Bertie Ahern: The Man Who Blew the Boom: Power & Money (33 page)

Cowen said he had decided to ask his department to study the issue with the Revenue Commissioners and come up with proposals that struck a proper balance between the needs of the investor and the well-being of the community.

I am now making it clear that I intend to include appropriate follow-up measures in next year’s budget. Those using this particular group of reliefs should therefore realise that the concept of unlimited or unrestricted reliefs is no longer viable or acceptable to the general tax-paying public in current-day economic circumstances. I want to ensure that everyone makes an appropriate contribution to the state.

Nine property-based reliefs were already due to be abolished in July 2006, having been given a stay of execution in McCreevy’s final budget, and the termination date for these schemes remained in place. However, the strategy adopted had an unforeseen consequence in that it acted as an incentive to those contemplating such investments to hurry on with them. Local authorities around the country were being flooded with planning applications for hotels, multi-storey car parks and other developments that qualified under existing tax schemes.

Ahern, speaking on
RTE
radio about the budget, said ‘the game is up’ for rich people who used tax schemes to significantly lower their tax bills, echoing a claim he had made at the time of McCreevy’s first budget six years earlier.

Cowen returned to the subject with his second budget. There were ‘more than 250,000 jobs in the construction sector, and the building industry accounts for approximately 20 per cent of the economy.’ It was a percentage that was well out of line with the historical and international average. ‘We should not do anything that disrupts unnecessarily an industry that is such an important driver of jobs,’ he said.

He announced that a number of schemes were being terminated, ‘subject to certain transitional provisions’: the urban renewal, town renewal and rural renewal schemes and the special reliefs for hotels, holiday cottages, student accommodation, multi-storey car parks, third-level educational buildings, sports-injuries clinics, developments associated with park-and-ride facilities and the general rental refurbishment scheme. The transitional provisions for projects already in the pipeline gave an additional five months of 100 per cent relief on expenditure on approved projects, bringing the scheme forward to the end of 2006. A sliding scale of relief levels then covered the period of the following two years. He said that the design chosen for transitional measures was half way between the two schemes suggested by two sets of consultants who had examined the matter. He also retained some reliefs, including those applying to nursing homes, childcare facilities and private hospitals.

However, Cowen introduced a minimum rate of income tax. By reducing the amount of income that could qualify for certain tax reliefs, he in effect introduced a minimum rate of 20 per cent on those with high incomes. ‘This phenomenon will help eliminate the phenomenon of tax-free millionaires.’ Interestingly, Cowen’s department, Finance, had been wary of introducing a minimum rate of tax for fear that those high-net-worth individuals who availed of tax schemes would consider it a target to be achieved by their accountants.

In this budget Cowen introduced a cap on the size of personal pension funds that could be built up by the wealthy while they availed of the income tax relief that accompanies pension contributions. People who owned their own companies in particular were paying themselves huge amounts of income, as pension payments, into their personal approved pension funds and so misusing a measure aimed at encouraging provision for pensions. Cowen’s move had been well flagged, and the financial accounts for such companies, as they were filed in the months following the budget, showed large amounts of money being paid to owner-directors by way of pension contributions, with these payments having been made before the budget cap. In time it would emerge that many rich people used their approved retirement funds to invest in property, using the fund as an equity investment and borrowing the bulk of the price they paid for their office or retail building. When the crash came, they ended up with personal retirement funds that were in negative equity.

The consultants’ reports into the tax relief schemes were published in February 2006. A review by Goodbodys for the Department of Finance concluded that a relatively small group of high-income individuals had avoided approximately €3 billion in tax over recent years through the use of Government-promoted relief schemes. Pride of place went to the urban renewal schemes, which the department now estimated had cost something in the region of €1.43 billion in tax forgone. During the more recent boom years the scheme had benefited the developers of projects that would have been built anyway, yet the tax breaks involved could represent up to 43 per cent of the value of the projects concerned. As the consultants put it, the measures had ‘strong negative distributional effects’, could no longer be justified and were an expensive way of achieving the objectives for which they were designed. Incredibly, the scheme, just like all the others reviewed, had been established without any cost-benefit study being conducted. In their report on a number of property-based schemes, Indecon consultants recommended that schemes promoting investment in private hospitals, nursing homes and childcare facilities should be continued, even though they would cost the exchequer an estimated €850 million in taxes forgone over the coming years.

