I thank the Chairman for the invitation. It is strange being on the other side of the fence, having reported on you. In the invitation to appear before the joint committee I was asked to address four areas, namely, a narrative on how the property and banking sectors had interacted with government, elected representatives and the State during the period prior to the banking crisis in Ireland; a narrative on the nature of the relationship between the property sector, banking, government, elected representatives and the State; a narrative on what, if any, controls or structures were in place to regulate any such relationship; and whether being a small country was a factor in terms of any such relationship. What follows is as a consequence of the extensive research I have done on foot of my book, my work as a consultant and a journalist and a presentation of facts. I will begin to answer these four very broad questions by first looking at the historical context and the culture of deference which I argue was firmly established before the boom. I will address these issues, primarily by focusing on political donations.
At the heart of the four corruption tribunals in Ireland in the past three decades - the beef tribunal, also known as the Hamilton inquiry; the McCracken tribunal; the Moriarty tribunal and the Mahon tribunal - were serious concerns about how political action was funded. These tribunals, in particular the McCracken and Moriarty tribunals, exposed a deferential culture by regulatory authorities towards the banking sector during the 1970s, 1980s and 1990s. They also identified a deferential culture by banks towards politics and vice versa. An absence of political will to enforce regulatory compliance was a recurring theme within the tribunals.
I will give two very brief examples of this. Central Bank inspectors examined the Guinness and Mahon bank loan book in 1976 and 1978. The inspectors expressed concern that "Guinness & Mahon was facilitating a tax avoidance scheme [which] was tantamount to facilitating tax evasion". The Central Bank inspectors discovered that one of its own directors had a loan of £416,000 which was secured by a £230,00 offshore deposit in the Cayman Islands. The response by the Central Bank was to trust a promise made by the then Guinness and Mahon chief executive who promised that the bank would wind down its loan business to Irish residents which was backed by offshore deposits. This promise was not kept.
Twenty years later, the McCracken tribunal discovered the consequence of this deference. Ansbacher was the largest incidence of tax evasion in the history of the State. Revenue subsequently yielded over €112 million in unpaid taxes and penalties from 200 Ansbacher accounts. This tax evasion was enabled by non-action by the Central Bank, Revenue Commissioners, company law regulators and prosecuting authorities. For instance, although the Finance Act 1986 empowered Revenue to inspect non-residence declarations held by financial institutions, it did not do so.
The second example of deference I will give is that of Charles J. Haughey's indebtedness to Allied Irish Bank which spiralled from £188,000 to £1.1. million in a four year period between 1975 and 1979. The Moriarty tribunal noted that AIB "exhibited a marked deference in its attitude" towards the leader of Fianna Fáil. On his election as Taoiseach in December 1979, Mr. Haughey's personal overdraft was 77 times his £14,717 gross annual salary. Mr. Haughey's financial adviser, who also happened to be the de facto chief executive of Guinness and Mahon bank, negotiated a £393,000 write-down of the Taoiseach's debts. The tribunal described this "somewhat unorthodox" bank discount which amounted to one third of Mr. Haughey's overall arrears, as conferring "a substantial benefit on Mr. Haughey in circumstances referrable to his political office and as an indirect payment". Moreover, the Moriarty tribunal established that Mr. Haughey received at least £9.1 million in donations between 1979 and 1996. The McCracken and Moriarty tribunals revealed a distinctive overlap between prominent financial donors of Mr. Haughey and individuals within the banking and property sectors. The journalist Colm Keena, in particular, has written and investigated a lot of this overlap.
The purpose of these two brief lessons from the tribunals is to illustrate that a culture of deference between State authorities, political parties, elected representatives, supervisory authorities, banking institutions and the property sector, was already well established by the 1990s. This culture of deference operated in a context where political parties and individual politicians were particularly financially vulnerable.
The committee asked me to explain the narrative of the relationship between these different entities and I will do so by first looking at disclosed political donations to political individuals and political parties in the three elections of 1997, 2002 and 2007. What follows is a short explanation of legislation on political funding as a means of describing the nature of the relationship between politics and the property and banking sectors. The purpose of this is to demonstrate that it is impossible to present a complete picture of how political parties financed their 1997, 2002 and 2007 election campaigns. Not all donations were legally required to be disclosed. None the less, the disclosed donations infer a pattern as illustrated in the three graphs in the appendix to this submission.
