This week's IFSC raids by the gardai come at an awkward time for the Financial Regulator boss Patrick Neary. Despite the regulator having only limited responsibility for most foreign banks operating in the IFSC, the raids will be fully exploited by Dublin's many critics and rivals.
The IFSC is one of the great success stories of modern Ireland. Since its foundation 21 years ago, it has grown to over 400 companies employing almost 11,000 people. IFSC-based companies pay more than €700m in tax, more than 10pc of total corporation-profits tax revenue.
Inevitably, the success of the IFSC has attracted jealous attention from other countries. Most vocal have been Germany and France, who claimed the 12.5pc tax rate which IFSC-based companies pay on their profits is undermining their tax bases.
Why should a French or German bank locate operations in their home country, where they would have to hand over more than 30pc of their profits in tax, when by setting up shop down on the docks, they can pay a little over one-third of that rate?
With the IFSC being the focus of such jealous scrutiny, it is vital that everything is squeaky clean down in Dublin's docklands. That has generally been been the case. Unfortunately, the events of August 2007, when the credit crunch first struck, continue to cast a pall over the IFSC.
On August 17 last year, the state bank of the German province of Saxony, SachsenLB, had to be bailed out by a massive €17.3bn rescue package funded by other German banks. SachsenLB was one of the first casualties of the US subprime mortgage disaster. Within days, SachsenLB was sold to another German state bank for a mere €250m.
So why should the misadventures of a second-tier German bank have any implications for the IFSC and the Irish system of financial regulation?
As soon as SachsenLB hit the rocks, it quickly emerged that it had used an IFSC-based subsidiary to make its disastrous foray into subprime mortgages and that the mortgages were held by two Irish-registered companies, Ormond Quay and Georges Quay.
Neary could hardly be taken to task for the SachsenLB debacle. Under the EU's single-market regulations, financial institutions are regulated throughout the union by their home regulator. In other words, it was the German financial regulator, not the Irish Financial Regulator, which was responsible for regulating SachsenLB. In fact, in the blame game which followed, it emerged that the German financial regulator had warned SachsenLB of the risks it was running with subprime mortgages as far back as 2005.
Responsibility for the fact that nothing seems to have been done to follow up on these warnings for more than two years rests squarely with the German financial regulator.
Unfortunately, when the mud starts to fly, some of it will, no matter how unfairly, inevitably stick.
If the SachsenLB affair had been the only time an IFSC-based company had been in the wars, it would be possible to blame any regulatory failures on the Germans. Nothing to do with us, mate.
The problem is that SachsenLB was not the first time that an IFSC-based company was in the news for all the wrong reasons.
In 2005, it emerged that the then head of the IFSC subsidiary of reinsurance company General Re, John Houldsworth, had "doctored" documents relating to a transaction between General Re and the American insurance company AIG. This allowed AIG to artificially boost its reserves.
Houldsworth later pleaded guilty in the US to criminal charges of helping AIG to flatter its finances.
While one regulatory lapse at the IFSC might be dismissed as mere misfortune, two begins to look like carelessness.
The current financial regulator is an offshoot of the Central Bank.
Traditionally, the Central Bank shunned financial regulation, preferring to concentrate on monetary policy and banking supervision instead. It was only in the run-up to the formation of the euro in 1999 that, in what amounted to a deathbed conversion, the Central Bank embraced financial regulation.
In truth, it had little choice. With the replacement of an independent Irish currency by the euro, the Central Bank's previous monetary role was largely redundant. If the Central Bank wanted to stay in business, it was financial regulation or bust.
The 1999 McDowell report recommended stripping the Central Bank of its regulatory role and hiving off this function to an independent financial regulator. Following the publication of the report, the Central Bank, with the tacit support of the Department of Finance, launched a furious lobbying campaign to retain control over any new financial regulator.
It eventually succeeded. In 2001, the government unveiled the new Central Bank and Financial Services Authority. This unwieldy hybrid consists of the Central Bank and the Financial Regulator under the overall control of the Central Bank. The new Financial Regulator started operations in 2003. The first chief executive was Liam O'Reilly. When O'Reilly retired in 2006, he was succeeded by Neary.
A native of Ballyragget, Co. Kilkenny, Neary is a Central Bank-lifer. He was educated at St Kieran's, the famous Kilkenny hurling nursery which has produced such stars as DJ Carey. He joined the Central Bank straight out of school in 1971 and, after qualifying an as accountant, gradually worked his way up through the ranks, serving both as deputy head of banking supervision and head of securities and exchanges supervision.
When the financial regulator was established in 2003, he moved over to the new organisation as prudential director, before ascending to the top job three years later.
In the five years of its existence, many of the fears of those who wanted to completely separate the Financial Regulator from the Central Bank have been borne out. While much of what went wrong in the IFSC was not its fault, no such defence can be summoned for its regulation of domestic financial institutions.
Every year the Central Bank publishes its financial-stability report, which analyses possible threats to the health of the Irish banking system. Successive financial-stability reports have drawn attention to the dangers posed by the rapid growth of property-related lending and escalating property values.
And what did the financial regulator do to act on these warnings? Very little, would appear to be the answer. With property values now falling rapidly, we may witness the consequences of the regulator's failure to act sooner, rather than later.
Meanwhile, the Financial Regulator fined the satirical magazine Phoenix €5,000 for having the temerity to publish unsigned share tips, and many financial institutions are contemplating stopping advertising on the radio altogether due to the amount of regulatory guff they must now include in their advertisements. This is the worst sort of box-ticking regulation.
Matters haven't been helped by the financial regulator, in common, it must be said, with most newly formed state organisations, spending a fortune on advertising. While much of this advertising is ostensibly in the form of public information campaigns, it does wonders for the financial regulator's profile.
With the credit crunch showing no signs of abating, Neary is likely to find the activities of his office coming under much closer scrutiny than either he or his predecessor have been used to over the past five years.