Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 10

Chapter 10 : Ulster Bank Group

Background

Ulster Bank Group comprises the following licensed banks

Ulster Bank Limited (UBL)

Ulster Bank Markets Limited (UBM)

Lombard and Ulster Banking Limited (LUBL).

Ulster Bank operates through a network of 113 branches.

Non-Resident Deposit Levels

The Ulster Bank group’s share of the non-resident deposit market as at 30 November 1998 was 3.46%.

The value of its non-resident book varied between ?115m and ?399m during the period 1986-98.

Key statistics for the group were

Year

Number of Non-resident Accounts

Percentage of Deposit

Book by Value a

1998

n/a

8.9%

1997

n/a

12.4%

1996

n/a

9.2%

a Calculated using Central Bank data.

Staff Instructions and Procedures

Staff instructions and procedures cover the operation of non-resident accounts. Written procedures are not as comprehensive in the case of the two subsidiaries.

However, in regard to the subsidiaries the bank informed me that LUBL and UBM have a centralised administration function for non-resident account operation. The staff have been in their jobs for a considerable period of time and are very familiar with the operational procedures.

UBL

The bank assured me that the procedure manuals of UBL emphasise that scrupulous care must be taken whenever an account is being opened. Adherence to these procedures also ensures that the bank complies with the relevant anti-money laundering regulations. The bank assured me that these stringent procedures are carried out as far as possible for non-resident customers in the same way as for resident customers.

In addition, in those circumstances where a branch is not fully satisfied that the address given is bona fide, or where the appropriate declaration form is completed on behalf of a non-resident, the bank’s procedures require that an affidavit be completed by a practicing solicitor or Commissioner for Oaths.

For all new accounts, a report is supplied to each branch on the following day giving full details of the customer. This report is generally checked by the accounts clerk in the branch, a responsible position usually occupied by a senior official.

LUBL

In accordance with the Criminal Justice Act 1994 LUBL requires positive identification of the customer’s name and a utility bill to verify the address. These are held on file in accordance with the bank’s guidance notes and are retained for five years after the relationship with the customer ends. Any omissions are followed up and are included in the procedure outlined earlier. When opening new non-resident accounts the account officer follows a set of standard procedures designed to ensure that all practices are complied with. The bank’s internal inspection officer checks all new accounts to ensure that the correct procedures were followed. Levels of authority do not exist as each account officer performs similar roles.

UBM

The majority of the bank’s personal customers and a number of other customers are referred to UBM from the UBL branch network. There is an agreement in place in relation to these referrals whereby UBL agree to undertake a full due diligence review of the customer before they are referred to UBM. In this regard it is not necessary for UBM to undertake any further action to verify the non-resident status of these customers.

Any other non-resident customers (usually corporate depositors) are known by the staff in the Treasury Department and they know the resident status of the customer.

In general the banks in the group did not call for affidavits as a means of satisfying themselves in regard to non-resident status claimed by depositors. It was the policy to obtain Form Fs up to 1993.

Internal Management Review

Internal Audit

Prior to 1992 the audit function focused mainly on branch inspection. Thereafter, while it continued to be a compliance review function for branches it also focused on forming an opinion on the adequacy, effectiveness and efficiency of the control systems as a whole.

Prior to 1994 each of the group companies had its own audit function. In 1994 the Group created a Group Audit and Compliance function which supports all parts of the Group. The Group Internal Audit and Compliance function has reviewed the operation of customer account maintenance from time to time. In UBL audits take place at branch level approximately every three years. In LUBL and UBM, audits of the deposit taking function take place randomly. Internal audits use standard audit techniques including sampling.

The Group’s records show that there were 347 audits since 1987. The operation of non-resident customer accounts is reviewed as part of these audits. The institutional breakdown of audits carried out in the period 1987-1998 was

UBL 339

LUBL 7

UBM 1

The Group informed me that it views its responsibility, in accepting non-resident deposit accounts, as to be reasonably satisfied as to the residency status of the customer at the time of account opening but that thereafter it regards it as the responsibility of the customer to inform the Group of any change in status.

Consequently, the Group’s audit function focused on the responsibilities in relation to maintenance of correct documentation and did not extend to authenticity checks.

In UBL, through the audit processes, the bank recorded on average 336 deficiencies per year since 1988.

