Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 16

Chapter 16 : TSB Bank

Background

TSB Bank was formed in 1992 upon the amalgamation of Cork and Limerick Savings Bank and Trustee Savings Bank Dublin.

The Cork and Limerick Savings Bank was the result of a merger of the Cork Savings Bank and the Limerick Savings Bank in 1986 and Trustee Savings Bank Dublin was the result of the merging of TSB Dublin and TSB Waterford in 1988.

TSB Bank currently has 80 branches.

Non-Resident Deposit Levels

TSB Bank's share of the non-resident market as at 30 November 1998 was 1.33%.

The value of its non-resident book varied between ?92m and ?120m 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

14,295

7.81%

1997

15,827

7.36%

1996

15,939

9.29%

a Information supplied by the bank

b Calculated using Central Bank Data.

Staff Instructions and Procedures

The bank has not issued specific instructions to staff to verify the residential status of the beneficial owner of the interest on non-resident accounts. However the bank's procedures did place an obligation on staff to be satisfied that the residential requirements were being complied with. TSB Bank has always followed good banking practice when opening accounts i.e. "Know Your Customer" and it pointed out that under the Criminal Justice Act 1994, the bank is under a legal obligation to take reasonable measures to identify customers with whom it proposes to do business and has issued specific instructions in this regard. These measures apply equally to all customers, whether resident or non-resident.

The bank asserts that its good banking practice, which has been observed over the years, is corroborated by the lack of any detected abuse of non-resident status.

The procedures issued to staff have always stated that interest may only be paid gross where the customer has completed a form of declaration as approved by the Revenue Commissioners and then only where the person or all of the persons beneficially entitled to the interest are resident outside of the State.

It is the bank's view that its personnel would not accept a declaration they knew to be invalid, as to do so would render them liable to dismissal from its service and guilty of a criminal offence.

TSB Bank have written procedures in place in relation to the opening of Special Savings Accounts. TSB Bank also have a small number of company accounts and some small charity accounts. It is standard practice that the required declarations are obtained.

In general, TSB Bank did not call for affidavits as a means of satisfying themselves in regard to non-resident status claimed by depositors. It is apparent from the information supplied that Forms F were obtained by the bank during the period.

Internal Management Review

Internal Audit

The internal audit function in TSB Bank has evolved over time. In 1986 the then constituent banks each had their own internal audit function. However, in respect of Limerick Savings Bank and TSB Waterford this was essentially a one-person operation. In respect of both TSB Dublin and Cork Savings Bank the audit function would have had relatively small numbers (three to four individuals).

Following the mergers of TSB Dublin with TSB Waterford and the Cork Savings Bank with the Limerick Savings Bank the following broad work programmes were in place from 1989 onwards.

TSB Dublin

Audit reviews were conducted in three main areas, branches (administrative reviews and credit operations), departments and the bank's computer system.

A branch could receive a full audit, a branch administration review or a review of its credit operations. In general, each branch was visited approximately once in every audit year. The operation of non-resident accounts was examined as part of the branch administrative review. The audit programme indicated that, as well as checking that non-resident declaration forms were in place, tests were also conducted on the residency status of the account holder.

Cork & Limerick Savings Bank

Like TSB Dublin, the audit function in the Cork & Limerick Savings Bank carried out reviews in respect of similar areas, i.e. branches, departments and computer systems.

TSB Bank

With the merger forming TSB Bank in 1992 the separate internal audit departments were amalgamated to form one dedicated bankwide internal audit function. The audit approach continued broadly as outlined previously for the former constituent banks until a revised audit plan was put in place in early 1995.

This plan was formulated using a risk based methodology. Resources were allocated to those areas with the greatest apparent risk. Since then branches have been subject to review on average every eighteen months. The bank's Treasury Department is audited every six months.

Non-Resident Checks

The following checks are carried out in TSB Bank

a full list of all accounts in the branch which are designated non-resident is extracted directly from the computer system. This list is examined and a sample of accounts are selected for detailed review as follows

accounts whose transactional activity does not appear to fit the profile of a non-resident account

high balance accounts

newly opened accounts are checked to ensure that the appropriate level of identification has been obtained

a random sample of the remaining non-resident accounts.

