TAOISEACH CHARLIE HAUGHEY’S REFUSAL TO OFFER Sutherland a second term as a commissioner in 1989 meant he had some choices to make. In his four years at the European Commission he had gained a reputation as a very formidable operator. His stock was high both in Brussels and in other European capitals. He had gained a taste for public life, and according to those closest to him, if he had been offered another prominent role he would have embraced it with both arms. But there was no suitable vacancy.
Instead Sutherland returned to Dublin in 1989 with his family. He resumed his career at the Bar, but only for a matter of months. There can be little doubt that if Sutherland had stayed at the Law Library, he would have ended his career as a senior member of the judiciary. There is a long-running series in the Financial Times every Saturday called ‘Lunch with the FT’. The conceit is that a journalist from the paper interviews a high-profile figure every week, the details of what they eat and how much it cost being an integral part of its enduring appeal. Sutherland’s lunch was the eighth most expensive in a series that dates back to 1994. After an hour at Wiltons, Jermyn Street, London, spent ruminating about Europe, globalisation, big business and migration, the bill came to £211.50. Sutherland concluded the interview with a most interesting observation: ‘I always saw myself as a jobbing barrister.’[1]
There is no doubt that Sutherland retained a passion for the law, but after four years of intrigue, brinkmanship and EU high jinks, the narrow confines of the Law Library would never satisfy his ambitions. Childhood friend Tony Spollen, visiting Sutherland just before Christmas 1988, asked what he was going to do next. ‘He said: “I have to provide for my family”.’ In fact, says Spollen, Sutherland was offered some big directorships, allowing him to gain a good understanding of business. ‘He knew his limitations. He wasn’t a financial guy, he wasn’t into reading profit and loss accounts or balance sheets, but when he needed advice he would consult the best. He was a very good chairman: he never spoke too much but he would never allow anybody else to speak too much either. He was able to defuse any situation with humour.’ Paddy Kevans, another close friend, agrees that when Sutherland came back from Brussels he decided that business was the logical next step.
Ireland in 1989 was not exactly a bustling hive of corporate activity. The International Financial Services Centre in Dublin’s docklands had recently opened and would go on to become a huge success, but there was little evidence of that yet. Political moves were being made in government circles towards the economic reforms that would presage the Celtic Tiger. For the most part, however, the economy in 1989 remained mired in recession, although the country had been enlivened by the heroics of the men’s soccer team at the European Championship the previous year, and further success at Italia 90 was to come. Indeed, some people attribute the first awakenings of modern Ireland to the heroics of Jack Charlton’s team. It was no longer heroic to be a failure. But for anybody embarking on a career in business, there were slim pickings.
The banking sector in Ireland was small and underdeveloped, but although not free from controversy, it was generally trusted. The same year he returned from Brussels, Sutherland became chairman of Allied Irish Bank (AIB). At the time the sector was essentially a duopoly, with the Bank of Ireland the other dominant institution; the only other significant player was the arriviste Anglo Irish Bank, set up in 1986 and headed by executive Seanie Fitzpatrick, a relative unknown determined to break into the big boys’ club.
AIB had been formed in 1966 through the merger of three banks: the Provincial Bank of Ireland, and the Munster and Leinster banks. For most of its life it had been a well-run and conservative bank. That would change in the 1980s, when it became embroiled in its first major controversy. It emerged in the mid-1980s that the London office of the Insurance Corporation of Ireland (ICI), a subsidiary of AIB, had been concealing heavy losses that could have potentially toppled the entire group. ICI had been underwriting a lot of new business, which made it look like a lucrative member of the group, but had not been putting aside enough reserves to cover its potential exposures. The revelation that there was a hole in its capital base created a political crisis. In March 1985, two months after Sutherland had taken up the role of European Commissioner for Competition, John Bruton, the Minister for Finance, announced in the Dáil that the government would take control of AIB’s shareholding in ICI.
By the time Sutherland took over the chairmanship of the bank in October 1989, the ICI scandal had faded under chief executive Gerry Scanlan.[fn1] Sutherland would be at the helm of AIB for roughly three years. During that period, the group reported profits of IR£237 million in the year to 31 March 1990. In 1991, its reported profits were IR£178 million.
Con O’Callaghan was AIB’s company secretary from 1988 until 1994. ‘I liked him very much, he was very easy to work with. He wasn’t into detail. He was into the bigger issues, not the nitty-gritty. But that is the role of the chairman. I think at times he felt he didn’t have enough to do.’ They were quiet times, says O’Callaghan. ‘There were no really stand-out moments. Sutherland was very popular among his colleagues, but he would not have been close to the executive on a personal level. His relationship with Gerry Scanlan, the chief executive, was business-like, but again they wouldn’t have been friendly.’
To the outside world, nothing much may have happened during Sutherland’s time as chairman. But internally there were developments that would have significant repercussions for the bank later that decade.