As well as the cost of €3 billion to the state of the various property-associated relief schemes, an additional €1.4 billion in taxes was lost to the exchequer in 2001 alone as a result of the relief from taxes of pension payments. While such benefits were widely spread, some very high-net-worth individuals were using the relief to shelter huge amounts of income. The report cited two unidentified individuals with seven-figure incomes who had built up personal retirement funds of €100 million each.

While Cowen implemented many of the report’s recommendations, opposition politicians criticised him for allowing the extension of existing schemes without their being subjected to a rigorous cost-benefit analysis. ‘This is a key recommendation,’ Richard Bruton said in response to Cowen’s reaction to the report. ‘It is regrettable that Minister Cowen chose not to implement this recommendation. Tax relief is a very blunt instrument for achieving social or economic objectives.’

Joan Burton, the Labour Party’s finance spokesperson, pointed out that people with pension funds of €100 million were able to draw down a quarter of that amount upon retirement, entirely tax-free.

It seems from this report that the beneficiaries of property-based tax schemes, such as builders and developers, not alone avoid paying tax as a consequence of schemes such as park-and-ride and private car parks, but as retirement approaches they have ready-made channels for setting up extraordinarily lucrative pension schemes funded by even more tax breaks by the state.

By the time of Cowen’s third budget speech in December 2006, economic growth was running at 5 per cent, and the number of people employed exceeded two million. Ireland’s unemployment and inflation rates were among the lowest in the
EU
, and the Government expected growth of 51/4 per cent during 2007, when more than seventy thousand new jobs were expected to be created. An unprecedented level of infrastructural investment was being made, the public services were being expanded and there were more gardaí, doctors, nurses and teachers employed than ever before.

Again, there were no cuts in income tax rates, but increases in tax credits and the standard rate band were announced. These changes meant that ‘two out of almost every five earners will be outside the tax net in 2007, compared to one-third in 2004 and one-quarter when we took office in 1997.’

By the time Cowen had introduced his third budget, the
Irish Times
had broken the story about the Mahon Tribunal’s inquiries into Ahern’s personal finances, and the Government had been through one of the most difficult and intense political crises of his period as Taoiseach. The strength of the economy and the belief of many that it was Ahern’s Governments that had delivered this level of prosperity were key factors in his ability to survive the huge controversy. He was an enormously popular political figure, and his Government was riding the crest of an economic wave.

However, the disclosure, and Ahern’s interview with Bryan Dobson on
RTE
’s television news, had used up much of Ahern’s political capital and meant that he had indirectly supplied answers to the tribunal earlier than he would otherwise have done.

Following on from the Peelo document given in confidence to the tribunal in April 2006, a wider number of people were drawn into the developing inquiry. The tribunal was considering whether there were foreign-currency aspects to some of the lodgements it was examining. Celia Larkin, in her private interview with the tribunal’s legal team, confirmed that she had been given £50,000 in December 1994 for use in the fitting out of the Beresford Avenue house, but she revealed that she had handed the money back to Ahern, in cash, the following month. The tribunal had also discovered another
AIB
account in Larkin’s name into which £28,772.90 had been lodged in December 1994. It began asking about this money. In time it would learn that this was cash—mostly sterling, according to Ahern—that had been given to him in a briefcase on a Saturday afternoon when he had been fully expecting to form his first Government, with the Labour Party, the following week.

Guidera was busy answering questions on his client’s behalf. In early February 2007—election year—he told the tribunal that the £50,000 had been sought back from Larkin when ‘it became more apparent to Mr Ahern at around this time that it would be more convenient for the monies to be held in cash.’ The cash had been held in Ahern’s safe in St Luke’s, the tribunal was told. On 2 March 2007 the tribunal again wrote to Guidera, informing him that it was ‘of the opinion that the information so far provided via correspondence does not resolve the tribunal’s inquiries as to the source of the following payments to Mr Ahern and subsequently lodged as set out hereunder or the purposes for which such payments were made to him.’ Ahern was invited to meet the tribunal’s legal team in private ‘at the earliest possible opportunity suitable to him.’

