Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 22

Chapter 22 : Guinness & Mahon (Ireland) Limited

Background

From April 1986 to August 1994, Guinness & Mahon (Ireland) Ltd (G&M) was a wholly owned subsidiary of Guinness Mahon & Co., London. The bank was acquired by Irish Permanent plc on 31 August 1994. The bank operates from a single location.

Non-Resident Deposit Levels

The bank's share of the non-resident deposit market as at 30 November 1998 was 0.18%.

The value of its non-resident book varied between ?12m and ?37m during the period 1986-98.

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

Year

Number of Non-Resident

Accountsa

Percentage of Deposit

Book by Valueb

1998

1997

1996

427

465

441

18.5%

19.5%

19.7%

a Information supplied by the bank

b Calculated using Central Bank data.

Staff Instructions and Procedures

G&M operates as a private bank and, as such provides private banking services to a relatively small number of high net-worth individuals. The bank believes in the principle of "know your customer" and as such, tries to meet its clients at least once a year. Client relationship executives are deemed to be sufficiently competent to recognise a change in residency of a customer and deal with it accordingly.

Guidelines have been issued to staff on the opening of non-resident accounts. Within four weeks of opening the account, all mandates and money laundering documentation must be forwarded to the bank’s operations department for update and filing.

This department checks to ensure the client has fully completed a declaration in respect of non-resident accounts. Where a declaration is not held, the operations executive will contact the client to have one completed. If the declaration is not received within another four weeks, the client will remain recorded as non-resident but DIRT liable.

The bank also checks to ensure that the mailing address for the client is the same as the address provided on the non-resident declaration. Where differences arise, explanations which do not affect the non-resident status of the account are accepted. Where the explanation conflicts with non-resident status, the account will be classified as resident.

The bank informed me that it has procedures for the opening and monitoring of Special Savings Accounts (SSAs). The bank also informed me that declarations are obtained for resident companies, charities and pension funds.

The requirement to obtain a Form F in the period 1986 to 1993 caused a lot of confusion. In 1992-93 G&M misinterpreted the legislative requirements and believed that the Form F was all that was required and undertook an exercise to obtain Form Fs instead of the required non-resident declaration. This was corrected in 1994.

I was also informed by the bank in oral evidence that it accepts deposits from one broker who has introduced 5 to 10 DIRT exempt accounts. As the bank only has a declaration signed by the broker it does not know the identity of the individual clients. The bank informed me that the broker is aware of the relevant legislative requirements.

The bank reviewed whether affidavits were used in non-resident cases and has confirmed that it did not locate any.

Internal Management Review

Internal Audit

There is not a dedicated internal audit department within G&M. During the period April 1986 to August 1994, when G&M was a wholly owned subsidiary of Guinness Mahon & Co., London the internal audit and review responsibilities resided with the internal audit department in London. The bank was subjected to internal audits on a two year cycle basis. The internal audits performed concentrated on specific areas like Treasury and Investments. Audit reports were prepared for both the Dublin Board and the London Board.

In 1994, G&M was sold to Irish Permanent plc. From late 1994, the internal review function has rested with the Irish Permanent internal audit department who have conducted on average three audits per year on specific areas or functions within the bank.

During the period 1986-98, neither internal audit department reviewed in isolation the operation of non-resident accounts within the bank. Internal audit would have reviewed certain functions and departments including Treasury. The operation of non-resident accounts would have come to their attention in the course of such reviews.

The bank was not in a position to state with any certainty how the authenticity of non-resident status was verified by internal audit in the period prior to the takeover by Irish Permanent plc. However, it appears from the knowledge available within the bank, that internal audit would review the correspondence and mandate files to ensure that relevant documentation was held by the bank and that there was nothing inconsistent with the status of non-resident contained in the correspondence files.

Internal Audit Results

Ansbacher Deposits - 1989 Review

In 1989 the internal audit department of Guinness Mahon & Co in London completed a review of G&M. While this audit did not specifically mention DIRT it noted that Ansbacher Cayman Limited, a company based in Grand Cayman, had from the mid 1970s placed substantial deposits with G&M. These were by way of call and fixed deposits, and by 1989 amounts equivalent to ?38 million were deposited with the bank ("Ansbacher Deposits"). These deposits equated to funds lodged in off-shore call and fixed deposit accounts with Ansbacher Cayman Limited by Dublin-based persons.

I was informed by the bank in oral evidence that the focus of this audit was on the weaknesses in the procedures in place for operating these accounts. I was also informed that the DIRT status of these accounts had not been reviewed at that time as the legal and beneficial owner of the deposits was Ansbacher Cayman Limited.

