Two-tier system puts corporate criminals above law

Tue, Dec 21, 2010, 00:00

OPINION:Ireland has an ingrained culture of corporate non-compliance which weak enforcement does nothing to deter, writes JOE McGRATH

IN 1958, the Cox report on corporate compliance concluded that some companies in Ireland exhibit “a complete disregard of the requirements of the Companies Acts”. Some 40 years later, the McDowell report concluded that Irish company law “was characterised by a culture of non-compliance” and “those who are tempted to make serious breaches of company law have little reason to fear detection or prosecution”.

The Honohan report of 2010 stated that the regulation of the financial sector was characterised by “inconclusive engagement . . . and a lack of decisive follow-through”. The Regling report into the banking collapse of the same year concluded that regulators were too deferential to regulated institutions, “moving very far in the direction not just of principles-based but of light-touch supervision”.

The evidence suggests that the inability of regulators to enforce corporate and financial laws has a long pedigree in Ireland.

The revelation of serious irresponsibility at Anglo Irish Bank is part of this longer trajectory of regulatory failure, and the failure to learn from past lessons. In particular, the Anglo case is merely an amplification of past wrongdoing and regulatory failures at Merchant Banking, a company in the Gallagher Group which failed in the early 1980s owing debts of approximately £30 million.

The liquidator’s investigation concluded that Merchant Banking had seriously breached at least five different pieces of legislation including the Companies Acts, the Central Bank Acts and the Larceny Acts. The bank had failed to hold annual general meetings, had falsely recorded transactions, made false returns to the Central Bank and obtained and managed its assets fraudulently.

This was facilitated by a weak and ineffective Central Bank. It had expressed concerns about the running of the bank since 1973 but did not send in inspectors to investigate it. Merchant Banking continued to take money from ordinary members of the public who walked in off the street with cash to deposit. These people lost their deposits in this bank and other banks lost millions.

The Garda Fraud Squad investigated but they lacked the additional resources and skills to deal effectively with corporate crime cases. It took several fraud squad officers working full-time on the case six years to complete their investigation and for a report to be sent to the DPP. Even then, the Garda had not been able to compile sufficient evidence to ground a successful prosecution so the DPP decided not to prosecute the case.

By contrast, the British authorities dealt much more decisively with Merchant Banking’s activities in Northern Ireland. The British conducted a two-year investigation that provided sufficient evidence to prompt Gallagher into pleading guilty to five offences. He was not treated deferentially.

He was arrested and initially denied bail. He was subsequently sentenced to two years imprisonment, despite the payment of significant compensation on his behalf. Even though Merchant Banking had a significantly smaller operation in Northern Ireland than in the Republic, the investigation and prosecution were taken more seriously in Northern Ireland and Patrick Gallagher was serving time there while all that happened here was that the Irish liquidator considered a civil suit.

Since this time, and particularly since the Garda investigation into allegedly fraudulent activities at Anglo Irish Bank, Irish society is much more aware that corporate crime can seriously affect the economic security of the State in ways that are more damaging than street crime.

Nevertheless, the State still does not prosecute corporate criminals except as a last resort where all other strategies to achieve compliance have failed. Most of the corporate crime offences on the statute book have never been prosecuted.

Those offences that have been prosecuted have been pursued in the District Court where punishments are limited. No one has been imprisoned following a prosecution by the Director of Corporate Enforcement and it has only referred five cases to the DPP for prosecution on indictment in the last 10 years.

If the prosecution of senior management is pursued, it will be a symbolic prosecution to satisfy public demand for corporate criminal responsibility, not an indication of a commitment to regularly prosecute corporate misconduct.

The apparent policy currently advanced by corporate and financial regulators is to sanction wrongdoers only where all other techniques of achieving compliance have failed. Most corporate enforcement now takes place within the non-legal and civil sphere. Warning letters, strike-offs, injunctions to compel compliance, administrative sanctions, restrictions and disqualifications of company directors have all replaced criminal law as the first and only response to corporate wrongdoing. The sort of actions, in other words, that could flow from yesterday’s verdict by Chartered Accountants Ireland, the largest and longest established accountancy body in Ireland, which concluded there was a prima facie case against David Drumm, Seán FitzPatrick and two others from Anglo that by their conduct at the bank, they had broken the bylaws of the profession.

To a large extent, compliance-orientated strategies have worked. The Registrar of Companies, the Director of Corporate Enforcement, and the Financial Regulator have successfully employed civil orders to make companies file annual returns, to make directors pay back illegal loans and to make liquidators fulfil their statutory responsibility to file reports and apply for restriction orders.

They have been used with increasing regularity in recent times to discipline elites and to manage the risks they pose to the public and other market players. For example, just 10 company directors were named on the register of disqualified persons in 2002 but by the end of 2009 this number had risen to 3,200.

Civil orders have the benefit of being cost-effective and efficient ways of enforcing corporate obligations. Regulators avoid lengthy and costly criminal trials which they cannot afford while also avoiding the difficulties of onerous criminal law procedures, like proving intent to commit the wrong beyond a reasonable doubt.

These sanctions can be particularly useful for regulators and politicians who want to get results and be seen to be tough on corporate misconduct, especially in a climate where the electorate are clamouring for corporate accountability.

Nevertheless, notwithstanding the capacity of such measures to achieve instrumental objectives in an efficient manner, it is difficult to escape the conclusion that the compliance-orientated approach has created a two-tier legal system privileging elites in the corporate and financial sector.

Corporate criminals continue to be treated far more deferentially than conventional criminals because they are only prosecuted, if at all, after non-legal enforcement techniques and civil sanctions have failed.

Political rhetoric on corporate accountability rings hollow when the public has lost its most powerful weapon of censure.

Criminal prosecutions make it easier for the public to identify corporate crimes as wrongs against society, to blame corporate criminals for their actions, and thereby reinforce the common sense of right and wrong.

If public shaming of corporate criminals does not occur then crime in the suites continues to be of a different character to crime in the streets. Unless this changes, we cannot claim we live in a society where all citizens are equal before the law.


Joe McGrath is Government of Ireland Research Scholar at the law faculty in University College Cork where he is completing his doctoral thesis on corporate crime

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