Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 17

Chapter 17 : ACC Bank plc

Background

ACC Bank is wholly owned by the Minister for Finance and operates through a network of 50 branches.

Non-Resident Deposit Levels

ACC Bank’s share of the non-resident market as at 30 November 1998 was 2.49%.

The value of its non-resident book varied between ?135m and ?225m during the period 1986-98. As at 31 December 1998 foreign currency denominated deposit accounts represented approximately 18% of the total non-resident book. Foreign currency accounts are held in either Sterling or US Dollars.

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

Year

Number of

Non-Resident Accountsa

Percentage of Deposit Book by Valueb

1998

11,965

14.9%

1997

n/a

17.1%

1996

n/a

19.4%

a Information supplied by the bank.

b Calculated by reference to data supplied by the bank except in the case of 1996 where Central Bank data was used.

Staff Instructions and Procedures

Over the period under review, guidance and instructions were issued to staff through a variety of means

Branch Administration Policy and Procedures Manual

The relevant section of this manual covers the policy and procedures for opening an account and refers specifically to the requirement for a declaration form in the case of non-resident accounts.

Banking Standards Guide

The relevant sections in the guide set out the standards to be adopted when opening accounts and specifically refers to the requirement for a declaration form in the case of non-resident accounts.

Branch Self Audit Checklist

This document sets out a list of checks to be performed by specified branch staff at prescribed intervals and represents a means whereby branches can regulate their procedures. In the case of non-resident accounts, this includes ensuring that non-resident declarations have been sought for all new accounts.

Internal Memoranda

Internal memoranda formed part of instruction and guidance issued to branch staff over the period and covered such matters as

non-resident declarations

taxation compliance

improving branch controls.

The bank informed me that it was not its practice to require a Form F during the period.

The bank confirmed that it never sought or received an affidavit under the Finance Act, 1983.

Internal Management Review

Non-resident accounts were reviewed during the period in two ways

Standard internal audit work

Special reviews.

Standard Internal Audit Work

Extent of Standard Internal Audit

During the period 1986-1998 non-resident accounts were reviewed as part of the bank’s standard internal audit work undertaken in each branch. Branches are audited on a cycle of 1-2 years depending on a number of factors including size and previous audit findings. In circumstances where a branch receives an unsatisfactory rating a follow-up visit is carried out after 6 months.

While the work programmes of internal audit evolved over time and the bank does not maintain a written log of changes to its programmes, I was informed that full reviews of non-resident accounts with possible indications of residency have been conducted since 1995. In the period 1992-1993 until then similar testing was carried out on a sample basis.

Results of Standard Internal Audit Work

In the course of the standard internal audit work undertaken in the period, non-resident administration issues arose in 68 branch audit reports and Special Savings Account (SSA) administration issues arose in 112 branch audit reports. The incidence of such issues by year was as follows

Year

Branches where

Non-Resident Issues Arose

Branches where SSA Issues

Arosea

1988

1

1989

5

1990

2

1991

8

1992

8

1993

12

9

1994

11

13

1995

6

19

1996

9

24

1997

6

25

1998

0

22

Total

68

112

a Special Savings Accounts were introduced with effect from 1 January 1993.

The types of issues which arose during such audits included

declaration forms not available

declaration forms not fully completed

non-implementation of instructions to revert accounts without declarations to DIRT liable status

opening of accounts for customers known to be resident

single declaration forms purporting to cover a number of accounts

non-resident accounts with frequent transaction movements

coding errors on non-resident accounts

account balances exceeding maximum SSA thresholds

breaches of SSA withdrawal periods.

Branches referred to on a recurring basis

The following branches were referred to on a number of occasions

Hatch Street 1991, 1992 and 1993

Longford 1989, 1991, 1994 and 1995

Ennis 1989, 1991 and 1993

The types of issues referred to in these branch reports broadly reflected those listed above.

I enquired of the Chief Executive as to whether this indicated that internal audit findings were not being taken seriously. The Chief Executive stated in evidence to me that "in general the audit findings were taken seriously. There was many an issue with individual branch managers who were told they had to get it right. So, it was taken seriously. Now there were, we will say, instances of mistakes being made. I just cannot tell you whether these instances were purely clerical errors where, in the systems that we put in, there were just mistakes made as to the designation of a particular account. I do not have the answer to that now, but in some cases when we investigated it, there were very specific corrections made."

