The Irish Times is reporting that the former CEO of National Irish Bank has been disqualified for nine years. Such disqualification orders present a powerful tool for regulators, particularly where the evidence of wrongdoing falls short of the legal standard for criminal prosecution. They are also preferable when moral blameworthiness is less clear and criminal punishment might be unduly harsh for the wrongdoing asserted. Such orders are quite regularly employed in the U.S. and other jurisdictions and one can expect them to be used here with greater regularity if regulators follow through on their promise of tougher enforcement.
Today's order follows the decision of the High Court in April where it had made a finding that Lacey is "“unfit to be concerned in the management of company”, within the meaning of section 160(2)(d) and (e)."
Lacey's defence - like that of many CEOs before him - was that he did not know about the illegal acts or that the illegal acts were committed by rogue actors who were subordinate to him, without his knowledge. He also claimed that the bank was a large organisation and he could not be expected to know the minutiae of the day-to-day details concerning its affairs. He argued that there was a system of delegation in place and that the illegal acts had not been brought to his attention as such. Moreover, he claimed that the external auditors had not raised any concerns and that the board had not been accused of wrongdoing. This echoes arguments made by other CEOs in high profile U.S. cases like Enron where the CEO, Jeffrey Skilling, also claimed that the company's actions were legal and that any illegality had been without his knowledge at the instance of the CFO, Andy Fastow.
The court was not convinced by Lacey's arguments. In relation to the I-did-not-know defence, it said:
... the Inspectors Report, had found that branch audit reports were consistently critical of the standard of compliance with the legislative provisions and Bank procedures pertaining to the operation of non resident deposit accounts. The report referred to the Bank’s obligation to hold a non resident declaration in the form prescribed or authorised by the Revenue Commissioners pursuant to s. 37 of the Finance Act 1986, for each account designated by the bank as a non resident account.
The Inspectors referred to the deficiencies most commonly reported including the failure to produce non resident declarations forms at the time of audit; charities declarations rather than non resident declarations; obsolete, undated, not fully completed and containing incorrect account numbers. "
The court seems to be placing a lot of emphasis on the incomplete documentation. Since the incomplete documentation had been flagged in communications which included the CEO, the court ruled that he could not have been unaware of noncompliance with the bank's legal obligations.
Further, the court held:
"The Inspectors found that bogus non resident accounts were opened and maintained by the bank and were widespread in the branch network. They found that the opening and maintenance of such accounts by the bank constituted an unlawful and improper practice which served to encourage the evasion of revenue obligations by third parties, both on the funds deposited and on the interest earned. They concluded that up to May 1995, a year after the respondent ceased to be Chief Executive, senior bank management failed to inform branch staff in clear terms of the relevant provisions of the Finance Act 1986. They also failed to have a review conducted at that time to ensure that all existing non resident accounts were genuine. Senior management was aware of the existence of bogus non resident accounts. The Bank failed to account to the revenue for DIRT properly payable."
With regard to the CMI deposits, the evidence is a bit thin, and the necessary nexus might be weak:
"The Inspectors found that the respondent was aware of the level of deposits being made by CMI with the Bank and that he knew or ought to have known how the product was presented. He had to bear responsibility for the practice which served to facilitate customers of the Bank and others in evading tax."
On the issue of delegation, the court correctly ruled that delegation of duties did not entail delegation of legal responsibility:
"The court is not satisfied from the evidence of the respondent, that there was a proper system in place or that he properly supervised the delegation of reading the internal audit reports. Indeed, given their importance as a control of the performance of the branches, their limited number and relative brevity, it is surprising that he only read those few categorised as poor or unsatisfactory.
While the respondent was entitled to delegate it did not follow that he was not under any duty in relation to the discharge of that delegated function, notwithstanding that the person to whom the function had been delegated appeared both trustworthy and capable of discharging the function. Where a delegation had taken place he, as delegating Chief Executive and director, remained responsible for the delegated function or functions and had a residual duty of supervision and control."
So, the defendant's lack of knowledge defence did not persuade the court as he had been included in the communications although the lack of documentation/noncompliance issue had not necessarily been red-flagged as potentially illegal or criminal:
"The court is satisfied from the evidence given in cross examination that the respondent had notice of some of the reports such as to be aware of issues of non-compliance with DIRT legislation.
On this basis it seems to the court that the inference drawn by the Inspectors that the respondent should not only have been aware of the failure of the branches to hold properly completed non-resident account declarations but should also have been aware that bogus non-resident accounts existed throughout the branch network, was a proper inference.
