’ve absolutely no recollection” four times.

Neary had also told the trial that Con Horan, his prudential director, had not informed him of a first attempt to unwind Quinn's CFDs in March 2008.

Besides the three defendants, how many others were involved in devising the support scheme even though they were working on the basis of legal advice that the Maple 10 arrangement was in compliance with the Companies Act 1963?

Finfacts: Last rites read for Anglo Irish Bank - - the damned builders' bank

1. So while Seán FitzPatrick should have been expected to know more than his other non-executive colleagues on the board about the risks of this transaction, at least two of them were chiefs of listed companies while another was the former chief of a Big 4 accounting firm.

The jury made the right call in acquitting FitzPatrick.

2. Willie McAteer and Pat Whelan, were found guilty of implementing the illegal scheme by a Dublin court on Friday.

The scheme was devised by many more and apart from the financial regulator, the senior management of the Central Bank and some officials in the Department of Finance were likely aware of it.

Anglo had also been advised by one of Dublin's biggest law firms that the arrangement was compliant with the Companies Act - while that does not make what's illegal legal, coupled with the tacit or overt imprimatur of the Central Bank, in the ordinary course of business, all that is usually sufficient for business executives who are  not legal specialists.

I used to have a copy of the Companies Act 1963 and while there are for example clear cases where companies engage in fraudulent trading when a company is close to collapse, there are others in hindsight where the directors should have called in a receiver earlier but last ditch attempts to rescue the firm that drained the more funds, were fruitless.

I have worked in a company of several hundred people that had some good contracts but it had cash flow problems and was awaiting an outside investment to stave off collapse.

Staff soon realise that there are serious problems and people with fear in their eyes anxiously search for some reassurance when there maybe none.

It must have been a similar atmosphere for non-executive staff within the bank.

Making a judgement on the share support scheme and the overall management of the bank during the property bubble, are different issues.

3. It's well to remember that there is no new dawn as compliance with company and tax laws will continue to be a much bigger risk area for Irish-owned firms and directors than for foreign-owned multinationals.

The Big 4 accounting firms are active in selling tax avoidance/ evasion shelters not only in the corporate tax area but in also cutting VAT for example [pdf].

Usually when abuse schemes are discovered by revenue authorities, a deal can be agreed.

In the past decade, there was a rare case in the US where a criminal prosecution was launched and KPMG LLP admitted to "criminal wrongdoing" and individual staff were targeted.

The US Department of Justice said in a statement: “In the largest criminal tax case ever filed, KPMG has admitted that it engaged in a fraud that generated at least $11 billion dollars in phony tax losses … cost the United States at least $2.5 billion dollars in evaded taxes.… KPMG also admitted that its personnel took specific deliberate steps to conceal the existence of the shelters from the IRS."

SEE also: OECD BEPS Project: Ireland should embrace corporate tax reform