Specific issues arising in branch audits

In February 1993, the Deputy Chief Executive wrote to the Chief Executive on the subject of Taxation Compliance following a meeting with Revenue. The memorandum stated that Revenue were informed that any breach would be treated as a disciplinary matter. I noted the following audit results

Tallaght 1993 One non-resident account was found to be held by a member of Head Office staff.

Tuam 1995 A sterling deposit account held by a staff member was coded as non-resident (and therefore not liable to DIRT) and neither a signature card nor a non-resident declaration were in place for the account. A foreign address was entered on the transaction slips processed against the account.

Nenagh 1995 A review of banking operations resulted in an overall rating of unsatisfactory. Internal audit concluded that no other rating could be considered given the findings on non-resident accounts and cheque issue. The findings related to a group of accounts operated by a single substantial customer. It was found that banking controls under a number of headings were subverted in the operation of the accounts.

Tullamore 1995 Investigations at the Tullamore branch revealed that a member of staff had been operating non-resident accounts with fictitious names and false addresses. These accounts were found to have been operated with the knowledge of the branch manager and assistant manager. The accounts, which comprised both Irish pound and sterling accounts, had aggregate balances in excess of ?50,000. It was further noted that as some of the accounts had been operating with non-resident status since March 1992, accumulated DIRT in excess of ?2,700 was outstanding.

The situation was further compounded in that as the accounts carried fictitious names and falsified declarations the provisions of the Criminal Justice Act, 1994 had been breached. A written explanation was requested from the branch manager. The report further stated that this was the second case of this kind to emerge from the branch network in recent weeks and reflected the lack of regard for both internal policy and the statutory requirements in the area of non-resident accounts.

Portlaoise 1998 As a result of a customer complaint to the Ombudsman a number of irregularities were found in the operation of a non-resident deposit account.

In light of the undertaking to Revenue I enquired of the bank as to whether disciplinary action had been taken in any of these cases. I was informed that the bank has no record of disciplinary action having been taken against the manager of either the Tallaght or Tuam branches. The staff members concerned were directed to regularise their affairs. In the case of the Tullamore branch the staff member involved was dismissed.

The bank informed me that in the case of reclassifications arising out of this work, DIRT would be accounted for with effect from the beginning of the tax year in which the reclassification occurred.

Internal Audit Reporting and Follow Up

General Follow Up

The Chief Executive informed me that the Deputy Chief Executive had responsibility for control issues, liaising with him in this regard. As issues arose they were corrected. The Chief Executive’s practice was to discuss the matter with the Deputy Chief Executive who in turn would hold discussions with the Head of Retail Banking and so on down the line.

The Chief Executive assured me that upon being informed of such matters he issued directions that the matters raised be addressed and that there was certainly an improvement but that there were still some lapses in practice.

In 1989 and in 1992 the General Manager, Retail Banking issued instructions to the effect that non-resident accounts not having a valid declaration should be reverted to DIRT liable status. Confirmation was requested from branch managers in November 1992 that all non-resident accounts were either accompanied by a valid declaration form or had been reverted to DIRT liable status. In December 1992 he reported that only 50% of managers had responded to the request for confirmation. In light of the failure of the instructions to have the desired effects, I enquired as to what action, if any, was taken against managers who persistently ignored instructions.

I was informed that the managers were reprimanded and were given a "dressing down" and that Internal Audit findings are taken into account when determining managers’ bonuses.

Special Savings Accounts

Arising from internal audit findings on the area of SSAs, the General Manager, Retail Banking issued a direction in September 1997 which stated, inter alia, "Problems continue to arise with regard to customers holding more than one Special Savings Account, balances on Special Savings Accounts exceeding the ?50,000 limit and the absence of documentation supporting the 30 days notice of withdrawal. All of these are statutory requirements. The 30 day notice period is being ignored on a widespread basis at some branches. This cannot continue. Unless the rules are complied with, the accounts concerned cannot continue to hold Special Savings Account status."

Interest on moneys in SSAs which were not being operated in accordance with statutory conditions would be subject to DIRT at the full rate. There is no evidence to show that the bank has calculated a DIRT liability for such cases.

Exempt Accounts

The bank assured me in oral evidence that its policy was to require declaration forms from companies, charities and pension funds for the purposes of exemption from DIRT and that clear instructions were given to that effect.

