Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 24

Chapter 24 : Administration of DIRT by AIB Group

Background

The following Banks within the AIB Group were involved in the collection of DIRT

AIB plc (AIB)

AIB Finance Company Ltd (AIF)

AIB Capital Markets plc. (AIBCM)

AIB operates through a network of 217 branches. During the period under review, the Retail Deposit Centre (RDC) of AIF held deposits denominated in foreign currency and term deposits sourced from the AIB branch network.

Non-Resident Deposit Levels

The AIB Group’s share of the non-resident deposit market at 30 November 1998 was 21.4%.

The combined group non-resident book varied between ?1,161m and ?1,988m during the period 1986-98.

Key statistics in relation to the group’s non-resident accounts were as follows

Year

Number of Non-Resident Accountsa

Percentage of Deposit

Book by Valueb

1998

91,028

15%

1997

92,067

17%

1996

91,183

17%

a Information supplied by the bank

b Calculated using Central Bank data.

Staff Instructions and Procedures

The principal source of instructions is a Group Operations Manual. In addition, the bank’s Group Taxation Department communicated, either directly or through line management, with branches by circular or memorandum on each occasion that new operational procedures or points of clarification regarding DIRT were necessary. In all, approximately 50 such communications were issued between 1986 and 1998. This department also provided support and advice to branches on technical queries regarding DIRT.

On the introduction of DIRT all non-resident and/or Form F accounts were automatically flagged DIRT exempt by the computer system. All non-resident accounts subsequently opened were initially treated on a similar basis until the computer systems were amended to provide for all accounts to default to net paying in the absence of specific intervention to make them gross interest paying. It was, however, recognised that not all non-resident accounts might qualify for DIRT exemption. Provision was made for the exempt flag to be removed in such cases. This action would be at the customer’s request.

In November 1986 briefings were given to all managers outlining the new procedures and advising that exemption from DIRT could in future only be permitted for genuine non-residents who had completed the new inspectable declaration. The bank recognised non-resident accounts at this stage fell into the categories of confirmed or unconfirmed. The instructions for confirmed non-residents provided for

contacting the customer and having a declaration form put in place as quickly as possible

if the customer did not wish to complete a form the manager was advised to delay making the account DIRT liable until February 1988

if there was a danger of losing funds they should be directed into a term deposit in the Retail Deposit Centre.

The instructions in regard to unconfirmed deposits included

the balance should be frozen at 5 April 1987 and no additions should be made to the account thereafter. At the expiry of the transitional period on 5 April 1987 these accounts were to be made DIRT liable.

any subsequent additions should be placed in a resident DIRT liable account.

The bank’s Group Taxation Manager circularised branches prior to interest crediting in 1987, 1988 and 1989 reminding them to review the tax status of accounts.

These circulars were accompanied by a list of non-resident accounts attached to branches in order to facilitate such review by the managers and remind staff that it was imperative to ensure that either the declaration was in place or the exempt flag removed.

The further instructions and actions of the bank in relation to the designation of deposit accounts for tax purposes is considered in Chapter 26.

The instructions provided for the holding of a Form F in order to exempt accounts from the interest reporting provisions although it is apparent that there was confusion in the system with regard to the necessity to hold such forms after April 1987. The Group Taxation Department issued instructions to remove any doubt in early 1987.

The bank’s Operations Manual provided for the seeking of affidavits in situations of doubt about the residential status of the beneficial owner of the interest. The use of such procedures in practice was limited.

Internal Management Review

Non-resident accounts were subject to review by

Group Internal Audit Department (GIA)

Line management who had overall responsibility for compliance with relevant procedures.

Internal Audit

Scope of Audit

The GIA examinations reviewed non-resident accounts for

the presence of declarations and their completeness in the period to September 1991

both authenticity and documentary compliance thereafter.

The authenticity checks involved 'looking behind' declarations by reviewing all available documentation, files, postal names and addresses etc., during the audit for any indication that the tax exempt status might be in doubt. Account transactions were also reviewed. Checks that accounts in the same name with resident addresses did not exist elsewhere in AIB were added to the audit procedures in late 1992, following developments in the bank's technology systems.

A rating system is used by GIA. A branch received a 'Less than Satisfactory' rating in circumstances where the failure rate for standard of completion or the presence of DIRT declarations was 10% or higher. The declaration would be regarded as incomplete even in a situation where the customer had completed it properly in all respects but the branch had omitted to date brand and initial it on receipt. If a declaration did not conform fully to the procedures as set out in the Operations Manual, it would fail the audit test, even though it was in order from a legislative point of view.

Any one incident where a branch knowingly permitted a 'bogus' non-resident account to be opened or operated, whether at the branch or the RDC, would automatically result in an unsatisfactory rating.

