The next item on our agenda is a discussion with representatives of AIB. I welcome Mr. Eugene Sheehy, group chief executive, and Mr. Philip Brennan, group general manager of regulatory and operational risk at AIB. I draw witnesses' attention to the fact that while members of the committee have absolute privilege the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official by name or in such a way as to make him or her identifiable. I ask Mr. Sheehy to make a short presentation, which will be followed by questions from members of the committee.
Financial Regulation: Discussion with AIB.
Mr. Eugene Sheehy
I thank the Chairman and members of the committee for their invitation to attend today to deal with issues raised with the committee on 24 March by Mr. Eugene McErlean, former group internal auditor of AIB. I am joined by my colleague Philip Brennan, who is group general manager, regulatory and operational risk for the bank.
I will cover two items in this opening statement and to give the committee the facts surrounding them. These are the following: the issue of dealing in AIB shares by Goodbody Stockbrokers which arose in May 2001; and the refunds of €255,000 which AIB made to certain business customers in 2002 relating to administration time.
I will first deal with the facilitation of client trading in AIB shares. Goodbody has been a wholly-owned subsidiary of AIB Capital Markets since 1990. Prior to 2001, Goodbody was prevented from purchasing or holding shares in its ultimate parent Allied Irish Banks plc as principal in the ordinary course of its stockbroking business. Consequently, Goodbody did not have a ready supply of AIB shares to trade and could not quote two-way — buy and sell — prices. Therefore, while it could trade any other share, it could not trade AIB as principal. It could only satisfy client demand for AIB shares where it could match buyers and sellers, that is on an agency basis.
In advance of the introduction of automated trading on the Irish Stock Exchange, the Irish market was transitioning from an agency basis, that is matching buyers and sellers, to principal's trading, that is stockbrokers dealing on their own account. Consequently, Goodbody was at a significant disadvantage relative to its main competitors and was unable to fully satisfy the needs of its customers. A particular disadvantage arose from the fact that international fund managers required their Irish broker to be able to readily supply a basket of the key Irish shares. Not being able to do so for one of the largest companies traded on the Irish Stock Exchange would risk Goodbody losing not just business in AIB shares but business in the other key Irish shares as well.
Attempting to address these restrictions had presented difficulties for Goodbody in previous years. The introduction of automated trading brought a new urgency to finding a satisfactory solution to address the matter. Under automated trading, stockbrokers had to be able to match buyers and sellers. Prior to the introduction of automated trading there was some scope to have short delays between receiving an order and seeking a counterparty to fill the other side of the trade. The introduction of automated trading significantly reduced this flexibility because customers could see screen prices and expected to be able to deal in real time or near real time. For example, if customer A wanted to sell 1,000 shares and customer B wanted to buy 900 shares at the same time, real-time service could only be provided if some mechanism was found to address the residual 100 shares. If this could not be achieved then neither transaction was likely to complete.
Automated trading in Irish stocks commenced on the Irish Stock Exchange on 6 June 2000. By this time, there was intense competition in the market, both between domestic brokers and with London-based brokers, who were also competing for market share. Goodbody was the only broker on the Irish market which was restricted under company law from holding and dealing its parent's shares as principal. Davy Stockbrokers, which at the time was owned by Bank of Ireland, did not have this problem as Bank of Ireland, being a company incorporated by charter, was not governed by the relevant provisions of the Companies Act. Automated trading significantly changed the market and immediate execution capability became a prerequisite to carrying on business effectively. This left Goodbody at a significant strategic disadvantage as regards dealing in AIB shares which, at the time, represented 15% of the Irish stock market.
AIB made representations to the Department of Enterprise, Trade and Employment to have the legislation amended. United Kingdom legislation had for some time included exemptions to permit securities firms to deal in the ordinary course of business in their own shares or those of their group companies. During 2000, the Department agreed to the amendment but it was clear there would be a delay in implementing the proposed change. The legislation was ultimately changed on 4 August 2001.
Conscious that the delay in enacting the legislation would put competitive pressure on it to satisfy customer need in the intervening period, Goodbody sought a way to legitimately quote two-way prices in AIB, which would provide immediacy of trading. In doing so, it was essential that legal and reputational risk be addressed. External legal advice was obtained and Goodbody brought a proposal to address the issue to the AIB Group audit committee in July 2000. The group audit committee comprises exclusively non-executive directors. Certain members of management, including the group internal auditor, also attend, as do the external auditors.
The interim arrangements which Goodbody proposed were for it to enter into an arm's length arrangement with a client, under which the client would grant Goodbody discretion to trade AIB shares on the client's behalf up to limits set by the client. Key stipulations were that: the client had to be unconnected with AIB or any of its subsidiaries and could not be a nominee of any one of them; the account was to be financed by the client, credit was not to be extended to the client and Goodbody undertook to satisfy itself as to the client's ability to take any losses that might arise; all gains and losses were to be for the account of the client; the terms of business would clearly spell out the nature of the arrangements and the risk of losses; and all normal account documentation, that is, contract notes, statements and so on were to be sent to the client so that he would be aware of the trading carried out on his behalf.
Goodbody advised that a London based fund manager regulated by the Investment Management Regulatory Organisation, IMRO, a predecessor of the Financial Services Authority, FSA, had been identified and an Isle of Man fund operated by the fund manager — an existing client of Goodbody with a good track record — was willing to act as the third party client. The proposal went on to say that the fund had been established by a particular family but was now managed day to day by the fund manager. An end of day nominal limit of €5 million was stipulated.
The proposal was noted by the group audit committee in July 2000 prior to implementation. Our records also show that details were advised to the Central Bank and Irish Stock Exchange on 27 July 2000. The Central Bank also sought and received a copy of the legal advice received by Goodbody on the proposed structure and the arrangement was put into operation on 19 January 2001.
A key part of the control environment in AIB is that group internal audit routinely carries out risk based audits on the operation of governance and controls within the group and reports its findings to management and, independently, to the group audit committee. In May 2001, four months after the interim arrangements referred to were put into operation, group internal audit conducted an audit in Goodbody and identified apparent irregularities in the operation of this arrangement. This resulted in a special investigation, under Mr. McErlean's direction, between May and September 2001. In late November 2001, AIB's group compliance department also carried out a review dealing with compliance matters. Detailed findings were presented in the two reports, the key ones being that the implementation and operation of the arrangement varied significantly from the proposals presented to the group audit committee and AIB senior executive management and the group audit committee were not advised of the full manner in which the arrangement operated in practice.
In summary, the group internal audit report established the following: the arrangements between the IMRO regulated fund manager and the Isle of Man based fund were never formalised; the beneficiary of the Isle of Man fund, while having the same surname as a well known wealthy family, was not a member of that family; and no mention was included in the group audit committee proposal regarding the complexities relating to stamp duty. These were identified subsequent to the proposal being considered by the group audit committee and resulted in the involvement of another client not averted to in the original proposal. This second client, which was involved in a small number of transactions, was a company incorporated in Nevis, an island in the Caribbean. The financial action task force, FATF, had identified Nevis as a non-co-operative country in combating money laundering. This second client was introduced as part of an arrangement to avoid a 1% stamp duty charge for the Isle of Man based fund which would otherwise arise where share trades for that investment fund client did not settle on the same day. The report also found the following: high levels of operational failure in settlements and dealing, together with processing delays relating to stamp duty, resulted in Goodbody funding the third party account; the identification of the various counter-parties did not satisfy best practice for anti-money laundering purposes; there was a failure by management in the application of a number of key compliance and operational controls; and there was a failure in the performance of certain activities by the Goodbody compliance function.
Although the arrangements had already ceased in September 2001, following the change in company law in August 2001, management in Goodbody and AIB Capital Markets treated the findings very seriously, in particular, in view of the departure in practice from the details approved by the group audit committee.
The following actions were taken: Goodbody sought a legal opinion relating to compliance with the Companies Act which concluded that the matters were unlikely to be found to be in breach and no reporting obligations arose; a legal opinion was also sought relating to compliance with anti-money laundering legislation. It concluded that, while no offence arose under legislation, Goodbody failed to observe the requirements of the money laundering guidelines for stockbrokers in a number of respects; a suspicious transaction report was filed with the Garda; the control environment in Goodbody, which was found to be unsatisfactory in a number of respects, was significantly strengthened and responsibilities were restructured; a member of senior management reached a termination arrangement with Goodbody; the accountability of certain members of management was reviewed resulting from which two new senior appointments were made; a member of staff was moved and the reporting lines of two individuals were changed; plans to outsource the back office activities, which had been put in place following an earlier operational review of this activity, were implemented; and the nature of the stamp duty avoidance arrangement was advised to the Office of the Revenue Commissioners and they were advised that, in circumstances where this arrangement was used with the Nevis incorporated client, Goodbody would not seek a refund of the stamp duty in question.
