Red faces for Donohoe and Makhlouf over ‘hacking’ report

The controversy surrounding Gabriel Makhlouf, the man appointed as the next governor of the Central Bank, is an embarrassment for Minister for Finance Paschal Donohoe, as well as the incoming governor himself.

Having passed over domestic candidates for the job, the Government – on the recommendation of its interview panel – appointed a candidate working on the other side of the world who, while he has extensive management and financial policy experience, has never been a central banker.

Some serious criticisms have now been made of Makhlouf in an official report into how he handled the leak of information on the New Zealand budget last year, with an inquiry finding he was slow to take responsibility. And subsequent comments at a press conference by the body which conducted the investigation – and the fact Makhlouf has not apologised for the way he handled the issue – have deepened the controversy.

In his response, Donohoe has focused on the main findings of the report, which was that that Makhlouf acted in good faith and did not show any political bias. However Makhlouf is criticised for his response to the controversy and portrayal of the crisis as a “hack” when it was really a systems weakness.

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Peter Hughes, the State Services Commissioner who conducted the investigation said he did not believe that it was a sackable offence, though his departure was one reason why he did not recommend any formal sanction.He added at a press conference: “The breach of security around the Budget documents should never have happened, under any circumstances. The right thing to do here was to take personal responsibility for the failure, irrespective of the actions of others and to do so publicly. He did not do that.”

The question now is would Makhlouf have got the Irish Central Bank job if the controversy had happened before the interviews, as opposed to after?

Budget leak

The controversy in New Zealand related to the emergence – courtesy of the main opposition party – of snippets of information about the budget, ahead of its publication last September.

Makhlouf heads the Treasury Department and it had loaded information in advance of the budget onto a server which it did not believe was accessible. It turned out that bits of it could be accessed, if the correct search terms were entered into the treasury website, and – after 2,000 searches and putting the pieces together – someone did just that..

In responding, the inquiry found that Makhlouf acted in good faith and in a politically neutral manner. However it found that some of his public comments were “unreasonable” – notably his use of the phrase “deliberately and systematically hacked”, when in fact the accessing of the information was legal. He was also criticised for the way he portrayed the leak in a radio interview.

And in a later statement, the treasury was found to have put too much emphasis on the person who had accessed the information, as opposed to its own failings. Makhlouf apologised for the leak again on Thursday, but not for the way he handled it.

The strength of Makhlouf’s CV was his wide administrative and management experience and his knowledge of economic policy. His weakness was his lack of direct central banking experience, which is important as the central bank’s key job is regulating the financial sector and his lack of knowledge of Ireland.For these reasons, his appointment came as a surprise.

He was always going to face scrutiny on his arrival and this will now increase – the latest report questions his judgement, albeit in relation to just one incident. We have seen in the past how we need a strong, efficiently-led and independent central bank. The new man, without direct central banking experience or knowledge of Ireland and now criticised in his final days in office in New Zealand, has much work to do on his arrival to establish his credentials and demonstrate his independence from those who appointed him.