Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 13

Chapter 13 : EBS Building Society

Background

The EBS operates through a network of 167 branches and agencies. During the period March 1994 to September 1996 the EBS operated a representative office in the London area which promoted non-resident accounts. In 1994, EBS acquired the Midland and Western Building Society and in 1998 it acquired the Norwich Irish Building Society.

Non-Resident Deposit Levels

The EBS share of the non-resident deposit market as at 30 November 1998 was 2.3%.

The value of its non-resident book varied between ?11m and ?209m during the period 1986-98.

Key statistics in relation to non-resident accounts are as follows

Year

Number of Non-Resident

Accountsa

Percentage of Deposit

Book by Valueb

1998

22,725

9.4%

1997

26,535

10.3%

1996

21,489

11.1%

a Information supplied by the society

b Calculated using Central Bank data

Staff Instructions and Procedures

Following the enactment of the Finance Act 1986 the society introduced procedures at that time which set out the requirements for the payment of interest without deduction of DIRT. Those procedures stated that

"no tax concession could be made pending a receipt of the declaration form. An account may be opened and lodgments accepted, all subject to DIRT."

The Chief Executive of EBS informed me at the hearing of evidence that this procedure applied throughout the period of my examination.

Instructions were reiterated in a reminder issued to all branch and branch agency managers in 1991 and the penalties for failing to comply with the requirements of the legislation were clearly set out.

Since the introduction of the Criminal Justice Act 1994 the EBS requires new account holders to produce some form of identification such as a passport or driving licence as well as some form of address verification such as a utility bill. Detailed procedures have been issued in this respect and the society informs me that all staff have received extensive training in relation to the implementation of these procedures.

In 1995 the society’s procedures in relation to the administrative requirements to qualify for the payment of interest without deduction of DIRT were made available to staff on-line.

I was informed that the society’s procedures in relation to non-resident accounts are discussed and elaborated upon during regular monthly branch manager meetings.

A centralised approach is adopted within EBS to the filing of account opening documentation. Prior to 1992, non-resident declaration forms were stored on microfilm and the original paper document was destroyed. Since 1992 the declarations have been stored on a document imaging system and the originals have been retained. However to facilitate compliance work in 1998, the non-resident declarations held on microfilm were transferred to the document imaging system. Non-resident declarations from Midland and Western Building Society and Norwich Irish Building Society have not been imaged.

The society has informed me that in order to achieve the maximum level of accuracy and correctness in non-resident forms, the society’s management have decided with effect from 21 May 1999 to reserve the ability to set an account as a gross interest paying account to the Customer Funding Department in head office.

The society did not seek a Form F during the period 1986 to 1993 and neither does the society appear to have sought affidavits in order to satisfy itself about the authenticity of any claim for non-residence or in any case where a resident was opening a non-resident account on behalf of a non-resident.

Internal Audit and Administrative Reviews

Audit Planning

An overall audit plan is prepared after reviewing all major risk areas. At the hearing of evidence the internal audit manager informed me that each branch would be visited annually for a complete review. However, reviews of the DIRT area are not undertaken at branch level as all of the documentation is held centrally in the society’s head office.

The audit plan is approved by the board audit committee. The audit committee of the EBS was established in August 1991 and normally meets half yearly.

Audit Reporting

The internal audit findings are reported to

the direct line management and followed up on a periodic basis to ensure that weaknesses are being addressed

the management committee in the form of a summary report highlighting the issues that are seen as most material at the time. This normally happens on a quarterly basis

the board audit committee on a half yearly basis. This report summarises the reviews conducted and the issues arising. The internal audit manager attends all meetings of the board audit committee.

Extent of Audit

Non-resident accounts were not examined by internal audit prior to 1989. During the period 1989 to 1998 the following matters were examined at different times for non-resident accounts

accounts with Irish addresses

trends in DIRT exempt balances

documentary compliance

the impact of transactional activity on claimed non-resident status

accounts with alias names.

The internal audit manager stated at the hearing that his concern in relation to DIRT was more with the substance or the authenticity of the non-resident status rather than the form. The society stated that in relation to DIRT the existence of less than fully complete declaration forms would not have been regarded as a serious offence whereas any connivance with customers to evade tax by setting up bogus non-resident accounts would be seen as a firing offence.

In giving evidence the Chief Executive of EBS stated that pressure was maintained at regular intervals on the system not to have or entertain bogus accounts.