The group internal audit report was submitted to the AIB Group audit committee in October 2001 together with management's response to the findings. The Central Bank and Irish Stock Exchange were kept informed on a continuing basis and copies of the group internal audit and group compliance reports on the activity in question and the management action plan were submitted to both bodies. The Irish Stock Exchange conducted a comprehensive review of Goodbody between July and September 2001 and issued a comprehensive report in October 2001. Group internal audit reviewed the principal trading area again in May 2002 and issued a satisfactory audit report. The Irish Stock Exchange conducted a further regulatory review in February and March 2002. There has been considerable comment about this matter since it became public. While I do not in any way attempt to condone it, I would like to make a number of points for the purpose of clarification. The original intent of the arrangement was valid and was advised in advance to the relevant internal and external bodies. There were, however, a number of serious failures in its execution. Those were totally unacceptable. The arrangements operated for a total of eight months. Goodbody was not trading on its own account in AIB shares, it was conducting trades for clients. Both clients were introduced to Goodbody by established financial intermediaries, in one case the principal of an IMRO-FSA-regulated fund manager. The third party fund introduced €580,000 to fund activity on the account. According to the internal audit report, the total profit earned by the third party fund over an eight month period was approximately €800,000. There were 20 trades on the account of the Nevis-incorporated company and the total profit earned was €51,000. Those 20 transactions in AIB shares were not routed through Nevis. Goodbody's client was a Nevis-incorporated company but the transactions were effected in Dublin. There was no prohibition on undertaking financial transactions with a company incorporated in Nevis, but the FATF did recommend that a higher level of due diligence be exercised by institutions dealing with Nevis. As noted earlier, Goodbody's nominal exposure was €5 million. However, if the client failed to pay, Goodbody could sell the shares so its actual financial risk was limited to any adverse price movement over the settlement period, typically three days, which would normally be a small proportion of the value of the shares and, as Mr. McErlean confirmed in his evidence on 24 March, "there is no evidence that the share price moved in any direction due to the trading that took place".
I will now move to the second issue, namely, the administration time charges. Between 1984 and 2001, a charge was levied by the bank for administration time, sometimes also referred to as management time. The charge was intended to recover the cost of "exceptional work of a material nature" carried out by the branch for a customer. The charge was levied on business customers only. The rate was IR£6.25 per quarter hour. On average, the charge generated about €6 million per annum. Branches were required to keep accurate details of when and for what purpose the charge was made and were required to input the details to the system on a daily basis. Branches were not to charge administration time where there was already a specific charge for the product or service. An administration time charge could not be levied on routine lending activities in view of the fact that those costs were recouped as part of the interest rate charged to customers.
For part of this period, I was managing director of retail operations in Ireland, so I am familiar with the issue. A number of things happened more or less contemporaneously in late 2000 and early 2001. As part of a general review of fees and charges in late 2000, AIB management questioned the justification for and sustainability of that charge. In February 2001 we wrote to the Office of the Director of Consumer Affairs, ODCA, the competent authority dealing with this matter at the time. We proposed a new business account charging structure, which included the abolition of the charge for administration time. We obtained regulatory approval in May 2001 to abolish the charge, and that became effective from 25 August 2001.
In April 2001, the Central Bank also raised the issue of administration time charges with AIB on a general basis and in the context of one specific case. The issue had already been identified for review by group internal audit following audits it had undertaken in late 2000. A more general audit of fees and charges, including that fee, was planned for 2001. Due to the Central Bank's interest in the subject matter, details of the specification for the audit work were advised in advance by our then group internal auditor, Mr. Eugene McErlean, to the Central Bank. Copies of the earlier audit reports were also sent to the Central Bank at its request. The ODCA also raised this matter with AIB around the same time. Both regulators were anxious to ensure that the issue was fully investigated and customers refunded if appropriate.
The 2001 audit sampled 20 branches in all. The focus was on fees and charges where manual intervention-application of fees was part of the process. Four fee types were examined, one of which was administration time charges. An audit report was issued to management in July 2001. The main findings related to administration time charges in the following specific areas; the need for policy clarification in regard to the application of the charge, the fact that the charge was being routinely levied on lending activities whereas bank policy stated that, in the main, it was intended that the cost incurred in this area should be recouped as part of the interest margin, poor record-keeping standards, failure to record and apply the charges on a timely basis in the majority of cases tested, and confusion as to what properly constituted "pre-notification" to customers in the case of those charges.
The report concluded that "in these circumstances, the justifiability of individual charges tested — and their verifiability/sustainability in the light of the standard of records maintained — had to be open to question". Noting that the charge had been abolished, group internal audit recommended, in regard to the retrospective situation, that a review of such charges be co-ordinated from the centre against clarified policy guidelines and over a period to be determined, following which the question of refunds would have to be considered.
On foot of the audit report, I personally wrote to Mr. Eugene McErlean in August stating that a full review — group internal audit had sampled 20 branches only — would be conducted across the branch network. However, I stated that because of the significant demands on staff by reason of the preparation for the impending changeover to euro notes and coins, the review would not be finalised and refunds not made until late 2002. I outlined our proposed approach in my correspondence and stated that customers would be refunded where errors were identified. Mr. Eugene McErlean duly copied his audit report and my response to the Central Bank in September and I subsequently advised the ODCA regarding the issues identified and the nature and extent of the proposed review.
In accordance with the recommendation of group internal audit in its audit report, clarified procedures were issued to branches on 15 April 2002 against which the review was to be undertaken. In May 2002, management in Ireland Division was well into its review of the historic application of administration time and our records show that it presented an update to the audit committee of 8 May on the matter. In this presentation, it advised that net fee income in total over the previous six years was in the order of €27 million and it provided details of the extensive nature of the review under way, details of which had been agreed in advance with group internal audit. The report to the group audit committee stated that early indications from a review of 65,000 business accounts were that the number of cases where charges had been applied without justification or where documentary evidence was either inadequate or did not exist, was relatively small. Management also reported that there was no evidence at that time of any concentration of inappropriate charging in any one area of the branch network.
During that time, there had been ongoing correspondence with the ODCA on fee charging and on 23 August, the bank wrote to the assistant director of consumer affairs setting out in detail the approach taken to the review and early indications that the total refund would amount to approximately €200,000.
When the management review was completed, follow-up internal audits were undertaken in September and December 2002. That was to ensure that the assessments made on the justifiability of administration time charges during the course of the management review were accurately recorded and were in line with the clarified procedures set out to branches and advised to the ODCA. Group internal audit identified three accounts where additional refunds totalling €41,000 were due. Those were made and group internal audit's conclusion was that the review and refund process had been carried out in accordance with guidelines issued and were also in line with the letter sent by management to the ODCA earlier in August. In all, 217 customers across 55 branches had refunds made to them totalling €255,000. Details of the final outcome were advised to the ODCA and to the Financial Regulator in February 2003.
A €50 million to €75 million guesstimate was given to the committee by Mr. Eugene McErlean in March, which was also contained in his statement of claim in his legal proceedings against AIB in May 2002, details of which the bank sent to the Central Bank. We can find no record of this guesstimate amount in our internal audit files or reports during 2000 or 2001. The 2001 annual report of the group internal auditor was presented to the group audit committee on 14 February 2002. It addressed the fee-charging issue but no estimate for the refund amount was given.
There were a number of audit findings at various stages of completion when Eugene McErlean left the bank in March 2002. He mentioned two of these specifically when he appeared before this committee on 24 March 2009. He brought these to the attention of the bank as part of his legal action against it in 2002. We took these claims seriously and advised the Central Bank, the regulatory supervisor for banks at the time, and our group audit committee. The group audit committee undertook a series of formal actions with the assistance of legal experts to assess the veracity of the claims and to satisfy itself that appropriate action was being taken.
I want to take the opportunity to set right some of the assumptions made about the reasons for Eugene McErlean's departure from AIB in 2002. While with the bank, he undertook the role of group internal auditor in a highly professional, competent and effective manner. Eugene McErlean was not dismissed by AIB. He claimed constructive dismissal from the bank following publication of the Ludwig report into the Rusnak fraud in Allfirst. He felt that the manner in which AIB announced details of actions to address issues raised by the fraudulent trading activity incorrectly implied that he had failed to detect the fraud. Eugene McErlean was not in any way culpable for the non-detection of that fraud. The AIB announcement did not intend to imply that he was. He settled his action with the bank later in 2002 and is now a pensioner of the bank.
I thank the committee for the opportunity to clarify and respond to several issues previously raised. We are ready to take any questions the committee may have.
I thank Mr. Sheehy and Mr. Brennan for attending.
Could Mr. Sheehy reconsider his claim that Mr. Eugene McErlean claimed constructive dismissal? That is not true. He looked for a declaration that he remain in his job. Mr. Sheehy needs to remedy that because it is a misleading statement.
I gather that the Charterhouse-Nevis scheme was not the only one and had predecessors. As Mr. Sheehy stated, since 1990 AIB had what he called a problem of not being able to access principals in dealing with its own shares. Perhaps Mr. Sheehy could enlighten us how he dealt with it between 1990 and 2000, before the Charterhouse-Nevis scheme was devised. Did Mr. McErlean have objections and investigate these schemes?
What Mr. Sheehy said to the committee this morning is a complete exoneration of Mr. McErlean's career and what he did. It now paints him in a new light, as someone who has been wronged by AIB. However, I am concerned that Mr. McErlean objected to a previous dodge of this type which was then changed to a new scheme, the Charterhouse-Nevis one, which was a complete sham. That is what we have to take from what Mr. Sheehy said. When it was introduced, thank God Mr. McErlean torpedoed it. Then he claimed the internal audit group did not like what it saw on the foreign exchange charges.
There are three incidents of Mr. McErlean going to his authorities and the Central Bank about these matters. At the same time, the bank made an effort each time to get rid of him, shaft him and to move him out. To me, it is quite simple. They wanted him out because he was telling them things they did not want to hear. I believe he should have been given a medal rather than being moved out.
On top of this, and one of the worst things that happened, Mr. McErlean's departure from AIB, for which he was under severe pressure, was announced in the most insidious and underhand way possible. It was announced the same day as the Ludwig report on John Rusnak's fraudulent activity in the US was released. That has been left to hang there until today and I thank Mr. Sheehy for clearing it up. Mr. McErlean was indirectly and by implication blamed for the Allfirst affair. It was said at the time the internal auditor would be removed from his post while an external auditor would be brought in instead. The implication was that the two were connected. That was never corrected until today.
The bank owes Mr. McErlean an apology. I invite Mr. Sheehy to apologise to him for the way he was treated and the insidious implications contained in the statement when he left AIB. It is the least he can do.
