Eight years after overcharging claims first emerged at AIB, differences of opinion still exist, writes SIMON CARSWELL, finance correspondent

YET MORE revelations about the banking sector and Irish financial regulation emerged this week, this time at the Oireachtas Joint Committee on Economic Regulatory Affairs in Leinster House.

The latest controversy centred around what appeared to relate to an earlier scandal involving overcharging at the State’s largest bank, Allied Irish Banks (AIB), dating back to 2000 and 2001.

However, intriguing new details emerged about overcharging by managers and other dealings with the regulatory authorities.

Further bizarre arrangements were outlined involving the trading by AIB’s stockbroker subsidiary in the bank’s shares through “blacklisted” financial island havens in the Pacific and Caribbean, and through an investment advisor purported to be linked to the Furstenburg brewing family in Germany.

The source of the new information was AIB’s former group internal auditor Eugene McErlean who left the bank in 2002 after the bank sought to appoint a group internal auditor from outside the bank following the John Rusnak rogue trading scandal that year.

He raised concerns about overcharging claims and the handling of those claims by the regulatory authorities from 2001 to 2005.

However, his testimony about the AIB share trading scheme was the most curious subject covered.

He claimed the bank’s stockbroking subsidiary, Goodbody Stockbrokers, traded in AIB shares, which was not allowed at the time, using companies in Nevis in the Caribbean, a blacklisted financial haven, and Vanuatu in the Pacific that were “shrouded in secrecy.”

The regulator said in a statement yesterday that “significant personnel changes took place in Goodbody” following the Central Bank’s investigation of the matter.

The regulator added that AIB had followed all procedures at the time, including reporting the matter to the Garda on the suspicion of money laundering.

Mr McErlean was described as “a whistleblower” by the Oireachtas committee. The story told by 50-year-old former bank official, a solicitor by training, has many parallels with another former AIB group internal auditor, Tony Spollen, who raised concerns about AIB’s tax exposure on the bogus resident accounts in the late 1980s and early 1990s.

Like Mr Spollen, Mr McErlean also departed AIB after a period of significant turmoil caused by the questioning of internal issues.

Mr McErlean was asked by Fianna Fáil TD Sean Ardagh, a member of the committee, if he was “a disaffected employee who is continuing to raise an issue that has been dealt with in the past?”

The former banker said he was “shocked” when he was told he was being “removed” following the Rusnak scandal. The bank planned to fill the role of group internal auditor with an outsider following the controversy.

Mr McErlean told the committee that he could “probably be characterised as disaffected” but that his disaffection came from “pressure being exerted on the audit department”.

He said the audit department had been demoted in a management restructuring before Christmas 2001, and he objected to this and had sought legal advice on the issue. “I was extremely concerned about that because it broke all sorts of Basel guidelines as to how the audit function should be placed in an organisation.”

Mr McErlean’s primary concerns related to the handling by the Financial Regulator of systemic overcharging of AIB customers on a range of issues. He outlined management time fees in particularly as an example, saying that some managers charged customers for playing rounds of golf.

He said his audit team had discovered that managers overcharged customers on the management fees to meet targets set for their branches. He said his report on the overcharging was referred to the Central Bank in 2001.

He claimed the regulator knew about the overcharging in 2001, investigated it in 2002 and had failed to act to protect consumers.

Then, he said, the regulator gave the impression it became aware of overcharging only when issues concerning overcharging on foreign exchange transactions became public in 2004.

Mr McErlean claims that he outlined “systemic overcharging” to the regulatory authorities, then the Central Bank, through the bank in 2001 and directly in 2002.

He estimated that the overcharging, including on management fees, amounted to between €50 million and €75 million.

The bank said in 2006 that the overcharging scandal, including excessive foreign exchange fees, totalled €65.6 million. This comprised customer refunds, interest and a donation of €20.6 million to charity in lieu of repaying customers who could not be identified due to the passage of time.

The €65.6 million was revised up from an initial €34.2 million repaid to customers on foreign exchange and other overcharges.

AIB’s statement in response to Mr McErlean said the matters raised had been fully reported to the regulatory authorities, fully investigated and fully addressed.

The regulator responded yesterday with a statement pointing out that the Financial Regulator was established in May 2003 and that prior to that date the Central Bank had told AIB to report the issue to the Office of the Director of Consumer Affairs (ODCA), which at the time was responsible for protecting bank customers.

The regulator assumed the ODCA’s files when it took charge of customer protection in 2004.

Referring specifically to the overcharging of management time fees, the regulator said that following discussions between AIB and the Central Bank-ODCA, the bank refunded €255,000 to affected customers for these fees and the investigation in this area was concluded in February 2003.

Some confusion appeared to arise from the committee hearing as to whether the management time charge amounted to between €50 million and €75 million. Mr McErlean’s estimate covered total systemic overcharging, and not just the management charges.

As it transpired, Mr McErlean’s rough estimate of the cost of the overcharging in 2001 matched the cost outlined by the bank in 2006.

However, five years had elapsed between the making of his claims about overcharging to the Central Bank and a final settlement being reached with AIB customers.

Mr McErlean’s main contention was the regulatory authorities (the Central Bank, the ODCA, and later the regulator) failed to investigate his allegations properly and in a timely fashion which could have led more overcharged customers being identified and reimbursed.

Mr McErlean also criticised the handling of his claims by the Central Bank, leading to accusations by Oireachtas committee members that the relationship between the banks and regulator was too close.

He said that at his first meeting with the Central Bank in May 2002 (after he left AIB) he outlined details of overcharging and other matters he discovered at the bank to Liam O’Reilly, then assistant director general of the Central Bank and later chief executive of the Financial Regulator.

At a later meeting, in October 2002, Dr O’Reilly asked Mr McErlean if he would withdraw his allegations, which he refused to do.

The regulator said in its statement yesterday: “The bank’s record of the meeting shows that Mr McErlean advised that he had withdrawn the allegations in relation to his legal proceedings against AIB.”

The regulator added that the record also showed that Mr McErlean agreed that issues relating to the 2001 overcharging issue and Goodbody Stockbrokers trading in the bank’s shares “had been or were being addressed by AIB”.

Eight years after the overcharging claims first emerged, differences of opinion still exist.