1995 Review

An internal audit in July 1995 noted the existence of a new account opening form introduced by the bank but considered that additional information about the client, which would assist in the provision of investment advice, should be recorded whenever possible. This information included residence for tax purposes (if different from domicile).

The audit also noted that mandates including non-resident declarations were missing from several files. Following this, a detailed review was carried out by the bank and a strict deadline of four weeks was laid down for receipt of a declaration.

Other Investigations and Reviews

Business Review of Guinness and Mahon 1994

This review was undertaken in the course of a due diligence investigation on behalf of the bank. It included a review of documentation retained by G&M to support DIRT exemptions and SSAs.

The review found that the documentation used by G&M did not completely satisfy the legislative requirements. G&M did not seem to have adopted a consistent approach to such declarations. The proper documentation was not on file in all cases.

The review included an examination of 26 non-resident accounts. Of these 6 were satisfactory. The other 20 had deficiencies. The main deficiencies were the use of the wrong declaration form (9), incorrect completion of the declaration (9) and the absence of a declaration (2).

In cases where proper documentation was not on file G&M had a declaration under Section 175 Income Tax Act 1967 (Form F).

Following this report G&M undertook a complete internal review of DIRT on behalf of Guinness and Mahon & Co., London. The objective of the review was to estimate the maximum potential liability arising from the inappropriate application of regulations regarding exemption from DIRT. The results of the review which was completed in August 1994 can be summarised as follows:

Non-Resident Documentation Deficiency

Estimated Maximum Potential Tax Liability April 1986 - June 1994

?

Estimated Annualised Maximum Potential Tax Liability based on year to

April 1994

?

Open Accounts at June 1994 where no documentation can be located.

96,000

32,000

Open Accounts in respect of which incorrect documentation was relied upon (primarily Form F).

43,000

10,000

Accounts closed prior to June 1994 where no documentation can be located.

158,000

2,000

Open Accounts at June 1994 in respect of which correct documentation is currently held but was not in place at the date of interest application.

225,000

6,000

Accounts closed prior to June 1994 in respect of which correct documentation was in place prior to closure but not at the date of interest application.

113,000

-

Total

635,000

50,000

The review recognised that a potential liability to tax could arise as a result of the deficient documentation if the matter were audited by the Revenue Commissioners. It noted that no financial institution in the State had ever been subject to an audit in respect of the application of DIRT regulations. Accordingly, it was not possible to judge the scope or nature of any such audit nor the basis upon which taxation assessments deriving therefrom would be raised. However, based upon experience in the U.K., it was considered likely that any assessment would be based upon a review of liabilities attaching to accounts which were "open" during the past year. On this basis, a possible settlement would be in the order of ?96,000 based upon the liability arising on existing open accounts in the period April 1986 to June 1994. However, having regard to complying with the spirit of the legislation, the bank felt that it would not be unreasonable to assume that a settlement might be reached in a token sum to be levied by way of penalty. This view was supported by bank's tax advisors.

Following this review G&M were satisfied that in the majority of cases those account holders in respect of whom DIRT was not deducted, qualified as exempt account holders notwithstanding the fact that correct documentation exempting the accounts was not in place. The bank also took immediate steps to rectify the deficient documentation in regard to the relevant accounts. The bank was therefore satisfied that it had in all material respects complied with the spirit of the legislation and because it had demonstrably acted in good faith in this matter, did not consider that it had an obligation to bring the matter to the attention of the Revenue Commissioners. I was informed in oral evidence that this decision was ultimately taken by Guinness and Mahon & Co., London.

The estimated maximum potential liability of ?635,000 set out in the table had been calculated by reference to interest applied and the standard rate of tax in each relevant tax year.

In addition to the maximum potential tax liability of ?635,000, the review noted that it was open to the Revenue Commissioners to apply interest on any underpayments of DIRT at the rate of 1.25% per month from the date of the underpayment. The potential liability which might arise under this heading was difficult to estimate given the requirement to make interim returns and payments on account. However, it was believed unlikely that the Revenue Commissioners would seek to recover any liability arising under this heading when all the facts were taken into consideration.

In order to reduce the risk of realisation of any potential liability, the following actions were undertaken

Accounts Open at June 1994

The bank wrote to the holders of all accounts in respect of which documentation was incomplete, with a request to complete the standard documentation, and also to complete a retrospective declaration covering the period from the date upon which the account was opened, to the present date. This covered accounts in respect of which the potential maximum risk was ?364,000.

