Belfast Telegraph

Bosses pay a high price after bringing down banking giant

With three former banking executives serving the first weekend of prison terms in the Republic, ranging from two years to three-and-a-half years, Declan Brennan, the only journalist to have sat through the entire Anglo Irish Bank and Irish Life and Permanent (Anglo-IL&P) market deception trial, explains the entire case

John Bowe spent much of the summer of 2013 dodging press photographers who were camped outside his family home in Glasnevin, Dublin. The former Anglo Irish Bank executive became a household name overnight as a result of leaked recordings of telephone calls from within the dealing room of his old firm.

The 52-year-old family man was caught candidly telling a fellow senior dealer that their boss David Drumm had picked a figure of €7bn out of his a*** so Anglo could convince the Central Bank to "put skin in the game" and bail them out. In the wake of the collapse of US firm Lehman Brothers he also joked that the taxpayer will never get any of the bailout back.

The Anglo Tapes - run by the Irish Independent and Sunday Independent - also featured a recording of Bowe singing the German national anthem before he and Drumm discussed the inflow of deposits from Germany in the wake of the government bank guarantee.

Before 2013 was out, Bowe had been charged with taking part in a back-to-back loans scheme with the aim of propping up Anglo's balance sheet and conning the public into thinking the bank was in rude health.

Despite having being interviewed under caution by investigators in mid-2012, Bowe didn't expect to face charges.

Sources close to him say he believes the charges came as a result of the Anglo Tapes infamy. But the reality is that from soon into the investigation into controversial billion-euro deals between Anglo and Irish Life & Permanent (IL&P) carried out in September 2008, Bowe was a suspect.

Bowe played a crucial role in the scheme, liaising between the bank's then CEO David Drumm, who trial judge Martin Nolan said was the driving force behind the scheme, and the traders who would push the buttons needed to execute it. Last Friday, Judge Nolan jailed Bowe alongside his co-conspirators Willie McAteer (65), Anglo's former finance director, and Denis Casey (56), IL&P's group chief executive. A fourth co-accused, IL&P's former finance director Peter Fitzpatrick, was earlier acquitted.

In his 25-minute judgment, Judge Nolan, who presided over their 89-day trial, said that the three former executives had failed to act with honesty and integrity by manufacturing €7.2bn in deposits in sham transactions.

He told them that they had taken part in a deceitful, dishonest and corrupt scheme which had the sole function of tricking the public into the true state of Anglo's books.

Throughout four months of complex evidence, intense cross-examination and often painstaking legal argument there was very little, if any, references to those potential victims of this fraud - the ordinary depositor and small nest egg investor.

Many of those who lost their shirt by investing their life savings in the ill-fated Anglo will take comfort from the fact that Judge Nolan brought these unknown, unnamed, victims to the fore.

While commenting that the collapse of Anglo was caused by risky borrowing and not by this fraudulent scheme, he said ordinary depositors and investors made important decisions about their savings based on the public accounts of companies like Anglo.

"They are entitled to rely on honesty and integrity. In this case, honesty and integrity were sorely lacking," Judge Nolan said.

Operation Diameter, the investigation run by the Garda Bureau of Fraud Investigation into the back-to-back loans between the two banks, began when the financial regulator made an official complaint on foot of newspaper reports on IL&P's alleged help to pretty up the books of disgraced Anglo Irish Bank.

Gardai raided Anglo Irish's headquarters in late February 2009 and took away crates of evidence.

Detectives began trawling through 800,000 files, mainly emails and audio recordings of telephone calls from the dealing rooms in both banks, looking for evidence of intent to defraud.

Hundreds of statements were taken, many running to over 100 pages each, with detectives interviewing people from the two banks, auditors PwC and Ernst & Young, the Department of Finance, the Central Bank and the Financial Regulator.

By March 2010 the small team of experienced fraud squad detectives, working out of an incident room in Dublin's Harcourt Street, were ready to make their first high-profile arrests.

McAteer was arrested by surprise at his home in Rathgar, south Dublin, at 6.30am and taken for questioning to Irishtown Garda station in Dublin's south inner city. His three co-accused provided extensive statements on a voluntary basis over the next two years.

The voluminous investigation files were sent to the DPP and in June 2014 the four men were finally charged in relation to the dodgy deals. Dublin District Court heard that the four had each replied "no" when charged. Books of evidence, each made up of two thick ring binder folders, were served on them.

It would be another two years before they learned their fate at the hands of a jury in the longest-running criminal trial in the State.