I understand Mr. Sheehy has to put a spin on the documents and reports in his possession such as the Deloitte report and those of several auditors. I do not accept much of the spin he has put on them. Not having seen the reports, however, I am not in a position to argue with him. It would be useful if he could let us have those reports to which he referred.
There are particular cases with which I would disagree with Mr. Sheehy. For instance, Mr. Sheehy stated, "Goodbody sought a legal opinion relating to compliance with the Companies Act which concluded that the matters were unlikely to be found to be in breach...". I understand the Goodbody legal opinion specifically did find it was in breach of the Companies Act. It may have found Goodbody was unlikely to be found in breach which is a different issue but that is spinning. The committee is entitled to see the Goodbody report. If these reports were open for everyone to see, we could all make our judgments on them rather than having Mr. Sheehy's interpretation which, understandably, benefits himself.
It is clear from what Mr. Sheehy said that the operation of the Charterhouse-Nevis scheme was a complete sham. This was put up as a cover for Goodbody dealing as principals in AIB shares. Perhaps it was discovered later by senior people in AIB; we will find out later how far it went. Why was no one disciplined for this? The only fall guy in this situation is the guy who said "Stop", namely, Mr. McErlean. What about the guys who were operating this? What happened to them? We are told here that a member of senior management reached a termination arrangement with Goodbody. I do not want to know the name of somebody like that. I do not believe it would be fair in this committee to name anybody like that, but maybe we could be told the terms of that termination and why that happened – because the implication is that termination arrangement was reached with someone who was culpable, otherwise we would not be here.
Did he or she get a payoff as a result of this? Did he or she do something wrong, as is so normal in Irish banks, and get paid to go away? Did he or she in a subsequent career get some type of endorsement from the Financial Regulator? We are entitled to know a great deal more about that.
Could Mr. Sheehy please tell us specifically about what happened to sort out this problem between 1990 and 2000 because the reason a subsidiary is not allowed to deal as principal in its own shares is a very good one? It is to avoid any manipulation of the shares by the parent, in effect. There is no other reason, as far as I am aware.
When Mr. Sheehy talks about suspicious transactions being reported to the Garda, could he tell us if any of the devices involved, such as dodging stamp duty, was used in the flotation of Irish Life by Goodbody, which was the lead broker, and how that was done? If there was anything there which is similar to what we have discovered here, it would be appropriate, say, in the case of a State flotation in which Goodbody was the broker involved, to tell us what was the position.
This is a very contorted scheme and very difficult to understand. However, I believe we understand it now. What is important is that we know who the final beneficiary was of all these deals in Nevis. People believe there are those in it who are evading tax or benefiting from insider dealing or activities of that type. I shall show where the evidence for that lies.
Mr. Sheehy says there were only 20 trades, in this case. Let us hear about the volumes because that is what is important; if they were absolutely massive, there was a great deal of profit made here. If the volumes were large, it really means that number of trades was pretty well irrelevant. The limits, I know, were €5 million, but perhaps Mr. Sheehy could tell us, specifically, whether there were any breaches of that limit, which I guess there were. Finally and specifically, was any short selling going on in this particular device? Those who were organising this were from Goodbody, because as regards the Fürstenberg thing, this was a sham, too. In other words, were any of them borrowing stock to sell AIB stock short – and were they specifically going to the United States to do that?
Mr. Eugene Sheehy
I shall, perhaps, start where Senator Ross opened, as regards Mr. Eugene McErlean. As I said on the record, he was a fine auditor as far as the bank was concerned. He did a good job. Personally I worked well with him and there were absolutely no issues throughout my time there. I am very sorry that he was offended in the way the communication came out around the Rusnak event. It is unfortunate, should not have happened and I apologise to him if he was offended. Certainly, we have gone on record and I shall go on the record anywhere, anytime to say he was absolutely unconnected and had no responsibility whatsoever.
Why was that issued at the same time as Rusnak?
Mr. Eugene Sheehy
It was in response to the Ludwig report. Many statements were issued at the time. The bank was under a lot of pressure to issue statements.
It was under a lot of pressure for heads and Mr. McErlean had absolutely nothing to do with Rusnak.
Mr. Eugene Sheehy
That is correct, absolutely.
A head rolled that day, and it was his.
Mr. Eugene Sheehy
We could go into what had happened. We certainly did not want Mr. McErlean to leave the bank, but that is what happened. It was unfortunate, I am sorry it caused him personal distress, which it obviously did, but it should not have happened.
It destroyed his career, and it was deliberately unjust.
Mr. Eugene Sheehy
I do not believe it was deliberately unjust, but it should not have happened the way it did. I am sorry it happened that way. Mr. Eugene McErlean's reputation in the bank is intact, as far as I am concerned and we will put that on the record.
He has not worked since. Effectively, by his name being mentioned in that press release he has been blacklisted. His name has been blackened.
Mr. Eugene Sheehy
I have no evidence of that.
Why has he not worked if he is such a good auditor? This man should be running AIB's audit still. He should be in charge of regulation in our banks or whatever. One thing I am pleased about is that Mr. Sheehy has made it clear he is a very fine honourable decent person, and he has suffered greatly as a result of the actions of the bank. Nevertheless, I believe——
Mr. Eugene Sheehy
Just for the record, he had alternative offers from the bank.
He was appointed manager in Navan.
Mr. Eugene Sheehy
It is totally unfounded that he was appointed assistant manager in Navan.
Can I get to the issues here?
I will come to the Deputy next, but perhaps we might get answers to Senator Ross's queries, first. I am aware of the absolute importance of what both members are saying, but I am trying to put some order on the proceedings. We shall go back to our witness from the point he left off as regards Senator Ross's questioning.
Mr. Eugene Sheehy
Senator Ross talked about the arrangement we put in place. Perhaps I should go back to the very first question in terms of was happening before the Charterhouse event. There was an arrangement with Goodbody in the 1990s. There happened to be a third party who happened to be connected to an individual in Goodbody, where a similar arrangement was in place, namely, it was providing AIB stock so that these trades could be completed. That was reviewed and it was found the arrangement fell far short of the standards that should have been in place. It would have been identified by a group internal audit, it was escalated, took somewhat longer to resolve than it should have, but it was closed down. That was the prior arrangement that had been in place.
There was still a problem for Goodbody in that it could not deal and compete effectively in the market. Therefore it was legitimate, while at the same time talking to the Department of Enterprise, Trade and Employment to try to resolve the issue, for the bank to bring forward a legal framework to resolve the issue. The framework that was brought forward was perfectly legal and appropriate – in regulatory and legal terms. The problem was that it was not executed properly. To call it a sham in its own right is just not factually correct, because it was not a sham. It was not implemented properly and that is what the audit report established, four months after it had been implemented. I take issue with Senator Ross in describing it as a sham. It was not implemented properly, but in itself it was not wrong.
On the issue of the reports which the Senator said help us to spin this story, they were all made available to the proper authorities at the appropriate time. One of the themes one sees coming through our statement or in any of the answers to the questions put to us is that every time we found a problem it was escalated appropriately – and reported appropriately. The disappointing thing for us is that there were problems, as there certainly were. However, I think the evidence shows that we did not shirk our responsibilities when we found them. They were properly escalated and dealt with. It is disappointing that these problems arose. All those reports have been fully disclosed to the authorities that require them.
The Senator asked who benefited from any of these transactions. I outlined in my statement that the profit on the Charterhouse scheme amounted to €800,000, and that obviously was for the benefit of Charterhouse. The Nevis profit was €51,000. The bank did not make any profit out of any of these transactions. It was the third party that did so. Goodbodys just wanted to be in a position to compete for a legitimate stockbroking business. We have over 80,000 retail shareholders. They largely transact their business through our branch network, where they get execution service from the branch network via Goodbodys. It would have been intolerable for the bank not to be able to trade on its own shares, through its branch network for its retail customers. That was the fundamental problem we were trying to address. The bank was not trying to make money out of this scheme. It was confined from competing. It was trying to move along the legislative change as fast as it could. It is difficult to move legislative change through the process when there is only one party involved, so it took quite a long time to get that done. There was no benefit to the bank. There was no short selling as Mr. McErlean said. There would have been some short selling, but there was no manipulation of trade to move the AIB share price one way or the other.
Therefore, there was short selling.
Mr. Eugene Sheehy
Yes.
Was it from the United States?
Mr. Philip Brennan
The business that was dealing with the Nevis dealt with US ADRs, which are American depository receipts and are a means of holding AIB shares in the US. In technical terms and due to dealing errors in many cases, there was a small element of short selling, but there was no significant element of short selling. The structure was not about short selling, but was a consequence of inefficiency in the way it was executed.
Why was there short selling? For what would they want to short sell?
Mr. Philip Brennan
It was because of the fact that there were shares to be delivered and that they were not in place. The position was short for small periods of time. It was done purely to execute the deals.
Mr. Eugene Sheehy
I am not aware of anything regarding Irish Life that is specific to this.
Mr. Philip Brennan
The reason for this scheme was because of deficiencies that prevented Goodbodys from dealing in the shares of Allied Irish Banks plc. It could deal in the shares of any other company, including Irish Life, as principal without any difficulty.
I will repeat some of the questions I asked.
Mr. Eugene Sheehy
I am just not sure of the order of them.
That is fine. Why was no disciplinary action taken against anybody? Was the guy who left rewarded? I understand that the legal opinion of Goodbodys informed the witnesses that the bank was in breach. Can they confirm this? The opinion stated that it was unlikely that the bank would be found to be in breach, but it did find that it was in breach. The witnesses stated that there were 20 trades, but I would like to know the volumes. Was there any breach of the €5 million limit?
