Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 26

Chapter 26 : Differences between AIB and Revenue over Interpretation of 1991 ‘Arrangement’

Background

A meeting took place on 13 February 1991 between AIB - Mr Jimmy O’Mahony (Group Taxation Manager) and Ms Deirdre Fullen (Tax Compliance Manager) and Revenue - Mr D.A. MacCarthaigh (Senior Inspector, Investigation Branch) and the three other Senior Inspectors in that Branch, Mr P. S. Ó Donghaile, Mr D. Roddy and Mr L. Liston. The subject matter of the meeting was the administration and control over non-resident accounts in AIB.

As a follow up to that meeting Mr MacCarthaigh wrote to Mr O’Mahony on 15 February 1991 reiterating the oral invitation to have all non-resident accounts re-examined by 30 June 1991. Any cases misclassified prior to 30 June 1991 were to be the subject of a DIRT payment to be negotiated at Investigation Branch without penalty or publication.

The 30 June 1991 deadline for the re-examination of accounts was later amended to 30 September 1991 by agreement.

Conflicting Positions

There is a fundamental disagreement between AIB and Revenue about the nature of the arrangement made in February 1991 regarding payment of DIRT in respect of interest on accounts which had been wrongly classified as non-resident.

AIB contend that the terms of the letter issued by Mr D.A. MacCarthaigh on 15 February 1991 were modified by reference to telephone calls and meetings after that date and they have contemporaneous notes of the nature and content of these contacts. They claim that these notes are proof that an evolving situation existed which culminated in there being no requirement to collect and pay retrospective DIRT to Revenue.

Revenue contend that Mr MacCarthaigh’s letter represents the arrangement and do not accept that it was modified except by specific amendments agreed with AIB. They claim that AIB notes of conversations and meetings do not represent accurate accounts of what took place. They are therefore seeking payment of DIRT liabilities for periods in which accounts were wrongly classified as non-resident.

The two contrasting views are set out hereunder.

The AIB version has been extracted from a submission made to me in the course of my investigation. The Revenue version has been extracted from a response furnished by the Chairman of the Revenue Commissioners to the Committee of Public Accounts on 20 October 1998 in response to evidence given by AIB officials at the Committee meeting of 15 October 1998. Copies of key documents are included at Appendix H.

AIB’s Position

Revenue Initiative February 1991

In late 1990, the Office of the Inspector of Taxes, Investigation Branch (IB) was in discussion with the then Group Taxation Manager of AIB, Mr James O’Mahony on a small number of individual cases. On 5 February 1991, Ms Deirdre Fullen, then Tax Compliance Manager, AIB had a telephone discussion with Mr Tony McCarthy, Senior Inspector of Taxes in IB. In the course of that discussion, when Ms Fullen was re-scheduling a meeting originally called by IB to discuss these cases, Mr McCarthy stated that he would "like to widen the agenda [for the forthcoming meeting] somewhat and, rather than dealing only with the two specific cases in question, to deal with the situation as it relates to branches of AIB in the Republic of Ireland as a whole". He stated that Revenue "do not hold AIB in high esteem" and that "certain issues keep recurring". He went on to say that "if we [AIB] are prepared to be pragmatic, the Revenue are prepared to look forward rather than back". A contemporaneous note of the discussion was taken by AIB.

Meeting of 13 February, 1991

A lengthy meeting was held on 13 February 1991 between AIB Group Tax Department (Mr O’Mahony and Ms Fullen) and representatives from IB led by Mr McCarthy.

This meeting and subsequent telephone discussions/meetings, all of which were recorded in file notes, are highly important as they confirm AIB’s stated position that there was an arrangement entered into with Revenue, which evolved over a period in 1991, whereby the problem of non-resident accounts was to be addressed in a particular way with no requirement, due to the sensitivity of the issue, to collect retrospective DIRT.

A number of salient points should be highlighted.

The initiative to deal with the wider problem of ‘bogus’ non-resident accounts was taken by Mr McCarthy before the meeting.

Mr McCarthy reiterated in his opening remarks at the meeting on 13 February that he wished to "widen the agenda to cover off the question of AIB Bank and its handling of non-resident accounts."