I enquired as to whether the reviews carried out by the bank had sought to establish whether these declarations were present. I was informed that declarations in respect of exempt accounts were reviewed, on a sample basis, as part of internal audit work in the area of wholesale banking in 1997. No review of this category of accounts was undertaken within retail banking. The bank stated that it was not aware of any compliance issues on these declarations but that they would not have been the main focus of the most recent review.

An interim internal audit report entitled "Areas of Difficulty" (June 1998) submitted by the internal audit manager to the General Manager, Finance stated that when the treasury/corporate area was reviewed in 1997 approximately 50% of customers did not have the appropriate declarations in place and that no work had been completed by the bank in this area. The report recommended that declarations should be sought for all customer accounts from which DIRT is not deducted. No DIRT liability was calculated in respect of the deficiency.

I was assured that the internal audit programme would from time to time check such declarations.

Special Reviews

1992 Review by External Auditors and 1992-93 Joint Review by Internal and External Auditors

Context

The management letter from the external auditors after completion of the audit of the 1991 accounts noted, inter alia, that a number of non-resident deposit accounts did not have declarations.

As part of management’s response, the General Manager, Retail Banking wrote to all Branch Managers in August 1992 stating that the bank could not continue to hold non-resident deposits without having on file signed declarations of non-residence. This point had been made twice in 1989 but it appeared that the situation had not been properly remedied. He therefore asked that the situation be regularised by 30 September 1992, by ensuring that any non-resident account not accompanied by the appropriate declaration would be reverted to resident status by that date.

In September 1992 the Government decided to commence a process which would lead to ACC Bank moving out of State ownership. As part of the preparatory process the bank engaged its external auditors to produce a Long Form Report (LFR) to make the disposal process more efficient. The LFR incorporates descriptions of the business processes employed and key business risks.

The purpose of the LFR was to provide a level of assurance to prospective purchasers and thereby reduce the extent of due diligence work that they would require to be conducted. Consequently, disruption to the bank’s ongoing activities would be minimised. Work on the report, which covered all aspects of the bank’s activities including the operation of DIRT, commenced in November 1992.

In November 1992 the external auditors visited 8 branches and examined non-resident declarations.

Results

The LFR went through three drafts dated December 1992, April 1993 and October 1993. The first draft highlighted major problems with regard to documentary compliance and concluded that the DIRT system was not being operated correctly by the bank and that it would be necessary to take measures to ensure that the position was rectified. The first draft included the following findings

Results of the Long Form Review - Accounts not subject to DIRT

Branch

Value of Accounts Held (?m)

Value of Accounts Reviewed

(?m)

No Declaration

(?m)

Questionable Declaration

(?m)

Total of No Declaration and Questionable Declaration as a % of Accounts Reviewed

by Value

Hatch Street

28.3

25.8

13.9

0.9

57%

Westmoreland St

27.9

26.6

2.6

17.9

77%

Monaghan

5.7

4.7

0.9

0.5

28%

Dundalk

6.8

6.0

0.7

0.4

20%

Tuam

6.3

5.1

1.4

2.4

74%

Roscommon

4.1

4.0

0.4

0.5

23%

Ballina

8.3

7.8

1.5

2.2

49%

Sligo

4.0

4.0

0.1

0.0

2%

Total

91.4

84.0

21.5

24.8

55%

The first draft concluded that, having found an overall level of 55% of DIRT exempt accounts by value without a valid declaration, there was no reason to believe that a review of other branches would disclose a different position and that on the assumption that 55% of interest credited should have been subject to DIRT, that the potential liability could be of the order of ?17m.

Objection to Publication of Results

ACC Bank are of the view that the information contained in the first draft of the LFR is inaccurate and does not reflect the true position. The bank has provided me with their views by way of affidavit. They assert that the inclusion of that first draft in my report is unfair. Insofar as their affidavit suggests that I have acted in an unfair manner, I do not accept their view. It is a fact that the report was prepared and I would be failing in my duty not to disclose its existence.

Relevant extracts from the three drafts of the LFR, together with a sworn affidavit from ACC Bank setting out its views on this matter are at Appendix G21.

