by Conor McCabe
The previous year, the chairman of AIB, Niall Crowley, criticised the Tánaiste, Dick Spring, over comments he had made relating to the operations of the Irish banking system. At a party conference in Cork in May 1984, Spring told delegates that ‘for too long the right of the banks to ignore any obligation except to themselves has been taken entirely for granted – and I do not think it is going too far to say that what is happening now amounts to an abuse of the people of this country’.31 He said that the banks should contribute to the alleviation of the country’s major social problems, especially during times of recession. ‘To give you an example,’ he told the conference, ‘The Allied Irish Banks’ profits last year alone would go a long way to solving the housing crisis that faces thousands of our young people.’ Mr Crowley’s reaction was swift. He told The Irish Times that the Tánaiste’s speech ‘showed an extraordinary lack of understanding of the principles of banking’. He pointed out that banks had a commercial responsibility to their depositors, ‘If we started lashing our depositors’ money around the country on enterprises totally without commercial viability we would be unable to repay the money when people wanted it back, and we would have to go out of business.’32 Less than a year later, AIB successfully dumped its financial problems onto the shoulders of the Irish people.
The Insurance Corporation of Ireland was founded in 1935, ‘for the purpose of transacting all classes of fire and general insurance’.33 In 1946, it took over the marine underwriting business of the State-owned company Irish Shipping Ltd and in 1971 ‘The government appointed the company sole agents for managing export credit insurance schemes for Irish exporters’.34 One year later, it formed the Property Corporation of Ireland, in association with Irish Shipping Ltd. Its first main venture was the construction of a 62,000 square foot office block on a one and a half acre site at Merrion Hall, Sandymount, Dublin. As with so many other commercial property ventures which were built at this time, the tenants for the offices came from the public sector. In 1974, Córas Tráchtála, the Irish export board, moved into the building along with Irish Shipping Ltd.
Seven years later, AIB secured 25 per cent of the issued share capital of ICI for £10.2 million. In 1983 it made an offer for the remaining 75 per cent, which was accepted, and ICI was fully incorporated into AIB. The entire deal cost the bank £40 million, of which only £10 million was cash, the other £30 million was made up of shares. ‘Allied Irish Bank picked an ideal time to make a bid for Insurance Corporation of Ireland,’ wrote Bill Murdoch in The Irish Times in 1983. He referred to ICI’s high liquidity, and its capital and free reserves of £51.1 million, which would ‘boost AIB’s capital base [and] allow it to expand still further’. All in all, he concluded, ‘it is a good deal for AIB’.35
ICI had 25 per cent of the employers’ and public liability insurance market in Ireland. It was the sole agent for export credit insurance for Irish exporters, and had among its clients Aer Lingus and Córas Iompair Éireann. By the time AIB took over the company, it had on its books around ‘120,000 insurance policies, of which 30,000 were for motor insurance’.36 However, the Irish insurance market was not the core of ICI’s operations. Around 70 per cent of its business emanated from London, where the company was active in underwriting high-risk business – an area of insurance in which it had little experience. In 1983, it recorded losses of £63 million, £50 million of which came out of its London office. In July 1984 it was audited by the Department of Trade, Commerce and Tourism, and was found wanting. The company simply shrugged its shoulders. It said everything was fine, and that it was unhappy with the State-appointed actuaries.
By November 1984, rumours about the health of ICI began appearing in the press. At a meeting between the Department of Trade and AIB and ICI executives held that month, the government officials were told that AIB had decided to invest more money in the company in order to cover any outstanding liabilities due to losses. It put over £86 million into ICI before the plug was pulled, and AIB went to the government to tell them that the largest bank in Ireland was on the verge of collapse. They were issued with an open-ended guarantee that the Irish taxpayer would cover all of ICI’s losses, whatever the cost. AIB were offered a blank cheque, and they immediately took it. By October 1985, the ICI deficit was estimated at £164 million. During a time of serious economic crisis in the country, with a hair-shirt budget and cuts in health, education and social services, the Irish government gave ICI an advance of £100 million to enable it to cover its liabilities while it was wound down. Fifteen years later, in September 2000, the £100 million was eventually repaid.
On 16 March 1985, one week after the government had stepped in to save AIB from collapse, the bank issued a statement to its shareholders and employees to reassure them that it had ‘extracted itself from the Insurance Corporation debacle with its balance sheet relatively intact’. The bank was also quick to point out that ‘its profits forecast for the year to 31 March will not be affected by this divestment and that AIB shareholders will be receiving an unchanged dividend out of the profits’.37 It was an incredible statement of power and influence. On 8 March, AIB had been hours away from collapse, yet seven days later it was able to inform its shareholders that not only was it rid of ICI, it would be paying out dividends on the back of its profits. The only concession to the government was the issuing of a loan of £50 million for a period of three years on which the State would pay a lower rate of interest than normal. That was it. And the Irish State accepted it as just another day in the world of Irish finance.