Mr. Eugene Sheehy
There was an individual disciplined. He reached a termination agreement, and as far as I am aware, there was no special compensation in that. He was not rewarded on the way out. The volumes in the trades in the Nevis company were quite small. The total profit was €51,000 from 20 trades. I could not tell the Senator the exact number of shares that were traded, but the amount of money involved would seem to indicate——
That is profit, but the volumes could be important.
Mr. Philip Brennan
The volume of deals going through on any day could be high, but the reality is that the benefits to the third party Nevis company was in the order of less than €50,000.
I know that. Can the witnesses provide us with the volumes? If they do not have the figures with them——
Mr. Philip Brennan
I do not have the figures.
Okay. It is an important point, but——
Mr. Philip Brennan
Let me explain to the Senator why the Nevis company was there. The main dealing was through the Isle of Man fund management company. They were trying to replicate a situation as if Goodbodys were trading on its own account. When stockbrokers trade on their own account, they do not incur stamp duty. If they did, the market would not work. They were replicating this for a short period of time, pending the introduction of the legislation. They were doing so by using a third party client. They were in a position to use another relief called closing relief, something with which the Senator may be familiar. When the purchase and sale of trades settle on the same day, the stamp duty can be recovered. The difficulty was that in practical terms, some of these trades did not settle on the same day. In order to make them settle on the same day, they moved some blocks of shares to this Nevis company. That had the effect of bringing the relief in the Isle of Man company into play. The reality was that the volumes that moved to the Nevis company were quite small.
That is fine. Could we have that figure at some stage? I understand that the witnesses do not have it now. Maybe they could let the committee have it tomorrow, by sending a note to the clerk. Would that be all right?
Mr. Philip Brennan
Yes.
Mr. Eugene Sheehy
In reviewing the files in preparation for today, it is quite clear from the legal opinions we read that it was unlikely the bank would be found in breach. No reporting obligations arose.
Did it say that the bank was technically in breach? I think it did.
Mr. Eugene Sheehy
I do not have it in front of me.
I do not have it in front of me either, but my understanding is that it did state the bank was in breach. Mr. Sheehy is saying that the bank was unlikely to be found in breach. That means that a judge will not find the bank in breach, but I think the opinion states that the bank was in breach. Is that not correct?
Mr. Philip Brennan
I think one would never get a legal opinion that will tell one anything absolutely.
Can Mr. Brennan answer the question?
Mr. Philip Brennan
The reality is that the finding stated we were unlikely to be in breach. That is exactly what it states.
I am sorry, but can Mr. Brennan answer the question? Did the opinion state that the bank was in breach?
Mr. Philip Brennan
Not to my knowledge, no.
Can we have a copy of it?
Mr. Philip Brennan
It is a privileged document.
I know, but could we have a copy with just that sentence in it? Mr. Brennan is interpreting it for us, and he is telling us we cannot see it. Why can he not let us have it so that we can see for ourselves?
Mr. Philip Brennan
Is there any reason for the Senator to believe that what we are saying to him is incorrect?
Mr. Brennan is not saying anything to me. That cannot be incorrect. I want to know if the opinion stated that the bank was technically in breach. The answer to that is either "Yes" or "No".
Mr. Eugene Sheehy
The answer is that our advice is that we are unlikely to be found in breach.
Correct. I know that. I want to know whether the opinion stated that the bank was in breach. For Mr. Sheehy to state that the bank was in breach but unlikely to be found in breach so now we can move on means that he does not care whether the bank was in breach because he knows the bank will get away with it. I want to know whether the opinion stated that the bank was technically in breach. That is a very fair question, and for the witnesses to say they do not know is not good enough.
Mr. Eugene Sheehy
We are saying that we have an opinion that states we are unlikely to be found in breach.
Did it state that the bank was technically in breach?
Mr. Eugene Sheehy
I do not know. I have not got the document.
Perhaps he can give us a response when he looks at it.
The word "unlikely" does not exclude the possibility of possibly being found in breach. Using the word "unlikely" implies that there is another comparison to be made in that it is unlikely, but it is possible.
Mr. Philip Brennan
It is in the nature of legal agreements that they rarely state something absolutely and that something is definitely the case. The conclusion of the legal opinion was that it was unlikely to be in breach.
Could we then have a copy of the legal opinion or that sentence of the legal opinion which states whether AIB was in breach——
Mr. Eugene Sheehy
Any of the relevant documents would have been made available to the responsible authorities. I would not give copies of the legal——
Then I have to take it that AIB was technically in breach. Mr. Sheehy is not giving an answer to the question.
Mr. Eugene Sheehy
The Senator is free to take that view but we will not give legal——
Mr. Sheehy will not answer.
Mr. Eugene Sheehy
We have answered.
Mr. Sheehy has not. He told me his interpretation.
Mr. Eugene Sheehy
We do not agree with the Senator's interpretation.
I want to follow up on this issue. Mr. Sheehy is saying AIB was not allowed to trade in its own shares through Goodbody whereas other stockbrokers could do so. As Senator Ross said, the penalty for breach of sections 32 and 60 of the Companies Act on indictment in a Circuit Court is a penalty of up to two years in jail or a substantial fine for every officer of the company who is aware of this fact. On summary conviction in the District Court, one could face six months in jail or a substantial fine. Whether AIB is likely or unlikely to be found in breach of the law, the penalty of the law if it applied in full to it and to the officers of the company was very serious. That is key. This is a serious law which has serious ramifications, and until that law changes, AIB must obey it.
With the consent of the Stock Exchange and, I understand, the consent of the Central Bank, which was effectively the financial regulator at that time, AIB agreed and everybody signed off on a process which was deemed to be and accepted as being within the law. Is that correct? In other words, the process which AIB had initially set up was wholly within the law. If each and every part of that was kept, AIB would have broken no law and it would not need a legal opinion on it. However, when AIB got involved with Mr. Fürstenberg, Charterhouse and all those other subsidiaries and companies, the facts are that this agreement was breached in every possible way. The people who broke that agreement were breaking the law. I am not here to hector. I am just making the point that the law was significantly broken, the penalties were serious and the people knew they were serious because AIB set up this structure to make sure it would not break the law, but it did.
When we talk about Goodbody since 1990, we are effectively talking about AIB as it is a wholly-owned subsidiary. Since 1990, therefore, it would have been fined at least £100,000 for breaches of regulations. Is that correct?
Mr. Philip Brennan
Yes, there were fines on Goodbody.
They were very serious fines, so, when AIB took over Goodbody, there were very serious issues there. People who eventually left the company or whose agreements were terminated, as I understand it, were cited for reputational damage, for working through members of their families and for holding accounts that should have been held in AIB proper. There were very serious issues. When Mr. McErlean got involved in this issue, he was at the root of the corruption and the root of the wrong that was going on in Irish banking. His finger was on the button there. He was exposing all of this to AIB. That is the truth of it; it is what was at the heart of it all. As Senator Ross pointed out, the only man who really suffered for doing all of this was Mr. McErlean. When the law was breached, there were officers of Mr. Sheehy's company involved in that breach. Is that correct?
Mr. Eugene Sheehy
We are not saying we breached the law.
The agreement was written and agreed by the Central Bank, which was the financial regulator, AIB and the Irish Stock Exchange. When that agreement was breached, was AIB not breaking the law?
Mr. Philip Brennan
It was in breach of the terms given the way the original proposal was put to the audit committee. The reason this went through this process to begin with was that it was within the law. It was taken extremely seriously. This was a competitive issue that Goodbody had. It related to dealing in its parent shares——
We are not contesting any of that.
Mr. Philip Brennan
——so it was brought to the highest governance body within the organisation to examine it. The Deputy is correct. It was not operated in the way it was supposed to be operated.
Therefore, it was in breach.
Mr. Philip Brennan
It was in breach of the terms with which——
It was absolutely and totally in breach of the law.
Mr. Philip Brennan
No, it was in breach of the terms that had been brought to the audit committee.
I spent two hours discussing this issue with officials of the Stock Exchange. They said they were absolutely astounded and horrified when they found out what had happened. They could not believe this was going on and they would have told that to AIB.
Mr. Eugene Sheehy
We reported it.
The point is that they were astounded by it. AIB had no choice. The point is the law was broken and officers of the company, whether employed by Goodbody or AIB, knew about it and colluded in it. That is at the heart of the matter.
Mr. Philip Brennan
Nobody is trying to defend what went on, quite the opposite. Mr. McErlean identified the issue, brought it to the senior management within the capital markets division and ultimately to the audit committee.
Who is that person in senior management?
Mr. Philip Brennan
The senior management of capital markets at the time would have been Mr. Doherty.
Colm Doherty knew about it.
Mr. Philip Brennan
It was brought to his attention. Without exception at management or audit committee level, this was totally unacceptable and was then brought to both the Central Bank and the Stock Exchange.
The point is the only information AIB gave to the Garda concerned the money laundering regulations not being met in regard to the company trading through Nevis. AIB did not test the evidence it had. There was no concern brought by Mr. Brennan, Mr. Doherty or anybody else to the Garda to say "We do not think we have breached the law but this has happened and it is outside the consent agreed to by the regulatory authorities, and is outside the law." They did not say that.
Mr. Philip Brennan
Our legal opinion stated that we were not in breach of the law. We brought the reports to the Stock Exchange and the Central Bank in both cases.
But AIB did not send them to the Garda.
Mr. Philip Brennan
Because we did not feel the need to.
AIB should have. That is the point. It is one of the main banks in Ireland.
Mr. Eugene Sheehy
The Deputy has absolutely no basis for saying that. We gave the money laundering report to the Garda which was exactly what one is supposed to do. We reported the failure to implement the scheme as designed to the authorities.
