A scandal involving rampant crony capitalism in Ireland has left one top South African banking group exposed to a back-breaking tax bill, and another local bank facing the blacklisting of its directors.
The two local groups are FirstRand, owner of First National Bank, and Investec.
FirstRand has sought to downplay its exposure, but one analyst estimates the group may face a bill of hundreds of millions of rands for unpaid Irish taxes and penalties. FirstRand and First National also face questions over the latter’s degree of responsibility for serious banking irregularities in Ireland.
Investec, although not directly implicated in the scandal, may have its directors blacklisted in Ireland for failing to cooperate with a formal inquiry ordered by the Irish High Court in 1999. The court inspectors released their findings, potentially damaging to both local groups, a fortnight ago.
At the centre of the scandal is Ansbacher, an international group of “boutique” banks specialising in “wealth preservation” for the super-rich. In Ireland Ansbacher and its predecessors ran an illegal banking operation that helped a select group of the well heeled and politically connected, the so-called “golden circles”, to dodge tax over the course of two decades.
First National bought the Ansbacher group in 1993. Ansbacher finally wound up its illegal Irish operations some three years later, but it is hard to see how the South African owners can avoid all responsibility. One could also ask how First National could have walked into the mess eyes wide shut.
Among reputations smashed in the scandal is that of Charles Haughey, the four-time Irish taoiseach or prime minister, who dominated his country’s political life between the 1960s and early 1990s. The illegal Irish banking operation was run by Des Traynor, a close associate of Haughey. Among other things, Traynor used the operation to channel secret payments to the taoiseach.
The current Irish Deputy Prime Minister, Mary Harney, after the July 6 release of the court inspectors’ report, called it a “damning insight into a world of conspiracy, fraud and tax evasion over a long number of years”.
Like any good yarn involving the secretive world of offshore banking, the scandal also contains reference to drugs and sex.
It all started one morning in February 1992 when police officers in the American state of Florida responded to an emergency call: a businessman, paranoid on cocaine, was threatening to jump off the 17th floor of the Hyatt Regency Grand Cypress Hotel near Disneyworld. In his hotel room were two escorts who had spent the night.
Police finally dissuaded the man from jumping. Haughey might have wished they had not. The man was Ben Dunne, then one of Ireland’s top businesspeople, a member of the Dunne family that owned a billion-pound supermarket chain.
Dunne’s behaviour in Florida ignited a family feud that lifted the lid on secret payments he had made to Haughey. A plethora of official investigations ensued, among them the so-called McCracken tribunal. Reporting on the Dunne affair in 1997, this tribunal also first lifted the veil on the “Ansbacher accounts”, which had been used to channel money to Haughey. But details of the banking scandal itself remained under wraps until the high court inspectors reported this month.
This report gives a unique insight into the world of discreet banking. It goes back to the early 1970s when Irish personal taxes were crushingly high. Says the report: “In these conditions, those with money were concerned about their financial future and were receptive to schemes that appeared to offer a measure of security.”
Some of those measures of security were provided by Traynor, the associate of taoiseach Haughey. In 1971 he helped the Irish Guinness and Mahon bank set up a subsidiary in the sun-drenched Cayman Islands, a tax haven in the Caribbean.
Traynor and the Caymans subsidiary, then called Guinness Mahon Cayman Trust or GMTC, set about its task of wealth preservation. But it was an elite affair: a reconstructed list of clients, released in the court inspectors’ report, contains only 190 names — Irish glitterati, Haughey himself, and some Americans, a major drug lord included.
GMTC was bought in 1988 by the Ansbacher group, which in turn was bought by South Africa’s First National Bank in January 1993. GMTC was subsequently renamed Ansbacher Cayman, part of the wider Ansbacher group. After First National became a full subsidiary of the newly formed South African group FirstRand in 1998, Ansbacher became a direct FirstRand subsidiary.
The report details a complex structure of “sham trusts”, “memorandum accounts” and “back-to-back loans”, which GMTC/Ansbacher Cayman juggled between the Caymans and Ireland. For clients who so wished the accounts were perfect vehicles to hide funds and dodge taxes. Says the report: “A feature of each of the services offered by Ansbacher is the extent to which secrecy or concealment was an essential element.”
And Traynor was the perfect man for the job. Again from the report: “He was reserved to the point of taciturnity; a man who could truly be said not to have permitted his left hand to know what his right hand was doing.”