Follow Up

In response to the findings of the LFR, the bank took action to address the issues raised in relation to DIRT. These actions comprised

the issuing of instructions, and

joint oversight of a clean-up process by internal and external audit

Instructions

The General Manager, Retail Banking wrote to branches on 2 December 1992 to say that there was a problem with the levels of non-compliance in respect of declarations for non-resident accounts. He stated that the bank’s external auditors had visited 8 branches and had found varying levels of non-compliance. He added that from the auditors’ findings it could be surmised that there was a problem at most branches and urgent attention must be given to remedying the problem. The letter stated that the problem existed on a number of levels

incomplete declaration held

completed declaration held for only one of a depositor’s accounts

no declaration held.

The General Manager, Retail Banking stated that "despite repeated exhortations to regularise matters, non-resident declarations have continued to be the subject of comment in both internal audit reports and in the external auditors’ management letters...Where no declaration is held and none can be procured by 31 December 1992 the relevant account(s) must be switched to resident status."

Joint Review

A joint exercise was conducted by the bank’s internal and external auditors the purpose of which was to oversee the carrying out of the bank’s instructions regarding the clean-up. I am informed that the external auditors monitored branches until February 1993 while internal audit monitored branches until March 1993. The results of this exercise were

Internal Audit Findings

Branch

Declaration

Satisfactory (%)

Declaration

Incomplete

(%)

Declaration not held for all accounts

(%)a

No

Declaration

(%)

Tallaght

98

0

1

1

Rathmines

100

0

0

0

Mohill

62

19

19

0

Dungarvan

100

0

0

0

Kilkenny

97

3

0

0

Navan

84

0

15

1

Tullamore

90

2

8

0

Wicklow

93

0

7

0

Wexford

86

10

3

1

Galway

60

11

29

0

Kilrush

46

5

49

0

Letterkenny

37

36

26

1

Ennis

65

1

34

0

Castlebar

58

20

19

3

Tralee

74

18

7

1

Longford

42

33

22

3

Thurles

33

7

15

45

New Ross

82

6

8

4

a While the bank held at least one declaration for the customer, it did not cover all of the customer’s accounts.

The report for the internal audit element of the review noted that

while the results had been verified by internal audit as at 28 January 1993, four branches - Thurles, Tallaght, Castlebar and Ennis had been given further reminders to regularise matters in relation to non-resident accounts with the above figures reflecting their efforts up to 5 March 1993.

in most of the branches, there were significant volumes of deposits for which declarations were incomplete or did not cover all of the customer’s accounts.

Internal Audit had previously repeatedly referred to the problem of non-compliance with statutory requirements in relation to non-resident declarations in its branch audit reports. Despite this, deficiencies on a significant scale were found in December 1992 even in branches where written confirmations from the manager had been secured.

The clean-up exercise by the branches examined by both external and internal auditors had brought about significant progress in eliminating the most glaring irregularities in the administration of non-resident accounts. However, further work would be necessary to deal with the incomplete and questionable declarations.

The state of disarray which existed with the declarations, the failure of branches to comply with direct instructions on the issue and the fact that written assurances by branch managers in December 1992 were found to be materially untrue were indicative of an attitude to banking standards and to legal requirements which needed to be sharply reversed.

External Audit Findings

The external auditors reviewed a further 3,956 accounts in 18 branches and found the following

Branch

Total

Valid Declaration

Declaration Incomplete/

Questionable

No Declaration/

Misc.

Form to be in place by 31/12/92a

Account to Revert to Residentb

Ballina

573

344

191

3

5

30

Ballinasloe

202

97

45

2

28

30

Bandon

191

31

156

0

1

3

Carlow

98

56

20

0

4

18

Clonmel

92

39

41

0

2

10

Cork

354

154

81

0

5

114

Drogheda

128

103

23

2

0

0

Dundalk

555

390

142

5

5

13

Limerick

111

90

14

0

2

5

Listowel

77

48

25

0

3

1

Monaghan

389

173

195

11

0

10

Mullingar

142

95

18

0

0

29

Naas

100

65

16

0

15

4

Nenagh

68

53

11

0

4

0

Newcastlewest

80

59

3

0

7

11

Portlaoise

75

54

30

0

6

12

Skibbereen

153

48

84

0

2

19

Tuam

568

56

317

25

11

159

Total

3,956

1,955

1,385

48

100

468

%

49.4%

35%

1.2%

2.5%

11.8%

a I am informed that these were cases where declarations were missing but the auditors had been assured that they would be obtained by 31 December 1992.

b Cases where no declaration was found and was not likely to be obtained by 31 December 1992.

