Amid all the confusion and contradictions of the AIB tax scandal this week, one astonishing admission stands out: some of the most respected institutions in Ireland depended on crime for their survival. Tax evasion by the holders of bogus non-resident bank accounts is a serious crime. But according to the group chief executive of AIB in his evidence to the Dail Committee of Public Accounts on Thursday, any bank which refused to go along with it would have gone out of business.

In a State where stealing a handbag can get you six years in jail, this was a crime that no one wanted to punish. The full truth of the AIB tax scandal is still obscure, but at least two things are now entirely clear. Almost everyone in authority knew what was going on. And almost no one wanted to know the details.

The belief that in this case ignorance might be bliss goes right back to 1983 when the then finance minister, Alan Dukes, was introducing legislation to provide that bank accounts of non-residents would be exempt from Irish tax.

The Finance Bill therefore contained a requirement that the person claiming this status would have to submit a sworn affidavit to that effect. Alan Dukes said explicitly that the purpose of this provision was to deal with a problem of evasion "that has been known about for some time".

This provision, however, was vigorously opposed by Fianna Fail, a party then led by a man with a special interest in non-residential bank accounts. The fear expressed by Fianna Fail spokesmen was that if there was too much scrutiny of such accounts, wealthy people would invest their money outside the State instead. So the requirement for an affidavit was dropped from the final Act and replaced with a much vaguer provision that, if in doubt, the bank should ask the depositor for an affidavit.

There was, in effect, a deliberate political decision to avoid discovering the details of a crime that was known to be widespread. "This was", as Dermot Quigley, chairman of the Revenue Commissioners, rather pointedly reminded the Dail Committee of Public Accounts on Wednesday, "not done by the Revenue Commissioners; it is the regime put in place by the Oireachtas."

By 1986, when Deposit Interest Retention Tax (DIRT) was introduced, AIB already had some experience of colluding with blatant tax evasion. As revealed by the beef tribunal, one branch of AIB alone, that in Cahir, Co Tipperary, processed bogus cheques worth £840,000 in 1986 for the local beef plant owned by Larry Goodman. Each Friday the manager of the plant would go to AIB with cheques made out in the names of non-existent Northern Ireland haulage companies. Although they were marked "& Co." and "not negotiable", and although the bank clearly knew the man who was presenting them, they were cashed without question. The cash was then used to pay wages without the deduction of PAYE or PRSI.

This, then, was the context in which the DIRT scandal began to unfold - a State unwilling to look too closely at what the banks were doing for fear of alarming the wealthy, and a banking system in which obvious tax evasion was tolerated for fear of alienating clients.

In this atmosphere, it is not surprising that thousands of people around the State believed that they could, without much risk, evade DIRT. It is not known, as yet, how many such people there were. According to internal documents published in Magill, by 1991 AIB alone held at least £600 million in at least 53,000 bogus non-resident accounts. This figure was disputed on Thursday, however, by the bank's group chief executive, Tom Mulcahy.

Mr Mulcahy insisted that the figures were plucked out of the air as an "off the cuff estimate" by the bank's taxation manager, Jimmy O'Mahony, and then used by the internal auditor, Anthony Spollen, in a report on the issue. This may well be so. There are, however, reasons to question such a confident dismissal of Mr Spollen's figures.

For one thing, the figures from the internal audit report as published in Magill are not in fact "off the cuff estimates". They give very precise numbers for the regional breakdown of the non-resident accounts (for example, 12,402 in Cork) and for the amount of money held in them (£149,403,366 in Cork).

What Mr Spollen had to make an educated guess at is how many of the 87,660 accounts were bogus. The problem with Mr Mulcahy's statement is that he neither gave his own estimate nor provided an alternative explanation for the fact that, for instance, in Tralee, a town with a population of 60,000, AIB had opened an astonishing 14,251 non-resident accounts containing £188 million.

Mr Spollen's assumption that you don't, in one bank alone, get almost one non-resident account for every four residents unless most of the accounts are bogus does not seem far-fetched.