Deposit interest retention tax (DIRT) was a government tax on bank deposits introduced by Garret FitzGerald in 1986, during the Fine Gael–Labour coalition. At the time, tax evasion was a national pastime. The ‘stroke’ culture (that of being deceitful for personal gain), prevalent throughout Irish society, had taken on a life of its own when it came to tax evasion. Politicians, businesspeople, members of the clergy, prominent sportspeople and other pillars of society saw nothing particularly wrong with avoiding their tax obligations. The more complex the tax avoidance strategy, the more elevated the sneaking regard for it. Almost as soon as DIRT was introduced, people were looking for ways to avoid paying it, and the banks proved very useful in this respect. DIRT applied only to resident accounts, but physically moving out of the country to open up legitimate non-resident bank accounts was a step too far for most people. That is when banks had a Eureka! moment. Resident accounts could simply be reclassified as non-resident, which would take them out of the tax net.
Obviously this was not exactly above board, as it didn’t require the account holders concerned to move abroad. As with a lot of things in Ireland back then, however, most people – except apparently for the revenue commissioners – knew it was happening. What was more, all the banks were at it, although AIB and ACC, the state-owned bank, were particularly aggressive. The other banks complained that AIB was attracting a lot of their customers because of its willingness to offer bogus non-resident accounts.
That began to change at the start of 1991, when a Revenue official called Tony McCarthy contacted Jimmy O’Mahony, the head of taxation at AIB, about the issue of bogus non-resident accounts. Exactly what was discussed and what was agreed at those meetings would subsequently become the subject of a parliamentary inquiry – but Donal De Buitléir, O’Mahony’s deputy head at the AIB taxation department and previously a Revenue official, claimed at the time to have had extensive discussions with O’Mahony about his meetings with McCarthy.
‘He said Revenue had made a proposal. It became known as “the deal”.’ Although De Buitléir had been in the Revenue, he claimed never to have been aware of the extent of the problem, but every bank had been involved. ‘There were offers made to other banks at the same time.’ De Buitléir says he had a meeting at the time with Revenue official Sean Moriarty. ‘I said to him, “We [AIB] did a good clean up.” He said “Yes you did, we checked.” So we thought the problem was sorted.’ As AIB understood it, the deal was that they would pay the Revenue IR£10 million to settle past DIRT liabilities, and they were to reclassify all bogus non-resident accounts as resident accounts that were subject to the tax.
Around the same time, the relationship between Sutherland’s boyhood friend Tony Spollen, now head of internal audit at AIB, and the chief executive had become strained to the point where there was open hostility between the two men. Invited to a meeting at the end of January 1991 with two senior AIB executives, Spollen was advised that he was being transferred to a new role within the bank. Unhappy with the proposed move, which he viewed as a demotion, Spollen put together a dossier of potential liabilities facing the bank. He included the issue of bogus non-resident accounts, estimating that AIB’s exposure was potentially IR£100 million. Crucially, in Spollen’s view, the meetings between O’Mahony and McCarthy had concluded with a verbal handshake. AIB had nothing in writing. Spollen said this could not be considered an amnesty. The dossier was intended for Scanlan, although he refused to take it, insisting that Spollen report directly to his line manager. Eventually a sub-committee, headed by Douglas Morpeth, was set up to look into Spollen’s claims. It reported that there were no issues.
Spollen’s future at the bank had, however, become untenable. Peter Sutherland was in an invidious position. He had been friends with Spollen since childhood and was loyal to him, but he was also chairman of the bank, and that conferred responsibilities. The last thing he wanted was for the dispute to end up in court. He brokered a deal between Spollen and AIB which involved a pay-off for the former.
John Blake Dillon, at that stage a partner with PwC, was in Sutherland’s AIB office in February 1993 when the call came through from Mickey Kantor. According to Dillon, Sutherland was immediately flattered and interested by Kantor’s proposal – to become the next director general of GATT. De Buitléir says the feeling in the bank was that it was only a matter of time before Sutherland moved on. ‘When he was in the bank, a lot of the senior executives felt he was too big for the bank. He spent a lot of time there but he would be ringing Jacques Delors. That was his base. He would be operating at a global level.’
In 1998, Liam Collins, a journalist with the Sunday Independent, was given Spollen’s dossier by one of his sources. (Spollen says he was not himself the source and has never met Collins.) Among the various issues contained in the dossier, Collins homed in on the DIRT liability. When, having done some digging, he eventually published his story in April 1998, it was the scoop of the year, triggering a chain of events that would shape the country’s political landscape for some years.
Collins’ story prompted the Public Accounts Committee (PAC) to examine the chairman of the Revenue Commissioners on the issue at a meeting on 28 April 1998. As a result of further substantial reports in the media, the PAC requested the chairman of the Revenue Commissioners to attend a meeting of the committee on 13 October.
