Loans to bank directors

FOR EIGHT years Anglo Irish Bank concealed from public scrutiny huge loans granted to former chairman Seán FitzPatrick

FOR EIGHT years Anglo Irish Bank concealed from public scrutiny huge loans granted to former chairman Seán FitzPatrick. Each year, he used short-term borrowings from Irish Nationwide Building Society to remove and reduce, temporarily, his loans with the bank.

This calculated deceit was designed to avoid a full disclosure of his actual bank borrowings in Anglo’s year-end financial statement. The belated public revelation of this irregularity prompted the Financial Regulator to investigate all directors’ loans at the other credit institutions covered by the Government guarantee scheme.

The regulator’s review and findings, which covered three years to 2008, will be greeted with relief by the public – rightly worried by low standards of corporate governance in some of Ireland’s larger companies – qualified by some concern. The regulator found no evidence of year-end loan manipulation to hide directors’ borrowings, as occurred in Anglo. Loans made to directors in the other financial institutions broadly met requirements. The exceptions, however, give some grounds for unease. One in 10 loan disclosures made by directors was incorrect. A director failed to acknowledge a sizeable (€148,214) loan; while an €11.3 million loan to the business of a former Bank of Ireland director was not disclosed when required. In total, loans amounting to €18.8 million (to directors and connected parties) were not disclosed by the six institutions in that three-year period.

The Financial Regulator, in response, has tightened the reporting requirements on banks and building societies. In future, these lenders must make a more public and detailed disclosure of directors’ loans in their annual accounts. But abuse of the directors’ borrowing facility is not solely confined to financial institutions. The recently published (2008) report of the Office of the Director of Corporate Enforcement (ODCE) makes that clear. The office recorded a 22 per cent rise in alleged breaches of the Companies Acts. Many of the cases involved directors’ loans, where borrowings were used improperly for personal benefit. These loans amounted to €134 million last year, a fourfold rise on the 2007 figure. Company law helps stop unscrupulous directors from divesting company assets for their personal benefit, at the expense of creditors. Where this does occur, a company auditor must report the matter to the ODCE. And last year, auditors reported 161 such alleged breaches. Mandatory reporting by auditors of suspected breaches of company law should, in time, ensure greater compliance by directors.