Central Bank forced to admit investigative failings

Yesterday was a bad day for the Central Bank

Yesterday was a bad day for the Central Bank. The Bank has been anxious to defend its record in policing Guinness & Mahon bank in the 1970s and 1980s, but has had to admit it could have done better.

Of course, a regulatory authority can always do better; but in the case of the Central Bank a senior official has said concerns he expressed in 1988 were not acted on at the time.

Mr Terry Donovan, deputy head of banking supervision, was a trainee examiner in 1988 when he took part in an examination of Guinness & Mahon. It was his first examination and he remembered it well, he said. He discovered matters he was concerned about, raised them with his superiors, but was not satisfied with the response.

His direct superior was Ms Ann Horan, who was the head examiner for the 1988 examination. It was expected she would strongly contest Mr Donovan's evidence when she entered the witness-box yesterday, but in fact her strongest objections concerned the tone of Mr Donovan's evidence.

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It transpired that as a trainee Ms Horan had conducted her first examination of a bank at Guinness & Mahon. She had herself developed similar concerns to those of Mr Donovan. She also had brought the matter to the attention of her superiors.

At the heart of the matter were back-to-back loans issued by the bank. These were being issued to residents and non-residents and were "secured" by funds held offshore, mainly in the Cayman Islands. In other words, they formed part of a trail which led to the secretive Ansbacher deposits.

The Central Bank had no difficulty with loans being issued to non-residents, but in relation to residents it suspected the loans were a fiction, and were in fact withdrawals being made by the owners of offshore funds. It further suspected that these offshore deposits had not been declared to the Revenue.

When Mr Adrian Byrne discovered these back-to-back loans in 1978 he raised the matter with the late Desmond Traynor, then the de-facto chief executive of Guinness & Mahon. Mr Traynor gave a commitment not to issue any new loans to Irish residents, and to wind down the business.

What Ms Horan and Mr Donovan discovered in 1986 and 1988 were back-to-back loans to non-residents, and similar loans to residents which were in existence since before 1978. Unknown to them and their superiors was the fact that there were other, new, loans which had been issued to residents but the backing for which was not evident from the Guinness & Mahon books.

Crucially, Mr Donovan felt that when he raised the loans issue with executives of Guinness & Mahon, he did not get satisfactory replies. He felt the executives were very sensitive about the matter.

Mr Byrne and Ms Horan could not remember conversations which the trainee, Mr Donovan, said took place in 1988 and at which he expressed his concerns. However, they did not deny that they could have happened.

Mr Donovan was not told by Mr Byrne that the matter of back-to-back loans to residents had been discussed with Guinness & Mahon in 1978, or that it had made a commitment to wind down such loans.

Furthermore, Ms Horan during her evidence revealed she also had not known in the 1980s of this aspect of the history of the Central Bank's relationship with Guinness & Mahon.

Before starting her 1988 inspection, Ms Horan had read the previous report on Guinness & Mahon, written in 1986, but that did not mention the issue. Earlier reports did but she did not read them. Mr Byrne did not tell her about the matter before she started her examination. At the time Mr Byrne held the position now held by Mr Donovan. He is now Mr Donovan's direct superior.

Responding to Mr Jerry Healy SC, for the tribunal, Mr Byrne said there was no evidence that Mr Donovan discovered anything in 1988 that was not already known to the Central Bank.

However, he agreed it would have been better if the Central Bank officials examining Guinness & Mahon in the 1980s had known the full history of that bank's relationship with the regulatory bank.