Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 14

Chapter 14 : First Active plc

Background

First Active plc was formerly the First National Building Society prior to its conversion to plc status in September 1998. It acquired Irish Life Building Society in 1993. The company is now a bank. It has 72 branches and 90 agencies.

Non-Resident Deposit Levels

First Active’s 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 ?237m 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

24,406

11.2%

1997

26,181

13.5%

1996

20,126

12.9%

a Information supplied by the bank

b Calculated using Central Bank data

Staff Instructions and Procedures

The bank has written procedures in relation to the opening of non-resident accounts and address verification requirements. The levels of authority required for opening resident and non-resident accounts have always been the same with all relevant staff having authority to open such accounts.

Prior to the introduction of the Criminal Justice Act 1994, First Active would generally have satisfied itself as to the residential status of a customer by ensuring that the non-resident form was fully completed. In addition, on a number of occasions, branch managers received computer printouts of the non-resident customers attached to their branches and were requested to satisfy themselves in respect of the residential status of such customers.

The Criminal Justice Act 1994 imposed requirements on credit institutions in relation to personal identification and address verification. Since coming into force in 1995 compliance with its provisions allows the bank to satisfy itself in relation to the residential status of customers for tax purposes.

On a number of occasions circulars/memoranda were issued to branch and agency managers reminding them of the requirements of the relevant legislation in relation to non-resident accounts and the possible personal consequences of operating non-resident accounts for residents.

The bank stated that while it has experienced some isolated breaches of procedures over the years, it is satisfied that procedures have been applied to a high standard throughout the period under review.

First Active has always adopted a centralised approach to the filing of non-resident declaration forms.

From 1986 to April 1994 individual non-resident declaration forms were forwarded on a daily basis to Head Office where they were checked and microfilmed.

From May 1994 to October 1998 non-resident declaration forms were forwarded to Head Office, on a monthly basis, as part of a branch return and were microfilmed with other branch documentation.

In November 1998, it was decided that branches should separate certain key documents including non-resident declaration forms from their other returns and forward them, on a daily basis, to Head Office. The change in approach was put in place as a result of difficulties encountered in the retrieval of forms when needed.

A number of control reports are used by the bank to monitor non-resident accounts. These include reports which

detail cases where any non-resident account has a joint holder added with a resident address

set out accounts where the address has been changed

indicate changes in coding including those of codes which are indicative of residency status.

These reports are reviewed and the implications for DIRT status of the deposit is taken into account. A further set of monthly reports provide details of

new accounts

inconsistencies in coding including that between residence and other codes.

The bank did not seek a Form F during the period 1986 to 1993 and neither did it seek 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 for the beneficial ownership of a non-resident.

Internal Management Review

Internal Audit

Branch and agency audits are conducted on an ongoing basis by the bank’s Audit Department. The Assistant General Manager, Internal Audit advised me that between 50 - 60% of branches would be audited in any one year.

Non-resident accounts were not looked at in isolation but formed one part of a branch audit programme. Branch audit programmes were reviewed typically every 12-18 months. While auditing practices had evolved over the years the approach had always been to audit compliance with the bank’s internal procedures in relation to non-resident accounts.

There does not appear to have been any significant review of non-resident accounts by Internal Audit in the years 1986 to 1990. This appears to be attributable to the fact that the total funds in non-resident accounts during that period was relatively low. The Assistant General Manager Internal Audit stated that he would regard the year 1991 as being something of a watershed with regard to the review of non-resident accounts. Around that time three significant instances came to light of irregularities with non-resident accounts. Two of the instances involved staff members and the third involved an agent of the bank.

The first instance came to the attention of the internal audit manager in June 1991 and involved a branch manager operating a non-resident account on his own behalf. A final written warning was issued to the branch manager in question as his actions were deemed to constitute gross mis-conduct. The amount of interest paid gross on this account between 1988 and the date the account was closed in June 1991 was ?2,522. The branch manager has since left the bank.

The second incident concerned a cashier who signed a non-resident declaration form on behalf of a blood relative who the bank believes was genuinely non-resident. The amount of interest paid gross on this account in the period 1989 - 1990 was ?84. The account was closed in December 1990.

The third instance involved an agent signing account opening and non-resident declaration forms on behalf of customers. From the bank’s record of the conversation held with the agent in April 1991, it would appear that the agent admitted to having signed at least three non-resident declaration forms. No disciplinary action appears to have been taken against the agent concerned.

From my review of reports it appears that the emphasis of internal audit between 1991 and 1994 was on

the level of activity on non-resident accounts

the number of customers attached to the relevant branch or agency having addresses care of the branch or ‘no correspondence’ flags on their accounts.