The Electoral Act 1997 was enacted in response to controversy arising from unorthodox political donations which came to public attention during the course of the beef tribunal. It emerged that some political individuals and political parties were reliant on donations from the beef industry in the late 1980s and early 1990s. This relationship between the beef industry and politics created the public perception that a quid pro quo existed, in other words, that political donations facilitated policy decisions which benefited the beef sector.
The 1997 Act established new rules for the disclosure of political donations. For the first time in the history of the Irish State, political donations over a certain limit were required to be disclosed. The threshold for disclosure of donations to political individuals, including candidates in Dáil, Seanad, European and presidential elections, was €634.87. The threshold for disclosure of donations to political parties was €5,078.95. There was no limit as to how much could be donated.
The Electoral (Amendment) Act 2001, maintained the disclosure limits under the 1997 Act but introduced a limit as to how much could be donated. The threshold for disclosure of donations to political individuals remained at €634, however, donations by the same donor must not exceed €2,539 in any given year. The threshold for disclosure of donations to political parties remained at €5,078. However, donations by the same donor must not now exceed €6,349 in any given year. Also of significance was the banning of foreign donations in circumstances where the donor was not an Irish citizen.
The Electoral Act 1997 and the Electoral (Amendment) Act 2001, required that political individuals, including candidates, and political parties must submit an annual statement of donations and election expenditure to the Standards in Public Office Commission. I compiled information from the archives of the Standards in Public Office Commission for a ten-year period in order to construct the graphs in the appendix relating to political party funding. Where I was unsure about particular figures I took the conservative approach and when in doubt I did not include them.
I will now deal with disclosed donations to political individuals. Figure No. 1 in the appendix represents all disclosed donations to political individuals between 1997 and 2009. The period includes the 1997, 2002 and 2007 general elections. In doing so it must be clearly acknowledged that this figure represents disclosed donations as opposed to undisclosed donations, donations under the €634 threshold. There are a number of observations that can be extrapolated from this data.
First, disclosed donations to political individuals significantly increased in election years. That is not rocket science. Second, Fianna Fáil representatives attracted almost twice as many disclosed donations as all the other parties combined during the 2002 and 2007 general elections. That Fianna Fáil candidates were the beneficiaries of more disclosed donations than candidates from other parties is not surprising because proportionate to other parties, Fianna Fáil traditionally runs more candidates. For instance, of the 466 candidates who ran in the 2002 election, 22% were from Fianna Fáil. None the less, during that election year, Fianna Fáil received two thirds of all funding disclosed which means that candidates from that party were in receipt of seven times more disclosed donations than a non-Fianna Fáil candidate. Third, it is not possible to break down the sources of disclosed donations as is the case for party donations because the donations tend to be from individuals without reference to business addresses. I can deal with this in more detail later if the committee wishes.
Political individuals attracted significantly more disclosed political donations than political parties, notwithstanding the 2001 amended rules which introduced a higher donation limit to political parties of just over €6,000, compared to donations to political individuals at just over €2,500. Disclosed donations to political individuals in 2007 amounted to €855, 995. Excluding subscriptions from the salaries of elected representatives to their parties, disclosed donations to political parties in 2007 amounted to just €43,693. It appears that it is more attractive to donate to political representatives than to political parties.
I will now look at disclosed donations to political parties. Figure No. 2 in the appendix represents all disclosed donations to political parties between 1997 and 2009. A number of observations can be extrapolated from this data. Since the introduction of the Electoral (Amendment) Act 2001, which introduced a limit on the value of donations to be disclosed, a pattern emerged whereby all political parties disclosed under the limit.
