The European Commission has ordered AIB Bank and Bank of Ireland to answer allegations of operating a cartel to fix customer charges for converting pounds into other euro zone currencies and vice versa and for cross-border transaction fees.

The Republic's two biggest banks yesterday confirmed they had received detailed documentation from the Commission as part of an inquiry into price fixing by 120 banks and banking federations in Ireland, Belgium, Portugal and Finland. The Commission has the power to impose fines of up to 10 per cent of a firm's global sales in serious cartel cases.

An AIB spokesman said the bank was studying the document, received this week, and would not comment further at this stage. A Bank of Ireland spokesman also confirmed it had received the document and stressed it would vigorously refute the allegations. "We are very puzzled by this. It is very difficult to see how such an accusation could be made in the Irish market. The bank will vigorously defend its position," he said.

The banks must reply in early October.

Yesterday, the Commission said it had enough evidence that the 120 banks identified in the four EU states were violating European Union competition rules. "These banks have until early October to respond but they can be certain the Commission will severely punish any price-fixing agreements. If its existence is confirmed, it would have been of the nature to compromise the launch of the euro and harm the consumer," it stated.

Fine Gael finance spokesman Mr Michael Noonan said the investigation provided a "timely warning" to the banks.

"The banking sector in Ireland has been notoriously uncompetitive. I do not believe that a formal cartel exists between Irish banks. I do believe, however, that a kind of `golf course' cartel operates and the intervention of the EU Commissioner to ensure competitiveness is very timely."

The Commission's letters, called Statements of Objection, are in fact detailed documents which request specific information relating to the allegations. The Commission has indicated it will also be sending warnings to banks in other member-states.

A spokeswoman for EU Competition Commissioner, Mr Mario Monti, said these warnings did not prejudge the outcome of the inquiry and allowed the banks to defend themselves and to meet the Commission.

"It is impossible to say if there will be fines, let alone their size," she said, noting that the Commission took its decision according to the duration and seriousness of the cartel offence.

She declined to name any of the banks because not all the statements of objections have been sent out but said a full list would be issued at the end of this week or early next. Mr Monti said that, while banks were free to set the level of charges individually for exchanging currencies, they should be fully aware of the Commission's determination to severely punish any agreements to fix those charges.

The Commission's investigation has shown that the accused banks may have engaged in price-fixing deals to raise the exchange fees or control their decrease. The Commission noted the decline in exchange fees was a natural consequence of the final locking of euro-zone currencies on January 1st last year.