In relation to Special Savings Accounts (SSAs) the internal audit manager informed me that since SSAs are a very rule structured product, they lend themselves well to computer controls. Controls are built into the system to ensure compliance with the rules. In the situation where a control is broken, the account reverts from an SSA to a full DIRT paying account. Other controls operate in head office where reports are generated to ensure the rules are complied with.

I was informed at the hearing that a review of Special Savings Accounts was carried out following their introduction in 1993. The general conclusion reached following that review was that controls were very strongly designed within the system and that reports and monitoring in head office was strong.

The internal audit manager informed me that Corporates, Pension Funds and Charities would have been examined on a two tier basis

as part of an examination of account opening documentation

as part of the examinations of DIRT exempt accounts.

I noted that at the end of 1998 it was discovered that a number of the society’s corporate and charity accounts had been coded as non-resident in error (approximately 778 accounts with an estimated capital value of ?109m).

I enquired as to why this had not been discovered during earlier audits. The internal audit manager stated that the primary concern is that the accounts are correctly classified as exempt from DIRT. The problem of definition - whether a non-resident corporate should be classified as a corporate or non-resident is subsidiary to that.

As part of its affidavit of discovery, the society provided information in respect of internal audit reports to the audit committee and memoranda to the management committee, the key elements of which are set out below.

1989 Review

A report prepared by the internal audit manager in May 1989 highlighted the fact that an internal audit examination of the DIRT position at 31 March 1989 had revealed a potential problem with non-resident accounts. The problem identified was the use of local Irish accommodation addresses for accounts claiming non-resident status. The report stated that 60% of the accounts with Irish addresses were held in 10 of the society’s branches. The internal audit manager estimated the loss of revenue to the Revenue Commissioners as a result at approximately ?195,000.

Commenting on that report at the hearing of evidence, the internal audit manager stated that this was the first time that he had looked at DIRT and his initial impression was that something must be wrong when an Irish address appears against a non-resident account. He pointed out that it was an instant reaction to what he considered at the time to be a potential problem. He was not aware of the basis used in making the estimate of the loss of revenue.

The minutes of the management committee meeting held on 13 June 1989 record that the internal auditor "..... was instructed to take a firm stand on DIRT exemption procedures and report back within one month".

The internal audit manager contacted a number of the offices with DIRT exempt accounts having Irish addresses in order to ‘gain some insight as to how the local offices perceived this problem and to gauge any likely reaction to efforts in this direction’.

Most offices contacted by him admitted that they had a number of accounts for which the actual residency status had not been confirmed. All offices had non-resident accounts with Irish addresses and while they would appear "conspicuous" they claimed they were genuine. This in many cases was based on local knowledge.

His memorandum on the issue concluded

‘Some offices are aware of the abuses in this area. They also recognise that there are difficulties in obtaining a foreign address in all cases. Irish addresses will continue to be used in a number of cases as a last resort.

It was decided to follow this up by passing a listing of the accounts claiming exemption back to the offices for clarification of the residency status of the accounts assigned to their office. This was regarded as a local issue, to be handled by the branch and agency offices, as and when contact was made with customers.

1990 Review

An Internal Audit Report to the management committee meeting held on 24 January 1990 highlighted an increase of 1,958 in the number of accounts and ?24m in the balances claiming exemption from DIRT at 31 December 1989 compared with the position at 31 March 1989. This represented an increase of approximately 44% in DIRT exempt balances. The largest increases occurred in the Money Desk, Dundalk, Shandon Street, Caherciveen and Mullingar branches. The report stated that further research was essential to highlight any irregularities in the documentation surrounding the number of applications. At the hearing of evidence the internal audit manager stated that this increase corresponded with the society’s launch of Money Desk which mainly deals with corporate and bank funding.

1991 Review

An internal audit report on the position at 31 March 1991 identified branches and agencies with high levels of DIRT exempt accounts. The society informed me that in line with the internal audit manager’s recommendation, the management committee’s decision was to initiate an investigation of a number of agencies and branches where high levels of DIRT free accounts existed. The Chief Executive stated in evidence to me that the society satisfied itself in regard to the bona fides of the non-resident accounts of those branches and agencies.

Subsequently all offices were circularised with details of their DIRT exempt balances and asked to indicate their satisfaction as far as could reasonably be determined that all accounts were correctly classified. In cases where the customer had resumed residency in Ireland, the manager was instructed to adjust the DIRT exemption flag on the society’s database.