For example, the disclosed donations by all political parties in 2001 amounted to €753,523, the year before the 2002 election. In contrast, the disclosed donations by all political parties in 2006 amounted to €17,000, the year before the 2007 election. These figures exclude politicians donating to themselves or their own political parties. There appears to be a deliberate policy by political parties of soliciting donations below the disclosure thresholds. This is perhaps due to the relatively small difference in the maximum donation that can be accepted by a political party, €6,349, and the amount that must be disclosed, €5,078. The Fine Gael Party returned a nil disclosure to the Standards in Public Office Commission from 2001 to 2009 and, in fact, made its first disclosure last year. The Fianna Fáil Party, the Fine Gael Party and the Labour Party disclosed zero returns in disclosed donations for 2009, the year all three political parties ran substantial local and European by-election campaigns and a referendum on the Treaty of Lisbon.
It is impossible to present a complete picture of how political parties were financed in this period. Of the €10.1 million spent by political parties and candidates in the 2007 general election which was disclosed to the Standards in Public Office Commission, just €1.3 million of the donations was disclosed, with no information available on the origins of the remaining €8.8 million. That gap allows an unnecessary perception that something unorthodox is happening with political funding, but much of it can be explained by membership fees, annual draws and so forth. The €10.1 million figure does not encompass all of what was spent during the 2007 election. The legislation only requires election expenditure in the period between the dissolution of the Dáil and polling day, usually a period of three to five weeks, to be accounted for. Electioneering prior to this period is not accounted for. Election campaigning in the 2007 election, for instance, was well under way before May 2007. The pre-election statement of intent between Fine Gael and the Labour Party, known as the "Mullingar Accord", was inaugurated in 2004 and accompanied by a billboard campaign.
I will now look at disclosed donations to the Fianna Fáil Party by sector. Figure 3 in the appendix represents all disclosed donations to Fianna Fáil, excluding the donations to political representatives or individuals between 1997 and 2007. They amounted to €1.8 million; 80% of this figure was donated between 1997 and the change of the rules in 2001. Subsequent to the 2001 Act, the maximum donation a party could receive was limited to €6,349. As outlined, this is an incomplete picture of how the Fianna Fáil Party was funded because there are no statutory obligations to disclose donations below the legal threshold of €5,078. Nonetheless the figures do infer trends regarding sources of political donations. The figures are as follows: some 35%, or €635,970, of Fianna Fáil's disclosed donations were from property and construction interests. Fianna Fáil received substantial donations in 1998 for the particular and stated purpose of campaigning in the 1998 Good Friday Agreement referendum. When these are excluded, disclosed donations from property and construction interests amounted to 39%, or €545,818. A list of property companies and developers who donated to the Fianna Fáil Party can be accessed on the Standards Commission's website. All of them are on the public record. Some 20% of the disclosed donations to the Fianna Fáil Party in that period came from business interests and amounted to €367,000; 13% came from individuals, amounting to just over €245,000; 9% came from the hotels and catering sector and amounted to just €160,000; 7% came from the motor sector and amounted to just over €122,000; just over 7% came from the food and drinks sector and amounted to just over €126,000, while 5%, or about, €90,000 came from banks and financial services. This figure does not include, however, donations by individuals who were donating in a personal capacity but who were associated with the banking sector. Some 4% or just over €70,000 were from professional services such as solicitors' firms and auctioneers. Also in that period 34% or almost €89,000 of the disclosed donations of the Progressive Democrats of €262,000 came from the property sector.
It appears that the property barons of the 1990s and 2000s had replaced the beef barons of the 1980s. The Opposition did not disclose donations from property interests. The Fine Gael Party disclosed a sum of €197,914 in donations between 1997 and 2000 from a variety of businesses and individuals - 11 donations in all - but it did not disclose donations above the legal threshold from 2001 to 2009. Almost two thirds of the Labour Party's €392,000 in disclosed donations came from the trade union movement. Sinn Féin was in receipt of almost €1.3 million in disclosed donations in this period, much of it from the salaries of elected representatives, North and South, and organisation such as Friends of Sinn Féin, Australia and Friends of Sinn Féin, America. I can give a breakdown of all the figures for all of the parties, if needed.