For four months, since January, a remarkably attentive jury was taken repeatedly through the subtle legalities of how different accounting treatments mean different things to different people.

Time and time again defence lawyers for the IL&P defendants, Casey and Fitzpatrick, told the jury that if the €7.2bn deposits placed by them with Anglo had been accounted for differently, "none of us would be here today".

In September 2008, Anglo wired €7.2bn over to IL&P and in return IL&P pumped the same amount back into Anglo's accounts.

The cash coming back from IL&P was stamped as coming from its non-banking entity, Irish Life Assurance (ILA), so the "deposit" qualified as a retail customer deposit rather than as an inter-bank loan.

As millions in deposits flowed out of the bank on a daily basis, Anglo needed to do something - and fast - if investor confidence wasn't to completely collapse and close the bank.

Judge Nolan said he accepted that the crimes were done to try to save the bank and in the context of the Financial Regulator urging Irish financial institutions to "don the green jersey" and support one another during an unprecedented global credit crunch.

But he said while he could appreciate the desperation of the moment, saving the bank wasn't everything and it didn't justify the corrupt plan that was hatched.

Bowe, then the de-facto head of Anglo's Treasury division, frequently discussed the "Permo" deal and efforts to "fix the poxy balance sheet" with his chief exec. He also updated McAteer on the deal, which he said would involve "a dance" of "money going around in a circle".

The idea was quite simple. Anglo would transfer tranches of €1bn with IL&P and it in turn would transfer the money to its life assurance entity, Irish Life Assurance, which would then deposit the same amount back to Anglo.

There were nine transactions of different amounts, give or take a million (throughout the trial, lawyers and witnesses frequently were forced to correct a reference to million when they meant billion).

And each time the cash came back round to Anglo, it would be clocked up as customer deposits.

In the end the size of the transactions was so much in excess of Anglo's normal €500m credit limit with IL&P that Tony O'Hanlon - a senior manager - refused to sign off on the deal because he couldn't rationalise approving an excess of €6.7bn.

McAteer, in his other role as chief risk officer, did sign off on the excess which allowed the deal to proceed. In the final days of September 2008 -midway through the execution of the deals - the whole thing nearly unravelled as Anglo ran out of liquidity and didn't even have enough cash to make its regular day-to- day payments. They turned to IL&P for help, asking for an uncollateralised loan of €400m - but Casey said he would not risk placing unsecured money into the troubled bank. The following day the bank guarantee came in and deposits began to flow again in the market. As a result Anglo was able to restart the back-to-back deals with Irish Life.

Lumping the €7bn into deposits meant Drumm, could state in the bank's preliminary results on December 3 that "customer deposits increased to €51.5bn, an increase of €1.9bn (4%)". Bowe and McAteer claimed that the deposits were real deposits and were accounted for correctly on Anglo's balance sheet and so no fraud was carried out. The former IL&P executives, Casey and Fitzpatrick, told gardai they had no intention to mislead anybody and had no control over how Anglo would account for the deposits.

After the jury acquitted Fitzpatrick, lawyers for Casey (who was the last man awaiting his verdict) said there wasn't "a sheet of paper" separating the case against the former chief executive.

But the jury didn't agree and rejected Casey's defence that he couldn't have known how Anglo intended to present the deals to the market when he agreed to help them execute them.

In the tense days that followed Peter Fitzpatrick's acquittal, they asked for evidence of a phone call between him and his colleague Dave Gantly, in which the two discussed the September deal. Gantly told Fitzpatrick "it needs to be bossman to bossman".

Fitzpatrick's evidence to gardai about an earlier back-to-back deal with Anglo, in March that year, had contradicted Casey's statement that he hadn't authorised that deal. Fitzpatrick also told detectives about an exchange between Casey and then Anglo chairman Sean FitzPatrick at the end of an acrimonious meeting to discuss a botched merger proposal from Anglo.

Anglo's then chairman approached Casey and his chairwoman Gillian Bowler and suggested they let "bygones be bygones" and asked if the mutual support between the two banks would continue.

Casey agreed that it would continue, and told his finance director that - despite the animosity - he was acutely conscious of the fact that IL&P Group would require support from Anglo in order to manage the level of ECB borrowings on its reporting date in the coming December.

Peter Fitzpatrick told gardai that Casey then told him that IL&P should now proceed to support Anglo at the end of the month, on the basis that any deposit from IL&P was backed up against collateral from Anglo and so was risk-free.