At the branch a check is carried out in respect of the sample to ensure that

a Revenue declaration form is in place and has been properly completed

there is no evidence that the customer is resident

any withdrawals which have occurred are in order and correctly authorised by the customer.

The number of audits undertaken at branch level in the period 1989-98 is as follows

* A review of branch operations from a credit risk perspective.

** A review of branch activities from an operational perspective.

*** Special Savings Accounts and Non-Resident Accounts were examined in this audit module in the 1993-95 period.

The bank informed me that systematic abuse of non-resident status on a branch or bank-wide basis was never found. Hence TSB Bank has never had to discipline any member of its staff in this regard or make additional tax payments to the Revenue Commissioners.

I was informed that the reduction in sample size in the 1993-95 period was based on a number of factors

In general the reviews in the preceding years had been broadly satisfactory.

There was a requirement at that time from the bank's insurers that effectively every branch of the bank was visited once a year.

Internal Audit wished to concentrate on certain sensitive areas such as Special Savings Accounts because they were new products

Internal Audit Focus and Results

In the period 1989-92, 65 reviews out of a total of 90 were deemed satisfactory in relation to non-resident accounts. The matters arising in the other 25 reviews were instances where the non-resident declaration form could not be located at the time of the review in respect of a small number of cases examined or where the residency status of the customer was queried.

In the period 1993-95 the primary focus of the branch visits was on the credit risk in branches as based on the prior reviews conducted, areas such as non-resident accounts were not identified as an element which required any special attention. No material matters in relation to non-resident accounts arose. Reviews tended to concentrate on the operation of Special Savings Accounts.

From 1996 onwards, the focus of branch reviews altered to place greater emphasis on the administration reviews due to the introduction of the Criminal Justice Act 1994 which placed additional obligations on financial institutions with effect from 2 May 1995. In 1996, revised audit programmes were implemented following a risk review process which examined all of the audit units of the bank.

In the period 1996-98, 64 reviews were carried out. In general these reviews found procedural failings which were rectified by the branches. The exceptions noted were either where a number of non-resident declaration forms could not be located at the time of the review or where a number of the forms were not fully complete (i.e. unsigned or undated). None of the reviews ever uncovered a bogus non-resident account although some accounts were reclassified.

Internal Audit considered 13 branches of the 64 visited in the period 1996-98 to be unsatisfactory as the exception rate in the samples examined was greater than 15%. In the remaining 51 instances the reviews were considered satisfactory or had only a small number of exceptions.

An overview of the internal audit department for the year ended 31 October 1998 stated that with regard to the administration reviews, branches examined had in general proved to be less than satisfactory or at a minimum had key areas in need of attention. Of the 20 reviews undertaken during the year only 3 were satisfactory. There were a number of common areas in the reviews which proved unsatisfactory or required attention. These included incomplete forms in relation to dormant and non-resident accounts.

The overview noted that failings were believed to derive from the branch's current focus on development activity to the detriment of the administration area. In addition there was not the same level of experience at branch counters as was theretofore the situation.

Specific Findings

I reviewed a representative sample of extracts from internal audit reports in the period 1996-98. These were as follows

Ballyfermot - October 1996

The majority of accounts examined were in order. Three accounts were brought to the branch=s attention where non-resident forms could not be located. Withdrawals examined were in order.

Walkinstown - December 1996

The majority of accounts examined were in order. A declaration form could not be located for one account. In the case of three accounts, it was noted that while flagged non-resident, it appeared that these customers were resident i.e. evidence of regular withdrawals/Irish address on customer information file. In one case the flag was removed and in the other two cases a Acontact manager@ flag was placed on the accounts to confirm the status.

Clonmel - September 1997

The majority of accounts examined were in order. Two accounts were noted where declaration forms could not be located. The manager responded confirming that the forms could not be located and that accounts would have to be re-designated.

A number of accounts which were extremely active (some with Irish addresses) were also noted and were brought to the branch's attention. The branch confirmed that all but one still resided abroad with one having returned recently. Withdrawals examined were in order.

