New questions have been raised by the former Irish Life Permanent chief executive's evidence, writes Simon Carswell

THE AFFIDAVIT provided by former Irish Life Permanent chief executive Denis Casey to the investigative teams digging into Anglo Irish Bank raises new and pertinent questions about the €7 billion back-to-back deposits between the banks in September 2008 and how Anglo subsequently reported them in its 2008 accounts.

In his statement – revealed by The Irish Timesearlier this week – Casey questions why the financial regulator, Central Bank and Department of Finance did not scrutinise or influence how Anglo Irish Bank was going to present its financial results in December 2008 when it knew about the controversial transaction in advance of that publication.

The back-to-back circular deposits flowed between Anglo and ILP in the days over Anglo’s financial year-end at September 30th, 2008 – an accounting period covered in the results presented by Anglo on December 3rd, 2008.

The transaction masked the heavy loss of deposits at Anglo over the course of September.

No references were made to the deposits by the bank in the presentation of its results. The accounts gave the impression that Anglo had weathered the unprecedented financial turmoil over the preceding months remarkably well.

Anglo reported that customer deposits fell to €51.5 billion at September 30th from €54.5 billion six months earlier. It later emerged in a report by PricewaterhouseCoopers that by September 27th Anglo lost €10 billion – about a fifth of its deposits – in the turmoil.

The Department of Finance and Financial Regulator became aware of the Anglo-ILP transactions in October 2008 shortly after the transaction was unwound.

The regulator was clearly aware that Anglo was engaged in “balance-sheet management” – the technical term used by the bank in conversations with the regulator – at the time of the deposits.

An internal memo prepared on behalf of Anglo after the ILP transaction came under public scrutiny states that Anglo’s chief executive David Drumm and finance director Willie McAteer met the regulator three times as the crisis intensified – on September 17th, 20th and 24th – to discuss the bank’s “critical funding position”.

McAteer later recalled that, at the end of the September 24th meeting, he said the bank “will be managing the balance sheet at year end”, the memo says.

“Fair play to you, Willie,” replied the regulator, Pat Neary.

Anglo’s executive management team evaluated the ILP transactions with other members of the treasury and treasury risk management team on several occasions in the last two weeks of September, according to the internal memo.

The transactions broke the bank’s limits with counterparties but this was “appropriately signed off” by McAteer as chief risk officer and Mike Nurse, head of Anglo’s treasury group risk management, on October 1st, 2008.

On October 24th and 25th, ILP and Anglo discussed the €7 billion transaction with the regulator’s head of banking supervision, Mary Burke.

Anglo’s head of finance Colin Golden and Burke discussed the deposits on October 25th by telephone and the “appropriate accounting treatment” of the transactions, according to the memo.

The bank said that in January 2009, it received a “draft legal opinion” saying the transactions with ILP “do not breach company law” nor did they break market abuse or transparency rules.

The memo doesn’t disclose the current legal advice from the law firm Matheson Ormsby Prentice, saying that this was “ongoing”.

The way Anglo reported the transaction is at the core of Casey’s criticism of the authorities and at the centre of the Garda and ODCE investigations. Anglo represented the transaction as customer deposits rather than inter-bank lending as the funds came through a non-banking ILP subsidiary, Irish Life Assurance.

Casey claims that the transaction was “collateralised to ensure no risk was borne by ILP shareholders or customers” and that he refused further approaches from Anglo on Monday, September 29th, 2008 – in the hours before the guarantee – because they could not provide further collateral.

The bulk of the funds came into Anglo through the circular route after the Government guarantee.

Casey said he believed the collateralised nature of the transaction had “important implications for its accounting treatment in the books of Anglo Irish Bank, as I understand accounting regulations require collateralised transactions such as this, where there is a right of set off, to be netted off”.

Anglo has maintained that there was no right of set off, allowing the bank to treat the funds as customer deposits.

The Department of Finance and the regulator maintain that the transactions were not approved in advance by the regulatory authorities and that they had no knowledge of them.

ILP has also acknowledged that the regulator was unaware of them in advance.

However, Casey has questioned why the department and regulator did not query how Anglo would present the transaction when it presented its September 2008 accounts in December 2008.

“It now appears that no effective intervention was made at the time by any of those agencies to scrutinise or influence the manner in which Anglo reported that transaction,” Casey’s affidavit claims.

Within weeks of the deposits emerging publicly in February 2009, three senior ILP executives resigned – Casey, finance director Peter Fitzpatrick and head of treasury David Gantly. ILP said the transaction was wrong and should not have occurred.

Casey’s voluntary swearing of an affidavit and his passing it to investigators follows similar voluntary statements provided by his successor at ILP, Kevin Murphy, and the group’s chairwoman Gillian Bowler in recent months.

The two reports published this week into the causes of the banking crisis, the first by Central Bank governor Patrick Honohan and the second by international banking experts Klaus Regling and Max Watson, referred only in passing to the Anglo-ILP deposits as they fell outside their remit.

Awareness of the deposits and the other matters under investigation at Anglo – Seán FitzPatrick’s loans and the Golden Circle share transaction – had “coloured” his report, said Dr Honohan.

The Regling-Watson report only referred to the deposits as “window-dressing of balance sheets beyond acceptable levels”.

This statement implies a certain level of window-dressing is acceptable at financial institutions. “Window-dressing transactions may apparently have been viewed as benign in intent, but in fact they may have raised very serious disclosure issues indeed,” they said.

“What is clear is that the failure to identify, recognise the gravity of, and take tough remedial action to correct such serious governance breaches was a cardinal error of supervision during this period.”