The following table summarises the results of internal audits carried out in the period 1986-1998

Year Audits Sample size No forms Other

Deficiencies

1986 0 0 0 0
1987 1 - - -
1988 14 213 58 42
1989 29 1,261 336 368
1990 27 350 89 154
1991 42 2,456 239 321
1992 27 1,256 46 157
1993 41 2,360 132 231
1994 32 2,146 55 121
1995 49 2,810 70 402
1996 38 2,079 84 251
1997 22 1,279 87 119
1998 17 1,314 191 148
Total (1986-1998) 339 17,524 1,387 2,314
Average (1988 - 98) 31 1,593 126 210
Average Number of accounts 11,000
Sample % 14%

Management’s Representations

The bank has pointed out that the above audit findings need to be read in the following context

No forms means that there were no forms available on the branch files at the time of the audit. This does not necessarily mean that the forms did not exist since they could have been misfiled, mislaid or held at another branch (accounts move around from time to time).

‘Other Deficiencies’ cover some aspect of the form that is not completed 100% correctly and would include minor deficiencies.

In evidence, the group represented to me that the rising level of documentary non-compliance on non-resident accounts detected by internal audit in more recent years was symptomatic of a more general falldown in meeting documentation requirements across the range of banking functions. This was attributed to the loss of experienced staff and their replacement with staff who had to be trained to achieve the desired degree of competence in administrative matters.

Special Savings Accounts - LUBL

In the case of LUBL an audit review of Special Savings Accounts (SSAs) carried out in 1994 noted

three instances where an individual had two such accounts

eight instances where a married couple held two SSAs, one being held jointly and the other in the name of one spouse

in two cases a married couple held three such accounts (one jointly and the other two individually).

The internal response of management was to agree these findings and note that the customer had completed a declaration confirming that they had complied with legislation. The customer was liable and tax would be deducted where appropriate.

The bank informed me in evidence that no retrospective tax adjustment was made in these cases.

Audit Follow up and Reporting

It is the Group’s normal audit procedure that the manager of the audited section be made responsible for follow up corrective action, and for reporting progress through line management and to internal audit on an agreed timetable. Such reports may be verbal.

Reports on documentary compliance are made to the Group’s Audit and Compliance Committee.

The key reports during the period were

In May 1991 the committee was informed that an inspection of declaration forms at branches had shown only a 25% success rate. As a result a memorandum was issued to all branches which stated that any breach of the rules would be considered to be a serious matter. The minutes noted that there may have been a misconception by some branches that the practice was condoned by top management.

In November 1991 the committee was informed that in ten branches the standard of documentation received from non-resident depositors to whom gross interest was being paid was found to be generally unsatisfactory. Eight of these were in the Southern Region and two in the Northern Region. It was noted that the matter had been mentioned in the report to the committee in May 1991 and that there had been a steady improvement since then as a result of the programme of remedial action put in place by the Head of Retail Services earlier in 1991. Progress had, however, been slower than anticipated. The report noted that it was important that the bank’s records be brought up to the required standard and progress would continue to be monitored.

In May 1993 a paper tabled for the committee noted that inadequate documentation on non-resident depositors was viewed seriously by senior management and a range of disciplinary actions would be applied to managers at branches failing to satisfy the necessary requirements. The minutes of the meeting record that at a number of branches it was found that the general standard of documentation, which the bank is required to obtain from non-resident depositors before paying interest gross, was below that which the bank or the Revenue authorities would expect to see despite the fact that managers had been asked to certify periodically that their documentation was in order. A serious view was stated to have been taken by senior management of those branches found to be below standard.

Administrative Reviews

In addition to internal audit reviews the deposit administration function of the banks also review their records from time to time. The Group has records of two such reviews in UBL in 1993 and 1994. LUBL and UBM have a continuous monitoring process over the operation of new accounts. UBM also carried out a complete review of accounts in 1997.

There are details of two "Clean-ups" on file in relation to UBL, one in 1993 and the other in 1994.

1993 Review

In this review branches were asked to identify accounts where the bank did not hold the required form. They were further asked to calculate the gross interest paid since 1987 on those accounts. The bank only has the returns from the city area. The others were destroyed some time ago under its document retention policy. The results of the review of the city branches which covered 21 of the 80 branches which the bank had at that time, was that 49 accounts were reclassified. It was estimated that gross interest on these accounts was less than ?20,000.

1994 Review

In October 1994 all branches were asked to carry out a detailed review of non-resident accounts. Each branch made a return to the bank’s Head Office certifying that they carried out the review and provided details of accounts where the DIRT flag was re-instated as a result of the review. Out of approximately 12,000 accounts, 143 were reclassified of which 30 were current accounts. The bank did not have details of the balances on the 113 interest bearing accounts.