Castlebar - January 1988

In five cases declarations could not be located. One account was noted as having been set up with an Irish address. The manager responded by stating that the customers in question had been written to requesting that they complete a declaration and confirm their non-resident status.

Maynooth - November 1998

Non-resident accounts and account withdrawals were examined and found to be in order.

Similar findings were noted in the internal audit reports in the period 1989-92.

Audit Follow Up and Reporting

The matters raised in an audit report are brought to the branch manager and regional manager's attention. Any matters raised are addressed by the branch manager and documented in his response to the report.

An Audit Committee comprising three non executive directors was established by TSB Dublin in 1990 and continued in existence following the formation of TSB Bank in 1992. The internal auditor reports to the committee on a half yearly basis.

Since TSB Bank never had a serious issue in relation to the assessment and collection of DIRT, the matter never required to be brought to the main Board's attention. Any queries raised by the Board were addressed to its satisfaction by management.

The Audit Committee referred to non-resident accounts on two occasions.

At a meeting held on 17 July 1991 the committee considered the matters arising in the external auditors' management letter relating to TSB Dublin in respect of the financial year ended 20 November 1991. Overall the opinion expressed was that the letter was a very good one and reflected a good report for the bank. At this meeting the chairman queried what percentage of accounts flagged non-resident were found not to be supported by the appropriate declaration forms. The internal auditor stated that in general the percentage was low and that in the branches reviewed since the last meeting of the committee, no non-resident accounts had been found without the appropriate forms and that normally this area was reviewed by sampling in a branch audit.

At a meeting of the Audit Committee held on 15 December 1998 the head of internal audit stated that the internal audit review of the bank's non-resident accounts had confirmed that there was no evidence of any fictitious non-resident accounts being held in the bank. The review had highlighted some instances where forms were not fully completed or, in a small number of cases where the forms could not be found. In all cases the accounts involved were genuine non-resident accounts.

Specific Reviews

Other than routine internal audits and the exercise undertaken in 1998 to ascertain the number of non-resident accounts which were only supported by a Form F, which is discussed below, no specific reviews were undertaken by TSB Bank in the period 1986-98.

External Review

Central Bank Review

The Central Bank of Ireland in their supervisory reviews have never raised the operation of non-resident accounts with the bank.

External Audit Review

In their most recent report to the bank's Audit Committee in December 1998, the external auditors highlighted for the committee the findings of the bank's own internal audit reviews in respect of branch administrative failings with regard to the operation of non-resident accounts. This noted that non-resident accounts were deemed to require attention in a large number of branches visited and to be unsatisfactory in some branches. The weaknesses related to incomplete declaration forms or to the fact that some declaration forms could not be located at the time of the review.

TSB Bank informed me that the observations made by the bank's external auditors were made following a review of the work of the internal audit department during 1998. The matters arising from these audits had been brought to the attention of both branch management and regional management following the review and were dealt with at the time. As these matters had already been raised by the bank's internal auditor both internally and with the Audit Committee of the Board, the bank's control systems had operated properly.

In the years 1988-90 the external auditors= management letters for TSB Dublin included observations and management's response in respect of non-resident declarations. The extract below refers to 1990 but similar comments were made in 1988 and 1989.

"During our review of non-resident accounts we noted a number of instances where statutory non-resident declaration forms were not on file. We recommend that bank procedures ensure that this Form is completed by all non-residents prior to the opening of an account and that a review takes place to ensure that the necessary documentation for existing accounts is followed up and filed."

Management's response was that the statutory non-resident declaration form is placed on file when non-resident accounts are opened. Every effort is made to obtain the required documentation for existing accounts.

Administration of the Taxes Acts

Revenue Inspection of Declarations

In May 1998 officials from the Revenue Commissioners visited the bank, reviewed procedures and inspected a sample of non-resident declaration forms. The officials noted a number of accounts which did not have a Section 37 declaration but did have a Form F.

