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Ireland's political and cultural magazine
— October – November 2013
Y
OU’VE heard the Anglo Tapes, you
know the state and the citizen have
injected € billion into the banks,
house prices across the country are
down % from their peak, there are nearly
, people out of work and you’re even
familiar with the minutiae of the Code of
Conduct on Mortgage Arrears.
In short you think you know all you need
to know and more about the financial crisis
and the banks - then there is Section AK
in the Central Bank Act .
This piece of obscure legislation means
that the Financial Regulator is bound by
what the Central Bank describes as the Strict
Professional Secrecy Provisions not only
when supervising banks but also when pur-
suing wrongdoing in financial institutions.
And the upshot of these secrecy provisions
is that members of the public report poten-
tially serious malpractice or even criminality
to the Regulator they will be told that they
cannot even be informed if the complaint
will be investigated never mind the out-
come unless. the investigation results in a
settlement or a sanction. This is because the
potential breaches of regulation and laws
are resolved by the Regulator and the offend-
ing bank, in strict secrecy.
To be scrupulously accurate the Regulator
can hold the final part of the Sanction Inquiry
in public but only in limited circumstances
because – where it is suspected the law has
been broken, a person’s reputation may be
damaged or the wrongdoing relates to mat-
ters of a confidential nature – the hearing is
held behind closed doors.
But the Strict Professional Secrecy
Provisions at the heart of the apparatus,
regulating our banks have much more per-
vasive and insidious consequences – they
diminish regulatory legislation and codes
of conduct, undermine regulatory investi-
gators, and expose whistleblowers to their
employers, and, crucially, do so without the
alleged wrongdoing being recorded and
made publicly accessible.
Then there is the mechanism that the
Regulator uses to pursue wrongdoing
in banks: it’s called the Administrative
The dysfunctional regime at the Financial
Regulator means the outcome of complaints is
secret unless there is a sanction.
By Alan Jackman
NEWS CenTral banK
Irregulation
Sanction Procedure. This is a complicated,
forensic process but there are several pecu-
liar aspects to it besides the fact that it is
implemented under Strict Professional
Secrecy, that are worth considering.
If the Regulator has hard evidence that
a bank has broken the law, it informs the
bank that it’s aware of the bank’s activity.
The bank can choose voluntarily to enter
into a settlement at any time in the inquiry
process, effectively negotiating a resolution.
The settlement might result in a sanction
and a fine. But if the Regulator does fine the
bank or a person in the bank then no crimi-
nal prosecution can be brought, certainly
not by the bank.
The situation described above is man-
ifest in the case of Quinn Insurance and
Seán Quinn, who took substantial sums
of money from Quinn Insurance and used
it to pay down margin calls on contracts
for difference on Anglo Irish Bank shares.
Quinn Insurance was fined €. million
and Seán Quinn was fined €,. As
a result Seán Quinn and Quinn Insurance
received immunity from criminal prosecu-
tion in this matter.
Of course they both benefited from
receiving immunity from criminal prose-
cution, but actually so did the Regulator and
the Department of Finance, which may have
been embarrassed by details that may have
emerged in court in the event of a case pro-
ceeding, also benefit from the decision taken
by the Regulator? In other words was there
a conflict of interest in the decision-mak-
ing process that led to fines being imposed
and immunity from prosecution granted
and was the decision to take this course of
action, in the Central Bank’s interest or in
the public interest?
A whistleblower in AIB had evidence
of potential mass over-charging of cus-
tomers, over a six-year period, and illegal
share dealing. He reported the matter to
the Regulator which, in accordance with
the Administrative Sanction Procedure,
informed the bank it was aware what it had
been up to and asked the bank to cease the
activity. Now AIB knew that it had got a
whistleblower in its ranks that had exposed
it and even its personnel – potentially to
criminal prosecution, reputational dam-
age and the loss of their livelihoods.
Eugene McErlean was Allied Irish Bank’s
group auditor. He reported AIB to the
Regulator in May , for over-charging
of its customers that was finally estimated
at € million and what he considered to
be illegal transactions involving buying and
selling shares by the bank’s stockbroking
firm, Goodbody.
At first the Regulator appeared to view
the allegations seriously. Then in October
it invited McErlean to a second meet-
ing, where the Regulator wanted him to
state he had withdrawn all the allegations.
McErlean refused. His job as auditor at the
bank was outsourced and he retired from the
bank after signing a confidentiality agree-
ment. McErlean has described the fact that
his job was outsourced at the same time as
he reported the bank to the Regulator as a
coincidence.
But the Regulator didn’t stop the bank
from over-charging its customers – it
allowed the Bank to continue for another
two years. Then in the Regulator
reported to the Joint Oireachtas Committee
on Economic Regulatory Affairs and accord-
ing to McErlean misled it. The Regulator led
the politicians to believe it had only become
aware of the wrongdoing in , although
McErlean says the Regulator knew about
it as early as and investigated it in
.
What is most peculiar though is not that
his job was outsourced after he reported the
bank to the authorities or that the Regulator
allowed the over-charging to continue or
failed to pursue the bank even though the
over-charging amounted to € million but
that the Regulator and McErlean could not
agree on even the year that he reported the
alleged wrongdoing to the authorities. But
perhaps that’s what you get when
complaints cannot be lodged on
a formal basis or then made pub-
licly accessible even in a redacted
form.
We all know the banks ruined
the country by firstly import-
ing money on a massive scale,
money not linked to economic
activity, artificially and grossly
inflating property prices and
then by lending huge amounts of
money to a small number of peo-
ple who could not repay the loans
when the bubble burst. Anglo
loaned € billion to just twenty
property developers. RTE’s docu-
mentary ‘Inside Irish Nationwide’
raised serious questions about
the building society that cost the
country € billion. What are the
chances of a whistleblower com-
ing forward about these lending
practices, having witnessed how
McErlean was treated? Proposed
whistleblower legislation won’t
save whistleblowers from the
spinelessness of the Regulator.
But there is another even
more important question: did
any of the supervisors at the
Regulator have concerns about or inves-
tigate the lending practices in banks that
resulted in € billion not being able to be
repaid? Again because of the secrecy pro-
visions this information cannot be made
public. Jonathan Sugarman’s complaint
about alleged regulatory breaches of pre-
scribed liquidity ratios in his then employer,
Unicredit Bank, oft-covered in Village mag-
azine, was never made public, despite the
Central Bank issuing a public call for indi-
viduals with information to come forward.
Indeed it is not really clear if the complaint is
still under investigation, with the Regulator
saying one thing to the Irish Independent
and another to Mr Sugarman. Worse still the
Regulator stated it would treat evidence “in
confidence” but after Jonathan Sugarman
came forward it signalled, extraordinar-
ily, that it reserved the right to forward any
evidence that could incriminate him, to the
Gardaí. Only in the irreproachable office of
the Regulator.
Both Quinn
and Quinn
Insurance
beneted
from
receiving
immunity
from
criminal
prosecution,
but so
did the
Regulator
and the
Dept of
Finance
“
— October – November 2013
Although the Financial Regulator, the
agency responsible for policing the Banks
and their conduct, will accept information
relating to alleged wrongdoing in a bank
from a member of the public, it cannot inves-
tigate individual complaints. The banks
know that their conduct and any informa-
tion provided to the Regulator is protected
by strict secrecy and ordinary customers,
perhaps without the financial means to get
legal representation, are left without the
benefit of its offices.
Imagine if you were mugged and beaten
and you reported the incident to the Gardaí
only to be told by the Gardaí, they could not
tell you whether the complaint will be inves-
tigated never mind the actual outcome of an
investigation.
Now if you or I commit an offence, or
were having our house repossessed, it is
done under the Public Administration of
Justice. Many years ago I was given a graphic
demonstration of how this concept is put
into practice. I was sitting in the public gal-
lery of a district court when a man stood up
in the well of the court and approached the
Judge. The man hadn’t paid his road tax. He
spoke to the Judge. The Judge could hear the
man but the rest of the people in the court-
room couldn’t make out what he was saying.