In addition, the internal audit department made direct contact with a number of the offices highlighted in the report to remind them of their legal obligations. The following is an extract from the letter of 30 July 1991 which was circulated to branches by the General Manager Treasury & Funding in this regard

"Because account holders may forget to inform the society of a status change, the legislation requires the society to change the DIRT status of an account when "it is in possession of information which can reasonably be taken to indicate that the deposit is, or may be, a relevant deposit" (the interest is being paid to a person who is now living in the State). You are therefore directed to conduct a review of accounts which you believe may no longer be exempt from DIRT. To assist in this review, a list of non-resident accounts will be sent to you by the internal auditor. You will be asked to complete a return indicating your satisfaction that all the remainder accounts are, in your opinion, still non-resident. All other accounts must revert back to being subject to DIRT".

A report from the internal auditor, considered at the management committee meeting on 10 December 1991 stated that replies had been received from 44 of the 163 offices circulated. The remaining offices had indicated that the status of the accounts was being discussed with customers as they attended their offices. Where obvious inconsistencies arose, the accounts were being reclassified as eligible for DIRT.

The internal audit manager stated in evidence to me that that written confirmation would have been received from all offices where DIRT exempt accounts were significant. He stated that confirmation would have been received from other offices at meetings with the manager or by way of telephone contact.

1992 Review

At a management committee meeting on 13 February 1992, the agencies’ management was asked to investigate the handling of non-resident accounts at two agency offices, Castlebar and Sandymount. This investigation was one of the factors contributing ultimately to the closure of one of the agencies in January 1994. The other agency was also investigated, but management was satisfied that its non-resident accounts were legitimate.

1993 Review

The internal audit report to the management committee for the period ended September 1993 noted that all offices had been circulated with detailed listings of the accounts claiming exemption sourced to their offices as at the end of June 1993 and were reminded of the requirements for claiming exemption under the Finance Act 1986.

A random sample of declaration forms relating to the accounts claiming exemption was taken as at the end of June 1993. Of the 294 accounts selected for testing internal audit were unable to locate 36 declaration forms (12%).

In a briefing document submitted to me by the society it was pointed out that the internal auditor’s work in seeking to locate forms was, of necessity cursory. He requested a copy of the form from the microfilming section for the account being sampled, using the account number, and if the form could not be located immediately, he regarded it as ‘missing’. In many instances, a non-resident declaration would have been available for the customer, under another account number. Alternatively, the form might be in the branch or agency office, or in head office awaiting microfilming.

I enquired at the hearing as to whether documentary compliance extended beyond the existence of the form to its quality of completion. The internal audit manager informed me that their main concern was with the presence of the form and whether the signature correlated closely with that of the applicant’s signature together with checking that the address on the declaration was a foreign address.

1994 Review

The internal auditor’s report to the audit committee dated 11 February 1994 included reference to a reduction of ?13m in DIRT exempt balances during 1993 and to the fact that supporting declarations were not available for 12% of the accounts sampled.

In September 1994 the internal auditor wrote to all offices, enclosing a listing of their DIRT exempt accounts and asking them to satisfy themselves that the accounts listed continued to qualify for exemption. The letter also pointed out that there was an onus on the customer to inform the society if they resume residency in the State and an onus on the society to change the DIRT status on an account when ‘.....it is in possession of information which can reasonably be taken to indicate that the deposit is or may be a relevant deposit’.

1995 Review

In July 1995 the internal auditor again wrote to all offices enclosing a listing of their DIRT exempt accounts and asking them to satisfy themselves that the accounts listed continued to qualify for exemption.

The society stated that the approach adopted was based on the understanding that the local office manager was likely to be more aware of the local circumstances of his customers than a staff member carrying out a centralised desk based review.

Outcome of Reviews 1989 - 1995

No centralised information was maintained or is currently maintained as to the number or value of accounts which were amended arising from these review processes. Where accounts were amended following receipt of information which could reasonably be taken to indicate residency, interest accrued on these accounts from the last time interest was credited automatically became subject to the prevailing rate of DIRT at the time.

1996 and 1997 Position

The society informed me that no specific compliance work on non-resident accounts was undertaken in 1996 or 1997 apart from an examination of non-resident/no correspondence accounts for possible accounts in aliases, arising from an incident involving accounts with alias names in 1997 (but not involving DIRT exempt status).

I was informed at the hearing of evidence that the reduced audit work in the area of non-resident accounts in 1996 and 1997 was due to the greater assurances received in relation to the status of the customer following the introduction of the Criminal Justice Act 1994.