The bank informed the Revenue Commissioners that, in 1986, branches wrote to all non-resident account holders requesting new declarations and that they had some difficulty obtaining forms in view of the considerable depositor apprehension at that time. Despite this, between the original request and subsequent follow-ups, new declaration forms were obtained for the majority of non-resident accounts. In general where TSB Bank did not receive the new declaration, accounts were re-designated as resident, making them liable for retention tax. Where non-activity on the account and/or branch knowledge indicated a genuine non-resident situation, it would appear that accounts were not re-designated. Correspondence on this issue is continuing.

As a result of this examination the bank wrote to all managers asking them for details of the number of non-resident accounts which were only supported by a Form F rather than the Section 37 declaration. I was informed that the result of this exercise was that there were slightly over 1,400 of these accounts (at December 1998, TSB Bank had a total of 14,295 non-resident accounts). The bank has written to all such account holders requesting the new declaration form to be completed.

In the course of oral evidence the Chief Executive of TSB Bank informed me that when the Revenue Commissioners examined the declarations in the Grafton Street branch they discovered 8 of these accounts. Five of these accounts had no movement since 1986 and in relation to the other 3 the amounts of interest could literally be counted in pennies.

The Financial Controller of TSB Bank stated in evidence that while no detailed analysis of these 1,400 accounts has been undertaken he believed that, similar to the results of the Revenue examination, the majority of these accounts have minor balances and that a large number would be dormant accounts. He also informed me that a number of branches re-classified such accounts where balances were less than ,1,000 in 1998.

I asked the Head of Internal Audit why internal audit did not raise this issue as a potential problem for the bank in the period 1987 to 1998. In response he informed me that the number of instances where internal audit came across a Form F only was low and certainly not of a magnitude to indicate the extent of the current problem. The primary reason for this is the sampling method employed by internal audit for examining non-resident accounts which is weighted towards high value accounts and accounts with a high number of transactions. A small number of additional accounts are randomly selected.

Investigation Branch Enquiries

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

Interest Reporting

Returns under Section 891 of the Taxes Consolidation Act 1997 have been made in all appropriate cases. The bank did not submit returns for two years 1993-94 and 1994-95 at the required time. Following reminders from the Revenue Commissioners these returns were subsequently submitted.

DIRT Remittances

TSB Bank informed me that at no time have the Revenue Commissioners ever expressed any concern with regard to the amount of DIRT collected by the bank.

On two occasions the bank overpaid its DIRT liability which necessitated meetings and correspondence initiated by the bank to rectify the situation. TSB Dublin overpaid its April 1988 payment by ,2.1m remedying the situation in April 1989, following a meeting with officials of the Collector General's Office. Cork and Limerick Savings Bank overpaid its DIRT liability in October 1988 by ?1.2m a situation that was not remedied, due to errors on the bank's side, until April 1994.

In both cases the overpayments arose because the Savings Banks were asked by the Department of Finance in 1987 to make their April 1987 DIRT payment on an accruals basis rather than on the basis set out in the 1986 Finance Act.

Result of Work Performed by the Appointed Auditor

The Auditor reviewed branches of the bank at Bandon and Dundalk. The following are the results of the review.

Tax Exemption

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

Sample

227

No Declaration held

13

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

25

12

10

Total Declaration Exceptions

60

Percentage Exception

26%

Authenticity Risk Profile - Non-Residents

Sample

227

Risk Indicator

Irish Address

7

PO Box or "2Care of" Address

5

Hold Mail

2

Transaction Profile

2

Accounts with Liens

0

Other

0

Total accounts with risk indicators

16

Percentage Exceptions

7%

Accounts also with documentary exceptions

7

Accounts where the bank believes it holds

appropriate evidence of non-residence

16

Documentary Compliance - other Exempt Accounts and SSAs

Account Type

Exempt

SSA

Sample

15

20

No Declaration

3

0

Declaration Exceptions

7

0

Total Exceptions

10

0

Percentage Exceptions

67%

0%

Interest Reporting Exemption

Documentary Exemption (Form F) Dundalk Branch only

Sample

112

No Form

99

Percentage Exception

88%

At no time during the period under review did the Bandon branch of the TSB Bank hold Form Fs.

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