Monday 22 January 2018

Role of regulatory authorities may take centre stage at bankers' sentence hearing

Former head of capital markets at Anglo Irish Bank John Bowe Photo: Courtpix
Former head of capital markets at Anglo Irish Bank John Bowe Photo: Courtpix
Dearbhail McDonald

Dearbhail McDonald

The phone conversation was remarkably open and frank, normal even.

On one end of the line was John Bowe, Anglo's head of capital markets. At the other was Mary Elizabeth Donoghue from the Office of the Financial Regulator.

The call occurred on October 28, 2008, weeks before publication of Anglo's preliminary results on December 3, 2008. Critically, it also came weeks after the execution of a spectacular €7.2bn scheme of circular transactions between Anglo and Irish Life & Permanent.

The scheme was designed to bolster Anglo's year end balance sheet by making it appear that the circular loans (from ILP's life assurance company) were customer deposits, boosting Anglo's health at a time when it was dying on its feet.

"Let's call a spade a spade," said Donoghue as Bowe explained the motivation behind the balance sheet window dressing exercise, insisting it had nothing to do with the liquidity crisis then engulfing banks around the globe, including our own.

The conversation included this exchange:

Bowe: "This was purely about avoiding an issue of confidence in the bank."

Donoghue: "Yeah, so it looked like an asset manager had placed money with yourselves?"

Bowe "Exactly."

Donoghue "It forms part of the... the customer deposit, yeah."

Bowe: "Exactly."

Donoghue: "Yeah. That's fine, that's grand, that's what I - even my limited reading of it now that's what I read it to be and I just wanted - let's not get too excited about what's happening here and let's call it what it is. That's fine."

Of course, it wasn't fine, it was catastrophic.

In common with all licenced banks, Anglo submitted its preliminary accounts to the authorities - presumably armed with Bowe's explanation - before publication to the market on December 3, 2008.

Within weeks, the "best performing bank in the world" was nationalised in disgrace.

Were it not for a key ruling in the early stages of the latest Anglo trial, the role of the regulator and other State players such as the Central Bank may have loomed larger in what became - at 89 days - the longest running criminal trial in the history of the State.

Last week Denis Casey, former CEO of ILP, was found guilty alongside Bowe and Willie McAteer (Anglo's former finance director) of conspiracy to defraud. A fourth accused, Peter Fitzpatrick - former ILP finance director - was found not guilty.

Over six days of legal argument in the absence of the jury, prosecutors fought to exclude any reference to advice from the regulator to engage in a "green jersey agenda" by helping each other to get through the 2008 financial crisis.

Lawyers for the accused queried whether the constituent elements of the offence of conspiracy to defraud, including mental intent (and by extension, dishonesty), could be met if the men believed the authorities had encouraged them.

The defence of officially induced error, available in the US and Canada, is not on our statute books. Nor has the concept been fully tested here. The closest thing we have is entrapment, a device deployed on occasion by undercover gardai to snare drug dealers. Crucially, however, entrapment includes an intention to prosecute - a high bar - so the defence was not open to the accused as the prosecution of the four men followed a look back exercise.

Trial judge Martin Nolan had some sympathy for the state of affairs leading up to the execution of the scheme. During his ruling, he said it was inconceivable the authorities did not know the banks were engaged in "balance sheet management".

He said the then Regulator, Patrick Neary, and the then governor of the Central Bank, John Hurley, were "hands-on". He said they put in Casey's mind the issue of the "green jersey agenda" and Casey acted on that.

He said he thought the Regulator condoned optics-based balance sheet management.

But he found, reluctantly, there was no defence of entrapment open to the accused.

In the end, the judge agreed with the prosecution's contention that any indifference, acquiescence or turning a blind eye by the regulatory authorities could not afford a defence.

On day 15 of the trial he ruled that the role of the Regulator was a matter of mitigation, not a defence: the issue of the green jersey agenda featured in the trial, but no witnesses were called on the matter.

Would the jury have delivered different verdicts had evidence been fully led about the green jersey agenda and the purported role of the regulatory authorities? It's impossible to tell.

But we do know that, contrary to common misconceptions, Irish juries are more than capable of handling complex "white collar" prosecutions.

This jury deliberated for almost 62 hours, setting yet another legal precedent.

It remains to be seen what sentence will be imposed on the "hidden loans" three as conspiracy to defraud is a common law offence and Judge Nolan is "at large" to decide the penalty.

But it will be fascinating to see to what extent, if any, the sentences will be mitigated by the actions of those whose job it was to regulate the banks.

Anglo deal stank from the start. See back page

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