Ireland Dusts Off 'New' Regulator After Twin Scandals

by Jason Gorringe, Tax-News.com, London

11 February 2002

After a dreadful week for top Irish companies, the Irish government is giving increased urgency to its plans for a new financial regulator. A senior adviser to Mary Harney, the deputy prime minister and Tanaiste, said that consultation with the European Central Bank had been concluded last week, and the government now hoped to have the legislation on the statute books before parliament's Easter recess.

During last week, storms hit Ireland's one-time largest company, pharmaceuticals giant Elan, and the country's second-largest bank, AIB.

Elan saw its NYSE-listed shares collapse from $30 at the beginning of the week to $13.52 at Friday's close. As recently as the middle of January they were trading at $45. Its London and Dublin listings also plummeted. During the week the company admitted that off-balance sheet vehicles had been used to bolster reported earnings, and two US law firms said they would sue the company for allegedly defrauding investors.

Elan's share price has also been hit by the admission that late product launches and higher development costs would lead to earnings this year around 30% below analysts' forecasts. "This is an unmitigated disaster," said David Maris, analyst at CSFB in Boston. "After you go through all the adjustments, we are not even sure if they made any money last year."

Finally Elan confirmed on Friday that the Securities and Exchange Commission had begun a probe into the company's accounting practices and added: "The SEC's investigation is not a surprise given all of the events of the past few weeks. We intend to cooperate fully."

AIB's shares ended the week at $20.99, having fallen 20% on Wednesday to $19.50 when news broke of the $750m loss by rogue trader John Rusnak at its US subsidiary Allfirst.

On Sunday it became known that Allied Irish Banks' US subsidiary became concerned about its currency trading business at the end of December, more than a month before last week's announcement.

Michael Buckley, chief executive of AIB, said on Sunday that sums being demanded by John Rusnak, the currency trader at the heart of the fraud investigation, to back his trading raised worries before the end of last year. The bank had previously said it did not become suspicious until mid-January.

Mr Buckley told Irish radio on Sunday: "As I understand it, Allfirst treasury management began to become concerned at the amount of cash that trader was using at the end of December and in early January. Over the few weeks from then on, [it] became a concern that he was engaged in fraudulent activity."

Several senior staff of Allfirst have been suspended since the $750m loss was discovered, and the head office is under close scrutiny from at least six separate investigations.

Paul Appleby, Ireland's newly-appointed director for corporate enforcement, said he was following the AIB case, but declined to confirm whether his office would launch its own formal investigation into the suspected fraud. Two senior bank supervision officials from Ireland's Central Bank arrived in Baltimore, where they are expected to take part in the investigation by the Federal Reserve, the primary regulator of Allfirst.

Ireland's plans for a new financial regulator were announced almost a year ago, when a long-running turf battle between Finance Minister Charlie McCreevy and Tanaiste Mary Harney seemed to have been resolved by the creation of a new 'independent' Financial Services Authority which would yet have its roots inside the Central Bank, and would share a Chairman with the Irish Monetary Authority, which would clearly remain inside the Central Bank. The Central Bank would become 'The Central Bank of Ireland and Financial Services Authority' (CBIFSA) and would have two 'pillars', one dealing with monetary policy and the other with regulatory matters.

It seemed though that the new arrangements were more cosmetic than real, and nothing has since been heard of the plans until now. The Central Bank claimed at the time that the new regulatory structure for financial institutions would leave it in charge of regulating financial institutions. A Bank spokesman said that the organisation would continue to carry out the same functions as before, but would be divided up differently internally.

It certainly looked as though Mr McCreevy and the Central Bank had 'won', although both the Finance Minister and the Tanaiste did their best to present the hybrid they have created as being a really new structure. Mr McCreevy said the changes would develop a renewed focus on consumer issues, while facilitating the development of a competitive, modern financial system. Mary Harney said the central bank had been "transformed and reformed".

Recommended