AIB, Ireland’s largest bank, continued to target Irish customers who wanted to avoid paying tax after it had been bailed out at a cost to the public of €7 billion, leaked documents show.

Leaked files from the Isle of Man (IOM) offices of offshore law firm Appleby reveal Government-owned AIB also refused to give the Revenue Commissioners access to data on its offshore customers when responding to a court order in 2015.

The customers of its offshore operations included former clients of Anglo Irish Bank in the Isle of Man, which had merged with AIB International Savings Ltd (ISL) in Douglas.

The offshore operation instead sought to have the data moved from the bank’s central server in the Republic to Jersey and the Isle of Man, to better provide for its clients’ confidentiality.

AIB ISL and AIB (CI) Ltd, which is based in Jersey, “declined to provide the consent requested and confirmed to AIB plc that the Irish Revenue Commissioners should follow established procedures under IOM and Jersey law should they wish to proceed to obtain any such information,” said a letter prepared by the law firm in the Isle of Man, for the two offshore banks.

The files show that when AIB was forming its unified group data system in 2006, AIB Offshore foresaw that such a development would create confidentiality issues for its high net worth customers if the Revenue was able to argue that the data held on the AIB server was under the “power, possession and procurement” of Dublin-based AIB plc.

A spokesman for the bank would not say whether it subsequently acceded to the Revenue Commissioners’ request.

The Isle Of Man, which disputes claims that it is a tax haven, has strong banking confidentiality laws.

Appleby has provided legal advice to AIB Offshore, as the Irish bank’s offshore business is called, for more than two decades, and more recently has been providing management services to the offshore branches following AIB’s decision in 2012 to close and wind down the business.

The Appleby documents, seen by The Irish Times as part of the Paradise Papers project organised through the International Consortium of Investigative Journalists, provide a unique insight into AIB Offshore’s battles with the Revenue Commissioners over the past 20 years.

They show that the bank changed its business model in 1998 to only accepting residents of Ireland who could avail of legitimate tax planning opportunities.

A note drafted prior to a board meeting of AIB IOM in 2004 broke the business into a pre-1998 model, from which period the bank continued to have “legacy” customers, and post-1998 when the offshore bank business become more focused on high net worth individuals who “legitimately” availed of the bank’s services.

The pre-1998 customers were “resident and domiciled in Ireland [and] may have a tax liability on income arising”, the note said.

“The vast majority of our Irish resident customers taken on since 1998 will have a tax planning rationale for holding an offshore account as AIB Bank (Isle of Man) Limited adopted a policy of only accepting non-domiciled residents of Ireland who could avail of legitimate tax planning opportunities.”

Attractive taxation position

An internal document dated 2006 said the offshore subsidiaries “provide services to Irish and UK resident non-domiciled individuals, most of whom are very wealthy and legitimately avail of offshore services due to the attractive taxation position that applies to them in Ireland and the UK”.

The documents show that the bank’s offshore arm continued to target Irish residents after it was taken into State ownership and hoped to generate business from existing AIB customers. Its offshore operations argued that they could continue to be a crucial source of deposits for the AIB group, pointing out that the AIB offshore subsidiaries, and the now-merged Anglo IOM branch, had combined deposits at their height of “almost €7 billion”.

Up to the time the decision was made to close it in 2012, AIB Offshore saw itself playing a crucial role in the AIB group by getting business from “high net worth individuals”, the vast bulk of whom would be doing business with the bank for “tax planning” reasons, the documents show. The resultant deposits could then be used by the group.

In a document prepared by AIB (CI) in 2011, prior to a meeting with the Jersey Financial Services Commission – which was at the time concerned about the stability of the AIB group – the offshore bank said it remained “a key provider of funding for AIB” with deposit balances peaking at £2.8 billion in June 2010, after which credit rating difficulties led to a sustained withdrawal of funds. By April 2011, deposits had fallen to £1.36 billion.

Opportunities existed for the merged Anglo/AIB offshore businesses in the expatriate market. “Leverage the strengths of both businesses in both pure deposit taking and transactional banking for ex pats,” the document said. “Gain larger share of worldwide ex-pat market to produce long term sticky retail deposits.” The bank would also “generate referrals from the AIB group for genuine ex-pats.”

The decision of the offshore operations to change their focus coincided with a clampdown by the Revenue on money held in the offshore arms of Irish banks following a number of well-publicised controversies.

The documents show it sparked a lengthy battle with, on one side, the offshore arms of the banks, arguing that they were separate legal entities operating under the laws of the offshore jurisdictions where they were located, while the Revenue sought to use the transaction links between AIB in the Republic and AIB Offshore to gain access to information held in the Republic about offshore trusts, deposits, and other offshore assets that were linked to Irish taxpayers.