The law was the Companies Act 1990, sections 32 and 60.
Mr. Eugene Sheehy
What part of that law was broken?
The law that states wholly-owned subsidiaries of AIB could not trade in its shares. That is the point.
Mr. Eugene Sheehy
AIB was not dealing in its shares, nor was Goodbody.
It was. The point is——
Mr. Eugene Sheehy
Can Deputy O'Dowd point out one aspect of the law that was broken? The scheme was properly designed and it was not implemented properly. The law was——
That is the point. Where it was not implemented properly is where AIB was breaking the law.
Mr. Eugene Sheehy
Where was it broken?
Mr. Philip Brennan
The law was broken if AIB or Goodbody held the shares in their accounts and dealt them but that was not the case. The shares were held by an Isle of Man fund.
The point is that it did not work the way it was supposed to work.
Mr. Philip Brennan
That is correct.
That was breaking the law and AIB should have told this to the Garda.
Mr. Eugene Sheehy
Where was that breaking the law?
If Mr. Sheehy does not know, obviously——
Mr. Eugene Sheehy
I am asking the Deputy. He is saying it. It is a big accusation to make.
It is a fact.
Mr. Eugene Sheehy
Where?
The other point I want to make to Mr. Sheehy is as follows. Taking the history of Goodbody and the regulatory issues that arose, I understand a senior executive, Mr. Buckley, wrote a letter to Mr. McErlean stating that he would be held personally responsible for any losses to AIB as a result of some of these issues being exposed within the company. The whole issue here——
Mr. Eugene Sheehy
I have never seen that letter.
I appreciate Mr. Sheehy was not the chief executive at the time.
Mr. Eugene Sheehy
No, but I am sure it would be on our files. I have never seen it.
It should be on AIB's files. Mr. Sheehy should look for it. The other point I want to make is that Mr. Sheehy said he approached the Department of Enterprise, Trade and Employment or its equivalent at the time. When did he first approach it?
Mr. Eugene Sheehy
In July 2000.
Mr. Philip Brennan
The catalyst for all of this was the introduction of automated trading to the Stock Exchange. With the advent of automated trading, the whole issue of immediacy was very much on the agenda. One needed to have shares to satisfy demand immediately. Conscious of the competitive issues that this would pose, the matter was brought to the predecessor of the Department referred to by the Deputy with a view to having the law changed. It was clear it would take some time. We knew it would be changed but that it could not be done immediately. The purpose of introducing the arrangement we are discussing was to bridge that gap in a way that was both legal and regulatorily acceptable.
I am trying to deal with a political issue. In what month in 2000 was this done?
Mr. Eugene Sheehy
We understand it was around mid-2000.
Did the delegates approach the Minister or any departmental officials?
Mr. Eugene Sheehy
We would have dealt with the officials. This was technical jargon and stuff.
When Mr. Sheehy refers to "technical jargon and stuff", does he mean that AIB proposed an amendment to the legislation or entered into an exchange of views on what it might contain?
Mr. Philip Brennan
I have not reviewed the documents but I assume we would have set out the nature of the competitive problem we faced. In the United Kingdom, stockbroking subsidiaries of a parent financial institution were not meeting with this problem. There was legislation to cater for it in that jurisdiction. It did not apply to our main competitor here because of the Constitution.
In other words, there was objective effort on AIB's behalf to change the law. A submission was made to the Department in mid-2000. Are the delegates aware that section 111 of the legislation which set up the Office of the Director of Corporate Enforcement — the section amending sections 32 and 60 of the Companies Act 1990 — was not in the Bill as initially presented to the Dáil? It was never debated on Second Stage and never mentioned on Committee Stage. However, on Report and Final Stages, section 111 was suddenly and miraculously brought forward in the Dáil. No briefing document was prepared by the Minister on this change in the legislation. There was no debate in the Dáil on the issue, yet it had been discussed nine months to a year earlier.
This raises serious questions regarding the transparency of the political system. We find what the delegates are saying absolutely incredible. It is GUBU stuff — grotesque, unbelievable, bizarre and unprecedented. It is also disgraceful and unacceptable. I do not doubt the delegates' personal integrity. If the law had to be changed, it should have been done according to normal parliamentary practice, with the relevant provision debated on Second Stage and in committee. Instead, however, there is not one word on the record of the Dáil on this issue. I am absolutely amazed at that. I have submitted questions on this matter to various Ministers and have been told that some of the information will take several months to collect. However, we are determined to get to the bottom of this.
The situation seems to be that we had a law which required to be changed and no transparency or accountability in the process by which this was done within the political system. A system was set up that was within the law, everybody signed up to it and, suddenly, it goes to companies on the island of Nevis. That simply does not add up. This amounts to a shameful episode in banking. We have not got to the bottom of these issues. If our banking system is to have any credibility internationally, the entire system must change, including the banks, the regulator, and the Government. The key point is that if we are to take everything the delegates say at face value, none of these other developments would ever have happened. However, the reality is that they did happen.
One of the issues I am concerned about relates to the membership of the board of the Stock Exchange. I noticed from its notepaper that a named non-executive director is also a director of Goodbody Stockbrokers and a person who knew all about the issue we are discussing. I am not being pejorative in this; I acknowledge that everybody is entitled to say his or her piece. As we have discussed, two fines of €60,000 and €100,000, respectively, were issued. In one of these cases, the matter was brought to the disciplinary committee of the Stock Exchange for discussion. However, in this, a more serious case, there was no reference to the disciplinary committee. This is unacceptable. I do not know why it happened and I am not making allegations against anybody in particular. However, it is inconsistent that the non-executive directors of the Irish Stock Exchange should include a person who may not be implicated in any of this but who certainly had a full and absolute knowledge of it.
Mr. Eugene Sheehy
Regarding the change in the legislation to which the Deputy referred, we are quite willing to go back to our files on this issue. I was not prepared for that particular question but, as I said, we are willing to go back into the files to discover when the first briefings took place, who was involved and so on. As far as I am aware from casual reference to it, it seemed to be a technical process within the Department. I do not know about the parliamentary procedures whereby it ended up being presented as the Deputy describes it.
Mr. Philip Brennan
I do not think there was any argument over this.
Mr. Eugene Sheehy
I understand it was a technical change. However, we are willing to share any information we have on the process.
I understand that from the delegates' point of view, everything was out in the open. However, the Government——
Mr. Eugene Sheehy
This was so obscure and so technical that people——
It was so fundamental to the entire process that if change were required, it should have been done transparently.
Mr. Eugene Sheehy
It was a matter of removing one anomaly in the system. It looks in retrospect like a very significant event but at the time, it probably seemed to be merely a technical issue.
I take Mr. Sheehy's point and accept that it is nothing to do with the delegates. When Ministers publish a Bill, they generally provide information on all the sections in an explanatory memorandum. In this instance, there was no mention of the provision to which I referred.
Mr. Eugene Sheehy
We will write to the committee giving the chronology of events. There is no problem with that.
I cannot comment on the membership of the board of the Stock Exchange. I do not know who are the members. In the past, the main stockbroking houses were typically represented as a matter of course.
The problem is that the entities concerned are regulating themselves to a great extent. That is my point.
Mr. Eugene Sheehy
Perhaps we may draw some comfort from the fact that even though representatives of the companies may be members of the board of the Stock Exchange, they are still subject to fines.
However, in this instance, the issue was not brought to the board. No fine was imposed in this case, even though such fines had issued previously. That is the whole point.
Mr. Eugene Sheehy
This is now a matter for the Financial Regulator.
I thank the witnesses for appearing before the committee. Their opening statement, which is ten pages long, is concise but also comprehensive. It could easily have been 1,000 pages long. It is a shame we did not receive it 24 hours ago in order to have more time to tease out the various issues and be better prepared for this discussion.
Mr. Philip Brennan
Our document was submitted on Tuesday.
Was it?
Mr. Eugene Sheehy
As the material on Goodbody Stockbrokers is very hard for people to come to terms with, we tried to simplify it as much as possible without losing any of the relevance.
We can only deal with the Goodbody Stockbrokers material today because we simply do not have time to cover the rest. I share Senator Ross's concerns in that it looks as if the whole proposition that was put together was a sham. The delegates say it was not executed properly. There is every implication it was not implemented at all. From what has been said, it seems there are comparisons between the way Des Traynor operated an Ansbacher account from the Cayman Islands and how Goodbody Stockbrokers operated the share trades in regard to the Isle of Man, Charterhouse and Nevis.
The ethics of what happened concern me more than anything else. It appears as though the bank is trying to isolate people such as legal advisers, external auditors, the group audit committee, the top echelons and their professional advisers within the bank from responsibility for what happened in respect of the issue of Goodbody Stockbrokers trading AIB shares. I fully accept and understand the reasons that some method would be needed to enable Goodbody Stockbrokers to trade a share that had such a position within the Irish Stock Exchange. However, my concern is that this scheme was approved by top people. While they later received a report to the effect that it did not operate, they knew nothing. Although they heard no evil, saw no evil and spoke no evil, an improperly executed situation was going on under their eyes in a stock exchange organisation that probably had the best reputation in Ireland at the time. From an ethical perspective, this was the bank with the highest market capitalisation in Ireland and its subsidiary, Goodbody Stockbrokers, which people from the business community, the economy as a whole and parliamentarians always accepted as being a reputable company. However, the higher officers and senior advisers are being protected in whatever way possible from any damage as a result of this sham exercise operated by Goodbody Stockbrokers in respect of shares.