Whatever the precise figures, moreover, there is no real contention by AIB or anyone else that the criminal evasion of tax by means of bogus accounts was other than pervasive, both in AIB and in the other financial institutions.

Where were the representatives of the public interest in all of this? The Governor of the Central Bank, Maurice O'Connell, acknowledged that his institution has a right to see internal audit reports like that drawn up by Mr Spollen but did not in fact ask for them before 1995. Even though, as he put it himself, one of the Central Bank's statutory duties is to satisfy itself "as to the quality and integrity of management" in the banks, he insisted that collusion in tax evasion by that management was not a matter for the Central Bank.

The Revenue Commissioners, meanwhile, had, and still have, no power to check any bank account unless they are acting on specific information. The Revenue was not, however, completely powerless. The Revenue has a legal right to see the declarations signed by people opening non-resident accounts.

It could have carried out a rather simple exercise by seeing who, in Tralee for example, was claiming to be a non-resident and then checking the phone book or the electoral register. It is clear from Dermot Quigley's evidence to the Committee of Public Accounts that no effort was made to carry out such an exercise.

It is not that the Revenue took the honesty of the banks on trust. On the contrary, it clearly knew that lots of people had bogus accounts. As early as 1988, documents issued by the Revenue in relation to the tax amnesty made specific reference to taxpayers who were holding money in Irish banks "under non-resident names and addresses".

Nothing was done with this knowledge until, in late 1990 or early 1991, someone contacted tax officials with details of two particular bogus AIB accounts. Armed with this information, a senior Revenue inspector, D. A. Mac Carthaigh, contacted AIB and arranged a meeting for February 13th, 1991. Much has been made of an apparent dispute about whether the process initiated at this meeting was, or was not, a "deal".

This dispute, however, misses the central point. What was happening was not an exercise in crime and punishment. It was a joint attempt to find a way out of a mutually embarrassing situation. It is clear from the evidence of both AIB and the Revenue that each side understood that they had effectively ignored five years of widespread evasion.

The golden rule was "don't look back." Mr Mac Carthaigh, according to AIB's minutes of the meeting, said that "if AIB is prepared to be pragmatic, the Revenue is prepared to look forward rather than back".

What happened is not quite what had been alleged in Magill: a £14 million "settlement" for the taxes unpaid between 1986 and 1990. It is, in fact, much worse. There was no thorough examination of how much tax was owed for those years, let alone an agreement that AIB would pay a certain sum for that period. The sleeping dog of systematic crime was allowed to lie.

The now infamous £14 million is not a payment of the back taxes, merely the extra DIRT raised from AIB by applying stricter procedures in 1991 and 1992. As to the years between 1986 and 1990, both sides agree that, in the words of Dermot Quigley, "We could not put a figure on the amounts as we had no access to the true scale of bogus non-resident accounts".

It is now clear that neither the Revenue nor the AIB made any serious attempt to find out how many bogus accounts there were in those years and how much money was held in them. In effect, the tax was not "written off", merely ignored. The attitude of the Revenue was that if it happened to discover individual cases of bogus accounts, payment for them could be "negotiated . . . without penalty and without publication". But it was not about to go looking for them.

Nor, it seems, was there any attempt to check that the new, tighter regime agreed by the banks in 1991 was actually being implemented. AIB undertook that every branch manager would certify to AIB management that, insofar as they were aware, all non-resident accounts were now genuine. In a tough-sounding letter reminding the bank of this agreement, Mr Mac Carthaigh warned that future offences "will give rise to prosecution of both the bank and the official involved".

Asked on Wednesday whether this threat was followed up, the chairman of the Revenue said that "I do not know what the specific follow-up was". There does not even seem to have been any attempt to check whether the branch managers were in fact certifying the accounts. Even knowing that AIB had colluded with large-scale tax evasion for five years, the Revenue continued to trust the bank to do the right thing.