Unicredit and the trouble with Dublin’s Cayman-on-the-Liffey

February 10th, 2013

In September 2007, a year before Ireland’s banks went belly up, Jonathan Sugarman, a risk manager at Unicredit Bank Ireland, alerted his bosses and regulators at the Central Bank of Ireland to the fact that Unicredit was in massive breach of liquidity requirements. The law was clear: liquidity cover was allowed to fall to 89 per cent but any lower and a report had to be filed with the regulator and the bank faced a hefty fine. Sugarman identified that Unicredit was operating with cover of just 70 per cent, twenty times less than allowed. But his superiors at the bank and the regulators were intensely relaxed about the law-breaking. After six weeks of being stonewalled, Sugarman decided he had no choice other than to resign, as he did not wish to incriminate himself. Now a whistleblower, he has spent five years seeking to raise awareness of the failures of both the Irish central bank and Unicredit. He was interviewed by Kathimerini, a Greek affiliate of the New York Times. 

Recently you have given a few public lectures in Greece, on the issue of the banking system. Why are you interested in our country?

To be completely frank, it was the Greeks who showed interest in me. Perhaps some people saw that I worked as a risk manager, that my job was effectively to count the money held by a bank. [These people] approached me because they did not know anybody else who might publicly declare that this was his job. In June 2011 somebody offered to translate my blog into Greek, and since then I have had many contacts with Greeks from all walks of life, concerned citizens and academics.

Can you please tell us in simple words what a risk manager’s job is?

I will give you a simple image here. If the bank were a car, then the risk manager would be the driver, and the Central Bank would be the road police. A car’s driver is not supposed to drive beyond the speed limit. If the speed limit is 100 kilometres per hour, and the driver goes at 120 kilometres per hour, then he risks a fine. Similarly, a bank’s risk manager is responsible for keeping minimum liquidity. In other words, he must ensure that some amounts of money come in – deposits for example, and other amounts of money go out – in the form of loans or other banking products. In every country, the Central Bank defines the minimum liquidity that banks must always keep. In Ireland’s case, this minimum was 90 per cent. If a bank were to go under this [minimum] limit, then the bank is to be fined by law. In addition, the risk manager and the managing director could be sentenced to five years in prison.

When did you discover Unicredit Bank Ireland’s liquidity problem?

In the first weeks that I was employed at the bank I already saw a chaotic situation. Some days we operated within the law, while on other days we went entirely off limits. Initially, the managing director and other managers ignored my concerns. They mentioned technical problems in our information systems and that there was not a real problem with our liquidity. They claimed that because I was new in the job, I could not understand these problems. On the days that we were off limits, we explained in our daily report that this had happened because of technical problems, and of course we never informed the Regulator, as we should have done. After repeated breaches of the limit, I announced to the managing Director that I did not intend to pretend that I was blind, and that we should send an official report to the Central Bank of Ireland. This actually happened at the end of July, when I personally delivered an official notification of a liquidity breach, to the office of the financial regulator.

So did the bank face any sanctions?

There was no reaction whatsoever. And this happened when we had gone as low as 20 per cent below the required minimum liquidity, while Irish law required us to immediately report a breach of 1 per cent! In other words, I confessed to the banks’ police that I had broken the law, and they, instead of sending immediately their officers to thoroughly investigate what was happening in the bank, [the regulator] sent us a letter that essentially told us that “since you confirmed to us that the the crime had stopped, we are satisfied!”

So what did you do then?

Then I tried to find out what these technical problems were. A bank’s information system is its ‘Bible’. A bank does not keep its accounts on loose pieces of note paper. If we could not trust the information system’s results, then we would be unable to know whether we really had sufficient liquidity, or not. As a result, I called in a company that specialised in [banking] information systems.

And what was the result of their checking?

They called me at my home one night, in September 2007, and said “You complained to us that you were anxious about your liquidity falling to 70 per cent,” they told me. “In fact, your liquidity is 50 per cent!” The next morning I went to the managing director and handed in my resignation letter.

But what was the cause of low liquidity?

I suspect that our activities were not being accounted for correctly. Some days we accounted them correctly, on other days we did not.

But if the cause really was a technical problem, and not some fraud or some high risk transactions, then why did you not solve the problem yourself, instead of resigning?

The existence of such a problem shows how amenable to fraud is the whole system. Recent scandals with non-authorised deals by traders in the London offices of the Swiss bank UBS, or in Société Générale in France, prove exactly this fact. If the bank had failed next day, I would have been held responsible for it, and according to the law I would go to prison for five years. Put very simply, I did not want to go to prison.

Why do you believe that you were the only one to have been afraid of this?

Banks act with impunity. As we have seen since, the upper echelons in banks can be confident they will never be held responsible for anything. This does not necessarily mean anything, but Unicredit Bank Ireland’s chairman, Dr Brian Hillery (pictured left), is an ex-member of the Irish parliament, and is from Fianna Fáil, the political party that was in power at the time. Later on, after I handed in my resignation, Hillery became a director of Central Bank of Ireland. I wonder how can the Central Bank impartially investigate a bank whose chairman now sits on the board of the Central Bank?

