Mandarins of finance also have a great deal to answer for

This week the Committee of Public Accounts heard from the men who have dominated public fiscal policy in Ireland over the last…

This week the Committee of Public Accounts heard from the men who have dominated public fiscal policy in Ireland over the last 25 years, the successive governors of the Central Bank and secretaries of the Department of Finance: Maurice Doyle, Maurice O'Connell, Sean Cromien, Paddy Mullarkey and the leading lights in the Revenue Commissioners.

The broad thrust of their evidence can be summed up in three short words: it wasn't us.

In seeking to explain how a massive fraud on the exchequer could be allowed to continue for over 20 years, they pointed the finger away from themselves and towards the politicians.

In terms of the immediate effect on public opinion, their gesture may have been deft. But in the light of the evidence uncovered by the Comptroller and Auditor General it is unlikely, in the long run, to be very convincing. That there is a great deal of political responsibility for the scandal is obvious, and successive ministers for finance can expect to have a hard time explaining themselves before the committee. But the evidence suggests the mandarins themselves have a great deal to answer for. There is, for a start, no doubt that both the Central Bank and the Department of Finance knew about the bogus accounts all along. As early as July 1982, for instance, the Central Bank noted in a memorandum for the Department of Finance that "We have had reports that some financial institutions are accepting deposits in Irish pounds from residents over non-resident addresses. We assume that tax avoidance would be the purpose of this practice."

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In 1984, an internal Department of Finance memorandum noted that the use of bogus non-resident accounts had "long since reached epidemic proportions". At the same time, another memorandum noted that a staggering two-thirds of non-resident accounts were "suspicious" and estimated the amount of money involved at between £1 billion and £1.2 billion.

The thrust of evidence from both Maurice Doyle and Maurice O'Connell, however, was that the politicians, by backtracking on a proposal in the Finance Bill of 1983 to require the holders of non-resident accounts to sign affidavits, had, in Mr Doyle's words, "simply emasculated the anti-evasion measure" and thereby "sent a clear pellucid signal to the Department of Finance and the Revenue Commissioners that this was not an avenue that they wanted to be pursued".

The clear implication of these suggestions was that the mandarins wanted to pursue the tax cheats but that the weak-kneed politicians had backed off. The politicians did, indeed, back off. But it is simply not true that the mandarins pushed for the affidavit proposal.

From the Comptroller and Auditor General's report, it is clear they did not support it in the first place. In May 1983, a representative of the Department of Finance met the banks to hear their objections to the affidavits plan. The banks "saw the provision as it stood as an impediment to genuine business in the international field, where competition for deposits was very keen".

And crucially, the report adds: "Both the Department of Finance and the Central Bank agreed with this position." So the politicians may indeed have "emasculated" the proposal, but the mandarins handed them the knife.

Instead of pushing the Department of Finance to take action against this widespread fraud, the Central Bank wrongly implied it was on the case itself: "We are," it told the Department in July 1982, "proceeding with our own investigation."

This was, however, an outright untruth. The Comptroller and Auditor General, in his report, notes that Mr O'Connell had admitted to him that "the word `investigation' was an exaggeration in that there was no scientific or formal investigation at the time."

If, as Mr O'Connell insisted this week, the bogus accounts were purely a taxation issue and did not come within the remit of the Central Bank, why did the bank feel it necessary to claim it was investigating them? And if, as he also suggested, the whole mess was the responsibility of politicians, why did the Central Bank actively mislead the branch of government - the Department of Finance - which advised the politicians on these matters?

There are, in any case, two good reasons to doubt Maurice O'Connell's repeated assertions that bogus non-resident accounts were none of the Central Bank's business. Even if it is accepted that the Central Bank had no reason to be concerned with unlawful and unethical behaviour by senior figures in the banking industry - an extraordinary proposition in itself - it seems clear that at least two of its basic regulatory functions required it to take an interest in the bogus accounts. The Central Bank had, as a matter of law, a responsibility to ensure the banks were behaving prudently and a responsibility for exchange controls. Both of these had a bearing on the bogus accounts.

It was significant this week that the banks themselves accepted that the Central Bank might have a legitimate "prudential" interest in the bogus accounts. Jim Bardon, director general of the Irish Banking Federation, accepted under questioning that "any situation where the law is being broken is a matter of concern both for the institution and for the regulatory authority".

He also accepted that the solvency of the banks could, at least in principle, be affected by large-scale frauds and that this too would be "a matter for the regulator".

We were thus left with the highly unusual situation of the institutions being regulated accepting that the Central Bank might have good reason to look closely at their behaviour on bogus accounts while the regulator - the Central Bank itself - modestly demurs.

And it was accepted from early on that the bogus accounts had worrying implications for exchange controls. In December 1983, representatives of the Department of Finance and of the Central Bank discussed a possible tightening of exchange controls.

The Department officials expressed the view that the bogus accounts were a cause for concern on two fronts: tax evasion and "the possibility that balances might be transferred overseas for unapproved purposes".

The first of these was stated to be a matter for the Revenue. The second, however, was "of course a matter for Exchange Control". Accordingly, the bank was supposed to "hold discussions at a senior level with the commercial banks" about this matter.

What happened?

"There were," notes the Comptroller tersely, "no follow-up discussions with the commercial banks."

If the Central Bank's disavowal of responsibility cannot sustain much scrutiny, what about the broader defence of all the officials - that it was necessary to turn a blind eye to the DIRT fraud in order to prevent, in Maurice Doyle's words, "a flight of capital out of the country"?

For the Department of Finance, the Central Bank and the Revenue, this was the primary consideration. But was there any evidence that such fears were well grounded?

All the evidence pointed in the opposite direction. In 1987, for example, the board of the Central Bank discussed a paper on monetary policy which specifically stated that outflows of capital were primarily influenced by the possibility of speculative gains on foreign currency dealings and not by the desire to avoid Irish taxes: "The `pure' tax effect - the level of outflow that would have taken place in the absence of speculation - is probably small, say, no more than £200 million."

Likewise, the leading expert on this subject, the chief executive of the National Treasury Management Agency, Michael Somers, told the Committee on Tuesday that the possibility of capital flight was relatively slight. While "there probably could have been some flight of funds", the amounts involved would be "probably fairly small beer because we are dealing with billions of pounds flowing in and out of the country at that stage".

Even Maurice Doyle himself, under questioning from Pat Rabbitte, had to agree the reality was "a flight from disclosure rather than a flight from capital".

Given that their approach to the whole question of the bogus accounts was based on fears that were not quantified and that were almost certainly exaggerated, it is not too surprising that the mandarins should want to blame anyone but themselves.

But given also that, from the evidence of senior tax inspector Tony Mac Carthaigh on Thursday, a whole new tax fraud may be unfolding right now, such inability to accept the failures of the past does not augur well for the ability of the system to cope with the failures of the present.