1998 Reviews

A memorandum from the funding products manager to the management committee dated 13 March 1998 noted that the internal auditor had commenced a review of non-resident DIRT accounts and set out the main findings which were as follows

114 non-resident accounts (balances ?1.7m) with Irish addresses and regular transactions through the network were noted. The memorandum stated that these might be explained by the customers or the office staff failing to adjust the DIRT flag on their return from abroad

674 non-resident accounts (balances ?4.4m) with foreign addresses and regular withdrawals through the network were also noted. The memorandum stated that these might indicate that customers had failed to change their addresses on returning from abroad

a test on the availability of DIRT exemption forms had revealed that 17% of forms were not available.

The memorandum recommended the sending of a letter to all offices together with listings of

non-resident accounts with Irish addresses which have at least one transaction in 1997

all accounts sourced to the office which are currently flagged as non-resident

and requesting that the accounts be reviewed and the status amended where necessary.

In an internal audit report to the audit committee dated 17 August 1998 it was stated that during March 1998 internal audit had examined non-resident accounts as follows

offices with the highest numbers of non-resident accounts as at December 1997 were asked to satisfy themselves that accounts designated within their offices were correct

recent account transactions were examined to ensure that account activity was not in conflict with non-residential status. Approximately 900 accounts with capital balances of ?7m were identified as having regular transactions through EBS offices. Listings were supplied to these offices who were asked to satisfy themselves that accounts were correctly stated - otherwise they were instructed to make the accounts subject to DIRT.

The EBS received notification in September 1998 from the Revenue Commissioners that they intended carrying out an examination of non-resident declaration forms at the Grafton Street and Maynooth offices. In advance of that examination, the society conducted its own examination of declarations relating to those particular branches. Having conducted this exercise, the results were forwarded to the management committee in a memorandum dated 9 October 1998, details of which are set out hereunder

Grafton Street No. ?

Accounts sourced as non-resident 229 1,747,147

Non-resident forms found 208 1,720,693

Missing forms 21 26,454

Percentage non-resident forms missing 9%

It was noted that three of the missing forms related to accounts with Dublin registered addresses while correspondence and documentary evidence of the customer’s foreign residence was available in two further cases.

The memorandum commented that while 9% of the forms could not be located, it was felt that the accounts were genuine non-resident accounts, particularly those opened after the introduction of the money laundering legislation (Criminal Justice Act, 1994) when addresses would have had to be verified. It was also noted that there appeared to have been an administrative failure in the Grafton Street branch from 1997 onwards where forms may not have been obtained for all non-resident accounts.

Maynooth No ?

Accounts sourced as non-resident 22 122,616

Non-resident declaration forms found 19 121,939

Missing non-resident declaration forms 3 676

Percentage non-resident forms missing: 14%

All accounts were found to have registered addresses in the UK.

In September 1998, lists of all 22,900 non-resident accounts were sent to branches and they were asked to confirm their non-residency status. Transaction levels in 1997 were noted on these lists and branches were asked to pay particular attention to accounts with high transaction levels. As a result of this exercise, 187 accounts with a capital balance of approximately ?1.5m were reclassified as resident.

The society carried out a search for declaration forms in relation to the 22,900 accounts with non-resident status. The initial search suggested that 4,079 forms (18%) were missing. Further examination of the accounts showed that 246 were actually Credit Union accounts (correctly flagged as gross accounts, but incorrectly flagged as non-resident), while forms were actually available in respect of 1,052 accounts, but under a different account number. This suggested an actual level of missing forms of 2,781 (12%).

In December 1998, letters were sent to 2,019 customers where forms were not found (the other 762 were ‘no correspondence’). A follow up letter was sent in March 1999 to those who had not replied to the December 1998 letter.

The result of the December 1998 and March 1999 letters was that 1,533 confirmed their non-residency status and supplied duplicate non-resident declarations. 114 (capital balance ?630,000) replied to say that they were resident, and their accounts were reclassified accordingly. No response was received from the other 372 (capital balance ?2.6m). The society stated that it intended to make a final attempt to locate forms for these accounts and, if no form could be found, to reclassify them as resident before the end of June 1999.

In April 1999, lists covering 436 high transaction accounts (defined as more than 5 withdrawals or 2 lodgments in 1998) were sent to the relevant branches, and managers were asked to confirm non-resident status. As a result of this circularisation, 92 of these accounts (capital balance ?200,000) were reclassified as resident. The society stated that branches continue to confirm positions with customers as the opportunity arises.

In April 1999 also, a list of 961 ‘no correspondence’ non-resident accounts was sent to branches and managers were asked to confirm (by way of local knowledge) that the account status was correct. Arising from this, 47 accounts (capital balance ?35,000) were reclassified as resident.

In summary, between September 1998 and April 1999, 440 accounts were reclassified from non-resident to resident status. The total capital balance involved in the reclassified accounts was ?2.365m. The average balance per account reclassified was ?5,375.