With the exception of eight account holders who failed to respond, all clients completed the standard documentation and the retrospective declaration. The eight accounts in respect of which replies were not received were reclassified as DIRT liable from a current date.

Accounts Closed at June 1994

In cases where a potential liability in excess of ?500 could arise because documentation was incomplete or inadequate, the bank wrote to the holders of all closed accounts with a request that they complete a form of retrospective declaration. The response to the circulation was extremely poor and, despite second requests, no responses were received. While the potential tax liability arising on these accounts was of the order of ?271,000, it is believed that the possibility of crystallisation of any part of this liability is remote, given that the accounts have been closed for some considerable period of time.

I was informed in oral evidence that Irish Permanent plc only became aware of the detail of this report in late 1998.

External Reviews

Central Bank Review

The bank informed me that, from a review of the bank's available records, it appears the operating of non-resident accounts was not raised by the Central Bank of Ireland. However I noted during the course of my investigation that G&M furnished a report on the Ansbacher deposits to the Central Bank on 10 October 1997.

External Audit Review

Year Ended 30 September 1986

Following their audit for the year ended 30 September 1986, the external auditors prepared a memorandum of recommendations This memorandum stated that in the course of their work they noted that certain non-resident external deposit accounts did not have the documentation required for exchange control and DIRT purposes.

The auditors recommended that the residency of all new accounts should be properly investigated and fully documented. In addition they recommended a review of the residency of all existing external accounts in the light of the Finance Act 1986.

In a response at that time, G&M management stated that further examination of their records found that only three non-resident declaration forms were not in place and that they were endeavouring to make sure that the forms were on file at all times.

Administration of the Taxes Acts

Revenue Inspection of Declarations

In November 1998, Revenue inspected non-resident declarations in respect of all 260 of the bank’s non-resident accounts.

Prior to the examination of the declarations G&M supplied the Revenue officials with the following information

DIRT was being charged on 11 non-resident accounts because no declaration had been completed.

DIRT was not being charged on 8 accounts despite the absence of a declaration. The value of these accounts was approximately ?36,000. These accounts were reclassified during December 1998 and January 1999.

The Revenue officials also noted

Three other cases for which the bank did not have declarations. The bank stated that one account had been opened very recently and that they would pursue the missing declarations.

Six cases for which the declarations held were not properly completed and could not be regarded as meeting the requirements of the legislation. They advised the bank to obtain properly completed declarations for each of these cases.

Six cases for which pre 1986 declarations were held by the bank. They were Form Fs which were not valid from 5 April 1987. Revenue advised the bank to obtain proper declarations from these customers if they were still non-resident.

At 31 May 1999 the bank had received no communication from the Revenue Commissioners in relation to this examination.

Ansbacher Deposits

The Revenue Commissioners contacted G&M in September 1997 following the publication of the report of the Tribunal of Enquiry (Dunnes Payments). In a letter dated 3 September 1997 Revenue stated that having regard to the content of the extract from the 1989 internal audit report it appeared to be the case that the bank was in possession of information which could reasonably be taken to indicate that the Ansbacher deposits were or may have been liable to DIRT. In response the bank stated that the deposits were made by Ansbacher Cayman Limited and that they were foreign currency accounts and therefore not liable to DIRT.

Revenue subsequently wrote to Irish Permanent plc in February 1998. This letter stated that the Irish Permanent position that all of the Ansbacher deposits were deposits denominated in foreign currency was at variance with the position as reported by G&M to the Central Bank in a letter of 10 October 1997 in which it was stated that approximately thirty Irish pound accounts were opened within the Ansbacher accounts. In response Irish Permanent stated that following further enquiries they confirmed that in respect of the period 6 April 1986 to 5 April 1993 there were in existence eight Ansbacher Cayman Limited accounts denominated in Irish pounds. Irish Permanent was of the view that such accounts were not chargeable to DIRT as the account holder was a bank incorporated in the Cayman Islands.

In response Revenue again wrote to Irish Permanent on 20 February 1998. In this letter Revenue stated that the view of Irish Permanent that the Irish pound deposits were not chargeable to DIRT was not supported by the provisions of Section 256(1) Taxes Consolidated Act 1997 which defines "relevant deposit" viz. DIRT liable deposits, as excluding a deposit in respect of which no person in the State is beneficially entitled to the interest and a Section 37 declaration of non-residence has been made to the relevant deposit taker. In a letter dated 16 January 1998 Irish Permanent confirmed that G&M did not hold such a declaration in connection with the Ansbacher deposits. On this basis Revenue stated that the Ansbacher Irish pound deposits were within the charge to DIRT from 6 April 1986 to the date of closure of the accounts.