Following these exercises, the second and third drafts of the LFR stated "A review of the operation of DIRT by the bank was undertaken in order to obtain assurance that the system is operated correctly. Following this review an instruction was given to all branch managers in the bank to obtain properly completed declarations in respect of non-resident and charitable deposits where none existed or to revert the account to DIRT status and deduct tax as appropriate. By 31 December 1992 this exercise was substantially complete and the position was generally in accordance with the regulations."

The LFR was never finalised or issued as the intended privatisation of the bank did not materialise due to a change of government and the new government’s proposal for a third banking force.

Reclassifications

As a consequence of the instructions issued and the joint review in 1993, 852 accounts with a total value of ?7,689,512 were reclassified as resident by the bank. This is further considered under the heading of Liability Estimation beneath.

1998 Special Review

In 1998 a special review was carried out by internal audit. The impetus for the review was a proposed Revenue inspection of declaration forms.

The report of the review noted

almost 10% of the bank’s non-resident book carried the instruction to issue no correspondence. This represented a balance of almost ?23m, spread over 661 accounts

66 non-resident accounts with total balances over ?2.6m carried a "c/o ACC Bank" address. Sixteen branches held more than 10% of non-resident funds in such accounts

5,501 accounts were noted where declarations were more than five years old.

Internal audit recommended that

in the case of no correspondence accounts each branch initiate an immediate review of accounts held with this instruction, with a view to reducing the level significantly.

with regard to "c/o ACC Bank" accounts, Retail Banking, as part of a review of non-resident accounts, give particular attention to accounts with this type of address. The review by branch staff should focus on accounts with frequent transactions or accounts which have transfers to accounts with resident status. Where it is not possible to confirm a customer's address a caution code should be placed on the account.

an exercise be initiated by Retail Banking to review all accounts for which declarations are over five years old.

1999 Special Review

A two pronged review was conducted of 11 branches within the bank’s branch network in 1999

the status of the non-resident book as at 31 December 1998 was examined

the reasons for reclassification of non-resident accounts in the period 1990 to 1998 were considered.

Examination of the Current Non-Resident Book

50% of each of the 11 branches’ non-resident book including the top fifteen Irish pound accounts and the top five foreign currency accounts at each branch were examined.

This involved examining the accounts of 368 customers to ensure that a non-resident declaration was in place and to verify the tax status of the account. Evidence of correspondence between the bank and the customer and the presence of indicators contrary to non-resident status were also checked for.

The review found that for 60% of customers the bank had some form of correspondence between itself and the customer. Branch staff claimed to have knowledge of 70% of the remainder and were satisfied with their bona fides. Of the total book reviewed, 2.4% of accounts in value terms were found to have evidence contrary to the tax status on the account. This accounted for nine customers. In the case of six customers, it was found that one party to the account was resident while the other was non-resident.

The bulk of cases where branch staff had no knowledge of the customers arose in three branches - Charlemont Place, Tralee and Dundalk.

This review also examined 289 "no correspondence" cases. The results were as follows

Accounts Already Closed

Customer Known to Staff

Contradictory Evidence of Status

Customer Not Known

39%

34%

5%

22%

The bank informed me that 36 "c/o ACC Bank" cases were also reviewed and 50% were found to be already closed. A further 25% had supporting correspondence.

Views of the Bank

I sought the comments of the bank on its high levels of "no correspondence" accounts among its non-resident book. The bank stated that it was not aware of how this level compared with industry levels. I was assured that there had been a directive to obtain addresses for these accounts. The bank provided details of explanations received from branches for "no correspondence" accounts and these included

customer not wanting statements sent to a foreign address

intermediaries, including solicitors, holding funds on behalf of clients

landlord or tenant situation

customers’ requests for confidentiality

customer temporarily residing in a hotel, hospital etc.

I enquired as to whether the bank would consider that such accounts pose a higher risk in terms of possibly being bogus. The bank indicated that a sample of "no correspondence" accounts at the end of 1998 showed that they represented approximately 7-8% of non-resident accounts at that time. The bank stated that such accounts reduce the control environment and that branches have been clearly advised to discourage the practice save in exceptional circumstances.

In regard to "c/o ACC Bank" the bank could only speculate as to the reasons and suggested circumstances such as persons wanting to keep their affairs private from other family members. I enquired as to the bank’s policy on such accounts. I was informed that for existing customers that such requests are granted but in the case of new customers a correspondence address is required.

