Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 18

Chapter 18 : ICC Bank plc / ICC Investment Bank Ltd

Background

ICC Bank plc (ICC) is owned by the State. ICC Investment Bank Ltd (ICCIB) is a wholly owned subsidiary of ICC Bank plc. In general, deposit accounts held by ICC carry a State guarantee whereas those with ICCIB do not. Unless expressly stated otherwise references to "the bank" refer to the Group. ICCIB commenced trading on 17 February 1993. The bank operates through 5 branches.

Non-Resident Deposit Levels

The bank’s share of the non-resident market at 30 November 1998 was 1%.

The value of its non-resident book varied between ?52m and ?103m during the period 1986-98.

Key statistics for the period were

Year

Number of Non-Resident Accountsa

Percentage of Deposit Book by Valueb

1998

772

11.1%

1997

804

10.0%

1996

789

8.3%

a Information supplied by the bank

b Calculated using information supplied by the Central Bank

Staff Instructions and Procedures

While ICC and ICCIB are separate legal entities, the deposits in both institutions have a common administration and the same procedures apply in both banks regarding the management of deposits.

The bank’s Deposits Procedures Manual covers non-resident accounts and provides specific instructions to staff on

opening of accounts

receipt of deposits

repayment/withdrawal

taxation (also covers SSAs)

anti-money laundering procedures.

Prior to 1991, staff were instructed that there were two requirements for a customer to open a non-resident account

completion of a non-resident declaration form

evidence of origination of funds from outside the State, which required that funds had to be received directly from a foreign bank or in the case of funds drawn on an Irish-based bank or building society by way of cheque stamped as ‘Eligible for Credit to an External Account’.

In response to my enquiries the bank stated that its approach to satisfying itself as to the authenticity of non-resident status at account opening stage was quite stringent. This would have included obtaining the appropriate declaration. There was a separation of function within the bank between those charged with getting deposits and those charged with opening accounts.

In 1991, in line with the abolition of exchange controls, the second condition was abolished.

The Criminal Justice Act 1994 necessitated the introduction of new procedures and in April, 1995, the bank introduced written procedures for the acceptance of new depositors. In summary, these procedures required that the bank obtain satisfactory evidence of identity and address.

I was informed in evidence that from around the mid 1990s the bank began to look more closely at the cost of smaller deposits and while it would not actively discourage such small deposits, there has been a lesser focus on them since then.

I was assured that prior to 1986 the bank would have had Form Fs in place and that from 1986-87 it would have made every effort to obtain non-resident declarations for relevant accounts opened before 1986. In regard to the operation of Form Fs after 1986 the bank informed me that during the period 1986 to 1993 it did not receive any requests from Revenue for the submission of returns of interest. The bank stated that if such returns had been requested it would have been obliged to include interest paid to non-resident depositors for whom Form Fs were not held but that in the absence of any such requests it is its contention that the issue had no practical application.

The bank informed me that affidavits were not requested and that to the best of its knowledge an affidavit was never taken. The bank’s policy was that if a staff member had a doubt about a client or authentication of the details in the statutory declaration, the deposit was not accepted.

The bank assured me that declarations from corporate depositors to avail of DIRT exempt status are received in all cases.

The bank outlined its systems to ensure compliance with regulations governing SSAs which included

production of daily exception reports of breaches of the maximum deposit level

in cases where 30 days notice has not been served and the customer insists on withdrawal, the bank reverts the account to standard DIRT rated and deducts tax at that rate from the last interest application date.

I enquired whether the bank has accounts which are designated as being "no correspondence to issue" or "c/o bank" and what its policy is in this regard.

At 31 December 1998 there were 65 non-resident accounts having "c/o", "no correspondence" and similar addresses. I was informed in oral evidence that in the case of a request for "no correspondence" status, the request must be made in writing and that in such cases the request is granted. I was assured that the same level of authenticity checking is carried out in such cases as in the case of regular accounts. The bank indicated that it is happy that it has no non-resident accounts designated "no correspondence" which are other than legitimate.

I was informed that in December 1998 the bank also had 85 non-resident accounts for which the instructions were to send correspondence to an Irish address and that in all of these cases the address given on the non-resident declaration is a foreign address.

Internal Management Review

Internal Audit

Extent of Internal Audit

The bank’s Internal Audit Division performed audit work on customer deposit accounts on a regular basis in the period 1986 to 1998. In respect of non-resident deposit accounts, two forms of audit, in particular, are of relevance

Treasury Audit

Deposits are held centrally in the bank by Treasury. Treasury audits were carried out annually in the years 1989 to 1997 inclusive. The audit programme included a test in which a number of non-resident accounts are randomly selected for matching with the declaration of non-residency. A sample size of between 10 and 20 non-resident accounts was selected.