And the report is damning in its findings. The inspectors conclude that there is evidence tending to show that Ansbacher Cayman and its GMTC predecessors:
- conspired with clients enabling them to defraud Irish tax authorities;
- breached company law in Ireland and the Caymans;
- carried on an unlicensed banking practice in Ireland, as clients were able to lodge and withdraw funds in Ireland;
- and failed to pay corporate tax, in Ireland, on its own Irish profits.
The court inspectors praise First National and FirstRand for their co-operation in the inquiry (which, however, stopped short of disclosing clients’ names). But it recommends that authorities consider “disqualifying” Investec directors in Ireland for failing to cooperate. The inspectors felt Investec had a duty to provide information as it now owns Guiness Mahon London, which earlier indirectly owned GMTC.
But a much more serious threat to South African interests may be FirstRand’s exposure to Ansbacher’s Irish tax liabilities. Simply put: the finding is that GMTC/Ansbacher Cayman in fact operated a bank, although unlicensed, in Ireland. It made profits there on which it should have, but did not, pay corporate tax.
A statement by Ansbacher after the release of the report seeks to dismiss the risk of a huge tax bill, saying: “It is uncertain whether Irish Revenue will seek to issue assessments … Given the effluxion of time and the incompleteness of records it is difficult to envisage how assessments, if any, might be formulated.”
One analyst has presented the Mail & Guardian with a rough estimate of the liability, running into hundreds of millions of rands. FirstRand CEO Paul Harris disputed the figure, saying some of the analyst’s premises were wrong. He added: “If we made that kind of profit, we should have it, but I guarantee you, we ain’t got it.” Harris would not provide an alternative figure, saying: “In our view we don’t have a material liability.”
Whether or not Ansbacher and its parent, FirstRand, may actually be presented with a huge Irish tax bill may well depend on Irish tax authorities’ appetite to further untangle Traynor’s web.
But more disturbing from a corporate governance point of view, are questions relating to First National Bank’s acquisition of a bank engaged in illegal activities; and the continuation of those activities at least for a short while under First National stewardship (during which time documents were also destroyed, a la Enron).
The Ansbacher statement seeks to distance the new management from irregularities by relegating them to pre-1988 when the Ansbacher group took over GMTC, or at least to pre-1993 when First National bought Ansbacher. The statement also shifts blame to Traynor and his associates.
But how much did First National know when it bought the business, and how much did it condone after that?
The court inspectors’ report, without clearing First National altogether, finds that “it would be unfair to categorise [it] as having equal responsibility with others for the conduct of the company’s unlicensed banking business”. Supporting the finding, it points out that the illegal Irish accounts were voluntarily wound down between 1993, when the South Africans took over, and 1996 — before the scandal became public.
But that general finding aside, the report includes ample evidence to show First National was aware of some problems when it bought Ansbacher. It also seems to have tolerated Traynor, his associates and their abuses for some time.
The report says that Ansbacher group London management were aware by October 1991 “of the possibility that an unlicensed banking business was being carried on in Ireland”. By September 1992 Ansbacher London management considered dismissing Traynor since, as one draft internal memo put it, “the sort of business that he can usefully introduce to the Cayman Islands is more than outweighed by the regulatory risks involved in his conducting a pseudo banking business in Dublin”.
Before First National took over in 1993, it also knew something was amiss. In October 1992, First National’s Brian Lavelle met with Traynor to ask about the Irish accounts and whether a banking licence was not needed.
While First National clearly took action to rid itself of the problem after assuming ownership, some of the Irish accounts were nevertheless maintained for another three years, and the Irish operation continued without a banking licence. Traynor, who had almost been fired a year earlier, remained a director until his death in May 1994 — more than a year after First National took over — and others implicated alongside Traynor stayed even longer.
Some of them helped bury Traynor’s legacy. The report says that some months after his death a close associate and director of Ansbacher Cayman, John Furze, visited Dublin and ordered files destroyed. More were apparently destroyed by Furze and another bank employee as late as September 1995. Says the report: “The deliberate destruction of the files has been a major impediment to the inspectors in their investigation of Ansbacher’s Irish business.”
- FirstRand CEO Paul Harris this week said: “From our perspective this all happened pre-First National Bank and pre-FirstRand … We bought this company that turned out to have this bloody legacy, and we have had to sort it out.”
Harris pointed out, as confirmed by the Irish court inspectors’ report released this month, that First National and FirstRand had cooperated with the investigation. “We don’t condone anything that has happened and want to get to the bottom of it.”
He denied there was a real liability in terms of taxes which the report pointed out had not been paid in Ireland for perhaps two decades. He said: “We have had auditors crawling over this from every side … We’ve got a duty that, if there is a material chance we have a liability, we must disclose. In our view we don’t have a material liability.”