Reclassification of Non-Resident Accounts

Reclassifications of non-resident accounts as resident in the period 1990-1998 were

Year

Number of Accounts

Reclassified

Value of Accounts

Reclassified (?)

1992-93

852

7,689,512

1995

80

1,816,981

1996

160

2,463,111

1997

118

2,004,559

1998

553

15,936,850

Total

1,763

29,911,013

Reports to the Audit Committee

The Audit Committee met for the first time in February 1988.

I was informed that during the years 1986-1997 there were only two reports to the Audit Committee in which the issue of non-resident accounts were noted. In the report covering January to July 1994 it was stated that better controls were needed over non-resident accounts in the Dun Laoghaire branch. In the July-September report to the Audit Committee in 1995, it was noted that the overall rating for banking operations in Nenagh was unsatisfactory arising from the handling of the affairs of the branch's largest customer in a manner which subverted the bank's policies under a number of headings.

External Review

Central Bank Review

The bank indicated that it was not aware of any matters raised by the Central Bank of Ireland on the operation of non-resident accounts.

External Audit Review

Over the period 1986 to 1998, the external auditors raised issues in respect of non-resident accounts in eight Management Letters.

1986 The issue concerned the operation of the bank’s computerised recording systems.

1987 While the bank does not have a copy of the letter, its response to the points made indicates the issue concerned deposit accounts without the appropriate declarations.

1988 Comments were made by the external auditors in respect of two branches (Portlaoise and Thurles) which they visited. In both cases the auditors noted a number of cases where declarations were missing. Further comments were made on the accounting for DIRT.

1989 Comments were made in respect of two branches (Mallow and Navan) which the external auditors had visited. Both visits indicated non-compliance with the requirement to have a declaration in a number of cases.

Comments were made to the effect that "at the present time, there is no system to monitor dormant and "no correspondence" accounts." A recommendation was made to the effect that a system be implemented whereby these accounts can be readily identified and internal audit notified of movements.

1990 The external auditors raised an issue in respect of the Dungarvan branch where in a number of cases non-resident declarations had not been obtained.

1991 The audit noted a number of cases where there were no declarations. The branches sampled are not indicated.

1992 No comments were included in the management letter of this year in respect of non-resident accounts.

1993 No comments were included in the management letter of this year in respect of non-resident accounts.

1994 The management letter of this year referred to the fact that a number of non-resident accounts were covered by a single declaration and a lack of awareness among branch staff of the requirement for a declaration in the case of non-residents and SSAs.

In the wider context of deposit books held at branches, the presence of accounts designated "c/o bank" and "no correspondence to issue" was raised and comment was made on the fact that the matter had previously been raised by internal audit in 1994 regarding the Longford branch. The auditors recommended that the bank should review control in this area and that accounts with addresses of "c/o bank" should not be allowed

1995 In the management letter it was noted that non-resident accounts were found where there were no declaration forms on file and where the forms had been updated at the branch.

I was informed by the bank that no comments in relation to non-resident accounts were noted in management letters after 1995.

In addition to non-resident account issues the external auditors also commented on a number of occasions on the subject of SSAs. A summary of these comments is set out hereunder

1994 Branch staff unaware of the requirement for declarations.

1995 SSAs not being maintained satisfactorily, withdrawal notice being breached

1996 Recommended the development of an exception report to highlight SSA account movements outside regulatory parameters. A recommendation was made that the internal audit recommendations regarding "no correspondence" accounts should be implemented.

A management letter had not been received by the bank in relation to the 1998 audit by 8 July 1999.

Administration of the Taxes Acts

Revenue Inspection of Declarations

In 1998 the Revenue Commissioners carried out an inspection of declaration forms at the bank’s premises.

The results of the examination were

Branch

Inspection Date

Sample Size

Declarations Missing

Declarations Invalid

(Undated)

Naas

October 1998

123

3

9

Rathmines

October 1998

108

1

10

Interest Reporting

The bank has made all relevant returns under Section 891 of the Taxes Consolidation Act, 1997.

Investigation Branch Enquiries

The first formal discussions with Revenue on the subject of non-resident deposit accounts took place in February 1993 at a meeting in ACC Bank. Two Inspectors of Taxes, visited the bank as part of a Revenue exercise of reviewing tax compliance in the Semi-State sector. Copies of contemporaneous notes of that meeting which were made by ACC Bank and its tax advisers were furnished.

