Cults are not just religious!

It is the contention of Dialogue Ireland that cultist attitudes and mentalities can enter into any group including banks. We publish this Sunday Business Post article to help us focus on those elements which clarify the whole area of cultism.

Anglo debacle casts doubt on entire system of regulation

21 December 2008

By Richard Curran

The Sean FitzPatrick secret loans debacle has raised serious questions about corporate governance – and not only at Anglo Irish Bank. It also applies to Irish stock market companies, auditing and regulation, experts in corporate governance believe.

The role of the Financial Regulator, led by Patrick Neary, in not acting on the information sooner, has also been called into question. FitzPatrick said in his resignation statement that, on ’‘reflection’’, shifting his Anglo Irish Bank loans between banks was inappropriate and unacceptable. Both FitzPatrick and Anglo insisted there had been no breach of legal or banking regulations. However, as the Office of the Director of Corporate Enforcement (ODCE) prepares to investigate the circumstances and details of the loans, their statement may yet prove to be premature.

Corporate governance experts have pointed out that, un der Section 194 of the 1963 Companies Act: “It shall be the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the company.” In FitzPatrick’s case, his decision not to disclose the loans in the annual report was based on the view that, at that point, there were not loans with the bank. They were then loans with Irish Nationwide. However, it may have been incumbent on FitzPatrick to disclose the extent of Anglo Irish Bank loans he had taken out at some point during each of the eight years when they were actually outstanding to Anglo Irish Bank.

Very simple questions arise in relation to these loans. How could nobody other than FitzPatrick have known what was going on? If FitzPatrick took out the loans on normal commercial terms, as he has said, then who approved them? Surely they would have gone to a credit committee, whose members report to the audit committee. They would have seen that the figures didn’t add up when the annual report was published. Somebody in the bank approved them each year, and then signed off as they were transferred to Irish Nationwide. Lar Bradshaw was a co-borrower on one of the loans, yet FitzPatrick said Bradshaw was not aware of what was going on. As one of those borrowing the money, presumably Bradshaw would have had to approve the transfer of the loan to a different financial institution. If he was not aware, as FitzPatrick has said, then is the former Anglo Irish Bank chairman in breach of any rules here regarding the transfer?

Irish Nationwide must have agreed to issue FitzPatrick with annual short-term loans amounting to tens of million of euro. Is it normal for the building society to issue short-term loans of such amounts to the chief executive or chairman of a rival bank? The bank declined to reveal whether the loans were interest-only and whether anything had been paid back. It also declined to say what security it had on the loans. Perhaps the most serious questions of all are in relation to the Financial Regulator.

The regulator’s audit of Irish Nationwide which uncovered the loans began in January. The regulator appears to have been aware of the practice for several months, but only informed the Minister for Finance and the Department of Finance in recent days. The first question is: why did it take so long? This means that, while FitzPatrick was in with finance minister Brian Lenihan at the end of September arguing for a state bank guarantee scheme, the regulator was aware that the bank chairman had effectively deceived the entire investment community about the extent of his Anglo loans for eight years. Investors will want to know what this says about the relationship between the regulator and the wider banking community.

The debacle also raises questions about the internal workings of the bank and how that fed into the board sub-committees – and the board itself. Anglo has what would ordinarily be seen as a blue-chip board. Until last week, FitzPatrick was a director of Greencore. Ned Sullivan is chairman of Greencore and the senior director of Anglo Irish Bank. FitzPatrick was also chairman of Smurfit Kappa Group, whose chief executive is Gary McGann.

McGann is also a director of Anglo Irish Bank and chairs the group audit committee. According to Anglo’s corporate governance statement, the first job of the chairman is to promote ’‘continuing high standards of corporate governance and ensure there is effective communication with shareholders’’.

Every bank has credit committees. Even a local credit union has a credit committee. It is not clear whether FitzPatrick’s €87 million loans went before the credit committee or not. If they didn’t, they should have. Furthermore, if they didn’t, then to whom did FitzPatrick apply for them?

According to Anglo’s corporate governance statement: ’‘The Group Credit Committee, together with the Group Asset and Liability Committee, provide support to the Audit Committee in ensuring that efficient procedures are in place to manage risk.” The external auditors are Ernst & Young. The firm said it would not comment on individual clients, but could only audit information that was given to it. However, the auditors could re-examine whether, in light of last week’s revelations, the accounts of the bank need to be re-stated.

Anglo said last week that annual reports for the bank for each of the years in question “represent a true and fair view of the bank.” Surely, this is for Ernst & Young to decide – and not for Anglo Irish bank to rule on.

The fact is that, a t the time of audit, the loans were not outstanding to Anglo. However, on reflection, the auditors could take the view that, considering the facts that have now come to light, the accounts did not give a true and fair view.

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