Much of the evidence in the trial came from the same original source of the infamous Anglo Tapes - dealer room calls recorded automatically in case a dispute ever arose about the terms of million-euro deals hammered out over the phone on a daily basis.

During one call in mid-September, Drumm asked Bowe: "Are you going to be able to bloat the balance sheet... over year end with short term inter-bank and all that sort of stuff and shove it into liquidity?"

In another call on September 29, Bowe told Drumm and McAteer about the "€6bn fix" with "Permo", explaining that "the money goes round in a circle".

He said: "What's happening is we give the money to them and the dance here is we actually get it back in time and that's becoming very, very tough to do". During this conference call McAteer said, "well, keep going for the moment anyway".

The following day, after the IL&P deal had been completed, Sean FitzPatrick telephoned Bowe to congratulate him on his efforts. FitzPatrick went on to ask Bowe if there were "any funnies" in the bank's figures. Bowe told his chairman: "We have a big funny with Permo."

Over the next two months, Anglo's finance division began to put together the bank's accounts for its 2008 annual report. Kevin Kelly, head of financial reporting with Anglo in 2008, told the trial that the transactions were brought to the attention of the PwC accounting firm in October 2008 when they were brought in by the Government to review the books of all banks covered by the bank guarantee.

He said PwC's report of the transactions to the Department of Finance was consistent with his understanding of the transaction at the time. Kelly said that any information they had about the deal was also shared with Anglo's auditors, Ernst & Young (EY).

Judge Nolan had strong words to say about EY's role. He said it beggared belief that they signed off on the Anglo accounts if they knew about the IL&P deals, and that they should have known what was occurring if they were doing their job properly.

He suggested it was either a case of blindness or wilful blindness from a major accountancy firm whose function was to protect the public.

At the same time the Financial Regulator was asking questions about the deal. On October 1, Claire Taylor, who was the bank's assigned regulator, contacted Anglo to discuss the large sums moving between the two banks. Ciaran McArdle, an Anglo dealer, reassured her. "It's trying to manipulate our balance sheet for our financial year end. We have boosted our customer funding number. It's not a real number," he said.

Later that month Bowe told regulator official Mary Elizabeth Donoghue: "Call it balance sheet dressing or window dressing or anything... our motive was not about liquidity."

Ms Donoghue suggested: "So it'd look like an asset manager had placed money with yourselves?" and Bowe replied, "Exactly." She replied: "That's fine, that's grand."

On November 18, the bank's internal audit committee was told that "the transactions bolstered customer deposits". Asked by the committee if it was "window dressing" McAteer replied "balance sheet management".

The audit committee approved the treatment of the deals in Anglo's balance sheet as customer deposits and EY signed off on these accounts.

The balance sheet was published on December 3 as part of Anglo's preliminary results and with no explanatory note to show that €7.2bn of the deposits were linked to the same value in loans to IL&P.

The following February it began to emerge that the circular deposits from IL&P formed a large part - 16% - of the €51bn Anglo had presented as customer deposits in its end-of-year balance sheet.

Bowe had told a conference call with Anglo executives in March 2008, when a similar type of transaction was being discussed in relation to the bank's half-year figures, that the only issue they had to think about was from a regulatory point of view. He said: "And the regulator is more or less saying: 'Look, I'm not looking'."

The trial heard that in 2008, both Drumm and Casey were told that Irish banks should "don the green jersey" and "circle the wagons" to protect the Irish banking system during the unprecedented global financial crisis.

During six days of legal argument early in the trial, the prosecution argued that the regulator didn't sanction the September deals and had not given banks carte blanche to commit criminal transactions or defraud the public.

Judge Martin Nolan agreed, but disagreed that the prosecution's application to stop the jury hearing anything of the "green jersey" agenda.

He ruled that it would be impractical to run the five-month trial without informing the jury of the context of the deals.

Last Friday, he said that the State authorities were aware of what was going on and had turned a blind eye.

It must be said that, referring to the many testimonials presented on behalf of the accused, that Judge Nolan described the three as good honourable and hard-working family men who had acted in what they thought was the best interest of their companies.But this wasn't good enough to save them from prison.

What they did was reprehensible, in that it undermined the trust the public were entitled to place in financial institutions and blue chip firms.

Each man stood up as they received their individual sentences in a hushed courtroom packed with family, supporters and public spectators. Then all three quietly walked out of the courtroom, led by prison guards to their new home.

Belfast Telegraph