Mr O’Mahony stated that, since April 1990, a determined effort had been made to ensure that only genuine non-resident accounts had been exempted from DIRT by AIB. However, he qualified his remarks by stating that "things have improved significantly in this regard [i.e. as at February 1991] but it will take time". This action had been initiated by the Head of Branches and the Regional Managers at the instigation of the Group Taxation Manager. An examination of this area was also subsequently commissioned by the Group Financial Director as a result of difficulties which had been discovered in this area in the UK Branches. In December 1990 the AIB Finance Retail Deposit Centre (RDC) was also updated on the procedures for non-residents.

[From a review recently completed of what occurred between April 1990 and March 1991, it is evident that there was a significant improvement in compliance in the Branch Network after April 1990 and between March 1991 and September 1991 in the case of the RDC].

Mr McCarthy stated that Revenue were to "talk to all financial institutions in order to create the proper environment." Mr O’Mahony highlighted this as being a very important aspect.

Mr McCarthy stated that "for the first time, the Revenue are very serious about cleaning up the position once and for all."

Mr McCarthy initially gave AIB until 31 May 1991 (or longer if required) to undertake an exercise on non-resident accounts. He went on to say that "he would expect that any accounts which are incorrectly paid gross interest after to-day would have the tax paid over by the bank". The note goes on to say, "they do not propose to charge any penalty nor to have any publication. What the Revenue wish for is an amicable resolution of the whole issue". In response, Mr O’Mahony suggested that Revenue give AIB until 30 June 1991 to carry out the exercise and this was accepted.

Revenue clearly expected that, from that date forward, everything would be in order. The note states "Revenue are not so much looking back into the past but wish to look to the future".

The specific cases for which the meeting was originally arranged were dealt with at the end of the meeting.

The discussion was clearly wide ranging but the detailed file note and supporting evidence tends to show

- that Revenue were aware of the nature and extent of the problem across the industry and decided to address it. This was not an isolated approach to one bank to discuss a small number of cases.

- that AIB made no attempt to deny that there was a serious problem and indicated that it had already commenced an exercise in this area. This was received positively by the Revenue. There was no suggestion at the time that this earlier initiative by AIB to remedy the problem should be treated any differently to the Revenue’s proposal.

- that Revenue were intent on tackling the problem on a prospective basis by having a detailed exercise carried out over a period of time and ensuring that new procedures were adopted so that the issue did not recur.

In essence, AIB records that it was invited to examine all non-resident accounts up to a certain specific cut off date (initially agreed as 30 June 1991) and get its affairs in order. With regard to any problem cases uncovered after that date, the bank would have to pay the DIRT if the account was incorrectly classified and take appropriate action if staff complicity was an issue. There would be no penalty or publication for issues up to 30 June 1991. Revenue themselves described their approach as "an amicable resolution of the whole issue". The clear intent was that the arrangement was prospective. Revenue said that the same approach would apply across the industry. It was designed as a pragmatic solution to a very sensitive issue and accorded with Revenue’s treatment of this subject in earlier years.

Revenue Letter of 15 February, 1991

Two days later, the Revenue wrote to Mr O’Mahony confirming their understanding of the meeting. The text is self explanatory, but a number of issues require specific mention

- Revenue noted that action on this front had commenced in April 1990. They also noted the increased role of the Group’s Internal Audit Department (GIA) but incorrectly noted that GIA checked the authenticity of non-resident account holders from that date also. This was subsequently clarified and Revenue accepted in their letter of 7 March 1991 that the authenticity check would only come into operation as part of the new procedures. Mr O’Mahony confirmed this to GIA.

- AIB were invited to conduct an exercise across all non-resident accounts and were given until 30 June 1991 (subsequently extended to 30 September 1991) to complete it. The nature of the exercise requested was clearly extensive which does not accord with Mr Quigley’s assertion to the PAC that what was being examined at that stage was a small number of accounts.

- Revenue stated, in relation to the examination of non-resident accounts, "any cases discovered prior to 30 June 1991 will be the subject of a DIRT payment to be negotiated at this branch without penalty and without publication". This was not what had been said at the meeting where the non-retrospective nature of the agreement had been stressed. Mr O’Mahony sought clarification in a telephone discussion with Mr McCarthy on 26 February 1991 where the latter confirmed that "if relevant, any DIRT payment to be negotiated would relate only to that on interest paid subsequent to 5 April 1990."