A ‘Less than Satisfactory’ rating would also be applied in instances where the strict conditions governing the withdrawal of Special Savings Account (SSA) funds were being regularly overlooked.

Results of Internal Audit

The bank provided me with details which indicated that 1,187 branch internal audits were undertaken in the period 1986-1998. Copies of the reports were not available in 485 cases. The following table summarises the results and ratings in relation to non-resident accounts in the remaining 702 audits.

Notes.

1. Reports include Special and Short Audits

2. Where summary of report stated no comment these were deemed satisfactory unless other information to the contrary was provided.

Audit follow up and Reporting

Each audit report was sent to the relevant General Manager, together with an additional copy for the Branch Manager. To the extent that the branch received a 'Less than Satisfactory' rating in any particular area, the Branch Manager was requested to put matters identified in order. Where there were serious shortcomings in a particular Key Area, the Branch Manager is requested to do a full review of that Key Area. If a branch fails in more than 5 of the Key Areas, a further full audit is normally carried out at the branch by GIA within 6 months.

In all cases where shortcomings have been identified, the General Manager must confirm to GIA within 3 months that the necessary action to correct the shortcomings has been taken. If GIA do not receive this confirmation, they raise the matter with the General Manager.

For the period commencing 1 October 1991, the following action was taken where internal audit identified an instance of deliberate abuse of procedures in regard to the authenticity of the non-resident status of a customer

GIA advised Group Taxation Department

Group Taxation Department liaise with the branch and arrange for the branch to calculate the relevant DIRT (retrospectively to the date of opening of the account or 6 April 1986 if later), together with interest on late payment

This total is included in the next half yearly DIRT payment.

Audit Committee

The Group Audit Committee is briefed annually on the general outcome of audits. The information supplied indicates that this briefing included the following references to non-resident compliance

In December 1990 the committee was briefed on a Composite Rate Tax issue in the UK and a less than satisfactory rating received by the Retail Deposit Centre due to non-compliance with Form F and mandate procedure.

A special report which included material on DIRT compliance was made to the committee in March 1991. This is dealt with in detail in Chapter 27.

In early 1993 the committee noted that while the situation with regard to the validity of non-resident status had improved significantly, shortcomings with regard to documentation were still being identified in the audit process. However, immediate action was taken to rectify the accounts in question and confirmation of the implementation of internal audit recommendations was being required within three months.

In early 1996 the committee noted that the main failings in the area of accounts exempt from DIRT related to the standard of completion of documentation rather than to the legitimacy of the non-resident status.

In early 1997 the committee noted that the level of compliance with procedures showed a small improving trend. Failings continued to relate more to completion of documentation in accordance with specific and demanding Revenue requirements, rather than the legitimacy of the status of such accounts. The anticipated introduction of new documentation and somewhat eased requirements of Revenue was expected to lead to improved compliance.

In February 1998 the committee noted that for the second year in succession, an improvement in the level of compliance with bank policy and procedures was evident in this important area. As reported previously, failings, where found, related more to the standard of completion of the requisite declarations, than to the non-residency status of the account holders.

Major Cases Investigated by the Bank

Since October 1991 four serious breaches have been identified resulting in payment to Revenue of ?1,654,703.66 of DIRT and interest. In this context the bank defines "serious" as being cases other than those involving administrative or technical breaches i.e. instances involving potentially deliberate or material breaches.

These cases arose in Waterford, Castlebar, Stillorgan and Portlaoise.

Waterford

In January 1995, following a routine internal audit of AIB, The Quay, Waterford, GIA reported serious breaches of bank practices and regulations, including breaches of a tax/DIRT related nature, with regard to the operation of three different account connections.

Following receipt of legal advice, the matter was investigated in detail. DIRT was found to be due but unpaid in two of the three cases, with a significant amount of the liability arising in one case. DIRT due amounted to ?643,484.12 with interest on late payment amounting to ?390,075.58, bringing the total to ?1,033,559.70. Following calculation, this amount was included in the next DIRT remittance to the Revenue Commissioners.

Customers were interviewed and advised that the conduct of their banking affairs generally and the non-application of DIRT to interest was highly inappropriate and that these practices were to cease immediately and that retrospective DIRT and interest thereon was being collected from them.

The involvement of staff was also examined. The resignation of the most senior member of staff was accepted. Other staff found to have contravened internal procedures were disciplined.

The bank made a return of relevant aspects of the largest case to Revenue under Section 230 of the Finance Act 1992.

Castlebar

On 23 October 1995, the Office of the Chief Inspector of Taxes wrote to the Chairman of AIB in connection with an issue arising from a tax audit in Castlebar. The Principal Inspector stated that he had reason to suspect that a deposit account book produced to Revenue and purporting to come from the Castlebar branch may not have been genuine. He asked that the matter be investigated and clarified.