The collapse of the Insurance Corporation of Ireland was not unique. In October 1983, the Private Motorists Provident Society (PMPS), a friendly society with all the trappings of a bank (it took deposits and issued loans and mortgages) was ordered to close following the crash of its parent company, the Private Motorists Protection Association (PMPA). The government had recently discovered that the PMPA did not have enough money to pay out on claims. The PMPA was using revenue from new customers to pay old customers. It was not generating enough income from its investments to cover the insurance claims of its clients. It was a classic pyramid scheme. As long as there were enough new customers to pay the previous ones, the scheme could continue. However, it needed a growth multiplier of such magnitude that the scheme eventually collapsed under its own weight. There had been rumours of irregularities within PMPA for years, and by the time the Registrar of Friendly Societies sent external accountants into PMPA to investigate, it was already too late. The company was insolvent. ‘On 19 October 1983, following months of secret planning by civil servants, the government rushed emergency legislation through all stages of the Dáil in just one day, and the following day an administrator was appointed by the government to take control of the insurance company.’38 PMPS, which was also affected, had £9.4 million in deposits, all of which was frozen before the 5,600 account holders could do anything about it.
There had been signs that there were problems with PMPS. In April 1983, the news that the bank’s books were under scrutiny was leaked to the press, although the Registrar of Friendly Societies said that it was ‘part of a programme of routine inspections of all societies’.39 It was also announced that the PMPA group was awaiting a Supreme Court decision on the constitutionality ‘of legislation which requires that all provident and friendly societies either cease taking deposits from the public by November [1983] or take out a full banking licence’.40 This related to a court case between PMPS and the government over a Bill introduced in 1978 which stated that ‘societies with more than £25,000 deposited would have to cease their quasi-banking activities within five years of the passing of the legislation’.41 The purpose of the Bill was to tackle this ‘fringe banking sector’ which was ‘in competition with the conventional banking sector’.42 The passing of the Bill was held up by the PMPS court case; the knowledge that PMPS was outside regulated banking was not. Despite this, PMPS and PMPA were able to continue their business up until the moment they crashed.
; The implosion of the PMPS pyramid scheme was predated by the collapse of the Gallagher Group and Merchant Banking, which was put into receivership on 30 April 1982 with debts of close to £50 million. The group had been founded by Matt Gallagher, father of the two joint managing directors. Matt had made his money in Britain in the 1950s, in construction, mining and plant hire. He returned to Ireland in the early 1960s and became acquainted with Seán Lemass. In the words of the journalist Simon Carswell, ‘with the arrival of new multinational companies, Lemass needed someone to build homes for their workers and Matt was one of the businessmen charged with the task.43 His bank, Merchant Banking, was first set up in February 1961, primarily as a hire-purchase business, but in the 1970s the emphasis shifted towards deposit-taking. The death of Matt Gallagher in January 1974 propelled his son Patrick to the head of the family business. He spent much of the next eight years engaging in property development and speculation. With the economic downturn in the early 1980s, Patrick turned to the cash deposits of Merchant Banking and treated them as his own.
Ireland in the 1980s not only ignored the actions of its banks, but refused to prosecute or adapt whenever criminal acts or credit crises occurred. The power of the banks was such that regulatory procedures common in other developed economies were dismissed as either uncompetitive or damaging to the economy. The IFSC entered this world with great fanfare. The age of Ireland as a tax haven for financial services was about to begin.
‘IS THIS ALL BLARNEY? CAN IT REALLY BE SO PERFECT?’44
In April 1990 Daiwa Securities, the Japanese investment house, commenced operations in the IFSC with a £100 million open-ended foreign stock fund primarily aimed at Japanese investors. ‘The global scap [sic] fund will be managed by ABD International Management Company and International Capital Management’ wrote The Irish Times, ‘and will be the first stock fund to operate out of Ireland.’45 The news item finished with a quote from Daiwa’s spokesman: ‘Ireland levies no tax on investment trusts’ he said, ‘so we decided to try it instead of Luxembourg which is usually used.’ The following week the UK-based newspaper, the Guardian, published an article on Daiwa and the IFSC, except it quoted Daiwa’s spokesman as saying, ‘Ireland levies no taxes on investment trusts so we decided to try it instead of Luxemburg, which is usually used as a tax haven.’46
It may have been unintentional, but the omission highlighted the difference between the image in Ireland of the IFSC, and the tawdry reality which surrounded it. ‘The Irish are not keen on the term “tax haven”, with its connotations of dubious legality and doubtful security associated with places like the Cayman Islands’ wrote the Guardian. ‘But they are keen on attracting investment, and have proved adept at using tax incentives to attract companies, despite the country’s reputation for levying high taxes on its own citizens.’ The newspaper said that apart from the 10 per cent corporation tax, ‘companies can also benefit from 100 per cent allowances on equipment and development spending, and 200 per cent tax allowance for rental payments for 10 years.’ The article ended with a quote from Eric Wallace of the accounting firm Peat Marwick, in which he outlined the key advantages the IFSC had over other tax havens: ‘property and salaries are much cheaper than, for example, Luxembourg: it is much closer than the Cayman Islands: and it has the advantage over the Isle of Man or Jersey that it is in the European Community.’ The Irish government talked about the IFSC in terms of investment and job creation, but the focus was firmly on allowing financial firms to maximize profit through tax avoidance. There was little by way of actual investment in the State, with the main economic stimuli taking place in areas such as accounting, rent and construction.
