Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 15

Chapter 15 : Irish Nationwide Building Society

Background

The society which was established in 1873 currently operates through 48 branches and 85 agencies. During the period under review it acquired the Irish Mutual Building Society in 1989 and the Metropolitan Building Society in 1991.

Non-Resident Deposit Levels

The society's share of the non-resident deposit market as at 30 November 1998 was 1.46%.

The value of its non-resident book varied between ,8m and ,132m during the period 1986-98.

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

Year

Number of Non-Resident

Accountsa

Percentage of Deposit

Book by Valueb

1998

1997

1996

11,200

10,800

8,800

13.3%

12.1%

14.6%

a Information supplied by the society

b Calculated using Central Bank data.

Staff Instructions and Procedures

Investors wishing to open a non-resident account are required to complete a non-resident declaration. The declaration is forwarded to the society=s head office and a copy is retained at branch level.

The society has detailed account opening instructions including the requirement to identify the prospective customer and to complete a non-resident declaration.

Identification procedures which extend to all account holders provide for face-to-face contact and the use of identification documents from a reputable source including passports. In addition there is a requirement to record the reference numbers of the identification on the reverse of the account application card and to separately identify the address supplied.

In the case of non-resident accounts opened by post, the society stated it is not feasible for the customer to visit a branch. Arrangements are made in this instance for photostat copies of a passport/drivers licence and utility bill to be forwarded along with the account application cards. In the event of any suspicion arising as to the validity of the copies, a reference is then sought from a reputable credit or financial institution in the applicant's country of residence.

I was informed in oral evidence by the Managing Director of the society that procedures in relation to non-resident accounts were in place from the inception of DIRT and that staff are reminded of the procedures at management reviews, training courses and following any relevant findings from internal audit.

He also informed me that it is the society=s procedure that an account should not be designated DIRT exempt until the declaration had been received.

The bank did not seek a Form F during the period 1986 to 1993 and neither did it seek an affidavit 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

Extent and Frequency

There was no internal audit function within the society until 1991. The first documented internal audit examination of non-resident accounts was in 1993. I was informed by the Managing Director of the society that prior to the establishment of the internal audit function non-resident declarations were examined by head office staff following the opening of each account. There would also have been some visits by head office staff to branches but this was not as formalised as the internal audit process.

During the period 1993-97 a branch internal audit included an examination of a sample of approximately 20 non-resident accounts which had been opened within the previous 12 months. As a result non-resident accounts opened prior to 1992 would not have been reviewed in this period unless they had a high frequency of transactions at the time a special examination of non-resident accounts was undertaken in 1993-94. The primary focus of the audit in relation to non-resident accounts was on whether the declaration existed. I noted from my review of internal audit reports in this period that, in general, no reference was made to the standard of completion of the declarations.

The current practice is that four branches are audited every three months with a sample of 35 non-resident accounts opened within the previous 12 months examined so as to ensure that non-resident declaration forms are in place and completed accurately. The sample size of 35 was introduced in mid-1998.

Since late 1998 all high activity non-resident accounts are also routinely reviewed and explanations obtained as to the reason why such activity is occurring.

I was informed by the society that while no changes have been made to instructions, procedures or policies as a result of recommendations made by internal audit, a stronger emphasis has been placed on the issue of non-resident accounts with sample sizes increasing when performing routine branch audit visits.

In relation to Special Savings Accounts I was informed by the Head of Internal Audit that the focus of internal audit is on the actual existence and completeness of the declaration and not on the other provisions such as the minimum notice required for withdrawals.

Internal Audit Results

I obtained and reviewed a copy of all internal audit reports undertaken in the period 1993-1998 which referred to non-resident accounts. The results of this review for the period 1994-1998 is outlined in the following table.

According to the society the result of reviews carried out by external audit was that on average a small percentage (3%) of non-resident declarations were missing.

I asked the internal auditor for an explanation of the difference between the 3% deficiency rate noted by external audit and the 17% deficiency rate as calculated by me following my review of the internal audit reports. In response I was informed that the major reason for the deficiencies mentioned in the internal reports was poor filing systems in branches. Cases where the declarations did not exist or where they found that accounts needed to be reclassified did arise occasionally and would have been dealt with appropriately. She informed me that the 3% referred to was a figure calculated by the external auditors which took account of the results of the follow up work undertaken by the branch after the issuing of the internal audit recommendations. Certain other cases were disposed of by being redesignated resident where a non-resident account holder had returned to Ireland.

Where accounts were redesignated, the DIRT payable relating to the relevant year of assessment would be adjusted. There were no additional DIRT payments.

I was informed in oral evidence by the Managing Director that the society does not have any statistics on accounts which were redesignated resident from non-resident during the period under review.

I noted during my review of internal audit reports that there was no reference to the audit of agencies. Agents have introduced almost 2,000 of the non-resident accounts held by the society. I was informed in oral evidence by the Head of Internal Audit that the agents of the society are subject to audit by internal audit but in practice agents were seldom audited until recently. She informed me that reliance was placed on the branch managers who would visit the agents allocated to them. She also informed me that at present any audit of an agent would only cover the existence and completeness of the non-resident declarations. Due to the nature of the computer system in operation internal audit are unable to audit high activity accounts introduced by agents. I was also informed by the Managing Director that no major problems in relation to non-resident accounts introduced by agents have arisen.