At the time, Ireland was labelled the ‘Wild West of European Finance‘ by the New York Times. Was this fair?

Ireland was a very attractive place for banks and multinational corporations because of its extremely low tax rate, which was 10 per cent. Banks could establish subsidiaries that would be controlled (or rather, as it was later proved, would be not controlled) by the Central Bank of Ireland. In theory, we all had our ‘daddy and mummy’, who were the big European or US banks. Whenever we run out of cash, we could phone our daddy in Frankfurt, or our mummy in Rome, to send us some. Everything looked perfect! Moreover, daddy and mummy had sent an official letter to the Central Bank of Ireland when they created their subsidiary, saying that they would take care of their child should it ever misbehave. So, the Central Bank was not too strict with us, children.

So why did your bank not pick up the phone to daddy and mummy, when it was obvious that you were out of cash?

If the managing director had called his friend in Milan and told him that he had run out of money, then the first question he would have to answer would be “Why? Don’t you know how to manage your bank?” Obviously then no one was going to call their ‘parents’ and tell them they had misbehaved. In theory, a liquidity problem could be solved in five minutes. But how was he going to justify that he arrived at a liquidity level below 70 per cent when the law demanded at least 90 per cent? Obviously, if anyone were to admit something like this, they would instantly lose their bonus!

And what was the reaction of the parent company when you resigned?

There was no reaction whatsoever. Three years later Senator David Norris presented my issue in the Senate. Subsequently, Unicredit’s headquarters in Milan were contacted [by journalists]. [Unicredit headquarters] Told them they had nothing to do with it all. Either they were pretending, or they really did not know what was going on. So, I wonder “Is it that your child in Dublin did not tell you what really happened? Or, even worse, did the Central Bank of Ireland not tell Banca d’Italia – the central bank of Italy, what had happened?”

So is your opinion that the central bank of Italy knew about this?

I cannot answer this question. If you want an answer, you might ask Mario Draghi, who at the time was governor of the Banca d’Italia. This is a very simple question: “While you were Governor of Italy’s central bank, did you know that the biggest bank in your country did not know what its Irish child was doing? And if you were not informed about it, how do you explain that?”

Do you believe that the Irish banks failed for similar reasons?

A year after my resignation, within a single night, Ireland’s government had to guarantee all of its banks. Perhaps they did not all face exactly the same problems, but finally they arrived at the same point. Of course, I wonder where all the risk managers of these banks are now?

Really, where are they?

They are at a silent moment in time.

And why is all this happening, in your opinion?

It is all part of the ‘big lie’ which we are all living through. No one wants to be the first one to admit the problem. Even if we leave aside the performance of any particular risk manager, the banking system still has a set of other controls. These include auditing companies that co-sign the the annual financial reports and the regulating authorities, the central banks.

So you say that it is not only the banks’ fault?

It simply cannot be that it is no banker’s fault. There are people who are responsible for signing that everything complies with the law. Every bank has at least one risk manager; every bank has at least one chartered accountant; every bank has an external auditing company. Every country has a central bank, just as Ireland has the Central Bank of Ireland. Therefore, there are specific people who are responsible for the fact that the banks in Ireland needed to be re-capitalised, and these people have a name and surname. We cannot say, “It just happened!” or “Daddy, the toy broke! Who broke it? I don’t know, it broke by itself!”

But why isn’t your story better known?

It is a story that brings discomfort to many people in key positions at various places.

Can I suppose then that the Central Bank of Ireland did not ask you what had happened, even after the banks had requested to be bailed-out?

No, in fact they did call me, twice. The first time, in the month of May 2011. They invited anyone with information to come forward and offered confidentiality to anyone who would. But this meeting was a fiasco. Essentially, the confidentiality clause referred only to my anonymity. As they clarified at the meeting, they would be obliged to report everything that I told them to the state’s public prosecution, which meant that everything I might say could be used against me by the authorities. Naturally, I refused to talk then. The second time was in February, 2012. Even though there was no further clarity by then regarding the confidentiality, I was prepared to share some of what I knew. At this second meeting the Central Bank officials admitted that they had had sight of further irregularities at the bank. But my initial enthusiasm over this admission, soon proved to be misplaced. In June, 2012, they declared the case closed. In August of 2012 they gave to the press something that they claimed passed as minutes of our meeting. However, it bore no reflection to what had been said.

And what are your relations with the bank today?

I have no relationship whatsoever with the bank. I demanded damages for constructive dismissal. Their reply was that I would receive nothing, and that I would have to face a legal battle should I ever reveal any information to third persons. I assure you that it is scary enough to be threatened by a trillion Euro bank! They even used data from my personal life to allege that I cannot know what I am talking about because I am psychologically disturbed!

So you have initiated court proceedings against the bank?

