Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 1

Chapter 1 : Introduction

Background

In April 1998 there were reports in the printed media concerning the use by Allied Irish Banks plc (AIB) of "bogus" non-resident accounts as a means of evading Deposit Interest Retention Tax (DIRT). The April 1998 report which contained only an outline of the alleged problem, prompted the Committee of Public Accounts of Dáil ?reann (PAC) to examine the Chairman of the Revenue Commissioners on the issue at a meeting on 28 April 1998.

In October 1998, there were further more substantial reports in the printed media which resulted in the PAC requesting the Chairman of the Revenue Commissioners to attend a meeting of the Committee on 13 October 1998. At that meeting the Chairman of the Revenue Commissioners stated that Revenue were unaware of the alleged scale of bogus non-resident accounts in AIB until the media disclosures in April 1998 and that there had been no deal done with AIB in respect of unpaid DIRT.

AIB were then invited to attend a meeting of the PAC to respond to the statement made by the Chairman of the Revenue Commissioners. That meeting took place on 15 October 1998 with a delegation from AIB headed by its Group Chief Executive. At the meeting the Group Chief Executive contended, inter alia, that the issue of bogus non-resident accounts was an industry wide problem rather than a problem that was specific to AIB. Moreover, he also contended that Revenue had agreed with AIB in 1991 that there would be no retrospective liability to DIRT in respect of interest on accounts previously wrongly classified as non-resident.

The Governor of the Central Bank also gave evidence to the PAC on 15 October 1998.

On 21 October 1998 the Dáil passed a resolution asking that the PAC examine and report to Dáil ?reann, inter alia, on any purported settlement between financial institutions and the Revenue Commissioners in respect of undeclared DIRT and information known to the financial institutions and regulatory authorities concerning the use of bogus non-resident accounts. By means of that resolution, Dáil ?reann also undertook to facilitate the PAC in its investigations.

Having considered the matter, the PAC decided that its existing powers would not be sufficient to further its investigations into the matter. Accordingly, it made a series of recommendations about how best to proceed which included a recommendation that the Comptroller and Auditor General (C&AG) should be requested by Dáil ?reann to prepare a report and be empowered to conduct an investigation. On receipt of his report, the PAC would then continue its examination of the key issues, using enhanced powers under the "compellability" legislation and make recommendations on further action.

On 8 December 1998 Government initiated a Bill entitled "Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions) Bill, 1998" to give effect to the recommendations of the PAC and the Bill became law on 16 December 1998. On the following day, a Dáil resolution requested the C&AG, in essence

to carry out an investigation into the operation of DIRT by the Revenue Commissioners and the financial institutions in the period 1 January 1986 to 1 December 1998

to ascertain if there was a shortfall in the amounts of DIRT paid by the financial institutions and the reasons for and the circumstances of the shortfall

to ascertain the information known or which might reasonably be expected to have been known or available to the financial institutions, the Revenue Commissioners, the Department of Finance and the Central Bank of Ireland concerning the practice of using bogus non-resident accounts for the purpose of evading DIRT and the use made thereof

to report his findings to Dáil ?reann.

The full text of the Dáil resolution is at Appendix A.

Approach

Once the enabling legislation was passed, a dedicated team comprising staff from within my Office with expertise in accounting, information technology and law was set up to undertake the investigation work. At an early stage, the financial institutions were requested to furnish information to me under several headings and all of them complied with this request. Follow-up meetings with representatives from the institutions clarified and elaborated on that information. At the same time, relevant files were sought and obtained from the Central Bank, the Department of Finance and the Office of the Revenue Commissioners and the examination of the papers was augmented by discussion with the organisations as necessary. Each of the financial institutions and the three State organisations were furnished with a synthesis of the information provided by them for the purpose of verifying the accuracy of my summary.

Once all the preliminary information had been obtained, the investigation took on a new complexion. Using the powers granted to me by the legislation, I adopted a three pronged approach

Directing the financial institutions to make discovery on oath of any documents which were germane to the subject matter of the investigation

Appointing an auditor to carry out an examination in the financial institutions of their administration of DIRT

Directing persons to attend before me to give evidence on oath.