The committee also asked me to look at controls and structures to regulate such relationships. I will look at them by considering policy. Irish legislation was criticised by the Council of Europe Group of States against Corruption, GRECO, in 2009 for failing to account for "behaviour of those persons who are close to power and who try to obtain advantages from their situation by influencing the decision-maker". Reliance on political donations from a particular sector may facilitate a perception of undue influence by donors over policy-making. This undue but not illegal influence of vested interests over regulation and policy-making arises where elites have access to insider information which they utilise for their private benefit. This informal misuse of power occurs where personal relationships, patronage, lobbying, political favours and political donations unduly influence the decision-making process, even if no laws are broken.
Did donors from the property sector have a vested interest in the formulation of policy? Was the decision-making capacity of political parties eroded by a conflict of interest? Were key political decisions insulated from critical debate because they were executed within a closed and cartelised system that facilitated regulatory capture? What did the Honohan, Regling and Watson, Nyberg and Wright reports have to say about policy in this regard? They offered limited analysis of the policy-making process outside the financial sector. The Honohan report dedicated just six paragraphs to tax incentives aimed at the construction sector. The Regling and Watson report briefly described the problem of policy analysis, design and implementation as "unusually severe", pointing, in particular, to weaknesses in tax policy. The Nyberg report had five paragraphs on what it termed "advice on economic policy". The Governor of the Central Bank, Professor Patrick Honohan, found that "significant factors contributing to the unsustainable structure of spending in the Irish economy were due to the Government's procyclical fiscal policy stance, budgetary measures aimed at boosting the construction sector, and a relaxed approach to the growing reliance on construction-related and other insecure sources of tax revenue". According to the Honohan report, tax reliefs incentive schemes and income tax exemptions for developers and investors included:
multi-storey car parks, student accommodation, buildings used for third-level educational purposes, hotels and holiday camps, holiday cottages, rural and urban renewal, park-and-ride facilities, living over the shop, nursing homes, private hospitals and convalescent facilities, sports injury clinics and childcare facilities.
The Regling and Watson report noted that such tax reliefs "directed to the property sector, often in particular regions of the country ... contributed to a more general misallocation of resources as some of the tax concessions seemed to have been granted on an ad-hoc basis in a not fully transparent way". The incentives were not necessarily bad, as they brought much needed investment to particular areas of the country. The problem was that they went on for too long. As the committee has heard, Mr. Wright has acknowledged in his testimony to the banking inquiry that these policies should have been "grandfathered" or ended earlier.
Why were reliefs extended twice in the period of their implementation?
For example, the Finance Act 1994 and Chapter 1, Part 9, of the Taxes Consolidation Act 1997 provided for accelerated capital allowances for hotels. While this special provision for hotels was terminated in budget 2003, the Finance Act 2003 included transitional arrangements that allowed for the continued availability of a 100% write-off over seven years provided certain conditions were met. This arrangement was further extended in the Finance Acts 2004 and 2005. The Finance Act 2006 extended the transitional period by introducing a phase-out period. Peter Bacon, who has also come before the committee, complied a report for the Irish Hotels Federation which asserted that "The tax allowance scheme allowed hotels to access both equity and debt finance easier than would be the case otherwise ... the total value of tax allowance related to hotels that have not been open seven years at the end of 2009 will be just over €1.5 billion".
Other incentives of note include the 2000 to 2007 special incentive tax rate for developers. This sought to free up land for development by taxing proceeds from the sale of land at 20% instead of the higher rate of up to 42%. Moreover, Part V of the Planning and Development Act 2000 was amended in 2002 to allow developers to negotiate their way out of providing 20% social and affordable housing in any development through land swap, payments to local authority or the building of equivalent social and affordable housing elsewhere. It would be helpful if the committee considered the following: a list of the tax reliefs and incentives granted by the Government to developers and investors between 1997 and 2007; the cost of these reliefs and incentives; the reason tax incentives were extended beyond their natural life spans; whether the structure of local government funding facilitated a financial dependency on development levies; whether reliance on such levies, worth nearly €600 million in 2005 and €700 million in 2006, influenced erroneous planning decisions; and the number of politicians, or their close associates, who received interest-free loans or mortgages on favourable terms or who received loans outside of normal lending practices.
The committee also asked me to look at suggested reforms and controls to moderate these kinds of relationships and I now turn to these. I have presented eight reforms to regulate such relationships. First, is independent audit of the capacity and operational ability of oversight agencies, including the Criminal Assets Bureau, the Office of the Director of Corporate Enforcement, the Garda Bureau of Fraud Investigation, the Central Bank, the Revenue Commissioners, the Competition Authority and other agencies charged with the prevention, detection, investigation and prosecution of white collar crime. This approach was taken in the UK after its financial crisis. In 2008, the UK's Attorney General commissioned the De Grazia review which appraised the Serious Fraud Office, SFO, in regard to two US agencies, which were the US Attorney's Office for the Southern District of New York and the Manhattan District Attorney's Office. These were both well established bodies prosecuting serious and complex economic crime. The review's 34 recommendations focused on operations, capacity, governance and external relationships.
Second, I recommend introducing monetary awards for whistleblowers. This approach was taken in the USA following the economic crisis. The Dodd Frank Act 2010 established the Office of the Whistleblower. The Act expanded powers first introduced under the Sarbanes-Oxley Act 2002. The Securities and Exchange Commission is now authorised by the US Congress to provide monetary awards ranging between 10% and 30% of the money collected in cases where high quality original whistleblower information leads to a commission enforcement action of over $1 million in sanctions.
My third recommendation is the introduction of a register of liabilities. Australia, Finland, New Zealand, Poland, Spain and Canada require politicians to publicly disclose any debts they may have. Ireland only has a register of assets.
Fourth, I note that the Standards in Public Office Commission's annual report 2013 contains 20 recommendations on reforming our ethics and electoral legislation. I submitted an additional six recommendations on the draft guidelines on party finance in my submission to the commission in 2013.
Fifth, I recommend that political parties be required to publish accounts under the guidelines on party finance in advance of the 2016 general election. The delay by the Government in introducing these guidelines means that parties are not obliged to publish accounts until mid-2016 which may, in effect, be after the 2016 general election.
Sixth, I recommend the establishment of an independent commission to decide how political activity in Ireland is funded. The principle that politicians should not regulate themselves is well established. For example, political actors do not decide constituency boundaries. Ireland's rules on political funding disproportionately favour incumbents and political parties.
My seventh recommendation relates to lobbying and seeks registration not only of lobbyists but of why decisions have been made. I recommend the introduction of a web-based centralised information platform to co-ordinate consultations with individuals, stakeholders and lobby groups. This would serve to report on input received on policy and detail how decisions were made. It would improve the openness and transparency of engagement in policy-making by all actors. Stakeholder and lobbying interaction is recorded by health department in Canada within what they call the Consultation and Stakeholder Information Management System, or CMIMS.
My eighth recommendation is to stop blaming our small population or geographical size for bad governance. The committee asked me to examine whether being a small country is a factor in terms of problematic relationships. The population size of a country is not a determining factor in measuring governance effectiveness. Academic research shows that poor governance is correlated with the quality of institutions, in respect of which Niamh Hardiman went into considerable detail yesterday, lower levels of investment and growth, inequality, education, democratisation, colonial heritage, religion and an absence of legislative controls. In Ireland's case, substantial levels of regulation combined with a high degree of State ownership have facilitated considerable political discretion. These conditions have been at the heart of the majority of governance scandals since the foundation of the State.
In the appendix to my written submission, I include a table ranking the governance scores of 17 selected countries for 2008. That year was chosen as the year of Ireland's financial crisis. Transparency International's Corruption Perception Index, CPI, is a compilation of corruption scores which ranks countries from least corrupt to most corrupt while the World Bank measures good governance using six different indicators, of which four are presented in the appendix. Although Transparency International and the World Bank use different aggregation methods, they are highly correlated. The population sizes of the 17 countries is also set out in the table. While this is a crude exercise, it demonstrates that countries with smaller and larger populations rank both higher and lower than Ireland in the good governance stakes. Indeed, the table suggests that countries with smaller populations tend to have better governance than countries with larger populations. To invoke being a small country is to use a bogeyman argument. It is a lazy explanation for poor governance. Many small countries escaped the economic collapse unscathed while many large ones did not.