From the evidence given in cross examination the court finds that the respondent was aware that non-compliance continued to a significant extent. The court also finds that the ignoring of an obligation to account for retrospective tax when the accounts were redesignated would seem to confirm a degree of complacency on the part of the respondent with regard to the implementation of the provisions of the Finance Act 1986. The court finds that the respondent failed as Chief Executive and as director of the Bank to exercise a proper duty of care in relation to tax compliance."
Today's order follows the decision of the High Court in April where it had made a finding that Lacey is "“unfit to be concerned in the management of company”, within the meaning of section 160(2)(d) and (e)."
Lacey's defence - like that of many CEOs before him - was that he did not know about the illegal acts or that the illegal acts were committed by rogue actors who were subordinate to him, without his knowledge. He also claimed that the bank was a large organisation and he could not be expected to know the minutiae of the day-to-day details concerning its affairs. He argued that there was a system of delegation in place and that the illegal acts had not been brought to his attention as such. Moreover, he claimed that the external auditors had not raised any concerns and that the board had not been accused of wrongdoing. This echoes arguments made by other CEOs in high profile U.S. cases like Enron where the CEO, Jeffrey Skilling, also claimed that the company's actions were legal and that any illegality had been without his knowledge at the instance of the CFO, Andy Fastow.
The court was not convinced by Lacey's arguments. In relation to the I-did-not-know defence, it said:
... the Inspectors Report, had found that branch audit reports were consistently critical of the standard of compliance with the legislative provisions and Bank procedures pertaining to the operation of non resident deposit accounts. The report referred to the Bank’s obligation to hold a non resident declaration in the form prescribed or authorised by the Revenue Commissioners pursuant to s. 37 of the Finance Act 1986, for each account designated by the bank as a non resident account.
The Inspectors referred to the deficiencies most commonly reported including the failure to produce non resident declarations forms at the time of audit; charities declarations rather than non resident declarations; obsolete, undated, not fully completed and containing incorrect account numbers. "
The court seems to be placing a lot of emphasis on the incomplete documentation. Since the incomplete documentation had been flagged in communications which included the CEO, the court ruled that he could not have been unaware of noncompliance with the bank's legal obligations.
Further, the court held:
"The Inspectors found that bogus non resident accounts were opened and maintained by the bank and were widespread in the branch network. They found that the opening and maintenance of such accounts by the bank constituted an unlawful and improper practice which served to encourage the evasion of revenue obligations by third parties, both on the funds deposited and on the interest earned. They concluded that up to May 1995, a year after the respondent ceased to be Chief Executive, senior bank management failed to inform branch staff in clear terms of the relevant provisions of the Finance Act 1986. They also failed to have a review conducted at that time to ensure that all existing non resident accounts were genuine. Senior management was aware of the existence of bogus non resident accounts. The Bank failed to account to the revenue for DIRT properly payable."
With regard to the CMI deposits, the evidence is a bit thin, and the necessary nexus might be weak:
"The Inspectors found that the respondent was aware of the level of deposits being made by CMI with the Bank and that he knew or ought to have known how the product was presented. He had to bear responsibility for the practice which served to facilitate customers of the Bank and others in evading tax."
On the issue of delegation, the court correctly ruled that delegation of duties did not entail delegation of legal responsibility:
"The court is not satisfied from the evidence of the respondent, that there was a proper system in place or that he properly supervised the delegation of reading the internal audit reports. Indeed, given their importance as a control of the performance of the branches, their limited number and relative brevity, it is surprising that he only read those few categorised as poor or unsatisfactory.
While the respondent was entitled to delegate it did not follow that he was not under any duty in relation to the discharge of that delegated function, notwithstanding that the person to whom the function had been delegated appeared both trustworthy and capable of discharging the function. Where a delegation had taken place he, as delegating Chief Executive and director, remained responsible for the delegated function or functions and had a residual duty of supervision and control."
So, the defendant's lack of knowledge defence did not persuade the court as he had been included in the communications although the lack of documentation/noncompliance issue had not necessarily been red-flagged as potentially illegal or criminal:
"The court is satisfied from the evidence given in cross examination that the respondent had notice of some of the reports such as to be aware of issues of non-compliance with DIRT legislation.
On this basis it seems to the court that the inference drawn by the Inspectors that the respondent should not only have been aware of the failure of the branches to hold properly completed non-resident account declarations but should also have been aware that bogus non-resident accounts existed throughout the branch network, was a proper inference.
From the evidence given in cross examination the court finds that the respondent was aware that non-compliance continued to a significant extent. The court also finds that the ignoring of an obligation to account for retrospective tax when the accounts were redesignated would seem to confirm a degree of complacency on the part of the respondent with regard to the implementation of the provisions of the Finance Act 1986. The court finds that the respondent failed as Chief Executive and as director of the Bank to exercise a proper duty of care in relation to tax compliance."
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