The Judge looking down at the man from the
bench said in a raised voice: “Speak up, the
Court deserves to hear you.” The man had
been grovelling, now he grovelled at the top
of his voice.
But there is no Public Administration of
Justice for banks and bankers. Instead there
is the Strict Professional Secrecy Provisions
and Administrative Sanction Procedure and
alleged wrongdoing is addressed behind
closed doors between people who know each
other during most of the inquiry process. A
process that allows the banks to enter into
a voluntary settlement at any stage before
the inquiry concludes.
All this had me wondering whether this
arrangement for bankers is constitutional:
Article . of the Constitution states: All
citizens shall, as human persons, be held
equal before the law.
It is hard to see how the present regula-
tory framework is constitutional.
So what do you do, if like me, you are
concerned about Banking Regulation? Well
in , I phoned the person with ultimate
responsibility for the Central Bank
Act, Ann Nolan, Second Secretary at the
Department of Finance.
I told Ann Nolan that I was alleging seri-
ous wrongdoing against the Bank of Ireland
and senior executives in the Bank, including
Helen Nolan the Bank’s Group Secretary.
Ann Nolan suggested I give my infor-
mation to the Regulator. I told her I would
have done so but for the Strict Professional
Secrecy Provisions in the Central Bank
Act, and the fact I could not even be informed
if the matter had been investigated.
It took Ann Nolan several minutes and
a number of questions from me, for her to
own up to the fact Helen Nolan was her sister.
When I put it to her she had failed to declare
an obvious conflict of interest, she stated:
everyone is entitled to have a sister.
It is important to understand that the
Regulator is fundamentally compromised
when it comes to vindicating people’s rights,
protecting whistleblowers and empower-
ing its own investigators in the pursuit of
wrongdoing because its primary job and
the primary job of the Secrecy Provisions
and the Administrative Sanction Procedure
is to ensure stability in and to protect the
Banking System.
Maybe it is simple pragmatism to sub-
ject the rights of individuals, even if some
are pushed to the brink of suicide, and to
accept that banks may break the law and
effectively go unpunished to protect the
Banking System from an erosion of confi-
dence or even financial collapse. But – not
unconnectedly – that is indeed precisely
what has occurred and the very regulatory
apparatus that permitted this catastrophe
to happen is still in place.
Instead of the secrecy provisions assist-
ing in upholding confidence in the banking
system, they provide cover for serious
wrongdoing and dodgy practices in banks
– practices that have put the very existence
of the state at risk.
The people who benefit most from the
secrecy are the most senior people in the
banks, the Regulator, the Department of
Finance and the Government.
This level of secrecy means that the pub-
lic still has to put blind faith in the Regulator
despite the current bill for the banking crisis
standing at € billion. And that bill does
not include the less obvious costs of negative
equity in family homes, or in unemployment
and emigration. I don’t believe in these cir-
cumstances the Regulator is deserving of our
blind faith.
A first step to a better system of regulation
could be to remove the conflict of interest
at the heart of the Regulatory Framework
and to split the responsibility for regulating
the banks into two separate agencies as they
did in the UK earlier this year. The UK now
has a Prudential Regulatory Authority that
is responsible for systemic stability and a
Financial Conduct Authority that is respon-
sible for consumer protection.
A second but equally important step
would be to make the Regulator accounta-
ble to the state and the citizen by allowing
individuals formally to lodge complaints to
the Regulator about banking conduct. Such a
system would introduce a much greater level
of transparency, and at the very least would
permit those who come forward and make
complaints against very powerful institu-
tions to have their complaints recorded and
the outcome of any investigations, even in a
redacted format, made publicly accessible.
There are many powerful people in our
society who would like this issue to go away
before it is even raised. They are preying on
our ignorance of what seems at first glance
an obscure and trivial matter and, above all,
they don’t even want us to talk about it.
NEWS CenTral banK
Jonathan
Sugerman
(top) and
Eugene
McErlean