Precedents Supporting AIB’s Position

It is not unusual for Revenue to enter into arrangements with taxpayers or taxpayer groups which result in an extra-statutory arrangement. Such arrangements sometimes involve the non-collection of prior liabilities. An example of this was the arrangement entered into with the building sub-contractors in 1970. It was widely known that widespread tax evasion existed in this sector. Specific legislation for a new tax collection system was introduced in the Finance Act, 1970. Revenue did not pursue prior year liabilities. A more recent example is VAT on the importation of services referred to as "4th Schedule" and other services received from abroad. There was extensive non-compliance with this legislation, which dated from 1972. Revenue issued a Statement of Practice in 1990 [SP VAT 1/90] in an effort to improve compliance in this area. It states "Any person who has not discharged a liability in respect of the payment of VAT on services received from abroad in the past should contact the local tax office with a view to regularising the position. The Revenue Commissioners will deal constructively with such cases." In effect, retrospective VAT was not collected in all cases and, where it was, the general rule was that it was for a maximum of two years previously. Frequently, such arrangements, particularly at individual taxpayer level, may not be documented or may be only partly documented. These arrangements are entered into by Revenue under their ‘Care and Management’ powers. AIB can, if required, provide independent expert witnesses who will vouch for this.

Liability to DIRT

In a further telephone discussion with Mr McCarthy on 5 March 1991 Mr O’Mahony advised that it was AIB’s intention to have the exercise concluded by 2 April 1991 (the next interest payment date for the bank). He also stated that the DIRT payment for October 1990 had already increased (by ?5m) in view of the earlier commencement of the exercise (as advised at the meeting). In view of this, Mr O’Mahony expressed the view that it would be evident to Mr McCarthy from the next payment that things were in order.

Revenue Board Approval

The main purpose of Mr O’Mahony’s telephone call to Mr McCarthy on 5 March 1991 was to discuss issues which had been raised by AIB senior management. In particular, AIB was anxious to ensure that IB were acting with the authority of the Revenue Board and that the other financial institutions were also being approached. Mr McCarthy advised that he viewed the Revenue initiative as an "amnesty" up to 30 June, 1991. He went on to advise that it was with the approval of the Board of the Revenue Commissioners that Enquiry Branch were asked to contact all the financial institutions with a view to clearing up the act once and for all. Mr McCarthy stated that they had gone right to the top in Bank of Ireland and that the Secretary of NIB was dealing with the matter.

This gave AIB the comfort it required and clearly demonstrated that the initiative was viewed in prospective terms by Revenue. AIB also concluded from this discussion that no retrospective settlement was being sought by Revenue and, in Mr McCarthy’s words an unofficial "amnesty" was being granted.

This demonstrates that AIB has a firm basis for its view that the arrangement was forward looking, no retrospective tax was to be collected or paid, the initiative was approved by the Board of Revenue, was intended to have application across the industry and was in accord with the Revenue’s "Care and Management" powers.

Implementation

A determined effort was made to act promptly on the Revenue initiative.

Annual Accounts of AIB

On 12 March 1991, Dr Donal de Buitléir, then Head of Group Taxation wrote to Mr John Keogh, then Group Financial Director, in advance of the finalisation of annual accounts, summarising the position in relation to liability to DIRT. This memorandum sets out his understanding of the position at that stage which was that the bank was being requested to settle any tax due since 6 April 1990. However, by advancing the exercise so that it was completed prior to 31 March 1991, this only left an exposure for the first six months from April to October 1990 but, in view of the fact that the DIRT payment had increased significantly in October 1990, he was of the view that any settlement, should it arise, would not be material. This reflected the tone of the exchanges between Mr O’Mahony and Mr McCarthy and, in particular, the clarification given in the telephone call of 5 March. No provision was made in the Group Accounts. It transpired that no settlement was ever sought.

Competitive Issues

From an early stage, it had been recognised that a critical aspect of ensuring the success of the Revenue initiative was its application across the whole financial sector. This was to ensure that, when DIRT was applied to the accounts of the customers in question, they were not in a position to move their funds to a rival financial institution which had less rigorous requirements.

In early April 1991, reports from the branch system in AIB indicated that not all financial institutions were acting similarly and that customers, when being notified that their accounts were being made liable to DIRT, were moving to rival institutions.