Mr. Sheehy stated the management in Goodbody Stockbrokers and AIB Capital Markets treated the findings very seriously. This is when Mr. McErlean's group internal audit report was given to him. Mr. McErlean left in March 2002 and Mr. Sheehy has stated that group internal audit reviewed the principal trading area again in May 2002 and issued a satisfactory audit report. Without more details as to exactly what was contained in these audit reports, even these items from a ten-page presentation do not give members the entire picture. It makes it quite difficult for me to articulate what I perceive to be the position while effectively asking questions of Mr. Sheehy at the same time. A suspicious transaction report was filed with the Garda. Was it followed up, what were the consequences and have there been developments in this regard? As for the nature of the stamp duty avoidance arrangement, how much stamp duty was avoided in this case? Was stamp duty paid subsequently or was agreement reached with the Revenue Commissioners in this regard?
The presentation noted that Goodbody Stockbrokers failed to observe the requirements of the money laundering guidelines for stockbrokers in a number of respects. Again, this immediately leads one to question what were those respects and in what ways did Goodbody Stockbrokers fail to observe them. The Irish Stock Exchange regulatory review of February and March 2002 noted there were a number of serious failures in the scheme's execution, which were totally unacceptable. A profit of €800,000 was made by Charterhouse and a profit of €51,000 was made by whoever the final beneficiary is in Nevis. Did they do anything at all? Was paper passing around, apart from cheque payments to these people? Are there trade slips and statements? Did they ever issue from the Isle of Man or from Nevis?
I will leave it there because I have raised a lot of questions and time is moving on.
Mr. Eugene Sheehy
The broad thrust of the Deputy's opening statement pertained to ethics. This was not our proudest moment. This was not a well executed piece of business and it fell short of what we aspire to. It is embarrassing and should not have happened. Having identified the issue, we believe we then followed a highly ethical course, which was to report it to the responsible authorities, employ all the proper internal compliance and regulatory and audit procedures and follow them through, given due process and fairness to everyone involved. This is what happened, there was no shirking in any way and at no time along the process was the application of proper standards not made. This matter was taken very seriously and the group internal audit function did a good job. The audit committee of the board, which is a non-executive group of directors, took it very seriously and steps were taken. Action was taken pretty quickly whenever these problems were identified. However, they should not have happened and there is no excuse for it.
When we make suspicious activity reports to the Garda, of which we make thousands every year, we do not receive feedback from the Garda. We provide it with the information and subsequently, it is entirely in its domain to deal with as it sees fit. There is no follow-up and that is the way in which the process works.
There was no stamp duty avoidance and the Revenue Commissioners never lost a cent. We spoke to the Revenue Commissioners about the issue. Goodbody Stockbrokers could have claimed relief under a heading called "closing relief". It is relief one gets whereby if one trades a share within a day, stamp duty does not arise. Stamp duty crystallises when it trips over into the next day. One could have made a case for such relief but we decided not to so do because of the general lack of application of the original scheme. As it was not up to the highest standards, we were not going to do that and so we directly approached the Revenue Commissioners to tell them what was the situation, what was the amount of stamp duty and that we would not be making a closing relief claim. Consequently, there was absolutely no monetary impact for the Revenue Commissioners.
Overall, the level of compliance after the fact stands up fairly well. The problems were with the manner in which this scheme was set up and once the problem was identified, the controls in the bank proved to be pretty robust.
I wish to deal with a couple of points. First, I refer to the end of Mr. Sheehy's presentation which pertains to the circumstances in which Mr. Eugene McErlean's position with the bank effectively was terminated. When the Ludwig report was published after the Rusnak fraud, I have no doubt that, internally, the bank would have known what type of man was Eugene McErlean. The bank would have known what kind of man Mr. McErlean was when it issued at the same time a statement to the effect that the internal auditor was leaving and the report on the Rusnak fraud. Mr. Eugene McErlean brought the Nevis scheme to the bank's attention. His position was that his personal and professional integrity was being impugned. Any ordinary person looking in would ask why they were linked, but the committee is now being told that there was no relationship and that he had no part to play in the Rusnak fraud. The bank owes him a full apology. It should not have come to a situation in which our witnesses needed to appear before an Oireachtas committee to make their case.
Hear, hear.
To an ordinary person looking in, this constructive dismissal was done in a calculated way to ensure that Mr. McErlean left his post.
Hear, hear.
I turn now to the Charterhouse-Nevis scheme. From my dealings with ordinary customers, I know that banks will chase them. That is their job and it is correct to do so in terms of ensuring the legal security of loans. The legal aspect is top priority. I do not understand why our guests are saying that the fund in the Charterhouse-Nevis scheme was never formalised. Who was the third party client and did the AIB Group find out that information? If a bank setting up such a scheme wanted it to be legally water tight, as our guests mentioned, the bank's legal representatives would have checked it out. The witnesses are telling the committee that they took great care to ensure that the scheme stood up legally. When it came to Mr. McErlean's attention, however, it was found to be far from legal.
The witnesses also said that the fund was never formalised and that the beneficiary of the Isle of Man fund, while having the same surname as a well known wealthy family, was not a member of that family. How did an institution like the AIB Group not follow up on the legal side? It does this to its ordinary customers, as is its job. The inconsistency is significant.
Reverting to Deputy Ardagh's comments, any ordinary person looking in would believe that the bank wanted to put distance between it and the scheme when the latter was brought to light by Mr. McErlean. Did the AIB Group legal team check out the scheme, who was the beneficiary of the Isle of Man fund and did the bank check out the identity of the third party client at the start of the scheme?
No one else has touched on the administration time charge of £25 per hour. Over a six-year period, the amount was £27 million. Our witnesses claim that £255,000 was the eventual figure, which works out at less than 1%. With 55 branches, it equates to £4,600 per branch. For 217 customers, this equates to £1,175 per customer or 47 hours. Were customers informed that they would be charged up to £25 per hour for the service?
The claim of four customers per branch and 47 hours per customer does not stand up. Once again, the AIB Group appears to have opted for large customers. However, the ordinary small customer continued to be ripped off by this management charge of £25, which had been in place since 1984. Mr. Sheehy stated: "I was managing director of our retail operations in Ireland". From what date was he the director? Mr. Sheehy also stated that a review occurred in late 2000, but the scheme had been in place since 1984. There was a problem in 2000, but £27 million had been earned by that stage. These are legitimate questions; this is not personal.
Mr. McErlean was linked with the Rusnak fraud, but the witnesses now say that he had nothing to do with it. Given that they knew what type of man he was, they knew how he would have reacted. If they were so concerned about the scheme being legally water tight, did their legal people not check it out? When it came to Mr. McErlean's attention, the scheme was effectively cast out and let loose, at a distance from the AIB Group although it was great while it was working for the bank. The AIB Group set up the scheme to facilitate clients to be able to match buyers and sellers in AIB Group shares. The bank seemed to go to a lot of trouble. When the scheme was discovered, major legal problems were found at every level.
The figure given for the administration time charges equates to less than 1% of the overall amount of £27 million taken in. When was Mr. Sheehy appointed to the retail role and why was a review not conducted earlier? It would appear that the small customer continued to be hit. The figure given only involves 217 customers, some four per branch.
Mr. Eugene Sheehy
I will restate that Mr. Eugene McErlean was not involved in the Allfirst issue in any way. The bank did not intend to imply that he was. I am sorry about how it has worked out, but we cannot go back and relive it.
A reputation is important to everyone.
Mr. Eugene Sheehy
It is and, as far as we are concerned, Mr. McErlean's reputation was never in doubt.
It was once he made his statement.
Mr. Eugene Sheehy
He was not dismissed from the AIB Group. Other jobs were available to him, but obviously——
Does Mr. Sheehy understand the point about how this issue moved to include the Rusnak affair?
Mr. Eugene Sheehy
I accept the Deputy's point.
In terms of its business, its other aspects and the legal and PR backups, surely someone in an organisation as large as the AIB Group would have realised that the two matters were going to be linked.
It was deliberate.
Mr. Eugene Sheehy
It was not deliberate. It is unfair to say that it was deliberate.
How did it arise?
Who was the chief executive officer at the time?
Mr. Eugene Sheehy
It was a recommendation in the Ludwig report, which we made public.
Who was the chief executive of the AIB Group at the time?
Mr. Eugene Sheehy
Mr. Michael Buckley.
I will revert to my colleague's questions. When Mr. McErlean found out about the scheme's early versions, Mr. Buckley wrote him a letter to say that he intended to hold Mr. McErlean personally liable for any losses incurred by Goodbody Stockbrokers as a result.
Mr. Eugene Sheehy
I have not seen that letter.
The letter was the press statement. Mr. McErlean's name appeared on it, then he was gone.
Mr. Eugene Sheehy
If the Deputy has that piece of paper, I would welcome it because we have never heard of or seen it.
It is a fact, but I do not have a copy of the letter. It is in the files held by the AIB Group. To revert to my colleague's point, Mr. McErlean's name was in the press release on the Rusnak affair. That was the pay off for being a good, faithful and honest servant of the AIB Group.
Mr. Eugene Sheehy
The Ludwig report recommended that the auditor's job be cycled every five years. It was unfortunate that——
That is the auditor, not the money.
We are dealing with the legal aspect in terms of the scheme's setup.
Mr. Eugene Sheehy
I want to repeat that Mr. Eugene McErlean was a fine auditor. I am sorry about how things worked out. It is a terrible pity. Like many other schemes, the scheme in question was perfectly designed legally and regulatorily.
The bank's own legal people——
Mr. Eugene Sheehy
Its structural design passed all of the tests.
I was not questioning that, but the scheme did not pass all of the tests. When it came to light, we found that it was hanging out all over the place.
Mr. Eugene Sheehy
Its execution was wrong.
Surely the AIB Group legal team would have checked out the identities of the third party client and the scheme's ultimate beneficiary and how the scheme was operating.
