Written Answers. - Exchange Controls.
Michael Noonan
Question:
64
Mr. Noonan
asked the
Minister for Finance
if he will publish the report he has received from the Central Bank on alleged breaches of exchange regulations arising from the McCracken Tribunal; and if he will make a statement on the matter.
[19639/97]
Pat Rabbitte
Question:
86
Mr. Rabbitte
asked the
Minister for Finance
if he will publish the report of the Central Bank investigation into possible breaches of exchange control rules identified by the Dunnes Payments Tribunal; and if he will make a statement on the matter.
[19660/97]
I propose to take Questions Nos. 64 and 86 together.
As I indicated in a statement issued on 31 October 1997, having consulted the Attorney General my Department referred the Central Bank report to the Director of Public Prosecutions for his consideration and any action he considers necessary and also asked the Director for his view as to whether communicating the response of the Central Bank and the addendum thereto to the Houses of the Oireachtas might prejudice consideration and possible prosecution by the DPP. I am awaiting his response.
The Deputy will be aware from my statement of 31 October 1997 that I also wrote separately to the Govenor of the Central Bank regarding the general supervisory issues arising from the Tribunal of Inquiry (Dunnes Payments) as the Central Bank has responsibility for the prudential regulation of banks and other financial institutions. I have been advised that while bank staff engaged in supervision are primarily concerned with prudential matters, there was no barrier on their reporting alleged breaches of exchange controls to their colleagues in the Exchange Control Division of the bank. However, I have been further advised that it is the recollection of officers in the two functions when exchange controls were in force that exchange control issues did not arise from banking supervision.
The Central Bank, by virtue of section 31 of the Central Bank Act, 1942, (replaced by section 16 of the Central Bank Act, 1989, subsequently amended by section 52 of the Central Bank Act, 1997), is prohibited from disclosing information to the Authorities. The situation was modified by the Criminal Justice Act, 1994. This Act has placed an obligation on the bank to report to the Garda any suspicion of a criminal act (such as assisting tax evasion/money laundering) by a bank. To date the bank has had no occasion to make such a report to the Garda. There is no authority for the Central Bank to report on matters to the Revenue Commissioners.
Given these circumstances, I asked the Governor to report separately to me on the supervisory issues and, in particular, if the board of the bank is satisfied that the bank has the necessary legal powers for the effective execution of its regulatory role, that the procedures and practices necessary to effectively exercise these powers are in place and that these procedures and practices are being implemented effectively.
A reply has been received from the Governor which states as follows:
11 November 1997
Mr. Charlie McCreevy TD,
Minister for Finance,
Department of Finance,
Merrion Street,
Dublin 2.
Dear Minister,
I refer to your letter of 31st October about supervisory issues arising from the Tribunal of Inquiry (Dunnes Payments).
These issues concern a breach by Guinness & Mahon (Ireland) Limited (G&M hereinafter) of the Central Bank's non-statutory Licensing and Supervision Requirements and Standards relating to large liabilities to interbank depositors and to matters relating to the control and management of G&M.
In 1988/90 G&M was in breach of the Bank's requirement that liabilities to any one interbank depositor may not exceed 15 per cent of total borrowings. Prior to 1988 there was no breach as the interbank liability was to an affiliate on which there were no limits in the requirements (The McCracken report dates the sale of the Guinness Mahon subsidiary which eventually became Ansbacher Cayman Limited as taking place in 1984 and 1985. In fact, the entity was first sold out of the Guinness Mahon Group in 1988). The Bank identified specifically the interbank liability to Ansbacher Cayman Limited in G&M in 1989. The breach of requirements was eliminated stepwise within two years of the matter coming to light.
The 15 per cent limit was designed to protect banks from the negative effects of a sudden withdrawal of liquidity by one interbank depositor. However, the Bank would not appear to have had cause to question seriously the liquidity aspects of G&M's operations at the time. Overall holdings of liquid assets by this bank were exceptionally high by any criterion — the average liquidity ratio was around 70 per cent through this period, compared with a 25 per cent norm. The important supervisory issues relating to this bank at the time were matters touching on ownership, future direction, profitability and intra-group relations, rather than on liquidity or solvency.
