Central Bank's softly, softly approach to tax `avoidance'

 

In 1976 Central Bank officials examined the books and records of Guinness & Mahon bank, came across evidence the bank was involved in facilitating tax evasion, and concluded that the late Mr Des Traynor was the central figure involved.

The officials were, of course, correct. Since his arrival in the bank in late 1969, Mr Traynor had been the main force behind the establishment of a number of offshore subsidiaries of the Dublin bank, and the management of the affairs of a number of rich private clients.

By 1976 £14.3 million was lodged with Guinness Mahon Cayman Trust (GMCT) and a further £2.8 million with Guinness Mahon Channel Islands. The Central Bank was satisfied this was money lodged offshore on which tax had been "avoided" but did nothing to stop Mr Traynor's activities.

One memo noted, amazingly: "In view of the delicate nature of these matters we did not pursue the matter further."

Not only was money being held offshore, but the Dublin bank was issuing loans to Irish residents which were backed by the offshore deposits. The existence of the backing was being kept secret by the bank, lest the Revenue become aware of the linked deposits, the Central Bank was informed.

Mr Traynor, in discussions with the investigating officials, denied that the bank was involved in facilitating tax evasion. He also said the bank would be reducing this kind of business.

In 1978 the issue of the backed loans came up again. The Central Bank told Guinness & Mahon that it believed its back-to-back loan business was not in the national interest, and was considering instructing it to wind down its offshore business. Mr Traynor said the bank had no role in devising the tax strategy of its clients, something which we now know is completely untrue.

The Central Bank did not believe him. The first finding on its 1978 was that Guinness & Mahon was involved in "taxation avoidance arrangements".

The Central Bank officials' view of Mr Traynor's credibility is crucial here. The Central Bank's supervision of the banking system, it was made clear yesterday, depends on correct and appropriate information being supplied by the banks.

In the case of Mr Traynor it is obvious Central Bank officials believed he was involved in facilitating tax evasion, despite his claims to the contrary. They noted how when raising questions with bank staff about back-to-back loans, they were always referred to Mr Traynor; it was obvious Mr Traynor was the main man, so to speak, in relation to the bank's offshore subsidiaries and the related loans.

The bank believed it could not inform the Revenue Commissioners of what it knew, because of the rules of secrecy which governed its work, but it was open to the bank to seek to have Mr Traynor removed as chief executive of Guinness & Mahon bank. This did not occur.

Further inspections of Guinness & Mahon during the 1980s did not concentrate on the back-to-back loans aspect of the bank's offshore business, because by this stage Mr Traynor was taking measures to ensure the business was being hidden from the Central Bank investigators.

In 1982 when looking into how Guinness & Mahon was run, Central Bank officials discovered that one of the backed loans was to Mr Ken O'Reilly-Hyland (75). Mr O'Reilly-Hyland is a former chairman of Burmah-Castrol, an associate of the former Taoiseach, Mr Charles Haughey, and a former Fianna Fail fund-raiser.

In 1982 he was a director of the Central Bank; yet the fact of his involvement in the suspect banking arrangement was not, seemingly, brought to the attention of the board.

In the next few days the tribunal will examine whether the Central Bank should have put a stop to Mr Traynor's activities in the 1970s. Instead Mr Traynor's clandestine banking operation continued to grow. In 1989 a Guinness & Mahon internal audit report said £46.8 million was lodged with the Dublin bank by the Cayman bank. The report was not given to the Central Bank.

Mr O'Reilly-Hyland is to give evidence, the tribunal heard. His solicitors have informed the tribunal that before his appointment to the board of the Central Bank he informed the minister for finance, the late George Colley, that he had an offshore trust.