Mr. Eugene Sheehy
The scheme was audited within four months of its implementation and the flaws identified. The matter was escalated and the scheme was closed down.
Regarding the legal aspect, did the AIB Group not try to find out on day one who the third party client was?
Mr. Eugene Sheehy
The requirement in this case was for an arm's length arrangement, so it was not the AIB Group. The AIB Group did not profit from the transaction.
That is not the question. Surely the AIB Group's good reputation was at stake.
Mr. Eugene Sheehy
The people on the other side were introduced by a proper introduction.
The AIB Group never checked out who that person was.
Mr. Philip Brennan
They were introduced by people we had dealt with, who were reputable and, in one case, who were IMRO approved. There is ample provision in the——
The question is very simple. Did the AIB Group know who the third party client was?
Mr. Philip Brennan
Yes, in both cases. They were two companies.
The bank knew it was dealing with an Isle of Man fund, but did it know who the client was?
Mr. Philip Brennan
We knew who the underlying shareholder of the Isle of Man company was and we were advised in both cases who the underlying shareholder of the Nevis company was.
No, the point I am making here is that the beneficiary of the Isle of Man fund, while having the same surname as a well known, wealthy family, was not a member of that family.
Mr. Philip Brennan
That is true.
When the scheme was established, did the AIB Group know who that person was?
Mr. Philip Brennan
There was an impression when the proposal was first brought to the attention of the audit committee that the underlying shareholder of the company was a member of a well known family, but that impression was subsequently proved incorrect.
Could an organisation of the size of the AIB Group not have checked the identity of that person, as it would do in a normal case with any ordinary customer?
Mr. Philip Brennan
The requirements to check out who the underlying company was were gone through, hence there was no breach of money-laundering law. The difficulty was that several procedures were set out by the Stock Exchange as to further levels of diligence that were necessary and they were not adhered to. That was one of the findings of the audit.
The bank did not go through the necessary formalities at the beginning?
Mr. Philip Brennan
No, the proper level of diligence was not gone through. This Nevis situation was never contemplated from day one. When the situation was examined after the event, the view was, because Nevis was an unco-operative territory, we would lodge a suspicious transaction report.
Outside of the Nevis issue, the beneficiary of the Isle of Man fund was not the person put forward by the fund manager of the Isle of Man. Was it found at the time that AIB did not do proper due diligence to check the veracity of the name of the beneficiary of the Isle of Man fund?
Mr. Philip Brennan
The person was identified but the identification revealed it was not who we thought it was. It was not the person we expected it to be, but they knew who it was.
Who was it?
Who was this person?
Mr. Philip Brennan
It is not appropriate to refer to customers in this forum but from my examination of the files it was a Belgian national who was resident in Switzerland and who had been introduced to Goodbody by a reputable person with whom he or she had done business.
In any normal situation that would be acceptable, but this was not normal. This was a legal system that AIB was setting up to enable Goodbody to trade with AIB shares. There are two elements to this. Nevis was never formalised. Why did AIB not check out in detail that this was legally formalised? How did AIB allow the scheme to get under way without its being legally formalised? How did the bank allow it to get under way without knowing definitively who the well known beneficiary of the Isle of Man fund was? Mr. Brennan has still not answered those questions. He has said there was difficulty with due diligence but he is fudging it.
Mr. Philip Brennan
No, I am not attempting to fudge anything. The bottom line is that it was not operated as it was intended to be operated. That is why is was unacceptable. I am not trying to defend this.
It would never have come to light had Mr. McErlean not looked at it. It would have sailed on.
Mr. Philip Brennan
The bank deliberately has systems and controls such as audits and compliance that go in and review these matters. That is their job. The Deputy is correct, it would not have come to light unless Mr. McErlean found it, but that is what the audit department does. That is why we have it.
My final question is on administrative charges.
Mr. Eugene Sheehy
I was in that role from 1999 to 2000. I was quite familiar with this charging area for many years. It was there since 1984, as it was with all the other banks. The problem with administrative time was that the application of the charge was inconsistent. We tried to introduce a level of science to it, where 16 different sub-sectors of charges go in to make it up, but while I have no doubt that the charges were valid, instead of applying the charge on a daily basis, people worked off their diaries at the end of the quarter or month and inputted it that way. They tended to default the charge to management time. That was a problem and I wrote to Mr. McErlean in 2001 saying we were not happy that this system can always be held to account. We were the first bank to stop charging it.
Less than 1% appears very low. Would Mr. Sheehy agree?
Mr. Eugene Sheehy
No, I would not. In general when I look at the 16 subsets that go in here, believe it or not the €6 million per year is a very small amount of money for the amount of administration and management time.
That is €6 million a year?
Mr. Eugene Sheehy
Yes, given the amount of work that went on behind the charge. We started pre-notifying customers in the 1990s because this was always a contentious issue. Customers did not like it and how it was done in our systems was not great. This led to much more debate between customers and management.
From 1984 to 1990 customers were not aware that they were being hit with a——
Mr. Eugene Sheehy
They were always aware. They always got a detailed sheet, but after the mid-1990s they were pre-notified before the charge was crystallised. There is no sleight of hand or some trick. It was always out to be seen from both sides. In the 1990s we tried to change all our charging and accounting systems to be data-driven so that a charge could not arise unless it was backed up by a ledger entry. There was a comprehensive review of it and given the number of people who looked at it, it seems fairly resilient.
For the ordinary person looking in, the people we represent and customers, €6 million is a lot of money. Mr. Sheehy will be aware that in the early 1990s small businesses were going through a horrendous time in terms of survival. Charges were a major factor and interest rates were much higher, up to 12% or 14%. Charges were very significant. A relatively small number of customers were refunded and the amount refunded was exceptionally small in the context of €27 million — €6 million per year equates to 0.9%.
Mr. Eugene Sheehy
When it was pre-notified, the customer knew in advance and had a debate with the bank. There were many withdrawals of these charges after such discussions. With the 16 different reason codes that make it up, the bank does quite an amount of work to justify these charges. During that period in the 1990s, AIB's market share of SMEs grew very substantially.
Would AIB's external auditors have reviewed its findings in that area as part of the audit procedures?
Mr. Eugene Sheehy
They would have. They would see all the serious audit reports.
We have examined this issue over a number of meetings and it boils down to ethical behaviour by the bank. People will make their own judgments based on the media coverage of what has been said today and the issue as a whole.
I wish to broaden the point to take in the many people currently concerned about mortgages that may have been given out by AIB. The Financial Regulator attended a meeting on 9 April and indicated at the end of her presentation that she had written to all banks warning them to treat their customers fairly if they got into difficulty with their mortgages because of unemployment and the present economic position.
She drew our attention to one danger that people were to be made aware of, namely that people on tracker mortgages — the type most beneficial to the consumer when interest rates fall — could come under pressure from banks if they got into difficulties. In return for getting some kind of fair hearing from the bank, such people may have to leave the tracker mortgage and go back to either a fixed rate or some other less favourable rate. The regulator issued a warning to people to be very careful about this.
The second big issue for people who will read about the witnesses' presentation and listen to it on the television news would be fixed rate mortgages. People with such mortgages can be crucified if they try to break from a fixed rate and get some kind of a reasonable rate because we have a new interest rate environment.
In light of everything we have heard the witnesses say today and in dealing with the real difficulties that the bank's customers have, will they indicate the bank's policy on people who have difficulties? If such people have tracker mortgages, is pressure being applied on them to get out of the tracker mortgage before the bank deals with them? What is the bank's policy on people with fixed rate mortgages who wish to break that contract to get a more favourable rate?
Mr. Eugene Sheehy
In Ireland we have 162,000 mortgages, and we have many thousands in the UK market. We have had an approach to the mortgage market for many years where we were more severe in our risk assessment than other operators. We also had a very limited channel open to brokers. The best measure of the behaviour of our mortgage book is how many customers are more than 90 days past due. Our figure is 1% and the market is running at approximately 2%, so although the mortgage book is deteriorating, it is not showing signs of stress relative to the overall industry.
We have agreed a code of practice with the regulator and the Government in how we deal with people who have fallen behind and where a legal process is pending. For family homes — the process does not apply to buy-to-lets — we will not initiate any legal action until at least 12 months after the account goes past due. We will not do it for any case in 2009. By way of example, in 2008 we had two repossessions, with one being an abandoned property and the other a buy-to-let holiday home. We have a code of practice which we are standing by and we have had no issues with the regulator on that.
The issue of banks wanting to move people from tracker mortgages to other forms of mortgage is interesting. Under last September's guarantee, banks have been passing on the ECB rate reductions as they arise. The bank is contractually obligated to pass them on in the case of a tracker mortgage but it is not obligated to do so for a standard variable mortgage. A fixed rate mortgage is self-explanatory. For the past five or six ECB rate moves, we have passed on the full benefit to both tracker and standard variable mortgage holders, amounting to significant reductions for customers.
To answer the Deputy's question on whether there has been movement between tracker and other types of mortgage, the makeup of our mortgage book has not changed in the past year. Some 64% of the book consists of tracker mortgages, 29% consists of standard variable and 7% consists of fixed rate mortgages. The owner-occupied mortgage book is slightly different, with 62% being tracker mortgages, 30% being standard variable and 8% being fixed rate mortgages. We have passed on the full benefit of the ECB moves in the standard variable and tracker mortgages for owner occupiers.
Some 8% of owner occupiers on our books are fixed and there has been increasing demand from people to change from this since the ECB rate moves downward since July last year. People are considering their fixed cost and the current ECB rate, with an increasing number requesting a breakage of the fixed rate contract.