Discovering Documents by way of Affidavit

The documents sought were those that touched upon or concerned specific aspects of DIRT administration in the institutions during the period 1 January 1986 to 1 December 1998 and in particular

Minutes of the Board, its sub-committees or audit committee in which any reference was made to DIRT or DIRT related matters

Documents prepared for or used by the Board, its sub-committees or audit committee in which any reference was made to DIRT or DIRT related matters

Reports to or received by Senior Management concerning the administration of DIRT and non-resident exemptions -- this included internal audit reports

Correspondence to or from external auditors concerning the administration of DIRT and non-resident exemptions.

The documents discovered were an important input to the oral hearings as well as constituting a valuable source of material for the final report.

Appointment of an Auditor

Section 2(1)(c) of the enabling Act gave me the power to appoint an auditor to go into the financial institutions to examine individual accounts and documents in order to establish the extent to which DIRT had been in the past, and was currently, administered properly.

To avoid potential conflicts of interest, I did not approach any Irish auditing firm about carrying out this work on my behalf. After consultation with the UK Inland Revenue and with a number of UK based auditing firms who had expertise and experience in systems for collecting withholding tax on interest, I appointed Ms Aileen Barry, a UK partner in Arthur Andersen, to undertake the examination in the financial institutions. In accordance with the terms of the Act, she (and her audit team) performed the work under my control and supervision.

A sampling strategy was determined after consultation with the Central Statistics Office and a tailored audit programme was developed in conjunction with the appointed auditor and validated by the head of internal audit in a major international bank operating in the UK.

The samples selected were representative of the non-resident account base across the industry and also included a number of branches/offices which appeared to have a disproportionate preponderance of non-resident accounts.

The appointed auditor examined non-resident and other DIRT exempt accounts and Special Savings Accounts in 56 offices and branches of financial institutions. The outcome of the audits was discussed by her or by a member of her team with the appropriate representatives of the financial institutions in each case. The auditor reported her findings to me on 5 July 1999 and I have incorporated the results of her examinations in this report.

Taking Oral Evidence on Oath

Having examined the information provided and the discovered documents, I drew up a list of persons who, on the face of it, appeared to be in a position to help me ascertain the facts in relation to the subject matter of my investigation. Over the period 26 April 1999 to 21 June 1999, I held 59 hearings and took evidence on oath from 76 witnesses. All oral evidence was taken in private in the presence of a stenographer and the ensuing transcripts were available to the relevant witnesses. A list of witnesses who attended is at Appendix C. Supplementary information, where appropriate, was obtained on affidavit.

The oral hearings were useful in clarifying and elaborating on much of the information contained in the documentation.

Finalisation of Report

The report represents the merging of the results of the three strands of investigation.

None of the organisations or persons referred to in Appendices B and C of the report have seen this report or any part of it prior to it being laid before Dáil ?reann. Nevertheless, I am satisfied that the report substantially reflects the factual position in the case of each of those organisations and persons.

The report has been prepared in a format that will, I hope, facilitate the efficient, effective and expeditious completion of the hearings of the PAC into the administration of DIRT.

Appendices and Report References

Key documents upon which certain parts of the report are based and information germane to the subject matter of my investigation are set out in the Appendices. In some instances, names and/or information which might identify individuals and/or institutions have been masked. This has been done for practical reasons (for example when exhibiting sample documents) or to protect the identify of account holders as is required under Section 2(6) of the Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions) Act, 1998.

In the case of financial institutions, individuals, other than those who attended the oral hearings, or who participated in relevant internal meetings in the institutions have not, in the main, been identified. However, in some cases individuals referred to in the report may be identifiable by surrounding information. This has been unavoidable. To the extent that information concerning such individuals is included it has been extracted from discovered documents or otherwise obtained from the relevant financial institution.

Acknowledgements

Throughout the conduct of my investigation the appointed auditor, my staff and I received the co-operation of all the financial institutions, the Office of the Revenue Commissioners, the Central Bank and the Department of Finance. I am aware of the extra administrative burden it placed on the resources of those organisations and the demands it made of certain individuals.

I wish to thank the appointed auditor, Ms Aileen Barry and her team for the professional and diligent manner in which they went about their part of the work.

Finally, I would like to thank my own in-house team who worked long and demanding hours in helping me to complete the investigation and produce the report within a reasonable time frame.

The contents of this page were last updated on 26/09/03