The matter was investigated by GIA and a report issued to the Head of Group Taxation. The Head of Group Taxation met with the Principal Inspector on 17 January 1996 to explain the position. He confirmed that investigations had revealed that the account in question was not on the bank’s system and that all bank branch balance records had been examined between the relevant dates and that there was no evidence that the account ever existed in AIB Castlebar.

The investigation revealed that an official who had been in charge of a sub-office, who had recently left the service of the bank to join another financial institution, had opened a number of these accounts which were not on the bank’s system. The account raised by Revenue was one of these.

The Head of Group Taxation contacted the Regional Manager and requested that he commission a full review of all non-resident accounts at the sub-office. This review was conducted and on 8 May 1996, the Head of Group Taxation wrote to the Principal Inspector advising him of the outcome. Additional payments of ?579,000 were made including ?220,000 in respect of interest on late payment. He also advised that the other actions agreed had been undertaken.

[See also Chapter 7, Section 3]

Stillorgan

On 20 July 1998, the Secretary of AIB received a letter from the Office of the Chief Inspector of Taxes (copied to the Head of Group Taxation) that, in the course of an investigation, it had come to the attention of Revenue that a taxpayer maintained an account with a non-resident address in the Stillorgan branch and that funds from that account were subsequently transferred to the Isle of Man. The bank was requested to

explain the circumstances in which the account was opened and maintained and the funds transferred offshore

produce the non-resident declaration for inspection

prepare a report on DIRT compliance in the branch.

The matter was investigated in detail by GIA. On 1 February 1999 a meeting was held between AIB Group Taxation Department and two Higher Grade Inspectors of Taxes in Investigation Branch for the purpose of responding to the information request. The bank gave summary details of their investigation into the circumstances of the opening, maintenance and closure of the account in question. As a result of this, an official from the branch has been requested to provide a formal statement.

With regard to the general level of DIRT compliance in the branch, there had been a number of internal audits in the branch where a less than satisfactory rating had been received with regard to DIRT compliance. The matter had resulted in disciplinary action. The recent investigation had revealed that tax amounting to ?35,432.27 (to include interest on late payment) had not in fact been remitted. ?26,524.71 of this was included in the October 1998 DIRT remittance and ?8,907.56 was to be included in the April 1999 DIRT remittance.

Portlaoise

The branch maintained a non-resident joint account for the customers (a husband and wife) for many years. The wife had a business in Northern Ireland. The customers were paid gross interest on their account over the years on foot of a declaration of non-residence using the Northern Ireland address.

In April 1995, the customers moved the money from a demand account at the branch to a term account at the Retail Deposit Centre. A new declaration of non-residence was completed but queried by the branch. A memorandum of events records that it transpired in a meeting held at that time that while the clients had a business in Northern Ireland and travelled there regularly, they were in fact Irish resident.

On contacting Group Taxation, the branch was advised to calculate the DIRT retrospective to 6 April 1986 plus interest on late payment which, in aggregate, amounted to ?15,488.50 and to include same in the next DIRT remittance. There was no correspondence exchanged with Revenue.

An internal audit conducted in the branch in May 1995 produced a satisfactory rating under the heading of DIRT compliance.

Internal Management Review

Outside the internal audit process certain other organs of the group were involved in monitoring and management of DIRT compliance. These were in particular the Group Taxation Department and the General Manager of Branches - Ireland and the General/Regional Managers. The efforts and achievements of these organs in this regard are outlined in Chapter 25.

External Review

Central Bank Review

No issues in relation to non-resident compliance were raised by the Central Bank of Ireland. However, the bank reported its state of affairs from the view point of non-resident compliance to the Central Bank in 1991 and 1992. The details of these reports and discussions are set out in Chapter 25.

External Audit Review

As part of the Group audit, the bank’s external auditors examine a sample of internal audit reports and also undertake a number of independent audits of branches. The external auditors make a summary report to the Group Audit Committee annually. More detailed reports are also made to relevant Business Unit Heads.

Reproduced below are the relevant comments for the years under review where an issue in respect of non-resident accounts and exemption from DIRT was referred to by the external auditors.