I have a couple of observations in this regard. The breakage of a fixed rate mortgage does not accrue any profit to the bank, as it has already contracted a fixed position. There is no economic benefit to the bank in taking the breakage cost. The customers who have had fixed rate mortgages saw substantial benefit from being on a fixed rate between 2005 and 2008, although the market has gone against them in the past six months. One is essentially buying insurance when buying a fixed rate mortgage.
We have a profile of the types of fixed rate mortgage we have, with 5% on a one-year term, 6% on a two-year term, 40% on a three-year term and 28% on a five-year term. That is spread over 8,000 customers.
There are big issues if one starts breaking contracts and other scenarios come into play. For example, we have €20 billion on fixed deposits. If we accept the principle that a contract can be broken because rates move in the short term, the structure of any contractual arrangement breaks down in banks. If a customer wants to break because of financial duress — he or she may be under too much pressure to carry the fixed rate and wants to go to a lower rate — there would be a cost. We will stretch the mortgage out for them and different moratoriums and breaks can be availed of. These are outlined in our standard documentation.
More people are asking about the issue and we are dealing with it on a case-by-case basis. We are not forcing anybody from a tracker mortgage into another product because of duress. Overall, we are passing on the ECB rate moves across the book and our level of legal action is very low. We will stand by the agreement we have made.
I take it the policy of AIB will not force people out of tracker mortgages in future either. The witness stated that the bank has not done so yet but he also indicated that people have perhaps not yet gotten into the maximum possible distress. Is it a policy decision, confirmed today publicly by Mr. Sheehy, that there will not be any attempt to ask people to leave a tracker mortgage if they get into difficulties?
Is the bank making any effort to meet people halfway with the fixed rate given any kind of unique circumstances, the significant profits made by banks over the last number of years and the amount of public money that has gone into AIB in the past six months? Is there no effort by the bank to become even more flexible with regard to people in difficulty who are on fixed rates currently?
Mr. Eugene Sheehy
There will not be any circumstance where we will try to force somebody out of a tracker mortgage. Such a mortgage is a contract and we will honour it.
If a person wants to change from a fixed contract to a standard variable or tracker, we will take the matter on a case-by-case basis. We will go through the issue with the customer but there is no economic benefit to the bank in breaking the contract. It would involve a straightforward subsidy to one customer which would ultimately be at the expense of other customers. We are very sympathetic and flexible in the way we will structure mortgages in terms of moratoriums and general consultation with the customer. We will not force anybody out of a tracker mortgage.
In his statement, Mr. Sheehy indicated there was no prohibition on undertaking financial transactions with a company incorporated in Nevis but the FATF recommended that a higher level of due diligence be exercised by institutions dealing with Nevis. Surely, once one has found out something like that, not to act on it would be similar to getting a smell of gas and lighting a match. It is something one should never do. The way the witnesses articulated those points was weak.
Mr. Philip Brennan
We should never have been involved. It was never planned that we would be involved.
The point I am making is about the way the witnesses are putting it. What they actually say is that there was no prohibition on doing it, so effectively they are arguing that they were able to do it in the same way as one is able to light a match when there is a stench of gas.
Mr. Eugene Sheehy
That is factually correct but we should never have done it.
They should not have written it this way either.
Mr. Eugene Sheehy
That was to correct statements made in public about what we did — that there was a prohibition.
Mr. Philip Brennan
There was no prohibition.
Yes, but as I was saying, that does not make sense.
Mr. Eugene Sheehy
If people go out in public and say it, for us not even to comment on it when we have an opportunity——
Do the witnesses think it a good thing that any bank should be involved with any of those companies?
Mr. Eugene Sheehy
No, absolutely not.
As my colleague pointed out, it should never have been involved in the first place.
I will make my next point as simply as I can. I am not into stocks and shares although perhaps I know a little more than I did. A profit of €800,000 was made on this account by the third party fund, which is a lot of money to make over a short period of a few months. How could that money have been made if trading was so low? When the witnesses mentioned the number of units going through, they did not give us a figure. If Goodbody had been dealing in shares for me it would have made a very small profit indeed. Instead, a large profit of €800,000 was made over this period. It seems whoever was making that profit was trading in the shares themselves.
Mr. Philip Brennan
This was a client buying and selling AIB shares. There are two sets of circumstances. In the second set of circumstances, with the Nevis company, as I mentioned, there were only a small number of trades — 20 trades. With the first Isle of Man fund there would have been significant volumes of trades going through.
There was not an instruction. In other words, they were not trading for me. Were they not trading for themselves? They were buying and selling shares themselves and taking the profit as opposed to buying and selling them for me and taking a small margin of 1% or 2%. Is that a fair point?
Mr. Philip Brennan
There were clients of Goodbody who had given a mandate to Goodbody to deal on their behalf. There were purchases and sales of AIB stocks — a considerable amount — on their behalf and the profit amounted to €800,000.
What Mr. Brennan is saying is that this third party was not trading for itself but for Goodbody's clients. Is that what he is saying?
Mr. Philip Brennan
No.
I am trying to understand this point.
Mr. Philip Brennan
There was a third party client and the profit on the trades was for the account of the third party client. It was the third party client who made a profit of €800,000.
And we do not know who that person is.
Mr. Philip Brennan
We know what the company is and we know who the principal behind the company is.
Who is it?
Mr. Philip Brennan
I will not name the person here. As I said, it was somebody who was resident in Switzerland, but I cannot name him or her for legal reasons.
Could Mr. Brennan help us by telling us whether it was a bona fide client or someone who was acting as a front for someone else?
Mr. Philip Brennan
I cannot answer that, Chairman.
Mr. Brennan should be able to.
The auditor, Mr. McErlean, was not able to get to that point. He was not able to identify that person.
Mr. Philip Brennan
I cannot either.
Mr. Sheehy made a case about this person, Mr. Fürstenberg, being introduced by a third party. Who sourced him for Goodbody? Did somebody come to Goodbody and say he or she had found a client, or did somebody in Goodbody go looking for a client? What actually happened?
Mr. Philip Brennan
The original client was introduced by the principal of a reputable FSA-regulated or IMRO-regulated firm with which we had been doing business for some time.
Who went looking? Did Goodbody go looking for somebody?
Mr. Philip Brennan
I am not aware of the answer to that question.
It is very important. Either I work for Goodbody——
Mr. Philip Brennan
It may well be that we did.
Let us continue on the basis that it did not. Who would this person have been dealing with in Goodbody? If somebody comes out of the blue and says there is a way of getting around the Companies Act——
Mr. Philip Brennan
This would have been a situation in which Goodbody was anxious to have a client who was willing to trade AIB shares and who would effectively provide a facility to enable it to——
Who was he introduced to, if Goodbody did not look for this person or advertise to say it was seeking reputable companies? What happened?
Mr. Philip Brennan
I do not have the names offhand but I presume it was senior personnel of the company.
Of which company.
Mr. Philip Brennan
Goodbody.
Who are the senior personnel there?
Mr. Philip Brennan
It would be wrong for me to speculate on who it might be. If I had the names I would certainly give them to the Deputy.
What positions might they have held?
Mr. Philip Brennan
We are speculating.
That is a rhetorical question, obviously.
I am a bit puzzled about this. It is stated that the ultimate beneficiary was a German or Belgian citizen. Is that correct?
Mr. Philip Brennan
With regard to the Nevis company, my understanding is that it was a Belgian national residing in Switzerland.
Does he exist?
Mr. Philip Brennan
I have never met the person and I know nothing about the situation. That is what I read in the files.
Perhaps Mr. Brennan could tell me something else. Did any employee of AIB or Goodbody benefit personally from this operation?
Mr. Eugene Sheehy
There is absolutely no evidence that anybody benefited from it.
None at all.
Mr. Eugene Sheehy
We have never seen the evidence.
Therefore, the beneficiary of the Nevis company is simply this Belgian citizen living in Switzerland?
Mr. Philip Brennan
That is our understanding.
He came out of nowhere.
Mr. Philip Brennan
No, he was introduced to the company.
But the company was not looking for him. That is the point Mr. Brennan made. He came to the company.
Mr. Philip Brennan
No, I did not say that.
Did the company seek this person? I am just trying to get it right.
Mr. Philip Brennan
In all cases in which there is a client interaction with Goodbody, in some cases Goodbody goes looking for business while in others clients will approach the company themselves. In this particular case, I do not know. It may well have been that Goodbody sought the business of this client because the introduction was through another person with whom it was already doing business.
Therefore, we have this Belgian man living in Switzerland who owns a company in Nevis. How did the company find Mr. Fürstenberg?
Mr. Philip Brennan
Again, the introduction of the Isle of Man fund which was the original party to the scheme, as disclosed to the audit committee, was by a fund manager in the UK that was IMRO-regulated.
Does Mr. Brennan now think that Mr. Fürstenberg was a misleading type of client for the company to have? Was it misled by his identity and his name?
Mr. Philip Brennan
The client was not the client we were led to believe he was to start off with.
Who misled the company?
Mr. Philip Brennan
The report that was made in the initial stages mentioned a surname which implied that the person was a member of a well known family. As it turned out, it was not the same family.
Yes, but who misled the company on that?
Mr. Philip Brennan
The report made by Goodbody suggested it was a particular name. Who made the assumption that the name was the same as that of the wealthy family I cannot tell the Senator, but it was generally assumed that it was the same, and it was not.
Was that stated or just implied?
Mr. Philip Brennan
It was implied.
Verbally.
Mr. Philip Brennan
It was implied.
In writing or verbally.
Mr. Philip Brennan
The name was a name that one would recognise.
But everybody called Fürstenberg is not a billionaire.
Mr. Philip Brennan
No.
I thank members. This meeting has been very productive in one sense as we have an apology in respect of Mr. McErlean, but there are issues we must explore further. I thank Mr. Sheehy and Mr. Brennan for coming before us.