While the data held offshore might be beyond the Revenue’s reach, details of many of the Irish owners of offshore trusts and deposits were traceable on the IT systems in the Republic as a result of so-called clearing transactions.

‘Qualified disclosure’

The leaked documents show that in December of 2003 the then group chief executive of AIB, Michael Buckley, wrote to the IOM subsidiary about the planned Revenue investigation into offshore assets and the Revenue’s suggestion that the banks write to customers advising them of the benefits of making a “qualified disclosure”.

The opportunities to grow the company in the future depended on the Irish authorities drawing a line under the ‘bad name’ offshore has in Ireland once and for all

A qualified disclosure is when the person with a tax liability approaches the Revenue before it has noticed the offender and begun its inquiry. The benefits of disclosure include avoiding the possibility of prosecution, having your name published, and certain penalties.

The IOM bank sought legal advice and in February 2004 met to discuss Buckley’s request. Chris Howland, managing director of AIB’s IOM branch, told the meeting that the case for acceding to Buckley’s request was compelling.

“This was because the opportunities to grow the company in the future depended on the Irish authorities drawing a line under the ‘bad name’ offshore has in Ireland once and for all.”

AIB in Dublin, he said, had indicated to him that this was the approach being taken by the Revenue. However, “in order to follow through, the Revenue Commissioners had to produce a satisfactory outcome for the [Dáil] Public Accounts Committee from the requests made to the onshore parent companies regarding their subsidiaries”.

That it would be good “to have the matter sorted once and for all” was a view echoed by the Assessor of Income Tax in the Isle of Man when he and the chief executive of the Financial Supervision Commission met with Howland and another AIB IOM director, Diarmuid Lynes, the meeting heard.

The Appleby documents, seen by The Irish Times as part of the Paradise Papers project organised through the International Consortium of Investigative Journalists, provide a unique insight into AIB Offshore’s battles with the Revenue Commissioners over the past 20 years. File photograph: Jason Alden/Bloomberg

“Mr Howland said that without a fundamental change in the attitude of the Irish authorities, the difficulties in sourcing business from the parent would be likely to remain. Set against this, the potential for growing the company’s business from customers of the parent who are leaving Ireland is of much greater significance than all of the company’s existing sources of business combined.”

Examining debits and credits

By 2005 the Revenue’s inquiries had led it to an account belonging to AIB (CI) with AIB Lansdowne Road, Dublin. A High Court order had been served on AIB and the Revenue was now examining debits and credits on the account above a certain threshold, with a view to identifying AIB customers in the Republic who had dealings with AIB (CI)’s operations in Jersey and IOM.

Rory Farren, then head of operations with AIB Offshore, wrote to senior management of the unit in May 2005 to update them as to what was happening. Where people who made drawings from or lodgments to the account, did so using accounts with AIB in the Republic, identifying them would be achievable, he warned. Where non-AIB accounts were used to cash cheques from the account, that information would also be given to the Revenue. About 5,000 customers affected by the Revenue’s inquiry were to be written to, he said.

Farren advised his colleagues that Revenue was also going to seek court orders in relation to two other accounts held in the Lansdowne Road branch, one belonging to AIB (CI) and the other to AIB in the IOM. The Revenue was also going to seek court orders concerning all AIB accounts held by the offshore subsidiaries with the bank in the Republic in the period 1991 to date, commencing with the two offshore banks’ “vostro” accounts with the AIB in the Irish Financial Services Centre.

Vostro accounts are accounts held by a foreign bank with a domestic bank. Farren’s note included data on recent transactions across the Vostro accounts. In the period 2000 to May 2005, there were outward payments of €1.17 billion from the IOM vostro account, and €1.12 billion from the Jersey vostro account. In relation to both operations, there was a sharp jump in the value of the outward payments in 2004 in comparison with other years. That was the year the Revenue began its offshore products investigation. The total number of outward payments during the period was 72,484.

The leaked files show that the Revenue’s investigations of AIB’s offshore operations created difficulties for the bank’s desire to establish a group-wide IT and data handling system.

In 2006, AIB was introducing a centralised transaction processing and data storage capability in the Republic. In February of that year, Ray O’Connor, the head of group taxation with AIB in Dublin, wrote to Howland in the IOM suggesting that they get legal advice on whether outsourcing their data to the Republic might create a risk for the offshore branch.

“Under current Irish legislation, one relevant point is whether the data could be within the ‘power, possession and procurement’ of AIB plc and therefore within the scope of a potential information request from Revenue. This is not a simple legal principle and would be worthy of discussion between your advisers, [AIB law agent] Bryan Sheridan, and myself,” O’Connor wrote.