Mr O’Mahony and Ms Fullen met Mr McCarthy on 17 May 1991 to discuss this issue. Revenue undertook to investigate this matter as the importance, due to the competitive pressures, of treating all financial institutions in the same manner had always been recognised.

On 18 June 1991, Ms Fullen contacted Mr McCarthy to follow up matters raised at the previous meeting. The latter advised that the matter of other Banks had been brought to the attention of the Board of the Revenue Commissioners and that other Banks had also made complaints (including a complaint against AIB).

It is clear that in 1991, the problem of bogus non-resident accounts was still an issue across the industry and that the matter had been raised with the Board of the Revenue. Evidence would suggest that Revenue did follow up with other financial institutions and, over time, the competitive concerns abated. This would seem to indicate a change in behaviour in other financial institutions around that time although the response of some sectors may have been slower than others.

Extension of the Completion Date

On 26 June 1991 Dr de Buitléir contacted Mr McCarthy and agreed that the deadline for completion of the exercise be extended to 30 September 1991. The primary reason for this was the absence of Mr O’Mahony due to serious illness.

Foreign currency accounts were made liable to DIRT on 1 June 1991 and another reason the exercise was extended was to ensure that, from that date, relevant declarations were in place where such accounts were held for non-residents. Instructions in this regard were given by the Group Taxation Manager to the Regional Managers.

Continuing discussions

There were continuing discussions, in Mr O’Mahony’s absence, between Ms Fullen and Mr McCarthy on operational procedures for non-resident accounts and other issues. Ms Fullen wrote to Mr McCarthy on 22 August 1991 seeking clarification on a number of procedural matters.

On 6 September 1991 Dr de Buitléir and Ms Fullen met Mr McCarthy and Ms Nuala Ní Suibhne at which time Mr McCarthy spoke of the encouraging response by financial institutions to the DIRT ‘clean-up’. During the course of the meeting the IB personnel responded to a number of queries which had been put by AIB in a memorandum of 22 August 1991. Mr McCarthy agreed the DIRT procedures which had been forwarded to him for comment by Ms Fullen. Further correspondence on points of clarification was exchanged on 27 September 1991, 4 October (in which Mr McCarthy agreed that authenticity checks by GIA would only apply from 30 September 1991), 5 December 1991, 4 February 1992 and 18 February 1992.

No settlement was made with Revenue and no such settlement was sought by them or even raised in the continuing contact with them.

Revenue’s Position

Background to the 13 February 1991 meeting

In late 1990 Revenue were in correspondence with the Tax Department of AIB in relation to two branches of the bank in which Irish resident taxpayers held deposit accounts which had been designated non-resident and which Revenue had discovered in investigating these individuals. The individual cases had been the subject of settlements. The bank, in a letter of 31 December 1990, advised Revenue that there were ‘no improper non-resident accounts held at either Branch’. However, the Senior Inspector was concerned that adequate controls may not have been in place in the bank to ensure that Irish resident taxpayers could not take advantage of non-resident declarations.

This led to further correspondence and a meeting was arranged between the bank and the Senior Inspector to discuss aspects of the two cases and the bank’s overall approach to the question of non-resident declarations. The Senior Inspector advised the bank on 5 February 1991 that the discussion would go beyond the two cases referred to. The Investigation Branch, in the course of their investigations into the affairs of taxpayers, had from time to time uncovered situations where Banks held accounts of Irish resident taxpayers which had been classified as non-resident. Although evidence of complicity by the bank or their officials in relation to this was skimpy, suspicions nevertheless existed that some bank officials may have facilitated the taxpayers in concealing their funds from Revenue. Consequently, the Senior Inspector invited the other Unit Leaders of the Revenue Investigation Branch to attend the meeting.

The proposed meeting presented an opportunity to Investigation Branch to

discuss the bank’s control system with particular reference to establishing a trail to a bank official accepting a bogus declaration

explore allied matters such as the bank’s Internal Audit procedures in this area.

Revenue had no detailed evidence on the scale of these accounts held by AIB and had not the legislative powers to establish such information. There was no mention at the meeting of the figure of 53,000 bogus non-resident accounts nor of a sizeable number of accounts for which no declarations existed.