On 5 April 2007 Ahern went to the offices of his solicitors, Frank Ward and Company, to be interviewed by the tribunal’s legal team. A transcript of the interview was later leaked to a number of reporters, and its contents caused enormous controversy during the 2007 general election. In fact it is widely believed that Frank Connolly’s reports in the
Mail on Sunday
, based on the transcripts, led directly to Ahern’s panicked calling of that election.

When one reads the transcript it is obvious that Ahern was at times very uncomfortable. The tribunal lawyers revealed that they had compared some uneven amounts—lodgements of pounds and pence—with the exchange rates that had been in operation on the days of these lodgements. It emerged that a number of lodgements that Ahern had made had been in sterling—something he had not stated in the Peelo document or in other dealings with the tribunal. It also emerged that he was now saying that the £50,000 in cash that Larkin gave him in January 2005 had been used by him to buy £30,000 sterling, some of which was then later relodged to
AIB
, accounting for the sterling lodgements. It was a convoluted and bizarre story. Furthermore, the tribunal confronted him with its discovery that the lodgement made in October 1994—which Ahern said was £16,500 given to him by four friends, and sterling cash given to him in Manchester—equated with exactly £25,000 sterling, using the exchange rate of the day. Also, a lodgement by Larkin on 5 December 1994, which the tribunal had been told was sterling given to Ahern in cash by Michael Wall, did not convert into a round-figure sum of sterling; it did, however, convert into a round-figure dollar sum: $45,000. ‘No way,’ Ahern responded when this was put to him. He was emphatic about the matter, returning to it at the end of the interview to state again that he had not lodged dollars to his accounts.

The tribunal would later retrieve foreign-currency records from
AIB
that showed that only approximately £2,000 in sterling was exchanged in
AIB
, O’Connell Street, on the date Larkin supposedly lodged the Michael Wall cash. However, an unusually large amount of non-sterling foreign currency had been exchanged—enough to accommodate $45,000.

During his later examination in public sittings, O’Neill asked Ahern about inquiries Ahern had made of
AIB
during Chistmas 2004. Ahern had asked what information it had about a number of particular transactions, including the ‘dig-out’ lodgements and lodgements of cash.
AIB
documents show that he had at that point identified as meriting particular attention all the transactions that were to be highlighted by the tribunal twenty-seven months later, in the letter of March 2007, in which it suggested that Ahern should agree to a private interview.

All the transactions concerned were large cash transactions with which Ahern was personally involved, but they were for amounts of less than £30,000 and so would not have been covered by the restricted order of discovery that the tribunal was dealing with at that time (Christmas 2004). Ahern, it appeared, had isolated these transactions from all those through his accounts during the period at issue. It would, however, take the tribunal two years and three months to come to a position where it was concentrating on them. Ahern said he had focused on these cash payments because of their size and the fact that he had no documentary evidence to show where the money had come from; but O’Neill said this could not be the case, since there were other large cash transactions that he had not asked the bank about back in 2004.

O’Neill read into the record one internal
AIB
memo showing that Ahern had been looking for information about these cash lodgements on New Year’s Eve 2004. O’Neill also displayed a bank memo, dated 3 February 2005, that recorded Ahern as looking for information about seven transactions on his accounts in 1993 and 1994. The transactions were ones that featured in the tribunal’s letter of March 2007. The information Ahern had sought, and which was described in the memo of February 2005, had been collected for him by one of his secretaries, Sandra Cullagh, in January 2005 and brought to him. From that period on he had known that the bank’s archives did not contain information that showed that the lodgements were foreign-currency transactions. At the same time Ahern had contacted Larkin, and she had in response sought whatever information the bank had in relation to transactions on accounts in her name that much later became the focus of the tribunal’s public inquiries. Again, internal
AIB
memos documented what had occurred.