At that meeting the chairman said that Revenue had been unaware of the alleged scale of bogus non-resident accounts in AIB until the media disclosures in April 1998, and that no deal had been done with the bank in respect of unpaid DIRT. Representatives of AIB were then invited to attend a meeting of the PAC to respond to the chairman’s statement. The meeting took place on 15 October 1998, with a delegation from AIB headed by Tom Mulcahy, now its chief executive, and including De Buitléir. At the meeting Mulcahy insisted that the issue of bogus non-resident accounts was an industry-wide problem rather than one specific to AIB. He added that Revenue had agreed with the AIB in 1991 that there would be no retrospective liability to DIRT in respect of interest on accounts wrongly classified as non-resident.
The governor of the Central Bank also gave evidence to the PAC on 15 October, and on 21 October the Dáil passed a resolution asking the PAC to examine any alleged settlement between the banks and the Revenue Commissioners in relation to undeclared DIRT and the use of bogus non-resident accounts. The inquiry began hearings in September 1999 that lasted for six weeks. They were televised daily on TG4 and dominated the news headlines for the entire period. The plot unfolded like a soap opera, only far more interesting. The animus that had existed between Scanlan and Spollen was laid bare. Revenue stuck to its line that there had been no amnesty, verbal or otherwise, in February 1991, while AIB insisted that there was. The tone was set by Fine Gael TD Jim Mitchell, chair of the PAC, whose questioning of AIB executives, including Sutherland, was unsparing. Even pre-crisis, bashing bankers played well with the electorate, and it was not unknown for rhetorical flourishes to be timed for the news bulletins. Sutherland’s last interaction with the PAC had been during the Arms Trial when he defended Captain James Kelly. This time he was in the witness box.
Sutherland had moved on both from AIB and from Ireland itself by the time the DIRT scandal erupted. Nevertheless he was sensitive to ongoing developments. He was now at Goldman Sachs, which was due to float at the beginning of 1999, and stood to become a very wealthy man. If he were to be embroiled in a scandal at home, then it could potentially force him to resign from his Goldman Sachs role.
Called before the PAC to give evidence, Sutherland said that the bank had acted on Spollen’s dossier. ‘We did everything possible to examine the situation and concluded that there was no past liability, on the basis of what the bank believed had been agreed with the Revenue Commissioners. In terms of liability we were looking at the future.’ Sutherland said he had relied on the word of De Buitléir, a tax expert, that the issue had been settled with Revenue. But the PAC in its report eventually came down on the side of Revenue, and AIB was forced to pay over €90 million in back taxes and fines. The Revenue Commissioners collected €859.2 million in total, including €225 million from the banks and €634.2 million from depositors who owed back taxes on the money held in the accounts. It had been the largest fraud ever perpetrated on the state – though those involved for AIB have never admitted liability.
The PAC also made an adverse finding against De Buitléir, who nevertheless says, ‘I had contempt for the process because it was so nakedly political. Peter gave his evidence. I don’t think he was tarnished. He was by some media people who didn’t like him anyway.’ According to De Buitléir, Sutherland had no role in the internal handling of DIRT in AIB. ‘The whole thing was dealt with. It was a very good piece of public administration but Revenue didn’t stand over it.’
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In Spollen’s view, Sutherland was unfairly maligned because of his chairmanship of AIB. ‘The big thing that hit AIB was the investment in the Insurance Corporation, and that was before his time.’ The bank had since had further problems; it emerged in 2002 that John Rusnak, a currency trader at Allfirst Bank, a wholly owned subsidiary of AIB, had concealed $691 million in trading losses. He was sentenced in 2003 to seven and a half years in prison. Rusnak, says Spollen, was nothing to do with Sutherland. ‘The property lending happened way after his time.’
Spollen had left AIB in 1991. When the leak to the Sunday Independent’s Liam Collins took place in 1998, he says, ‘I sat down with Peter and I explained that I didn’t know Collins. I didn’t leak it. In the middle of the PAC hearings we went out for dinner. Peter was not the chairman of the audit committee when I was there, and I suspect it was because of me. He told the PAC exactly as he saw it. Even during the hearings we would have gone for dinner quite a bit. He made it clear that he was representing the bank. Only once did we discuss the hearings and that was when Peter told me he knew that I didn’t leak. He was completely fair to me and very nice. He was a barrister, so he looked at the facts.’
Sutherland would return to the AIB board after leaving the WTO, but he severed all ties with the bank in 1997. Having, like the other banks, embarked on a reckless property-lending binge in the early 2000s, in 2011 AIB would require a €21 billion bailout from the Irish government during the financial crisis. The upfront cost to the exchequer for bailing out the six domestic banks was €64 billion. The state rescue of the banking sector was partly responsible for forcing the country into an EU/IMF bailout programme in November 2010. Sutherland, who had close links to the finance sector, would get caught in the backlash.