A record of the frequency and results of Treasury Audits in the years prior to 1989 was not available as the files had been shredded.

Branch Audits

Branch audits examine the overall operations of the branch under review. Samples of accounts are selected at random and may include non-resident accounts. Audit testing of deposit accounts selected includes the examination of customer documentation. In the case of non-resident accounts included in the sample, the declaration of non-residency is examined.

In respect of customers set up since 1 May 1995, verification of customer identity in accordance with the Criminal Justice Act 1994 is checked.

Results of Internal Audit

Matters identified in audit tests by the Internal Audit Division and reported to management included

the absence of non-residency forms

the incorrect completion of non-residency forms.

The following is a summary of the internal audit findings in respect of non-resident and DIRT exempt accounts examined during Treasury Audits.

Non-Resident

Sample Size

Non-Resident

Declarations Missinga

Non-Resident Declarations Unsatisfactory

Exempt Accounts Sample Size

Exempt Account Declarations Missinga

Exempt Account Declarations Unsatisfactory

1989

10

0

0

0

0

0

1990

10

3

0

10

1

0

1991

10

1

0

10

0

0

February 1992

20

0

0

20

4

0

April 1992

10

0

3

10

0

2

January 1993

10

2

1

0

0

0

October 1993

n/a

2

1

0

0

0

1994b

n/a

n/a

n/a

n/a

n/a

n/a

1995

8

0

0

12

0

0

1996

8

0

0

12

0

2

1997

10

0

0

0

0

0

Total

96

8

5

74

5

4

a After August 1994 an account would be flagged DIRT liable in the absence of a declaration.

b The bank was unable to locate the working papers in respect of the 1994 audit at the time of writing.

I was informed that to the best of the bank’s knowledge neither non-resident nor DIRT exempt accounts were reported upon as a result of the findings of branch audits.

The bank confirmed that SSAs are examined by internal audit and I was informed that no adverse comments on their administration were raised.

Reporting and Follow-up

The Internal Audit Division reports directly to the Managing Director and the Audit Committee which is a sub-committee of the Board.

Recommendations made and actioned included

the review, in August 1991, of non-resident accounts, not subject to DIRT, to ensure they were supported by a declaration of non-residency

the introduction of a procedure whereby all accounts are set up subject to DIRT and amended only on receipt of the relevant declaration. I was informed that this was introduced not later than August/September 1994.

Arising from internal audit reports, other recommendations issued

accounts not covered by declarations should be flagged DIRT liable

where applicable, declarations on behalf of their clients should be obtained from stockbroking firms with which the bank has a relationship

where there was one declaration covering a number of accounts, that document should be referenced to all relevant accounts.

Administrative Reviews

Treasury Services Division Review

On 3 September 1990, in response to the July 1990 internal audit of Treasury, Operations Division informed internal audit that the Treasury Services Division was to conduct a once-off clear-up of non-resident accounts and establish controls to monitor outstanding declarations.

On 9 August 1991 a memorandum from Operations Division stated that the recent review of non-DIRT paying clients had shown that there were a large number of clients for whom the proper documentation was not in place. The results of the review were attached to the memorandum. It went on to state that it was imperative that these forms be received as soon as possible. The findings were

Number of Declarations Missing

Non-Resident

84

Charity

51

135

In a memorandum dated 30 August 1991, internal audit noted that little progress had been made procuring forms in respect of the accounts identified by the review. In order that the bank fully comply with the requirements of the Finance Act 1986, internal audit recommended that

accounts for which a declaration form was not held should be recoded to "subject to DIRT"

all such accounts should be reworked where interest had been credited, to reflect the correct DIRT.

On 12 December 1991 the internal audit manager issued recommendations to the Head of Treasury and requested that they be actioned. The recommendations were that

all accounts for which a declaration had not been received should be recoded "subject to DIRT"

on the set up of new customers, the DIRT flag should be set as "subject to DIRT" and only amended upon receipt of a properly completed declaration.

The Management Committee at its January 1992 meeting decided, subject to the internal auditor being happy, that the bank should write to all depositors advising them that if a completed form was not received by the end of January 1992 that the bank will have to consider treating the account as resident. At that time the total value of accounts not having declarations was ?2.7m with a potential liability of the order of ?78,000 per annum.