UBM Review 1997

A full review of all non taxable accounts on the system including a review of the corresponding DIRT declarations was carried out by UBM in early 1997. The main issues that arose out of that review were as follows

Photocopies of declarations on file

Fax copies of declarations on file

Problems matching name of the customer’s accounts on the system with that on the declaration due to change of name for the customer

Declaration form not dated

A number of the declarations which were incomplete were in respect of dormant accounts. Rather than following up these incomplete declarations the bank amended the tax status of these customers to taxable.

The Group considered that there were no cases identified where additional tax payments to the Revenue Commissioners were necessary.

External Review

The Group confirmed that no matters were raised by their external auditors or the Central Bank of Ireland on the operation of non-resident accounts.

Administration of the Taxes Acts

Revenue Inspection of Declarations

Revenue have inspected declarations on three occasions.

Bank Date of Inspection

Sample Size

Declarations Missing

Queries Raised

UBL May 1998

100

0

7

LUBL November 1998

104

2

11

UBM February 1999

52

1

8

During the course of the inspection at LUBL it was noted that 116 accounts of the total of 1,512 were not covered by a declaration. A number of these accounts had already been identified by the bank as lacking documentation. The accounts had been frozen and no withdrawals allowed pending receipt of confirmation of residence status. The bank agreed to operate DIRT on these accounts with immediate effect. Subsequently declarations were put in place or located for 47 accounts. The estimated deposit values of the remaining 69 accounts was ?800,000.

Investigation Branch Enquiries

Prior to the inspection of declarations in 1998 and 1999, no matters came to the attention of the Investigation Branch of Revenue which would have necessitated contact with the Group.

Interest Reporting

A review of Revenue files indicated that no returns under Section 891 of the Taxes Consolidation Act 1997 had been made in respect of LUBL since 1993-94 and for the years 1993-94 and 1994-95 for UBL. I was informed in the course of my hearing of oral evidence that the bank has taken steps to file these returns.

Liability Estimation

The financial controller made some calculations of the Group’s potential tax liability using the internal audit findings for the period 1987 - 1998. While he indicated that it was difficult to come up with a figure because of the many variables his most pessimistic calculation resulted in a figure of approximately ?900,000 from 1986 to 1998. He noted that this amount must be considered in the context of the 1993 clean-up where the bank identified interest paid gross of less than ?20,000 in the city area branches from 1987 to 1992 which in the opinion of the financial controller would suggest that the ?900,000 figure was excessive.

Result of Work Performed by the Appointed Auditor

The Auditor reviewed LUBL, UBM and the Money Desk and Treasury of UBL on a central basis. UBL branches were audited at Arva and Waterford. The following are the results of the review of the Group.

Tax Exemption
Documentary Compliance - Declarations of Non-Residence (Form 37)
Bank

UBL

LUBL

UBM

Sample

329

157

88

No Declaration held

5

1

1

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

25

4

8

11

0

8

9

2

4

Total Declaration Exceptions

42

20

16

Percentage Exception

13%

13%

18%

Authenticity Risk Profile - Non-Residents
Bank

UBL

LUBL

UBM

Sample

329

157

37

Risk Indicator
Irish Address

4

13

0

PO Box or ‘Care of’ Address

15

7

0

Hold Mail

3

11

0

Transaction Profile

7

0

0

Accounts with Liens

0

0

0

Other

0

0

0

Total accounts with risk indicators

29

31

0

Percentage Exceptions

9%

20%

0%

Accounts also with documentary exceptions

6

10

0

Accounts where the Group believes it holds appropriate evidence of non-residence

2

23

0

19Documentary Compliance - other Exempt Accounts and SSAs
Bank

UBL

LUBL

UBM

Account Type

Exempt

SSA

Exempt

SSA

Exempt

SSA

Sample

30

20

80

30

63

18

No Declaration

0

0

1

1

2

0

Declaration Exceptions

9

0

10

1

3

0

Total Exceptions

9

0

11

2

5

0

Percentage Exceptions

30%

0%

14%

7%

8%

0%

Interest Reporting Exemption
Documentary Exemption (Form F)
Bank

UBL

LUBL

UBM

Sample

91

120

4

No Form

2

1

2

Percentage Exception

2%

1%

50%

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