Reporting and Audit Follow-Up

In oral evidence I was informed that the Board of Directors also serves as the Audit Committee. Every member of the Board receives a full copy of each internal audit report. The Head of Internal Audit does not attend the Board meetings when internal audit reports are being discussed.

There has been no reference to non-resident accounts in the minutes of the Board. I was informed in oral evidence by the Managing Director of the society that the issue was discussed on occasions at Board level but that it would not have been a significant matter culminating in a specific decision by the Board and was therefore not recorded in the minutes.

Other Investigations and Reviews

In 1993 internal audit conducted a special examination of non-resident accounts for validity by measuring activity on accounts and querying whether accounts with frequent activity were genuine non-residents.

The then Head of Internal Audit noted 610 non-resident accounts which were transacting more frequently than once a month. On that basis he formed an initial belief that a large number of non-resident accounts in the society were not genuine. In early 1994 he requested a sample of branches to confirm in writing that these high activity non-resident account holders were genuine, and if not, the accounts were to be converted to resident status.

I noted from my review of documentation received from the society that 24 branches which accounted for approximately 100 accounts responded to the internal audit request. The former Head of Internal Audit informed me that when he received the responses from these branches, which were very positive, he was satisfied that the society did not have a problem with bogus non-resident accounts and he did not seek explanations from the remaining branches or from any agents.

In the course of this examination branch managers were also informed that it was a breach of society policy to open a non-resident account where the investor was known to be resident and to allow an account to continue as non-resident where the investor had returned to live in the State.

The society informed me that the outcome of this investigation was satisfactory, with most branch managers providing adequate explanations for activity on the non-resident accounts. However, there were a number of instances where responses were not obtained or where account holders were redesignated resident.

External Review

Central Bank Review

The society 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 issue of non-resident accounts was raised on two occasions by the society's external auditors

In relation to the year ended 31 December 1995 the auditors stated that based on testing carried out by the internal auditor and subsequent follow up by the external auditor, it was identified that on average 3% of special savings and non-resident declaration forms were missing. The report noted that if a form was not signed then the account was not a SSA or non-resident account and full liability to DIRT arose and was payable by the society. Management's response was that a thorough review was carried out on SSAs and non-resident declaration forms. Missing forms were located. They had been held in branches or mis-filed.

In relation to the year ended 31 December 1996 the auditors stated that based on a sample test performed at interim audit stage all declarations for SSAs were on file. All declarations for non-residents were on file except one, but this account had been closed during the year.

Administration of the Taxes Acts

Revenue Inspection of Declarations

Revenue inspected non-resident declarations in respect of the society=s branch at Lower O'Connell Street. The results were as follows

Date of Inspection

Sample

Declarations Missing

Queries Raised

June 1998

105

0

26

Three issues arose following the Revenue examination

There were 25 declarations (from the 100 actually dated) dating back to the period 1986-1989 inclusive. The society was satisfied that these accounts were genuine. The Revenue officials did note that their age supported the case for having a reviewing procedure at regular intervals rather than the present system of waiting to be told of a change of residence by the individual depositor.

In a letter dated 19 August 1998 to the society, Revenue stated that the unsatisfactory standard of completion of declarations need to be addressed immediately. Revenue referred to 23 declarations (22% of the total examined) for individuals which had at least one deficiency and suggested that the society should arrange for the completion of new declarations in each case. Revenue also stated that if the same percentage of deficient declarations applied in other branches then a more radical exercise was required by the society. In September 1998 the society replied to Revenue stating that they were arranging for the completion of new declarations in the case of the 23 deficient declarations and were working on reviewing and improving the standard of completion of declarations in all branches.

Revenue also stated in its follow up letter of 19 August 1998 that it would be raising queries in relation to the internal audit procedures in place in the society and the role of agents acting for the society.

Investigation Branch Enquiries

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

Interest Reporting

The society's returns under Section 891 were filed in all cases.

Result of Work Performed by the Appointed Auditor

The auditor reviewed branches of the society at Ennis, Grand Parade and Waterford and in addition carried out a central review. The following are the results of the review

Tax Exemption

Documentary Compliance - Declaration of Non-Residents (Form 37)

Sample

757

No Declaration held

6

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

64

39

85

Total Declaration Exceptions

194

Percentage Exception

26%

Authenticity Risk Profile - Non-Residents

Sample

840

Risk Indicator

Irish Address

26

PO Box or "Care of" Address

44

Hold Mail

0

Transaction Profile

16

Accounts with Liens

0

Other

49

Total accounts with Risk Indicators

135

Percentage Exceptions

16%

Accounts also with documentary exceptions

55

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

44

Documentary Compliance - other Exempt Accounts and SSAs

Account Type

Exempt

SSA

Sample

40

39

No Declaration

6

1

Declaration Exceptions

1

5

Total Exceptions

7

6

Percentage Exceptions

18%

15%

Interest Reporting Exemption

Documentary Exemption (Form F)

Sample

201

No Form

201

Percentage Exceptions

100%

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