The meeting of 13 February 1991

The Revenue approach as reflected in four separate contemporaneous notes made independently by each of the officers present at the meeting, was to explore the bank’s role in the matter of facilitating, or otherwise, Irish taxpayers in their efforts to evade tax. A wide ranging discussion ensued. The meeting did not result in any settlement or agreement that DIRT liability arising for past years would not be payable. The Investigation Branch did not have the bank’s own affairs under any form of investigation, nor had any challenge been issued in the matter of DIRT liability. With the limited information then available to Revenue, the primary concern was whether the bank had adequate controls in place to ensure that taxpayers (bank customers) were not being facilitated in evading their taxes.

Revenue’s notes of the meeting indicate that AIB were invited to re-examine all of their non-resident accounts and certify by 30 June 1991 that they were in order, AIB having advised in the course of the meeting that they had procedures in place to ensure compliance. Revenue agreed that any detection of bogus non-resident accounts arising as a result of that re-examination would result in DIRT and negotiated interest being payable but would not result in publication of the bank or its officials, and that any subsequent detections would be considered for prosecution.

Revenue’s letter of 15 February 1991 confirms this approach where it states

"I invited you to have all the non-resident accounts re-examined and suggested that each Branch Manager certify to you that all the accounts at their Branch, at 30 June, 1991, are insofar as they are aware genuine non-resident accounts. Any cases discovered prior to 30 June, 1991, will be the subject of a DIRT payment to be negotiated at this Branch without penalty and without publication. Detection of offences arising after that date will give rise to prosecution of both the bank and the official involved, a point which should be clearly advised to your staff"

The letter of 15 February 1991 sets out the terms under which discussions were taking place between Revenue and AIB. In essence Revenue sought

new stringent arrangements in regard to non-resident deposit accounts

review of all existing non-resident accounts with a view to re-classification

as a result of that review, disclosure to Revenue of cases which were re-classified so that tax liability with negotiated interest but without penalty and publication could be finalised.

Revenue were reassured by the bank’s attitude at the meeting and their emphasis on Internal Audit procedures in place.

Revenue did not, as is suggested by the bank, give AIB an "amnesty" from DIRT undercharges. The bank apparently contend that they sought confirmation on the telephone that the Senior Inspector’s superiors were aware of the "arrangement", and claim they were advised that it was with the agreement of the Board of the Revenue Commissioners. There is no evidence or recollection in Revenue of any such communication from the bank. Revenue is quite clear that neither senior management nor the Board considered or approved any arrangement involving the waiving of past liabilities in relation to DIRT. Indeed, it will be noted that in the Group Chief Executive’s statement to the PAC, in defining the so called forward looking arrangement, he says that there was to be no penalty or prosecution but says nothing about payment of tax. It is not credible that, in the context of such an important matter, such confirmation would be sought from the officer concerned and not from his superiors. The bank officials involved would have sufficient knowledge of the tax code and Revenue procedures to know that a Senior Inspector could not grant an amnesty.

In regard to the specific AIB contentions which are not accepted by Revenue.

The first AIB contention was that bogus non-resident accounts up to 1991 were an industry issue. While Revenue has acknowledged that there were problems about bogus non-resident accounts in a number of institutions, it does not accept the clear implication in the statement of the Group Chief Executive, AIB that there was an industry-wide "resolution" in the form of an "amnesty" in 1991 for non-payment of DIRT. No such amnesty was given. Neither Revenue senior management nor the Revenue Board ever approved such an amnesty for AIB. The Chairman of AIB is on the public record as stating that "there were not tax amnesties and no tax-deals with the Revenue Commissioners". The other main banking institution had indicated that it neither sought nor received any general agreement with regard to DIRT liability and that no general settlement with the Revenue Commissioners ever arose.

The second contention was that, while confirming that they did not do a deal with Revenue for ?14 million, AIB accepted Revenue proposals in 1991 for resolving this issue and AIB did all that they were asked to do. AIB have accepted in evidence that the proposals in the Revenue letter of 15 February 1991 would have required payment of past DIRT but then argued vaguely that "it became clear that this was a forward looking arrangement". Revenue do not accept the contention that there was agreement that retrospective DIRT need not be paid. There was no such agreement. Where bogus non-resident accounts had been discovered in individual cases payment of full DIRT back to 1986 has been required by Revenue.