DIRT Arrears

I enquired at the hearing as to whether any attempt was ever made to calculate arrears of DIRT on accounts reclassified. The internal audit manager stated that accounts would have been reclassified as soon as the society became aware of the change in status whether as a result of their own direct action in identifying those particular accounts, or where a customer advised them of their change in status. He did not consider that DIRT would have been due in that situation.

I enquired from the Chief Executive as to whether the EBS had a policy in regard to the calculation and payment of arrears of DIRT where accounts are reclassified from DIRT exempt to DIRT paying. The Chief Executive stated that the policy of the EBS would have been that where they became aware that a customer was no longer complying, the reclassification would happen without delay. He believes that this represented full compliance with the legislation

Periodic audit and management reviews focused on accounts with Irish addresses which the society believes maintained reasonable pressure on its offices to ensure that non-resident accounts were genuine, or if not to have them reclassified. The society confirmed that audit reports did indicate a high percentage (12%) of missing non-resident declaration forms but the society feels that this figure greatly exaggerated the true position. No account was taken of forms still in offices, forms in transit, forms misfiled, mislaid, lost or of multiple accounts relating to a single form.

Overall the society acknowledges errors in its administration of the DIRT tax but equally believes that its non-resident accounts are genuine and that no material amount has been lost to the Revenue Commissioners arising from administrative error. It states that some level of inadequate documentation and administration is inevitable, even in a system which is effective and well administered.

Other Administrative Reviews

The Chief Executive confirmed that a due diligence exercise had been carried out prior to the acquisition of Midland and Western Building Society and the Norwich Irish Building Society but no issues arose in relation to DIRT.

External Review

Central Bank Review

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

External Audit Review

The issue of missing non-resident declaration forms was raised by the external auditors following the 1990 and 1991 audits. They signalled the exposure of the society through not being able to trace declaration forms. The internal audit manager pointed out that these references were in relation to retrieving the documentation rather than the documents not existing.

Recent Action

The society stated that a verification project is currently underway in the EBS involving a review of non-resident accounts prioritised by balance, where any of the following conditions apply

declaration form cannot be found

‘no correspondence status’ on accounts

high transactions on accounts (more than 5 withdrawals or 2 lodgments in 1998)

Irish addresses on accounts

accounts reclassified during the period 1992 to 1998

This project is expected to involve verifying the correctness of the status of approximately 2,000 accounts with capital balances totalling some ?15m.

Administration of the Taxes Acts

Revenue Inspection of Declarations

An examination of non-resident declarations for the society’s Grafton Street and Maynooth offices took place in October 1998. As reported above, the position as indicated by the society’s own examination which was carried out immediately prior to the Revenue inspection was

Branch

No. of Non-Resident Accounts

Declarations Available

Declarations

Missing

Grafton Street

229

208

21

Maynooth

22

19

3

The society stated that they were satisfied that in 10 of the 24 cases where declarations were missing, the customers were eligible for non-resident status. It appears that Revenue queried approximately 45 declarations.

Investigation Branch Enquiries

Prior to the inspection of declarations in October 1998, no matters came to the attention of the Investigation Branch of Revenue which would have necessitated contact with EBS Building Society.

Interest Reporting

Returns under Section 891 of the Taxes Consolidation Act 1997 have only recently been made to the Revenue Commissioners for the years 1996-97 and 1997-98 due to an oversight on the part of the society.

Result of Work Performed by the Appointed Auditor

The Auditor reviewed a sample of records for the society as a whole together with a specific sample of records in respect of the Monaghan branch. The following are the results of the review

Tax Exemption
Documentary Compliance - Declaration of Non-Residents (Form 37)
Sample

580

No Declaration held

10

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

55

57

62

Total Declaration Exceptions

184

Percentage Exception

32%

Authenticity Risk Profile - Non-Residents
Sample

580

Risk Indicator
Irish Address

17

PO Box or ‘Care of’ Address

31

Hold Mail

69

Transaction Profile

0

Accounts with Liens

1

Other

0

Total accounts with Risk Indicators

118

Percentage Exceptions

20%

Accounts also with documentary exceptions

52

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

5

19Documentary Compliance - other Exempt Accounts and SSAs
Account Type

Exempt

SSA

Sample

43

15

No Declaration

1

0

Declaration Exceptions

21

0

Total Exceptions

22

0

Percentage Exceptions

51%

0%

Interest Reporting Exemption
Documentary Exemption (Form F)
Sample

194

No Form

194

Percentage Exception

100%

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