Sunday 22 July 2018

Former senior Anglo Irish official's 'shock' at details of €7.2b interbank loans

Former CEO of Anglo Irish Bank, David Drumm. Photo: Collins Courts
Former CEO of Anglo Irish Bank, David Drumm. Photo: Collins Courts

Andrew Phelan

A FORMER Anglo Irish Bank senior official has said it was a “shock” to him when he found out the details of the €7.2 billion interbank loans that are now at the centre of an alleged conspiracy to defraud.

Donal O’Connor, who was a director of Anglo at the time the cash transfers were happening, told a jury he only became aware of their “round the houses” nature after he took over as Chairman.

Mr O’Connor denied that he received documents outlining the transactions with Irish Life and Permanent (ILP) a month before his appointment.

He was giving evidence at Dublin Circuit Criminal Court in the fraud trial of Anglo’s former CEO David Drumm.

Mr Drumm (51) is pleading not guilty to conspiring to defraud Anglo investors by dishonestly creating the impression that the bank’s customer deposits were €7.2bn larger than they were.

He is alleged to have conspired with Anglo’s former Finance Director Willie McAteer and head of Capital Markets John Bowe, as well as then-CEO of ILP, Denis Casey, and others. The case centres on a series of interbank loans which circulated between Anglo and ILP in September 2008.

The transfers were routed through Irish Life Assurance, returning to Anglo where they were then treated as customer deposits, which are a better indicator of a bank’s health.

Mr Drumm also denies false accounting, by providing misleading information to the market.

Former bank bosses Willie McAteer, John Bowe and Denis Casey
Former bank bosses Willie McAteer, John Bowe and Denis Casey

The jury heard Mr O’Connor came to Anglo in June 2008. He was a non executive director, a member of the audit committee and later, became Chairman on December 18, 2008, following the resignation of Sean Fitzpatrick.

Mary Rose Gearty SC, prosecuting, asked him about an audit committee meeting of November 18, 2008.

Mr O’Connor said he had been in Sydney, Australia at the time and a hotel room was organised for him to make a conference call.

He said he remembered clearly that he had the agenda for the meeting “but I didn’t have any other papers and when the meeting started there was a reference to papers being distributed.”

Ms Gearty asked if he remembered there being an issue about whether he got the papers.

Mr O’Connor said in 2009 his attention was drawn to various emails that were sent with these additions papers attached “but I didn’t have them or receive them.”

They were sent to a PWC administrative assistant who printed out the agenda and gave it to him, but did not give him any additional papers.

Asked how that meeting went, he told Ms Gearty the main focus was “on loan loss provision” and it “was a very difficult time.”

The meeting took between two and three hours and Irish Life and Permanent was mentioned.

“My recollection, which is clear, is that toward the end of the meeting when we were coming to items for noting that one of the management team, I believe it was Colin Golden, started to talk and made reference to Irish Life,” he said.

“As is my wont. I interrupted, butted in when I heard him talk and said ‘Is that window dressing?’”

He recalled Mr Golden mentioning a figure on €7.2bn, and that he “said enough to pique my concern.”

Willie McAteer then “immediately stepped in” and said it was “normal balance sheet management,” Mr O’Connor said. The Financial Regulator and auditor were mentioned.

“I got the impression that this had been cleared, that they had been taken through, there was no issue,” Mr O’Connor said.

Nobody at the meeting made any further comment and they moved on to the next item, he said.

Mr O’Connor said he held Mr McAteer in “the highest regard.”

Ms Gearty asked Mr O’Connor what he had meant by window dressing.

“From an accounting perspective it would be when transactions are entered into that are legal but force the organisation to disclose information in a particular way that is usually flattering to the organisation,” he said.

Asked what he thought about the transaction after the meeting, he said “my mind was immediately put at ease” and he did not think any more about it until “after I became Chairman and things began to unfold.”

Mr O’Connor was then shown a version of the minutes of that meeting which stated it was outlined that the transactions were “in the nature of normal year end balance sheet management activity” and that the Financial Regulator and auditors “had no issue with them.”

Ms Gearty asked him if this was accurate.

“Yes,” Mr O’Connor replied, adding that there was a reference to the regulator and auditors, that there was no issue and “that was “the impression.”