AIB argued that the "amnesty" arrangement was indicated by a Senior Inspector of Taxes in a telephone conversation on 5 March 1991 but that no written confirmation was received. Anybody with even a cursory knowledge of the tax system, never mind detailed knowledge of it, would know that an "amnesty" could not be given in such a manner and without legislation. It should also be noted that up to 1993 no Amnesty had been introduced in this country providing for remission in whole or in part, of actual tax as distinct from interest and penalties. More importantly, there is strong evidence in the AIB internal audit documentation now available to Revenue that even on 5 April 1991 there was a clear awareness of this situation in AIB. "The Group Taxation Department has informed me that an Amnesty cannot be given without legislation going through the Dáil: the Group therefore has a contingent liability of c. ?100 million in respect of DIRT." (Quotation from letter of 5 April 1991 from Group Internal Auditor to Chairman of Audit Committee).

The AIB evidence has tended to obscure the point that, under the law and with the detailed information on bogus accounts which it had and which was withheld from Revenue, there was an indisputable onus on the bank to pay the DIRT due for all years.

The third contention was that AIB did not mislead Revenue on the extent of the problem at AIB. Revenue is in fundamental disagreement on this. Revenue does not accept that it was not misled on the detailed information available in AIB on the scale of the problem. It is clear that during the period in question AIB had detailed knowledge/estimates of the scale of its problem. At no time was this information made available to Revenue. Revenue obtained it only when they requested it after the disclosure in the Sunday Independent in April 1998. Under the DIRT system, which is a Self Assessment system on the financial institution, the clear onus was on AIB to act on the information available to it.

With regard to the statement that Revenue "never felt the need to come back and ask if there was tax to be paid".

(1) The onus was on AIB

(a) to advise Revenue of irregularities discovered by AIB (whenever those discoveries were made); and

(b) to revert to Revenue on the specific issues which had been raised e.g. names of branches where significant irregularities came to light.

AIB did not fulfil that onus.

(2) The fact is that the clear onus was on AIB to tell Revenue the position. The bank did not disclose the scale of what was involved to Revenue.

(3) Revenue were denied knowledge of essential information which was available, and which Revenue were entitled to, and which AIB were obliged to disclose to them.

Revenue in possession of that information would have acted very differently."

Outcome of Oral Hearings

The individuals who were involved in the meeting and contacts at the time - Mr O’Mahony, Ms Fullen and Dr de Buitléir for AIB and Mr MacCarthaigh and Mr Ó Donghaile for Revenue - have outlined in oral evidence to me their recollection and understanding of the related events of 1991. Apart from providing some clarification on the detail of their involvement in the issue their evidence merely served to underline the opposing positions of their respective organisations.

The Revenue position is supported by the correspondence and its notes of contacts with AIB. On the other hand, AIB’s position is supported by their contemporaneous notes of contacts with Revenue.

Other Issues

There are some other issues arising from the positions taken that require closer examination

Lack of Revenue follow up

Extent of alleged amnesty

?14 million "uplift"

Correction of Revenue Evidence given to the Committee of Public Accounts.

Lack of Revenue Follow Up

AIB suggest that the lack of follow up by Revenue in the matter of seeking DIRT arrears supports its view that the arrangement was ‘forward looking’.

The meeting between AIB and Revenue on 13 February 1991 and the consequent letter of 15 February 1991 required or implied certain demands on AIB as part of the agreed arrangement.

The principal demands were

The letter stated that any cases viz. bogus non-resident accounts, discovered prior to 30 June 1991 will be the subject of a DIRT payment to be negotiated at Investigation Branch without penalty and without publication. Subsequently, Revenue did not enquire whether there were any such cases and the question of a negotiated payment was not considered by Investigation Branch.

The letter "suggested that the examination be done of the numbers of non-resident accounts held at the various Branches and any unusual or unexpected preponderance should be notified to this Office and investigated by your internal audit people". According to the documents I have examined and the oral evidence given to me, there was no such notification given nor was the request repeated by Revenue.

Both AIB’s and Revenue’s notes of the meeting on 13 February 1991 recorded that AIB were to provide a certificate to Revenue that all non-resident accounts were in order by 30 June 1991. However, this requirement was not restated in the letter of 15 February 1991. Again, no such certificate was provided nor was it sought by Revenue after that date.