The papers of the bank’s tax advisers record that at the outset of the meeting a cheque for ?350,000 in settlement of payroll/expenses issues was handed to Revenue. After discussing a number of issues the matter of non-resident accounts was discussed.

The tax advisers’ notes record that Revenue policy had been to hold the financial institutions as being culpable on the basis that they had been colluding with the customers in opening and maintaining such accounts when the institutions should have known that the individuals in question were resident in Ireland.

The bank explained its attitude towards the non-resident declarations and while admitting that there had been some difficulties in the past, emphasised that the attitude of management had always been that this was a very serious matter and it was being very closely monitored. It was mentioned that there had been a further drive in the previous few months to ensure that the necessary declarations were in place, although it was pointed out that there may be some weaknesses to the extent that declarations might not have been amended to reflect the fact that the customer might have opened more than one such account.

The bank went on to relate details of its recent experiences regarding SSAs and some complaints which had been made, both to the Department of Finance and the Revenue Commissioners regarding alleged abuses of the regulations. The bank pointed out that its internal audit people had carried out detailed examinations of the three branches against which allegations had been made and found the allegations to be completely without foundation. This was at great expense to the bank but it was satisfied with the work which had been carried out and that the experience had been used to serve as a reminder to branch managers of the legislative requirements.

The notes record that Revenue indicated that the perception regarding a lack of policing of the whole area of non-resident declarations was a correct one but that this should be viewed in the light of legislation which had frequently changed over the last few years. Revenue indicated that they would be available to discuss any complaints which the bank might have regarding the operation of non-resident accounts or SSAs by any other institution if it wished to pursue such a line and that they were anxious to ensure that there would be a level playing field among all of the institutions in this area. The bank’s tax advisers were left with the clear impression that Revenue would not be pursuing the issue of defective declarations in prior years.

The notes of the bank record that in the course of a lengthy discussion on the operation of non-resident deposits, it was acknowledged that the bank had problems in this area in the past although it had always been its very firm policy to comply fully with the requirements of the relevant legislation. The job of enforcing compliance had been made more difficult by the perception on the part of its staff of widespread abuse of the legislation by other financial institutions. The bank indicated that through its internal audit department, and otherwise, steps were being taken to rectify any defects that existed and that it was now satisfied that any problems had been largely dealt with. It conceded that there were situations where the declarations on file were defective e.g., in that they did not refer to all the customers' accounts, but that work was proceeding to deal with this also. The bank was determined to ensure full compliance by all staff in the future and any breach would be regarded as a disciplinary matter.

The Revenue official said that the 1986 Finance Act placed a responsibility on banks to be satisfied with the genuineness of non-resident declarations. Revenue had ample evidence of malpractice across the spectrum of financial institutions in this area in the past. He said that he believed that banks in general were taking their obligations in this regard much more seriously nowadays.

The bank was encouraged to bring to the attention of the Revenue Commissioners, actions on the part of any bank which were in breach of the Regulations and it was clear that the same invitation was to be extended to other financial institutions.

There was some discussion also about SSAs and the bank provided the Revenue with details of the complaints recently received about three of its branches which it had established were totally without foundation. The Revenue official was quite frank in admitting that evasion of the SSAs rules would not be difficult but expressed the hope that now that DIRT, whether at 10% or 27%, discharged in full the taxpayer’s liability in respect of the relevant interest, the incentive for evasion would be much less.

Finally, the Revenue official expressed himself to be satisfied with the general level of compliance in the bank and expressed the thanks of the Revenue Commissioners for this compliance, for the amount of work which the bank as a taxpayer does on behalf of the Revenue Commissioners and for its promptness in making payments to them.

In summary, the bank concluded it was a good meeting but it believed that it must be relentless in ensuring compliance with the requirements of tax legislation in regard to SSAs and non-resident accounts and must also bring the attention of Revenue to any malpractices detected on the part of its competitors.

I enquired as to whether at the meeting with Revenue in February 1993 there had been any suggestion by Revenue that arrears of DIRT would have to be paid in respect of non-resident accounts which were found not to be genuine. I was informed in evidence that a substantial part of the meeting was taken up with the topic of non-resident accounts, with the bank officials describing the exercise which had been performed in late 1992 and early 1993 and Revenue advising of the need for compliance. The bank indicated to Revenue that its situation with regard to non-resident accounts was by and large satisfactory following the review. I was informed by the bank that Revenue did not initiate further contact in the following months to follow up on the undertakings and assurances given by the bank. The bank assured me that the question of payment of arrears was not mentioned at any stage during that meeting.