He agreed with “the substance of it.”

There was no reference to the transactions at subsequent meetings or an informal dinner in November. Mr O’Connor recalled getting a draft copy of the Chairman’s statement for the December 2008 preliminary results and gave some comments back on them. The comments did not relate to the ILP transactions.

The following weeks were an “extremely busy time.”

The jury was then shown minutes from a December 22, 2008 board meeting at which the ILP transaction was referred to. The Chairman provided an update, the minutes stated.

“He referred to the balance sheet transactions at year end with Irish Life, commenting that the board needed to take time to review and consider same,” the minutes stated.

Mr O’Connor said while he had been aware of a “big deposit” with Irish Life, he only subsequently became aware of what he called the “round the houses issue,” at a meeting on January 13, 2009.

In the minutes of that meeting it was noted that Chief Financial Officer Matt Moran explained the details and circumstances of the ILP transactions and an extensive discussion ensued.

It was noted that Mr Moran confirmed that the Financial Regulator and Central Bank were “fully aware of both sides of the transaction at the time it occurred.”

The minutes stated that the Chairman commented that the board would need to consult with the Central Bank, Financial Regulator and external auditor regarding the disclosure of the IP transaction.

Mr O’Connor told the jury that was when he and the non executive directors heard there were two elements to the transaction; that the bank had given money to an Irish Life company, which gave it to a non-banking sister company, which had in turn given it back to the bank.

He used the colloquial phrase “around the houses” to explain that.

A mail was shown to the jury that Mr Drumm sent to Matt Moran on January 14, 2009. In this, Mr Drumm said that at all board meetings, the non executive directors had referred regularly to the desirability in the prevailing market conditions to “manage the balance sheet over the year end, a practice that is common in all banks, credit crunch or not.”

In the mail Mr Drumm went on to say “I would relish the opportunity to sit in front of Con and ask him to tell me to my face that he didn’t know about this. If they insist on killing the bank with this for no reason and try to protect themselves, I will go public with it. It’s not just Con, there was always a room full when you went down there to Dame Street.”

Mr O’Connor told the jury everyone in the bank had believed the Regulator was aware of the transaction and had been taken through it.

He said he was called to a meeting in Mr Moran’s office in February 13 2009. Mr Moran put down on the desk copies of the papers that had been given out at the audit committee meeting of November 18. These included the “paper that had been attempted to be sent to me,” including the “customer accounts” issue Mr O’Connor said.

A “newspaper statement” had prompted Mr Moran to go to him and challenge him about when he “became aware of the full impact” of the Irish Life issue. Mr O’Connor had said January and Mr Moran was challenging him on that.

Mr Moran was saying Mr O’Connor was aware from the November 18 meeting. Mr O’Connor denied this and “being the person that I am,” gathered all the information that he could and wrote down his recollection of everything that occurred.

He said a key issue was not so much a phrase or word that was used but “the meaning that was communicated” and he took it that the auditor and regulators had no issue with the transaction.

Nobody interjected after Mr McAteer gave his “comforting words” that it was balance sheet management and Mr O’Connor said there might be a “difference of perspective.”

On February 17, Mr O’Connor had sent a long email to the directors indicating that he was prepared to offer his resignation if he had been negligent or if there was that perception, as the bank had an issue of credibility. He set out the reasons he believed he was not negligent.

The mail stated if his colleagues wanted him to continue in his role he would do so to the best of his ability.

“I was very upset if my credibility was questioned,” he told the jury.

Mr O’Connor was reassured by his colleagues and did not resign.

In cross examination, Brendan Grehan SC, defending, that even when the transaction was described in detail on January 13, 2009 it “didn’t seem to be a problem.”

Mr O’Connor replied that when directors heard the details at that meeting there was “great concern” at how it was going to be dealt with - how it was going to be disclosed without damaging the other parties.

It was an issue to be dealt with internally. Then, the following day Mr O’Connor was at a meeting with the Financial Regulator and he told the Regulator what had happened.

“At that stage the Regulator was very exercised and excited about it,” he said.

Heretofore, he said, the auditors had had no difficulty with the transaction at all, because it “was accounted for correctly,” he said.