‘Significantly repositioned’

Two months later the IOM branch drafted a note on the matter. “The offshore business has been significantly repositioned over the past ten years,” it said. “As a result, banking services are not available to Irish or UK resident, ordinary resident and domiciled individuals. However, in common with other banks, there is a small legacy client base.”

The business now provided services to Irish and UK resident, non-domiciled individuals, most of whom were very wealthy and availed of offshore services due to the attractive taxation position which applies to them in Ireland and the UK.

Given the historic “offshore issues” in Ireland, the generally negative and aggressive press treatment of offshore, and the Irish tax authorities’ approach to this type of business, clients were keen to protect their confidentiality, the note said.

The leaked files give an insight into the sort of business done by AIB’s offshore arm

The location of data in Dublin about clients’ offshore activities could leave the bank exposed to suits from customers and “given the profile and the quality of many of these clients, this could result in significant damages and adverse consequences reputationally”. No access to customer information should be available to AIB in the Republic. “Only in this way can we protect the bank and its customers.”

The leaked files give an insight into the sort of business done by AIB’s offshore arm. A large percentage of the loans issued by AIB in Jersey and the Isle of Man were linked to property owned in the UK and the Republic. When the financial crisis hit, the value of these loans to the banks was severely diminished.

In April 2012, the then State-owned AIB announced it was winding down its operations in Jersey and IOM as part of its plan to become a smaller, domestically focused bank.

As part of the process of running down the two operations, Appleby was engaged to provide management services. The winding down involved dealing with depositors and managing the stressed loan book. Consideration was given to selling the loans, which included loans inherited from Anglo Irish Bank’s IOM operation, but when the loan book shrank in size, from £200 million to £123 million, this became commercially unattractive. So the loans were sold to AIB UK, by way of an operation christened “Project Nora”.

In banking terms a loan due to a bank is an asset, ie it has a value. During the crash, significant reductions in value, called haircuts, were applied to loans that were linked to property or property developers. The National Asset Management Agency paid €9 billion for AIB loans with a book value of €20.4 billion, which is a haircut of 56 per cent.

The leaked documents show that the AIB (CI) loans were sold to AIB (UK) for a price that involved a discount, or haircut, of 32 per cent, following an assessment of their value by PwC. A further 10 per cent discount was then applied to the loans to cover the future cost of administering the portfolio.

According to a note prepared for the board of AIB (UK), the loans were of “broadly acceptable quality, being secured primarily on residential property with a strong loan-to-value ratio.” The note also described the loans as “mainly non-complex property loans”.

As at the end of March 2013, the bulk of the loans were to property companies (£78 million) with personal advances being £24.3 million, home mortgages being £19.7 million, and miscellaneous being approximately £700,000.

Another note prepared for the UK bank said “the typical client base consisted of “UK/ROI domicile (expatriate) [high net worth] individuals and special purpose vehicles managed by trusts and investing surplus income in residential and commercial investment property”.

The note said the bank was working to mitigate the effect of the decision to wind down on its customers. AIB (CI) would remain the “lender of record”, meaning the loans would still be “offshore”.

“Customer tax arrangements will not be impacted. This has been agreed with local offshore tax authorities and KPMG.”

AIB UK, the note added, would be required to comply with the IOM and Jersey data protection laws. Customers who wished to bring their loans “onshore” could discuss this with the bank but customers who required new offshore lending “would be “required to take independent action”.

Deemed problematic

Since taking over the running down of the Isle of Man and Channel Islands businesses, Appleby produced quarterly reports on its work for AIB, including information on its efforts to run down the deposits, and deal with loans. There were accounts that were deemed problematic, including accounts where efforts to contact the owners of the money proved troublesome.

According to the report on AIB (CI) for the third quarter of 2015, the bank’s former IOM and Jersey branches had £6.48 million on deposit for customers who could not be contacted. A further £6 million was in accounts where contact had been made but the client was unresponsive. Suspicious activity reports were to be made in some cases where contacts with the owners of deposits had been made but no steps taken to withdraw the funds.

A spokesman for AIB did not respond to questions about the role played over the years by AIB Offshore, when asked to comment.

“Arising from the recapitalisation and restructuring of AIB, and the European Commission decision on State Aid, it was decided to wind down AIB ISL Limited and AIB CI Limited in 2012,” he said.

The banking licence of both companies was terminated and the administration of both, which is a legal and regulatory requirement as part of the orderly wind down of the banking operations, was migrated to and continues to be carried out by two companies, Estera Trust (Isle of Man) Limited and Estera Trust (Jersey) Limited. The Estera companies were part of the Appleby group until a management buy-out in December 2015.