Bearing in mind that

Mr MacCarthaigh’s record of the meeting on 13 February 1991 stated that Mr O’Mahony "freely accepted that up to April 1990 there was a major problem"

Mr MacCarthaigh, in a minute to the Chief Inspector of Taxes dated 2 November 1990 in the context of bogus non-resident accounts detected in the Roscrea Branch of the Bank of Ireland, had stated that "abuse of the DIRT legislation through the operation of bogus non-resident accounts is rampant"

there was a general view that at least 50% of non-resident accounts were bogus

I enquired of Revenue officials why there was no follow up in the AIB case.

Mr MacCarthaigh stated in evidence to me

"I had no evidence on which to raise an assessment. There wasn’t a follow through. If there wasn’t and blame or guilt lies, then I have to put up my hand and say I was the guilty one. I didn’t follow through, but I don’t see it in that context at all. Looking at it in 1991 is very different to looking at it in 1999 in the sense that I did not have any of the wealth of information that is now available to me, available in 1991. I was extremely sceptical about the bank. Maybe I could be faulted for placing too much reliance on my scepticism. But as circumstances turned out, it seems to have been well founded. I had seen the response I got on Skerries and Templemore. There was certainly no question of writing off tax. That was not the reason why I didn’t go back. I wasn’t able to pursue it. If I was able to do more than write a letter or ask or invite -- as I used the word -- I would have used it. I had no powers and I couldn’t follow through. I couldn’t look or check to see if they had made correct returns. I couldn’t raise an assessment for lack of evidence. At the same time I was moving on to what was and turned out to be a fairly serious problem in the drinks industry which preoccupied a substantial proportion of my time. There were at least four major legislation changes including the 1992 Act which would have been directly linked to my desk. And we are not dealing with the corner shop, we are dealing with one of the largest businesses in the State. The terms were set out on the 15th February. I expected them to come back. If it was in my interest to come back, it was in their interest as well because I had given certain undertakings. I wasn’t going to pursue penalties and there was to be no publication and no prosecution if they came back and settled cases prior to 30th September 1991. They didn’t do that. They didn’t avail of the offer that was available to them on that. They had an incentive to come back to me. They had an obligation to come back to me. I think it is unjustifiable that I should be sending reminders to Allied Irish Bank on such an important matter. After all, you mentioned a number of conversations of which I have no recollection. Certainly when it came to pursuing points or getting things done, on their own argument they seemed to be very diligent. Yet on the main points they weren’t diligent at all. It is very difficult to reconcile."

"The fact that there was a large problem with bogus accounts did not mean that the bank had a liability for all those accounts. They only had a liability in those cases where they failed to satisfy the obligations imposed by law. So, to a degree if the bank came back to me and said ‘here is ?10,000 in settlement. This is the tax involved in incorrectly designated accounts’ that would be the end of the story in the context of the fact that I couldn’t verify it, I would have to accept it. I was totally dependent on them. But the fact that there was a large number of wrong accounts does not by any stretch of the imagination mean that there was an equivalent sum of money payable to Revenue by the banks. I had no idea as to the scale of it. I still don’t know of involvement by their officials."

"I just don’t accept that Allied Irish Bank can transfer the monkey from their back onto the Revenue back by virtue of a letter not being issued to follow-up. I just refuse to accept that. They had a legal obligation. Primarily they had a legal obligation. Forget the invitation, they had a legal obligation. DIRT is a self-assessing tax. It is not something they can opt in and opt out of. It is a long-standing problem according to them."

I enquired of Mr MacCarthaigh if his assignment to the inquiry into the drinks industry in September 1991 was a factor in his non-pursuit of the AIB matter. He replied

"It is a huge factor. The volume of work involved in that was enormous. I was 15 months doing practically nothing else. I think there were at least four pieces of legislation that emanated in the Finance Act 1992 in which I had a direct involvement. There were substantial negotiations taking place because I did it on a top-down basis. It was a very complex operation. It took all my time. For example, I would have been carrying an allocation of maybe 20 cases. Whilst I may have concluded one or two of them at a later stage most of them were re-assigned to somebody else."

He stated that the AIB case was not reassigned.

In response to my enquiry as to whether in the normal course of events viz. without the drinks industry assignment, he would have followed up the AIB case in a pro-active way, he stated

"I think I would because the correspondence that you have been handed from the Revenue show that for want of a better expression I had a thing about the banks. I diligently pursued the banks. I pushed the boat out as far as I could within the limitations imposed on me. I am a little disappointed that I didn’t follow through at the time. I have to admit that personally. But certainly if I was not burdened down with the drinks operation, I would expect to have given it maybe even priority. But that is life."

