Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 12

Chapter 12 : Irish Permanent plc

Background

Irish Permanent plc has been a bank since 24 September 1994. Prior to that date it was a building society. All references to its administration of non-resident accounts relate to operations prior to the acquisition of Guinness & Mahon Bankers (Ireland) Ltd in 1994 and its merger in 1999 with Irish Life under the new name Irish Life and Permanent plc.

Irish Permanent operates through a network of 195 branches and agencies.

Non-Resident Deposit Levels

The Irish Permanent’s share of the non-resident deposit market as at 30 November 1998 was 10.62%.

The value of its non-resident book varied between ?23m and ?1.1bn during the period 1986-98.

Key statistics in relation to the institutions non-resident book are as follows

Year

Number of Non-Resident

Accountsa

Percentage of Deposit

Book by Valueb

1998

1997

1996

36,590

n/a

n/a

19.3%

26.6%

26.8%

a Information supplied by the bank

b Calculated using Central Bank data.

Staff Instructions and Procedures

The bank has a Branch Procedures manual which specifies how non-resident accounts are to be handled. It instructs staff to ensure that

the non-resident form is signed by all parties to a new account

the customer is informed that external funds lodged to the account after its opening must be in one of the following forms

foreign currency

Irish cheques stamped ‘eligible for credit to an external account’

a maximum of ?250 in Irish currency without evidence of conversion

evidence of conversion for amounts greater than ?250.

The procedures call for declaration forms to be forwarded daily to the bank’s Investment Services Department. Where a completed declaration form is not received at the time the account is originally set up, the account receives a special code which denotes that tax is to be deducted.

Prior to the introduction of anti-money laundering provisions in 1995, the bank checked that, in the case of new non-resident accounts, the address was outside the State but independent identification by means of passports and other documents did not occur.

The bank never got a Form F from non-residents. In oral evidence the bank pointed out that it had not arisen as a practical issue because no notice was ever served by Revenue requesting an interest return in the period between 1986-87 and 1993-94. In regard to employing the procedure of seeking an affidavit in situations of doubt the bank pointed out that it did not employ such a procedure because

in the bank’s view, persons who signed a declaration form while resident would have no difficulty in signing an affidavit saying they were non-resident

in practice, the bank would actually redesignate an account if it was not satisfied in regard to its non-resident status.

The bank also confirmed in evidence that it had proper procedures for the opening of other exempt accounts.

Internal Management Review

Internal Audit

Since 1986, the Internal Audit Department has grown from a three person unit to a function staffed by 11 persons. Up to 1988, no branch audit tests were done on non-resident accounts.

In the period 1988-92 branch audit tests included an examination of non-resident administration. The type of checks carried out included

ensuring that a declaration form was held

examining whether the account activity was consistent with claimed non-resident status

checking that the customer did not hold a resident account at the branch.

No tests were carried out on non-resident accounts in the period 1993-98. The reasons given for the cessation of these tests were

the reduction in interest rates reduced the amount of DIRT that could be evaded

SSAs offered investors legitimate resident accounts with a reduced DIRT rate

interest rates on non-resident accounts were reduced below those on resident accounts

it was considered that the tax amnesties had mopped up much of the type of money which might be expected to be in false non-resident accounts

advertising of non-resident accounts was reduced within the bank and generally

exchange liberalisation made it difficult for audit to distinguish sources of funds on the basis of currency.

No tests were carried out of funds generated from agencies up to 1998. At 31 December 1998 the bank estimated that ?234m of its non-resident funds had been introduced through agencies.

Since July 1998 the internal audit department has reintroduced audit testing of non-resident accounts in branches and extended testing to agencies also. It focuses exclusively on the existence of a declaration form.

The extent of audit checks of non-resident accounts can be summarised as follows

Checks carried out

Period

Branches

Agencies

1986 - 1987

1988 - 1992

1993 - 1998

1998

No

Yes

No

Yes

No

No

No

Yes

The bulk of corporate deposits are held in the bank’s Treasury Department. This has been audited four times in the 1990s in the course of which declaration forms were checked. An audit of charities was carried out in the late 1980s.

No audit checks were carried out on the administration of SSAs. The bank’s controls in relation to the operation of such accounts were built into its computerised procedures.

Internal Audit Results

The internal audit reports for 1988 and 1989 could not be located in most cases.

The table beneath sets out the overall audit result for the period from 1990 until the suspension of testing in 1993.

In general a minimum sample size of five appears to have been used but the bank’s internal audit has informed me that in the larger branches this could increase to ten or more. The reports rarely record the sample size.

Year

1992

1991

1990

Branches Audited a

Non-Resident Issues

No Non-Resident Issue

Audit file not found b

87

56

16

15

87

63

22

2

86

22

34

30

a Excludes closed branches

b In 1990 and 1991 internal audit achieved 100% coverage of branches. It is unclear whether audits were completed for the full branch network in 1992.