AIB

In certain years the external auditors reported the result of their own direct work. In those years the outcome can be summarised as follows

Direct Audit Findings - External Audit

Year

Branches Sampled

Branches with Exceptions

Issue

Error Rate

1989

1991

1994

1997

4

4

4

3

1

1

1

1

Form Fs could not be located for Accounts

Flagged as non-resident

Appropriate Form Fs not on file

Form Fs and declarations not located

No declaration on file

40%

20%

25%

10%

In other years the external auditors examined the result of internal audit and summarised its findings. Their report to the Audit Committee indicated that internal audit findings mirrored their own. These reports all of which relate to non-resident declaration forms may be summarised as follows

Accounting Period

Ended

Number of Internal Audit Reports Reviewed

Error Rate

March 1992

December 1992

December 1993

28

37

27

25%

43%

46%

AIF

The external audit also noted deficiencies in the administration of non-resident deposits introduced by branches to the RDC. It reported in January 1992 that "AIB branches do not always forward the relevant non-resident declaration forms to the RDC on a timely basis. As a result the group is exposed to a potential liability for Revenue penalties."

In response the Head of Branches in AIB indicated that strict procedures were now in place with respect to such deposits including the cancellation of deposits after 30 days if documentation has still not been received.

In its report to management the external auditors also noted that in 3 instances in a sample of 29, DIRT was not being deducted for non-residents even though the proper authorisation forms were not obtained and noted. "The company is exposing itself to a potential liability for the DIRT, if it is found to be not deducting DIRT when required."

The external auditors recommended that all accounts be set up as DIRT paying accounts, and only made DIRT free when the relevant form was received.

This matter arose again in 1993 when the external auditors reported that their review of non-resident deposits indicated that the relevant declaration of non-residency allowing interest to be paid free of DIRT was not held in all cases. They noted that management were updating procedures and would incorporate their recommendations.

AIBCM

No issues were reported by the external auditors of AIBCM in the area of non-resident accounts.

Administration of the Taxes Acts

Revenue Inspection of Declarations

Revenue inspected declarations of non-residence as follows

Bank/Branch Date of Inspection

Sample Size

Declarations Missing

Queries Raised

AIF - Naas

AIF - Drumcondra

AIB - Kilcock

AIB - Crumlin

AIBCM

March 1999

March 1999

April 1998

April 1998

March 1999

74

44

38

58

74

0 a

0

0

0

1 b

0

0

2

9

0

a Reference to branches in the case of AIF are to the originating branch within the AIB network.

b A replacement declaration was supplied on 19 March 1999.

Investigation Branch Enquiries

The Revenue Investigation Branch were involved in the investigation of six specific cases and in addition widened their focus to encompass DIRT compliance by the whole group in a meeting in February 1991. This widening arose in the context of cases being investigated in Skerries and Templemore. The details of these two cases and the wider investigation work are set out in Chapter 7 - Section 3.

The enquiries on the other cases did not involve any material breaches of the Taxes Acts or were disposed of following the supply of information by the bank.

The Office of the Chief Inspector was also involved in the Castlebar and Stillorgan cases outlined earlier. The Waterford and Portlaoise cases were internally investigated and disposed of.

Interest Reporting

Returns of Interest paid gross under Section 891 of the Taxes Consolidation Act 1997 were duly filed for all banks in the group.

Result of Work Performed by the Appointed Auditor

The Auditor reviewed branches of AIB at Ballyshannon, Dalkey, Enniscorthy, Killmallock, Rathkeale, Skibbereen, Tralee - Castle Street and Tralee - Denny Street. In addition AIBCM and AIF were reviewed. The following are the results of the review.

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

AIB

AIBCM

AIF

Sample

787

307

179

No Declaration held

3

1

0

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

101

1

25

239

2

17

19

3

14

Total Declaration Exceptions

130

259

36

Percentage Exception

17%

84%

20%

Authenticity Risk Profile - Non-Residents
Bank

AIB

AIBCM

AIF

Sample

735

307

69

Risk Indicator
Irish Address

41

0

0

PO Box or ‘Care of’ Address

27

1

3

Hold Mail

8

165

38

Transaction Profile

28

0

0

Accounts with Liens

0

18

6

Other

10

0

5

Total accounts with Risk Indicators

114

184

52

Percentage with Risk Indicators

16%

60%

75%

Accounts also with documentary exceptions

36

141

22

Accounts where banks believe they hold appropriate evidence of non-residence

95

46

45

19Documentary Compliance - other Exempt Accounts and SSAs
Bank

AIB

AIBCM

AIF

Account Type

Exempt

SSA

Exempt

SSA

Exempt

SSA

Sample

116

65

0

0

34

12

No Declaration

0

0

0

0

2

7

Declaration Exceptions

20

0

0

0

0

0

Total Exceptions

20

0

0

0

2

7

Percentage Exceptions

17%

0%

0

0

6%

58%

Interest Reporting Exemption
Documentary Compliance (Form F)
Bank

AIB

AIBCM

AIF

Sample

468

278

83

No Form

77

58

11

Percentage Exception

16%

21%

13%

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