On the matter relating to the control and management of G&M, there is no record in the Bank that it was informed of the matters in the internal auditor's report carried out by Guinness Mahon & Company Limited on G&M in Dublin in 1989. It emerged in the Tribunal report that these matters related essentially to inadequate internal controls and possible exposure to fraud relating to a large percentage of G&M's deposits. There is no record that the Bank had discovered the system for operating the Ansbacher accounts during its inspections and review meetings. Prior to publication of the Tribunal report, the Central Bank had no knowledge of the existence of the "Ansbacher Deposits" referred to during the Tribunal hearing or of the role played by G&M in the management of those deposits. I should stress that only in the 1990s has it become standard practice both in Ireland and elsewhere for supervisors to seek all material internal audit reports.
Supervision has three main elements; authorisation of new entities; ongoing supervision of existing entities; and policy development. Entities supervised by the bank are required to submit a regular flow of detailed financial data which represent the basis for assessment of institutions by the bank. Regular reviews and on-site inspections of entities are also undertaken. The reviews are usually on a half-yearly basis. There is a programme in place for the inspection of supervised entities on a regular basis.
I can confirm that the Board is satisfied with its legal powers which are generally adequate to enable the bank to discharge, satisfactorily, its statutory functions. The statutory position in Ireland follows mainstream European law in the area of prudential supervision and all EU Banking and Investment Directives have been transposed into Irish law and have been brought into force. In relation to credit institutions I would mention that the latest review of legislation was undertaken in 1996 and amendments to legislation were introduced in 1997 to take account of that review. In relation to the supervision of investment intermediaries, the Bank is currently in negotiations with the Departments of Finance and Enterprise, Trade and Employment with a view to amending the governing legislation i.e. the Investment Intermediaries Act, 1995. Several of these amendments are necessary to facilitate the transfer earlier this year of supervisory responsibility for retail intermediaries from the Department of Enterprise, Trade and Employment to the bank. The Bank is anxious to take advantage of this amending legislation to put forward certain changes to the 1995 Act which would enhance its ongoing implementation.
In relation to the supervision of recently transferred investment intermediaries, I would like to take this opportunity to highlight what the Bank perceives as a distinct lack of compliance culture among the retail end of this sector. Significant efforts on the part of the Bank will be required to address this problem.
With regard to supervisory procedures and practices, the Board keeps under review the Bank's supervisory practices and its approach to supervision. It endeavours to ensure that these are in line with international best practice and are subject to continuous modernisation and adaptation to meet the needs of a changing global environment.
I can also confirm that the board is satisfied that the supervisory procedures and practices are being effectively implemented by the Bank. The board is briefed on all matters of supervisory significance, on a monthly basis. It receives a comprehensive report, on a half-yearly basis, on work undertaken over the previous six months and on significant issues outstanding or likely to arise in the future. All significant proposals are subject to approval by the Board on a case by case basis — e.g. authorisation of banks, acquisition of/by banks and refusal to authorise investment intermediaries. Papers on various topics relating to supervision are circulated regularly to the Board and a significant part of board meetings is usually concerned with supervisory matters.
The board also decides on the manpower and other resource requirements of the supervisory functions. At present there are up to 100 members of staff engaged in supervision duties. Staff levels are kept under constant review, particularly by reference to the increasing regulatory functions being assigned to the Bank. In this respect staff numbers have increased significantly in recent times.
I would wish to draw your attention again to the strict legal requirements on confidentiality. In this connection I should mention that some of the matters set out above are disclosed on foot of a waiver of the confidentiality requirements of Section 16 of the Central Bank Act, 1989, given by G&M at the request of the Central Bank.
Effective supervision requires the co-operation of the supervised entity. No matter how effective a supervisory regime may be, there can be no assurance that deceit or default will not arise.
If you require any further information or clarification please get in touch with me and I will be available at any time to discuss further with you the issues that are raised here.
Yours sincerely,
Maurice O'Connell