Documentary compliance was not considered to be of major concern due to the centralised approach adopted to the control of the declaration forms. The bank did not maintain customer files at branch level so examinations were not carried out for consistency of claimed residential status with other documentation or correspondence.

The approach adopted by internal audit was to take a printout of the active non-resident accounts to the branch being visited and discuss particularly high activity level accounts with the branch manager. The printout was left with the manager in order to satisfy himself that the accounts were genuine non-resident accounts with an instruction to amend the tax status of the account where appropriate. There was no follow up to this exercise by internal audit. It was left up to the branch manager to regularise the account.

I was informed that in determining its audit approach internal audit was mindful of the strongly worded memoranda being issued by management to branches in relation to non-resident accounts and the consequent low risk of bogus non-resident accounts given the perceived compliant culture in the organisation.

The Assistant General Manager, Internal Audit stated that their overall assessment of the likelihood of bogus non-resident accounts dropped considerably around 1993-94 due to their assessment of the likely effect of a tax amnesty in 1993 combined with the introduction of a 1% reduction in the interest rate on non-resident accounts and the introduction of Special Savings Accounts (SSAs).

After 1994, branch and agency managers were required to confirm to internal audit that non-resident declaration forms had been obtained in respect of all new non-resident accounts opened.

The bank’s current audit procedures include provisions to obtain confirmations from branch managers in respect of their branch and its related agencies to the effect that properly completed declaration forms have been completed in respect of non-resident accounts and SSAs.

In addition a sample of non-resident accounts is checked against the bank’s records of new account application forms and non-resident declaration forms.

The following table summarises the coverage of non-resident accounts by internal audit during the period covered by my investigation

Years

Audit of Non-Resident Accounts

1986 - 1990

No

1991 - 1994

Yes

1995 - 1997

No

1998

Yes

Other Areas of Internal Audit Coverage

Special Savings Accounts (SSAs) were looked at for the presence and quality of completion of the declaration form. The Assistant General Manager, Internal Audit in evidence stated that particular attention would have been paid to these type of accounts in the years directly after the introduction of SSAs but as the rates of DIRT on these accounts moved from 10% to 15% and subsequently 20%, the perceived risk and audit coverage decreased. The audit papers revealed that, in 1993, SSA declarations were incorrectly completed in 36% of branches audited.

Accounts of Corporates, Pension Funds and Charities have not been audited on a regular basis by the Internal Audit Department. Some work has been carried out on them by their external tax advisers.

Internal Audit Findings

The following details in relation to non-resident accounts have been extracted from audit reports in the early 1990s.

In 1991, 19% of non-resident accounts in the Bray branch were noted as active while in 1993 branch audits revealed 20 active non-resident accounts in Tralee and 15 in Hollyhill.

In 1992, the audit of the Bray branch noted 92 accounts which were designated ‘care of branch’ or ‘No Correspondence’ while 147 accounts at the Grafton Street branch had similar designations.

In 1993, an audit of non-resident accounts attached to the Monaghan, Mullingar and Letterkenny agencies revealed 23 accounts opened using a non-resident address on the declaration form and a resident address on the account, usually ‘care of the agency’.

I enquired as to whether these findings were indicative of a problem with bogus non-resident accounts at the time. The bank informed me that despite the fact that there may have been higher percentage levels of active non-resident accounts in one branch or agency compared to another, they certainly did not take the view that they had a particular problem in any branch or agency as a result of those audits.

Administrative Issues Arising

While First Active has experienced minor abuses of its procedures it has no reason to believe that such abuse was widespread. In addition to the instances referred to earlier which occurred in the period 1990-91 involving two members of staff and an agent, the bank supplied the following details of minor abuses

In 1994-95 a review was conducted into information supplied to the Office of the Inspector of Taxes in one of the bank’s third party returns. The additional DIRT due to the Revenue Commissioners as a result of this review was ?733.

Concerns arose in December 1997 in relation to the authenticity of a non-resident account. The details were reported under the Money Laundering requirements. No further action is currently being taken in case the individual in question is tipped off before Garda investigations are complete.

Recent Action

A special review into non-resident accounts was carried out by internal audit in early 1998. Two events seem to have triggered this review

the general publicity attaching to the whole non-resident account area

a letter from the Revenue Commissioners stating that they intended to conduct a number of audits on the declaration forms.