The type of issues arising largely related to the transaction pattern on accounts. A sample of ten audit reports at six branches chosen on a random basis was analysed and the pattern set out in Table 12.1 emerged.

Table 12.1

Internal audit results at Irish Permanent 1990 - 1992

Branch Audit Report

Audit Issues

Walkinstown May 1992

August 1990

Five accounts were examined.

One account was noted with 10 transactions since 1991.

Another showed a round sum cheque lodgment of ?2,500.

Another had 19 transactions in the previous year. (13 processed through the branch.)

One account had an address in Ireland.

In another case interest from a residential bond was being credited to the account.

Dame Street February 1992

One active non-resident account was noted with 25 transactions in the previous 10 months.

Swords May 1992

One investor had a mortgage. Account files strongly suggested residence.

The manager was requested for assurances in regard to the operation of a further five accounts.

Kimmage April 1992

April 1991

September 1990

The number and frequency of transactions on five accounts examined seemed to indicate that the investor was resident.

Delays were noted in completing non-resident declaration forms. In two cases accounts had been opened over 12 months without the form. In the remaining case it took over two years to complete the form.

In two cases no declaration form was found.

Nenagh August 1991

October 1990

One account was reclassified as a result of audit.

One other case noted where transaction levels led to enquiries which established residence.

While share accounts had been redesignated for a person who returned to Ireland his deposit account had not.

In another case a high level of withdrawals was noted. This was attributed by the branch to the fact that the investors travelled regularly to Ireland on business.

Cavan October 1992

November 1991

Three active non-resident accounts were noted

one investor during 1992 made lodgments and 13 withdrawals (6 in cash) and had a mortgage

another had 8 withdrawals (3 in cash) and 2 lodgments during 1992

a third had 10 cash withdrawals and 1 cheque withdrawal during 1992.

Two investors who were also mortgage holders had account activity as follows

one had 9 transactions in four months

the other had 12 transactions in six months.

Another case was noted where an investor had 14 transactions in 10 months.

Investors with 13 transactions on their account in 8 months and who were also mortgage holders were queried. The branch explained that they were home for a period, had returned temporarily to England at the time of the audit but were returning permanently to Ireland in the near future at which time their account would be redesignated.

Reporting and Audit Follow up

The responsibility for follow up action in respect of individual cases including account reclassification lay with the manager who was required to write to internal audit with his/her response to the audit findings. In no case was an arrears payment calculated after reclassification of the account. The general view taken was that the branch staff only became aware of the resident status as a result of audits and that once the bank acted on becoming aware of the true residence status no back liability would arise.

The results of audit testing were also summarised and reported at least once a year to the Chief Executive. Individual reports on the Treasury Department are also submitted to him.

Reporting has evolved over the period. In the last three years comprehensive reports are passed to the Audit Committee.

Other Investigations and Reviews

Where there was suspicion of staff assisting customers to open or maintain false non-resident accounts the matter was treated as a special investigation. The Internal Audit Manager has reviewed the investigation files dating from 1988 (files for earlier years were shredded some years ago) and set out the details of cases.

Killarney

The Killarney branch was a particular area of concern to the internal audit department since it had a high percentage of account holders who had given addresses in the US. For a number of years standard audit tests were carried out but failed to identify abuse. Virtually all of the non-resident customers were "no correspondence" so direct contact with the customer was not possible. However US telephone books showed a person, with the non-resident account holder’s surname, living at the address recorded on the bank’s records. In addition, the audit was unable to link the non-resident customers with resident accounts (such as mortgage accounts). When transactions on non-resident accounts were queried, supporting documentation was produced to confirm their validity.

During the routine branch audit in 1991 extensive tests were carried out into non-resident accounts. Sufficient evidence was obtained to enable internal audit to conclude that abuse of the non-resident provisions was occurring. Internal audit concluded that accounts were being opened on behalf of customers using false names, at an address of a relative with that surname in the US. US telephone books were also used to obtain false addresses. Holders of false non-resident accounts were making lodgments of specified amounts on certain days so that, if the transaction was queried, documentation relating to lodgments made by valid non-residents could be used to support lodgments made by false non-residents.

About ?5m was ultimately reclassified as resident funds by the bank.

The following disciplinary action was taken against the manager

he was demoted to assistant branch manager for 6 months and informed that he would only be considered for reinstatement if all false accounts were brought back into order within that period

he received a final written disciplinary warning

he suffered a loss of increments.

The position was reviewed at the end of six months by internal audit who found that virtually every non-resident account had been eliminated.

No arrears of DIRT was paid to the Revenue arising out of the misclassification of funds.