The contract for the development of the IFSC was awarded to a consortium of three companies: Hardwicke Ltd, McInerney Properties plc and British Land plc. The estimated cost was £250 million, and created around 3,500 temporary construction jobs. In January 1989 AIB announced that it intended to locate ‘no fewer than six different activities in the centre’, while in June the Sumitomo Bank of Japan confirmed its intentions to establish an office in Dublin with ‘assets under management of $1 billion and capital of $250 million.’47 By the end of the year over seventy companies had secured approval from the Minister for Finance to operate in the IFSC, but as the centre had not yet been built they were allowed to set up office in other parts of Dublin, pending completion. The IFSC was a virtual world, held together through the approval of the Minister of Finance.
The perception of the IFSC as a tax haven was challenged by the president of the Institute of Chartered Accountants in Ireland, Mr Jim Gallaher. In 1989 he said that ‘The success of Dublin as a financial services centre is not just about increasing profits of multi-national financial conglomerates – it is about top-class professional services provided to the world by Irish men and women out of Ireland to the benefit of the whole Irish economy.’48 One year later the managing director of Mitsubishi Trust & Banking Corporation’s international banking group, Mr Tadashi Kohno, explained the bank’s decision to locate to the IFSC: ‘since Mitsubishi’s international banking operations commenced’ he said, ‘we have always been on the lookout for places with as little regulation as possible and as much tax incentive as possible from which to do business [and, in relation to London,] Ireland is more profitable in terms of tax and reserve costs.’49
Three years after the establishment of the IFSC there were just over 400 staff employed by the various companies based at the centre.50 By the end of 1990 over 190 projects had been approved, with a total job pledge of 2,400. This was somewhat of a shortfall on the prediction made in 1987 by the then Taoiseach Charles Haughey, when he said that the IFSC would create over 7,500 new jobs over a five-year period. The main growth in jobs happened within service provision to the IFSC. These included accountancy and legal firms, computer software houses, builders’ suppliers and engineers. Even here the actual growth generated by the Financial Centre was limited by the fact that a sizable part of the IFSC consisted of Irish firms who had simply moved from one part of the city to another, slashing their tax bill as a result. ‘Well over half the office space in the IFSC is occupied by Irish companies such as AIB, Bank of Ireland, Irish Life, Smurfit Paribas and many lesser-known names’ wrote the journalist Frank McDonald in 1991. ‘The relocation element has been substantial – with the banks, for example, simply shifting their currency dealing operations to the Custom House docks to take advantage of the lucrative tax incentives.’51 McDonald gave the example of the lawyer firm McCann Fitzgerald and accountants Arthur Anderson, both of whom had agreed to rent over 120,000 square feet of office space in the IFSC. They were vacating ‘The buildings they had occupied for years in Pembroke Street and St. Stephen’s Green, respectively.’ ‘it is little wonder’ said, McDonald, ‘that the Dublin office market is depressed.’ And, as The Irish Times noted, ‘taking account of transfers of existing jobs into the centre [by] large employers such as AIB and Bank of Ireland, the number of genuinely new [pledged] jobs is probably no more than 1,000 to 1,500 at best.’52
The limp employment figures for the IFSC were noted by the magazine, Finance. In September 1992 it reported that the centre, ‘which is five years old this year, currently employs 2,000 people, considerably less than the original projections.’53 The Irish Times, quoting the IDA, reported a revised figure in December of that year. It said that there were just over 1,250 people employed by around 150 companies, and that the jobs were ‘a mixture of back office administration-type jobs and more senior jobs.’54 Furthermore, ‘The majority of companies are located elsewhere in Dublin, and the IFSC is more of a concept than a place at this stage.’ It noted that ‘because of the off-shore nature of their activities, IFSC companies may be buffered from any ups and downs in the Irish economy’ – a tacit admission of the lack of investment undertaken by IFSC-based operations in the Irish economy. The international scope of its operation meant that it was a direct drain not only on Irish tax revenue – as seen by the amount of Irish institut
ions based within its virtual walls – but also on the tax revenue of sovereign states in Europe, Asia and the Americas.
Mr James Deeny, chairman of the International and Commercial Banks in Ireland, addressed the association’s annual general meeting in April 1991. He told the assembled guests that the IFSC ‘will not be a tax-avoidance haven for international financial institutions as some commentators have claimed’, but rather it ‘will prove to be one of the most cost-effective projects ever undertaken by the Irish government.’55 In August The New York Times ran a special report on offshore banking centres. It said:
They occupy a kind of shadowland of finance that is little understood but increasingly important. Broadly, these banking havens are places that offer customers the right to strict secrecy, few regulatory constraints and an official indifference to tax evasion. The leading havens include Switzerland, the Cayman Islands, Luxembourg, the Bahamas and the Channel Islands. Sometimes Hong Kong, Singapore and Bahrain are included as well. New entrants are crowding the field. Ireland, for example, established the International Financial Services Center three years ago as a tax haven in Dublin. Already, 170 financial institutions have set up shop there.56