It was impossible, even for financial reasons, to initiate private legal proceedings against the bank. What is even more important, is that before I could ever challenge a trillion euro bank, the police must first declare that a ‘crime’ had occurred. When the police claim no crime happened, how can you prosecute the criminal? In order to prove that the state authority itself has buried the evidence, I will have to present my case to some European-wide authority. So I am waiting for the European Banking Authority to find some teeth.

And are you eager to do something like this?

Eager I certainly am. Whether I will do it or not, I will decide when the time comes.

But even if you yourself have not been vindicated, do you believe that in the wake of the banking crisis, the banking system has been properly strengthened? Or perhaps the effectiveness of the regulatory authorities?

No. While the banks and their managers do not get punished, why should anything change? Soon we will have a new regulatory framework for the banking market, the so called Basel III agreement. But as long as we do not intend to impose the law, we can agree as many ‘Basels’ as we want.

According to your experience, is it possible that the system that you have been describing here could be changed for the better by the appearance of more whistleblowers?

Yes. But, if I judge from my own case, I do not think that there will be many more whistleblowers. There is no protection by the state at all. I have been supported only by my friends, or by people who simply heard about my story.

And has your value system changed through your experience?

Now I have greater faith in humanity, and much less faith in the established authorities, be they politicians, judges, or functionaries. We, common people, take too seriously all those people who do nothing to protect small investors or the small tax payers. They only care for saving the banks.

You sound like a disappointed ‘golden boy’ who has turned against a capitalist system that once fed him.

I am not going to enter into this discussion. Whether I am for capitalism, socialism, or the Left, has nothing to do with the discussion we are having now. Nineteenth century ideologies cannot be used to face a twenty-first century crisis. In Ireland at this moment we have a socialist government that is safe-guarding the monetary interests of the capitalist bondholders. While in Austria, it was the extreme Right wing party that brought my case to the parliament. Do you see any ideology here?

So you are against the financial system?

This is an interesting question if we wanted [this interview] to be a philosophical discussion; but this question is not relevant at the moment. We might barter a kilo of olive oil with a television set, actually I have seen this with my own eyes and it functions. However, at the end of the day, if you want a smartphone, you cannot simply barter for it with olive oil. Therefore, we must have a common ‘currency’. We return then to the starting point of this discussion. You either have rules and abide by them, or you have no rules, and everybody does whatever they want. If the latter is the case, then it would be better if we all knew that.

So what might help create a sound financial system, in your opinion?

To abide by the law. And enforce the law when it is broken.

Do you remember the day that you handed in your resignation?

I hardly slept the night before. Perhaps we have lost the sense of what a billion Euro means by now, but up to that day I used to sign for amounts like that; only in reality they did not exist! I was sad, and at the same time I felt relieved that I had stopped participating in a crime. The managing director tried to make me change my mind, but I would not go back. Also he faced huge pressure from the dealing room, so at the end the story it became a case of “Either me or them”.

And how was your career after that?

A short while after I left, I started looking for a new job. But the banking world is ultimately a small world. I was told that a person with my C.V. would be unable to find a job at another bank, having left Unicredit after just six months; and as a whistleblower on top of that. I was trapped.

And how did the people who were close to you feel about all this?

There are a few friends who have stood by me all this time. In 2007 no one could predict how things would turn out, and most people did not believe me. Only after they heard [and saw] on television that the banks had to be bailed out, did they understand that I was not lying.

And how do you make your living today?

“With a little help from my friends” as the Beatles song goes (laughs). I give consulting services to my friends, and I give lectures. I have also been approached to write a book. Life will show.

I imagine that you can not have the life that you had before.

Ι do not want to enter into details about my personal life and the psychological hardships that I have endured. My financial situation is difficult now. As I told you, I would not be here today without my friends’ help. Today I am giving you this interview and enjoying my coffee at the exceptional King George Palace hotel, on Syntagma Square. A few years ago I used to come to this hotel for my vacations. There are very few places where I would be able to stay today… [probably] at a Bed & Breakfast, at best.

Do you ever regret having been shut out of the world of banking?

I used to earn good money according by Irish standards. I had a beautiful home, a nice life. I had dinners at expensive restaurants. I travelled a lot. But I would never trade my beliefs for a life of luxury. Unfortunately, it seems these days that many people are willing, if not even eager, to sacrifice their children’s future for a fragile present of luxury. I cannot do that.

Is something haunting you now?

The laziness of the educated middle class is the thing haunting me. Rich bankers see what is happening, and laugh all the way to the bank, while the middle class works to serve their interests. Risk managers, lawyers, chartered accountants, all these people pretend that they are working hard, while in truth they are lazy – morally and intellectually. The same holds true for the university professors of law and of economics. Where is constructive criticism today? This laziness has become so widespread, that very few can see it for what it is.

Kathimerini thanked the management of the King George Palace hotel for hosting the interview. You can read more about  Sugarman’s campaign in Village’s Blowing the whistle so hard it hurts. Sugarman’s website is at WhistleblowerIrl.blogpost.com

Short URL: https://www.ianfraser.org/?p=9203

Posted by Ian Fraser on Feb 10 2013. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry