AIB’s ‘administrative cock-up’

AIB chief executive Michael Buckley has described overcharging on foreign exchange as an ‘administrative cock-up’.

WHAT is it all about?

AIB has admitted overcharging a number of its foreign-exchange customers by "approximately €14 million" over the last eight years.

How exactly did it do this?

In 1996, AIB informed the Office of the Director of Consumer Affairs (ODCA) of a range of foreign-exchange charges and margins to be levied on customers. It said the margin for non-cash foreign-exchange transactions over £500 (€635) would be 0.5%, which the ODCA authorised. But AIB then charged 1%.

What were these "non-cash" transactions?

There were three areas where customers were overcharged:

When they bought foreign-exchange drafts or travellers' cheques in currencies other than sterling for amounts between £500 and £10,000 (€13,000).

When they bought sterling drafts or travellers' cheques for amounts between £500 and £20,000 (€25,000).

When customers (mainly businesses) made outward international payments in any currency for amounts between £500 and £50,000 (€63,000).

How is AIB so sure the total overcharged was only €14m?

It isn't. "We made that estimation very quickly based on (becoming) aware of this in the last few days," says a spokeswoman. "It's an approximate figure. When we go through our investigation, we'll know how accurate it is. Hopefully, it is accurate."

Was it done deliberately?

Not according to the bank, which says it was "a pure mistake" or, in the words of chief executive Michael Buckley, "an administrative cock-up".

But if it was a mistake, why did it take so long to notice?

The error was apparently spotted "at a departmental level" in AIB in 2002, but according to senior management, not brought to their attention. They say they first heard of it last week, after the Irish Financial Services Regulatory Authority (IFSRA) met with the bank's compliance officers and raised the issue with them.

How did IFSRA find out about it?

An anonymous phone call two weeks ago. This week, another anonymous call was made to RTÉ, which saw the story enter the public domain.

Hadn't AIB scrutinised its operational and control systems in the wake of John Rusnak costing the bank hundreds of millions?

Yes. According to the bank, those systems are under constant review. But this one slipped through the net. It just happened that the bank profited from this oversight.

So what happens next?

IFSRA is investigating the matter, and has sought a full report from AIB on how the overcharging occurred, why it continued for so long, and what measures the bank will take to ensure it does not happen again.

IFSRA also wants to know the extent of the impact on customers, and how compensation can be best paid.

So those customers who were fleeced will be paid back?

That's what IFSRA wants. But the bank itself is not so sure. "The nature of these transactions means it will not be possible to identify most of the people who carried them out," AIB said. "Consequently, part of AIB's discussion with IFSRA will cover proposals on how to make appropriate restitution."

A spokeswoman later said if individuals could not be identified to be reimbursed, AIB would put the money back into the community in another way. "We're not going to keep it."

However, Tánaiste Mary Harney has said the onus is now on the bank to identify those customers it overcharged.

"If it was the bank undercharging for eight years, I'm quite certain it would have come to light an awful lot quicker," she said.

"The bank should be aware of who the people were, and no matter how difficult it is to find that out, no matter how time-consuming it might be, I believe there is an onus on the bank to identify all of the people involved and to make sure the money is returned to them."

So what can customers who suspect they were overcharged do?

AIB has established a customer helpline 1800 787 564. The line will be open from 9am to 5pm today and tomorrow.

Will AIB be prosecuted?

Don't hold your breath. Not a single bank official was pursued in the wake of the DIRT scandal, and that was of a far greater magnitude. That makes a prosecution unlikely.

As for a financial penalty, while IFSRA has the power to investigate financial institutions, it does not yet have the power to fine them, as it is awaiting the Oireachtas to pass the necessary bill. So the odds are that all AIB will have to do is reimburse the €14 million overcharged.

And if that is indeed an accurate figure, it would take AIB just five days to earn it back, seeing as it made €2.75 million profit a day last year.

But the bank has said it "apologises for this error and the fact that it went unaddressed for such a long period". I'm sure you're feeling better already...

An account of AIB scandals

In their 1999 book, This Great Little Nation - The A to Z of Irish Scandals and Controversies, the journalists Gene Kerrigan and Pat Brennan noted: "No single institution within the State has been so involved in recent financial scandals as AIB." Here are some of the reasons why:

Haughey's million:

In January 1983, the now-defunct Evening Press published a story about Charles Haughey's finances, indicating he owed £1 million to AIB.

The bank denied it, saying: "This statement is so outlandishly inaccurate that AIB feels bound, as a special matter, to say so positively and authoritatively."

It later turned out Haughey had indeed, at one point in the early 1980s, owed AIB more than £1m. A Haughey benefactor paid a substantial slice of it, but the bank ended up writing off the rest.

When the matter was raised at the Moriarty Tribunal in 1999, AIB executives said they did not know how the bank's denial - which was a blatant lie - came to be released.

The ICI affair:

AIB took over the Insurance Corporation of Ireland (ICI), a former State company which had been privatised in 1983. The bank spent £86m doing so, in the hope that huge profits lay around the corner.

They didn't. In 1984, to the astonishment of AIB, it turned out somewhere between £120m and £200m had been lost at ICI's London operation.

This left AIB in a spot of bother, and the bank went straight to the Government of the day seeking a bail-out. It got it: the State took over ICI and its huge debts. AIB lost its initial investment, but the taxpayer took upon himself the bank's ICI millstone.

And AIB never once suggested since, despite its mammoth profits year after year, that it should seek to repay that kind gesture.

The DIRT scandal:

Prior to 1986, it was the responsibility of the individual taxpayer to declare the interest he or she earned on money in a deposit account.

With the introduction of Deposit Income Retention Tax (DIRT), the onus was placed on financial institutions to deduct a percentage of interest directly from accounts and forward it to the Revenue Commissioners.

The only accounts exempt from DIRT were non-resident accounts, those of people living abroad who held money in Irish banks.

Between 1986 and 1999, AIB helped set up tens of thousands of bogus non-resident accounts for Irish customers.

In October 2000, it paid €114m, including interest and penalties, to the Revenue Commissioners to settle its liabilities.

Other banks were also involved, and made hefty settlements too, but AIB was by some distance the biggest offender.

While the Revenue Commissioners continue to chase holders of bogus non-resident accounts, no bank officials have ever been prosecuted for their role in the scam.

When asked why last year, Revenue chairman Frank Daly indicated that an aggressive pursuit of the banks would have resulted in a bitter stand-off.

"We had to go about this in a pragmatic way. Had we done otherwise, the shutters would have come down."

The Rogue Trader:

In February 2002, AIB made an early-morning statement to the effect that its Maryland subsidiary, Allfirst, had lost hundreds of millions of dollars and a trader was missing.

What subsequently unfolded was the largest corporate scandal to hit an Irish public company.

Former currency trader John Rusnak had hidden a whopping $691m in losses at Allfirst. He would subsequently be sentenced to seven and a half years in prison.

Rusnak engaged in the fraud over five years. But all this time "executives in Baltimore and Dublin missed enough red flags to decorate the Kremlin," said Conor O'Clery, the journalist who later co-authored a book about the affair.