They were “taken aback a bit” by the Regulator’s reaction.

The court heard the former Financial Regulator Patrick Neary had announced his resignation at this stage.  In relation to disclosure, “events overtook” them as ILP issued a press release about the transaction following media reports.

Mr Grehan asked Mr O’Connor about notes and minutes of the November 18, 2008 audit committee. The company secretary Natasha Mercer had not put any reference to the transactions in the first draft because “it didn’t strike her as important.”

He did not agree with a version of the minutes he was shown because he thought it was misleading.

In his statement, Matt Moran had said Ms Mercer told him she challenged Mr O’Connor three times about changing the minutes and he told her to “shut up.”

However, Mr Grehan pointed out that Ms Mercer “disavowed that” in evidence and Mr Moran in his evidence withdrew from his statement and said it “might have been metaphorical.”

Mr O’Connor said he had no recollection of any tension with Ms Mercer, saying he got on well with her and it had come as a surprise to him that she would have had any difficulty with him.

Mr O’Connor said he would never use a phrase like that to anybody.

“For anybody to say that about me is a complete untruth,” he said.

Mr O’Connor said he did not recall the issue of the minutes as a “controversy.” He remembered the draft minutes did not coincide with his recollection and he shared his views and notes with members of the committee and Ms Mercer.

Nobody was denying that he had used the term “window dressing” and he believed “minds were put at ease” by Mr McAteer’s answer. This was not in the first draft of the minutes.

The words that were paraphrased at the meeting were “not as clear as they might have been,” Mr O’Connor said.

Mr Grehan then asked him about the “thinking” behind Mr O’Connor’s February 2009 letter in which he said he was prepared to resign.

“My natural reaction is always to do the right thing,” he said. “I wanted to do what’s best for the bank, that is who I am.”

Asked if he considered that he might have been negligent, he said there had been other “very experienced” non executive directors at the meeting and none “picked up on the detail of it.”

This gave him a lot of comfort that he was not negligent, and he read out from his mail the other reasons he believed this.

These included having participated in the call in the early hours of the morning, not having the papers in advance, the “quality of the line not the greatest,” the fact that the item was near the end of the agenda, not having a background in banking and “not appreciating the significance of the term customer funding.”

These and other factors “contributed to my not having sufficient awareness of the ILP issue and its seriousness before I was appointed Chairman.”

Mr Grehan said there was a suggestion Mr O’Connor initially denied that the matter was discussed at the audit committee meeting.

“I don’t believe that is the case,” Mr O’Connor said.

He accepted that of the three non executive directors at the meeting, he had the most auditing experience. Mr O’Connor had also been a member of the board of the Irish Auditing and Accounting Supervisory Authority.

Mr O’Connor was then shown emails between a member of Mr Mercer’s department and Bonnie Cunningham, PWC meetings planner.

Ms Cunningham was asked if she received the documents emailed to her for Mr O’Connor in advance of the November 18, 2008 audit committee meeting.

Ms Cunningham replied: “Yes, all set. Donal received all. Thank you.”

“As I said, I didn’t receive them,” Mr O’Connor told the jury.

He said he drew attention at the meeting to the fact that he did not have the papers, but the meeting continued.

Mr Grehan asked Mr O’Connor why he did not ask the meeting if he could be given the documents.

“I do not remember the thought process regarding that,” he said.

“You were happy to proceed without them,” Mr Grehan said.

“Well I did proceed without them,” Mr O’Connor replied.

He added that those who were given the documents “didn’t glean any more information” and he was the one who raised the issue.

Mr Grehan asked if it was the case that Mr O’Connor “simply missed it.”

“In absolute terms you are right,” he replied, but said he thought it was a misleading statement because he raised a query, got an answer that gave him “comfort” and took it for what it was worth.

Mr Golden had made his own notes about the meeting which stated: “lent to ILP bank, borrowed from customer (Assurance Co) 7bn bolstered cust depos, not allowed net.”

Mr O’Connor said when Mr McAteer referred to the auditors and Financial Regulator “I got the clear impression that they were OK with this… they were comfortable with it.”

“I certainly didn’t know the detail of the transaction because when I found out on January 13 it was a shock to me,” he said.

The trial continues.

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