The bank informed me that the outcome in the case of accounts which had no non-resident declarations was

Accounts reclassified

5

Declarations subsequently received

46

Accounts having nil balances since 1989

18

Accounts misclassified (charity)

1

Forms not received and accounts closed shortly afterwards

13

Inactive accounts

1

Total

84

In the case of the charity accounts

Misclassified accounts found not to be charities

3

Dormant accounts

2

Declarations missing and accounts closed

2

New declarations received

34

Declarations found relating to other branches of the same charity

7

Accounts exempt under specific Revenue authorisation

3

Total

51

External Review

Central Bank Review

No matters were raised by the Central Bank of Ireland on the operation of non-resident accounts.

External Audit Review

No matters were raised by the external auditors on the operation of non-resident accounts.

Administration of the Taxes Acts

Revenue Inspection of Declarations

Revenue officials conducted an inspection of non-resident declarations in May 1998. To provide the information required for the inspection an in-depth review of all non-resident declarations held (and their validity) was conducted by the bank’s Taxation Section. It was reported that no widespread or systematic abuse of non-resident status was identified.

The Revenue report of the visit states that a sample of 70 declarations of a total of 778 was agreed in advance. The results of the inspection were

Inspection Date

Sample Size

Declarations Missing

Declarations Requiring Further Explanations

May 1998

70

0

2

The declarations requiring further explanation were of the nature of

one having an Irish and a foreign address

one having Ireland as the country of ordinary residence.

The Revenue report notes that the bank brought the following matters to the attention of the Revenue officials

two cases whose non-resident status was being reviewed by it and which were not part of the sample. The bank undertook to inform Revenue of the outcome of its review of these accounts.

a further two cases, again not part of the sample, where the declarations held by the bank were in a pre-1986 format. The Revenue officials requested copies of the declaration forms and advised the bank to obtain up to date declarations as soon as possible.

four deposits held by it which were not included on the non-resident listing and from which DIRT was not being deducted. The amounts in question had been placed on deposit with the bank by Allied Irish Bank Investment Managers (AIBIM) on behalf of its customers.

AIBIM requested that the names of the depositors not appear on any list of non-resident depositors for confidentiality reasons. Revenue were informed that AIBIM’s external auditors had advised the bank that they held the declarations for the four individuals concerned and would make them available to the bank if requested to do so for the purposes of Revenue’s inspection.

Following their inspection of declarations, Revenue wrote to the bank on 14 July 1998 advising the bank that it has a duty to hold declarations in respect of those account holders.

Investigation Branch Enquiries

The bank informed me that a Revenue review was carried out in 1993 as part of a wider exercise in the Semi-State sector and while it focused mainly on PAYE it extended to all taxes including DIRT.

I enquired as to whether during Revenue’s review of DIRT, the bank informed them of the results of its 1991 review in terms of missing declarations. I was informed that the matter was not referred to. Revenue asked the bank to perform an exercise involving a search for accounts linked to non-resident accounts and none were detected. The results of the exercise were forwarded to Revenue and nothing further was heard.

Interest Reporting

The banks returns under Section 891 of the Taxes Consolidation Act 1997 were filed in all cases.

Liability Estimation

I asked the bank if it accepted that, given that the legal requirement is that a declaration be in place at the time of interest crediting, interest paid in the absence of a declaration would have given rise to a DIRT liability. The bank stated that it felt that in a lot of cases the declarations would have been received prior to interest crediting and exposure may not be that sizeable.

Result of Work Performed by the Appointed Auditor

Tax Exemption
Documentary Compliance - Declarations of Non-Residence (Form 37)
Bank

ICC

ICCIB

Sample

222

219

No Declaration held

1

0

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

22

5

19

2

5

18

Total Declaration Exceptions

47

25

Percentage Exception

21%

11%

Authenticity Risk Profile - Non-Residents
Bank

ICC

ICCIB

Sample

222

219

Risk Indicator
Irish Address

9

0

PO Box or ‘Care of’ Address

10

0

Hold Mail

10

0

Transaction Profile

0

0

Accounts with Liens

0

0

Other

5

1

Total accounts with risk indicators

34

1

Percentage Risk Indicators

15%

1%

Accounts also with documentary exceptions

9

0

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

33

1

19Documentary Compliance - other Exempt Accounts and SSAs
Bank

ICC

ICCIB

Account Type

Exempt

SSA

Exempt

SSA

Sample

90

34

66

60

No Declaration

0

0

1

0

Declaration Exceptions

3

0

8

1

Total Exceptions

3

0

9

1

Percentage Exceptions

3%

0%

14%

2%

Interest Reporting Exemption
Documentary Exemption (Form F)
Bank

ICC

ICCIB

Sample

114

0

No Form

114

0

Percentage Exception

100%

0%

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