Other Cases

Six other cases arose where special investigations were conducted. None involved a material amount of funds and the cases were concluded with the accounts being categorised as resident where appropriate.

External Review

Central Bank Review

The bank confirmed that no matters were raised in regard to its administration of non-resident accounts by the Central Bank of Ireland.

External Audit Review

The bank’s external auditors reported to management that in relation to their audit of the 1997 accounts they reviewed 39 non-resident accounts. They found that

non-resident declaration forms were not on file for four accounts, apparently due to a filing backlog which, the auditors understood, was currently being addressed

one non-resident declaration form was insufficiently completed

two of the accounts sampled appeared, from the information kept on file, to be resident within the State, and therefore, could be liable to DIRT on any interest earned.

Administration of the Taxes Acts

Revenue Inspection of Declarations

The Revenue inspected non-resident declarations in respect of the bank’s branches at St. Stephen’s Green and Maynooth. The results were as follows

Branch

Date of Inspection

Sample

Declarations Missing

Queries Raised

St. Stephen’s Green

May 1998

70

6

15

Maynooth

June 1998

68

11

11

Missing Declarations

The bank attributed the large number of missing declarations to document retrieval difficulties. As a result the bank arranged in late 1998 to have all non-resident declaration forms, including those which had previously been filmed, scanned and transferred to compact disk. It then sought to match the declarations with active accounts. By February 1999 the bank was left with 6,423 non-resident accounts for which it could not locate a declaration. It wrote to all cases where it had a correspondence address (5,515) seeking that they complete new declaration forms. By June 1999, 2,854 new declaration forms were received. 436 letters were returned, undelivered, by the postal service.

The bank informed me that it is writing a second time to the remaining depositors advising them that their accounts will be made DIRT liable if a reply is not received. The bank is also manually reviewing the cases where no reply has been received, letters were returned undelivered or accounts flagged ‘no correspondence’ - 3,569 in total. 2,380 accounts had been reclassified by 30 June 1999.

Address Changes

In the course of the Revenue examination it was discovered that, due to an administrative error, in certain instances where the bank had been informed that the holder of a non-resident account had returned to Ireland, the account had not been redesignated. As a result of this discovery, all non-resident accounts which had an Irish postal address (1,650 accounts) were examined in detail. Of these accounts, it was found that in 995 cases the bank had been notified of a change in status and had changed the postal address but had not made the account liable to DIRT.

All of the 995 accounts were immediately changed to "net" and the DIRT liability accruing on each account from the date the bank was informed of the change in status was computed. The total DIRT liability was calculated at ?72,000.

The bank contacted the Revenue Commissioners and informed them of the situation. On advice of the Revenue Commissioners, an amended DIRT return for the period up to 5 April 1998 was submitted to the Collector General together with payment of ?72,000 in respect of the underpayment of DIRT and ?4,500 in respect of interest due on the underpayment, this interest being computed by Revenue.

Investigation Branch Enquiries

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

Interest Reporting

The bank’s returns under Section 891 of the Taxes Consolidation Act 1997 were filed in all cases.

Underpayment of DIRT

The Finance Act 1996 excluded certain products from the charge to DIRT. The bank reduced both the April 1998 and October 1998 instalments in respect of the exclusions. The adjustment would not have applied to the October 1998 instalment. The error came to light in the course of the routine examination in Revenue of the October 1998 DIRT returns. Irish Permanent had shown a very large decrease in its October 1998 payment on account over that for 1997 and an explanation was sought by the Inspector. The underpayment was ?6.6m. Payment which was due by 20 October 1998, was secured before the end of that month.

Result of Work Performed by the Appointed Auditor

The Auditor reviewed branches of the bank at Clonmel and Killorglin and in addition checked a sample of records at its Head Office. The following are the results of the review.

Tax Exemption
Documentary Compliance - Non-residents (Form 37)
Sample

736

No Declaration held

9

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

47

47

29

Total Declaration Exceptions

132

Percentage Exception

18%

Authenticity Risk Profile - Non-residents
Sample

736

Risk Indicator
Irish Address

11

PO Box or ‘Care of’ Address

10

Hold Mail

6

Transaction Profile

4

Accounts with Liens

5

Other

0

Total accounts with Risk Indicators

36

Percentage Exceptions

5%

Accounts also with documentary exceptions

13

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

23

19Documentary Compliance - other Exempt Accounts and SSAs
Account Type

Exempt

SSA

Sample

18

30

No Declaration

0

0

Declaration Exceptions

5

4

Total Exceptions

5

4

Percentage Exceptions

28%

13%

Interest Reporting Exemption
Documentary Exemption (Form F)
Sample

204

No Form

204

Percentage Exception

100%

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