Internal Audit reviewed a sample of 61 non-resident accounts opened in five branches during 1997. This exercise revealed that 24 declarations of non-residence were missing (39%). This review also looked at transactional patterns on 31 of the non-resident accounts. With one exception, the transaction pattern on those accounts was found to be consistent with the non-resident status.

As a result of the high level of documentary non-compliance revealed in the exercise, it was decided to carry out an extensive trawl of the declaration forms for evidence of mis-filing in relation to the 24 accounts for which declaration forms could not be located at the date of the audit. The following table indicates the result of that exercise

Status

Number

Original declaration forms located

12

New declaration forms obtained

6

Accounts reclassified

3

Accounts now closed

2

Errors (funds transferred to wrong account)

1

Total

24

The Managing Director has advised me by way of affidavit that the above review of non-resident declarations carried out by First Active adopted a judgmental, non-mathematical sampling approach from which there is no mathematical or sustainable basis for extrapolation. He has further advised me that the conclusions which can be drawn from the work carried out can only be derived from what was actually done i.e. a limited review. He states that an internal audit report of February 1998 and subsequent internal memoranda reflect the justifiable concern that the complexities of the retrieval process for declarations could pose difficulties for First Active in evidencing its compliance with DIRT obligations.

He went on to say that since that date First Active has taken substantive steps to address this data retrieval issue by generating hard copy evidence of non-resident declaration forms. This was an extensive exercise over a period of several months and he estimates that the cost involved to First Active was somewhere in the region of ?300,000. This process did not involve the seeking of new forms from customers but rather concentrated on the retrieval of existing forms and has led to a much improved retrieval system.

External Review

The bank informed me that to the best of its knowledge no issues have been raised in relation to non-resident accounts by either its external auditors or by the Central Bank of Ireland.

Administration of the Taxes Acts

Revenue Inspection of Declarations

Revenue have inspected declarations on two occasions.

In October 1998 an examination was conducted of non-resident declarations held in the bank’s Athlone branch. The bank is currently in the process of preparing answers to final queries raised as a result of that examination.

In February 1999, Revenue requested 100 declarations for examination from the bank’s Grafton Street branch. 85 declarations were available for inspection and queries were raised in relation to 8 accounts. Of the 15 accounts for which declarations were not available at the time of the audit, 4 related to DIRT free charities which had been incorrectly classified as non-resident while 2 related to DIRT free Corporates. Others were either incorrectly classified or the declaration could not be located.

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 First Active plc.

Interest Reporting

I also noted during my examination that returns of interest paid gross as required by Section 891 of the Taxes Consolidation Act 1997 had not been made to the Revenue Commissioners for the years 1995-96, 1996-97 and 1997-98.

Liability Estimation

Following the specific limited review carried out by internal audit in early 1998 which revealed an initial documentary non-compliance rate of 39%, the bank estimated its potential liability to DIRT at ?1.7m for the period 1994 to 1998. However this calculation was carried out in advance of the establishment by First Active of a project to improve its filing and retrieval systems in respect of non-resident declaration forms. The bank has pointed out that this project has reduced the number of missing declaration forms and it does not now believe that its original estimate of ?1.7m approximates to the potential DIRT liability at this stage, although no revised estimates have been prepared by them.

Exceptional Items

Statistics provided by the bank in relation to numbers of non-resident accounts revealed an unusually large upsurge in account closures in 1993 and 1994. Account closures within First Active have generally averaged 1,000 - 1,500 per year. In 1993, the number of non-resident account closures amounted to 2,950 and in 1994 the figure was 1,947. I sought an explanation in the course of hearing evidence and the bank replied by way of affidavit that it had no actual knowledge of the reasons to which it could depose.

Result of Work Performed by the Appointed Auditor

The Auditor reviewed branches of the bank in respect of Achill, Grafton St., Dublin and Monaghan. The following are the results of the review

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

480

No Declaration held

20

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

19

58

42

Total Declaration Exceptions

139

Percentage Exception

29%

Authenticity Risk Profile - Non-residents
Sample

480

Risk Indicator
Irish Address

8

PO Box or ‘Care of’ Address

7

Hold Mail

0

Transaction Profile

0

Accounts with Liens

0

Other

0

Total accounts with Risk Indicators

15

Percentage Exceptions

3%

Accounts also with documentary exceptions

11

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

0

19Documentary Compliance - other Exempt Accounts and SSAs
Account Type

Exempt

SSA

Sample

13

12

No Declaration

2

0

Declaration Exceptions

5

1

Total Exceptions

7

1

Percentage Exceptions

54%

8%

Interest Reporting Exemption
Documentary Compliance(Form F)
Sample 219
No Form 219
Percentage Exception 100%

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