Irish Permanent were advised that these accounts might be relevant deposits and without an admission of liability, made the following payment to Revenue in October 1998

Relevant DIRT ?24,158

Interest ?25,705

Penalties ? 3,000

Total ?52,863

In response to this payment Revenue wrote to Irish Permanent on 23 October 1998. This letter stated

"It is the Revenue view at this stage that there are DIRT issues in relation to the "Ansbacher Deposits" which are not addressed by the without prejudice offer made, as it now appears from information available, that Irish resident persons were beneficially entitled to interest on the deposits in question and it appears that this was known to bank employees.

In these circumstances, Revenue cannot accept the offer made. Furthermore, Revenue cannot accept the cheque for ?52,863.37 tendered in support of this offer. I propose to hold the cheque, without cashing it and invite you to offer it as a payment on account of DIRT, pending final settlement of this matter. Can you confirm that the cheque can be cashed by Revenue as such a payment on account. I am now inviting you to reconsider the issue of DIRT in relation to the "Ansbacher Deposits" and to report back to me on the issue having taken full account of the point raised by me above i.e. that Irish resident persons were in fact beneficially entitled to interest on the deposits whether in Irish or foreign currencies and that there appears to have been an awareness of this within the bank at the time."

At 13 April 1999 Irish Permanent had not responded to this letter.

I queried G&M as to the steps it took in order to satisfy itself that the funds within the "Ansbacher Deposits" were non-resident and the extent of any similar arrangements whereby non-resident banks made deposits in cases where the persons beneficially entitled to the interest were known to be Irish residents.

In response the bank informed me that there were approximately four hundred accounts in the name of Guinness Mahon Cayman Trust, subsequently known as Ansbacher Cayman Limited. All but approximately thirty of these accounts were foreign currency accounts and therefore, under the provisions of the Finance Act 1986, they were not relevant deposits.

The bank is firmly of the view and has taken counsel's opinion to the effect that the beneficial ownership of the moneys in these accounts and therefore the beneficial ownership of the interest earned on these accounts did not belong to Irish residents. The relationship between Ansbacher and its depositors was not one of trustee and beneficiary. The description of the contract between Ansbacher and its depositors is given in Joachimson v Swiss Bank Corporation (1991) 3KP 11 ten at 1127 as being a contract by which the bank borrows money and undertakes to repay its customers. The relationship is not one of where the bank holds moneys in a fiduciary capacity. That being the case in law, the moneys in Guinness and Mahon (Ireland) Limited were not beneficially owned by the customers of Ansbacher Cayman Limited. They were legally and beneficially owned by Ansbacher Cayman Limited who, in turn, had a contractual obligation to its depositors to repay the amounts of their deposits.

There were also companies associated with Guinness & Mahon (Ireland) Limited and Guinness, Mahon & Co., London, who placed deposits with Guinness & Mahon (Ireland) Limited. These companies were - Guinness, Mahon (Guernsey) Limited, College Trustees Limited, Guinness, Mahon Jersey Trust Limited, Overseas Nominees Limited and subsidiaries of Credit Suisse. The legal position of the deposits by these offshore entities with Guinness & Mahon (Ireland) Limited is stated by the bank to be similar to the position set out above regarding Ansbacher Cayman Limited.

Investigation Branch Enquiries

Prior to the inspection of declarations in 1998 and discussions in relation to the Ansbacher Deposits no matters came to the attention of the Investigation Branch of the Revenue which would have necessitated contact with the bank.

Interest Reporting

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

Result of Work Performed by the Appointed Auditor

The following are the results of the Auditors' review

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

295

No Declaration held

3

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

71

53

23

Total Declaration Exceptions

150

Percentage Exception

51%

Authenticity Risk Profile - Non-Residents
Sample

180

Risk Indicator
Irish Address

7

PO Box or ‘Care of’ Address

55

Hold Mail

22

Transaction Profile

0

Accounts with Liens

0

Other

0

Total accounts with Risk Indicators

84

Percentage Exceptions

47%

Accounts also with documentary exceptions

49

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

51

19Documentary Compliance - other Exempt Accounts and SSAs
Account Type

Exempt

SSA

Sample

33

30

No Declaration

5

1

Declaration Exceptions

14

4

Total Exceptions

19

5

Percentage Exceptions

58%

17%

Interest Reporting Exemption
Documentary Exemption (Form F)
Sample

75

No Form

69

Percentage Exception

92%

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