I enquired as to whether ACC Bank felt a responsibility to calculate the arrears due in respect of cases of non-compliance and to make the appropriate payment to Revenue. The bank responded by stating that, at the time, management and staff were under a lot of pressure due to the additional workload associated with the proposed sale of the bank and that in hindsight, had the matter been given more thought, a decision might have been made to settle.

Liability Estimation

By letter dated 30 October 1998, Revenue began an enquiry into the compliance by the bank with the DIRT legislation since its introduction in 1986.

In November 1998 the bank, together with its tax advisers, met with Revenue. The bank expressed concern that Revenue was attempting to start fresh enquiries on this issue nearly six years after the two senior Revenue officials had been informed of the situation and had chosen not to pursue the matter. The bank’s tax advisers’ note of the meeting records the Revenue response as

there is no time limit on investigations if there is evidence of fraud or neglect

the two Revenue officials did not have the power to write off any DIRT liability.

The note records that on the issue of whether the 1992 review had increased the level of DIRT paid, the bank had indicated that the April 1993 payment had been significantly higher than the April 1992 payment but that the reasons for the increase were not due to a reclassification of accounts but rather due to external factors such as the currency crisis, high interest rates and a switch from long to short term deposits.

On 30 April 1999 the bank’s tax advisers wrote to the Revenue Commissioners stating that the bank had examined its records from 1986 and searched archive material/data in order to develop a full picture on DIRT and non-residents. It was indicated to Revenue that the bank was of the opinion that it had a complete set of information to enable consideration of the position as to the liability.

Period 1986 to 1992

ACC Bank reconstructed a full list of all accounts reclassified in the period September 1992 to March 1993 inclusive. The full list totals 852 accounts with total balances reclassified of ?7,689,512.

The bank maintains that this figure needs to take account of the fact that

the selection for the 1992-93 list included all accounts where any part of the time span in which the change occurred fell within the period September 1992 to March 1993. Therefore, the list is the maximum possible.

recent examination of records shows, in respect of some branches, cases where the non-resident status was restored within, at most, a year (typically within a few months) of the forced reclassification. The explanation here is that properly completed declarations were subsequently obtained. The amount of the balances reversed was ?1,184,774 (54 accounts).

included in the 1992-93 list of reclassifications are the normal change of residency cases which regularly occur. A definite and reliable identification of these accounts had not proved possible. The normal level of reclassifications in the three years 1995 to 1997 was of the order of ?2m on average.

The bank put forward a set of liability calculation assumptions and arrived at an initial level of ?687,000. I was informed that, in the bank’s opinion, when interest was added the liability would be of the order of ?1.4m. The bank has subsequently made a voluntary interim payment to Revenue of ?1,349,898.

I have been informed by the Revenue Commissioners that the bank’s calculation is under consideration and that the final position cannot be established until a full DIRT audit has been concluded.

Other Significant References to ACC Bank in Report

Appendix G1 Department of Finance material

Chapter 7 Section 3 Meeting with Revenue in 1992

Chapter 7 Section 4 Matching Information

Chapter 7 Section 4 Assistant Secretary’s Proposals in 1992

Result of Work Performed by the Appointed Auditor

The Auditor reviewed branches of the bank at Ballina, Dundalk, Navan and Tuam. The following are the results of the review

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

449

No Declaration held

10

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

108

27

26

Total Declaration Exceptions

171

Percentage Exceptions

38%

Authenticity Risk Profile - Non-Residents
Sample

449

Risk Indicator
Irish Address

45

PO Box or ‘Care of’ Address

16

Hold Mail

11

Transaction Profile

2

Accounts with Liens

0

Other

17

Total accounts with Risk Indicators

91

Percentage Risk Indicators

20%

Accounts also with documentary exceptions

44

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

33

Documentary Compliance - other Exempt Accounts and SSAs
Account Type Exempt SSA
Sample 54 40
No Declaration 11 0
Declaration Exceptions 23 5
Total Exceptions 34 5
Percentage Exceptions 63% 13%
Interest reporting Exemption
Documentary Exemption
Sample 166
No Form 163
Percentage Exeption

98%

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