The Allfirst debacle is but the latest in a series of embarrassing ripples to buffet AIB, writes Arthur Beesley

The €864 million (£680 million) fraud at AIB's US division is the latest damaging blow to the standing of the Republic's largest bank.

Only 16 months ago, AIB made a €114 million settlement with the Revenue after large-scale evasion of Deposit Income Retention Tax (DIRT) was exposed. The payment was the largest tax settlement since the State's foundation. It included interest and penalties.

The transfer was made after an Oireachtas subcommittee revealed systematic evasion of the tax within the banking sector. AIB's settlement was the largest after the inquiry, indicating that it was the biggest offender.

But the DIRT settlement was small in the context of AIB's overall profits at that time. This underlines the strength of the bank, which ranked as the State's largest company before news of fraud hit its share price yesterday.

It was not always so, however. AIB faced bankruptcy in the 1980s after the disastrous acquisition of the Insurance Corporation of Ireland (ICI). The bank was bailed out by interest-free Government loans worth €127 million because closure would have had serious consequences for the State's entire banking system.

If the root of the DIRT affair was in the emotive area of taxes unpaid, the ICI debacle was more damaging from a financial perspective.

AIB bought a 25 per cent stake in ICI in 1981. In 1983, it purchased the remainder of the company, bringing the overall purchase price to €107.95 million.

That year, the company's non-marine branch in London wrote £200 million worth of business, about 20 times more than in previous periods. It was an expansion that would have grave consequences for the bank.

As difficulties mounted at ICI, the Department of Industry and Commerce study of ICI's provisioning revealed a €25.4 million under-provision in the Irish business. For its part, AIB put the shortfall at €50.8 million.

The losses mounted, prompting a move by AIB to disengage from the business in 1985. The bank told the Government of a €127 million deficit and the Minister of Industry and Commerce, Mr John Bruton, took control of the business.

With fears of a banking sector collapse, an administrator was appointed in 1985. Mr Billy McCann, an accountant with Craig Gardner, operated with funds from AIB, other banks and insurance companies - and the Central Bank. Mr McCann estimated the 1984 losses at €287 million, most of them incurred at the London office.

To surmount the crisis, AIB received an interest-free loan worth €127 million from the Exchequer in 1985. The business was renamed Icarom in 1990 and its Irish operation was sold to another company called Insurance Corporation of Ireland.

Further Government loans worth €95.25 million were made available in 1991 and 1992 to the Insurance Compensation Fund, which met the firm's liabilities. AIB agreed in 1992 to pay another €223.5 million over 20 years.

At a hearing before the Dáil Select Committee on Public Accounts in 1995, the Department of Finance estimated the cost of the saga at more than €508 million, including the €107.95 million lost by AIB in the acquisition.

Until yesterday, the most difficult days endured by the bank in recent years were at the DIRT hearings - also before the Committe on Public Accounts, which appointed a subcommittee to examine the scandal.

AIB always maintained it had agreed an amnesty with the Revenue over DIRT evasion. But the subcommittee found this was not the case and AIB said it agreed to the settlement because it was "sensible" to put the issue behind it. At that time, its chairman Mr Lochlann Quinn said: "On balance, it is in everyone's interest to get it behind us."

The settlement was three times as large as AIB's own estimate of its liability, which it put at €44.45 million. In the end, the deal followed 15 months of audits on bogus non-resident accounts which the bank opened for customers in the 1980s and 1990s.

Hearings of the Moriarty Tribunal have revealed settlements of a different nature.

The tribunal has heard that Mr Charles Haughey settled a £1.14 million liability for £750,000 in the weeks after he became taoiseach in 1979. It has also heard that AIB wrote off a €171,450 liability for the former taoiseach Dr Garret FitzGerald in 1993.