In response to my enquiries as to the system for monitoring progress of cases in Investigation Branch, Mr P.S. Ó Donghaile - Principal Inspector in charge of the Branch from June 1991 - stated in evidence to me that such a system was in place but that the AIB matter was not logged as a case because it was viewed as being on the margins of the activities that the Branch was engaged in. Mr Ó Donghaile pointed out that generally speaking, cases referred to the Branch had good hard evidence that there might be something wrong and the Branch had the capacity to go and inquire into that. The AIB matter was seen as being different. There was no hard evidence, just a couple of isolated incidents which had been dealt with. Mr Ó Donghaile stated

"We had raised an issue with them; we didn’t know where it was going. We are looking at a scenario where we couldn’t get behind anything they said to us, and I suppose, at the end of the day we were not very confident that they were going to say anything meaningful to us, in any event, knowing that we had a total lack of power to do anything about it. We were in their hands."

Under further questioning regarding the failure to follow up on the AIB case, Mr Ó Donghaile stated

"Certainly, if there was a failure on Revenue’s part, it was a sin of omission because things slip through the cracks and if you have a limited resource, you do what you can within the framework of that resource, which is what we were doing with the limited resource we had at our disposal. We were diverted into, at that time, several things, because in my previous five years in the Investigation Branch, I don’t think we were involved in anything quite as hectic as we were involved in 1991 in that we had the Beef thing and the Beef thing ranged across a whole series of companies that had to be addressed. We had the drinks thing and we had the semi-state thing. Now, we had never previously been involved in anything of that sort. Prior to that, we were caseworkers and this was a new departure. These things run very hard on our horizon. These are the things that we put our efforts into, along with the ongoing case load. This case here, as I said to you, was on the margins of our activities. We were tackling an issue in relation to AIB, we weren’t tackling AIB as a case per se. We just couldn’t investigate it. An issue had arisen, and we would raise the issue with them and we were waiting for them to come back to us and we would have expected them more so than say some of the operators that we had been used to dealing with. Now, they didn’t do so. Things slip through the cracks under those kind of pressures."

Extent of Alleged Amnesty

At an early stage of its dealings with Revenue in 1991, AIB were of the opinion that the amnesty granted covered no retrospective DIRT liability for periods prior to 6 April 1990 and that consequently any DIRT payment to be negotiated would relate only to DIRT arising on interest paid subsequent to 5 April 1990. The AIB view is recorded in a summary note prepared by Ms Fullen after the meeting of 13 February 1991. The Revenue letter of 15 February 1991 which was issued after that meeting is silent in this regard and, according to AIB papers, clarification was sought from Revenue soon afterwards.

A note dated 26 February 1991, prepared by Ms Fullen, records that Mr J O’Mahony telephoned Mr D.A. MacCarthaigh and received confirmation "that, if relevant, any DIRT payment to be negotiated would relate only to that on interest paid subsequent to 5 April 1990."

In a report dated 29 July 1991 on the origin of the arrangement with Revenue and developments to date, Ms Fullen pointed out that the extension granted by Revenue for having the reclassification exercise completed by 30 September 1991 did not extend the period (i.e. 6 April 1986 to 5 April 1990) for which AIB will not be penalised for non-deduction of DIRT where it was appropriate to do so. Ms Fullen also stated in that report that AIB had a potential DIRT exposure in relation to interest paid on bogus non-resident accounts in the branch network in October 1990 - interest being paid twice yearly on demand deposits at the branches. Reference was also made to a potential DIRT exposure for the months of June and July 1991 in respect of interest paid on term deposits in the RDC.

In the course of the oral hearings, I put it to the AIB representatives that my examination of the bank’s papers had not revealed any record of a change in AIB’s understanding of its arrangement with Revenue in this regard. At this stage I had already noted from Mr Don Walsh’s (then Head of Group Internal Audit - Ireland) evidence that an estimate of ?9.4m had been prepared to cover a possible liability for DIRT underpaid in the 1990 - 91 tax year.

In response to my enquiries, Dr de Buitléir and Mr Philip Brennan stated in evidence to me that no payover was made in respect of DIRT underpaid on accounts misclassified as non-resident from 6 April 1990 up to the date of their reclassification because it was AIB’s understanding that, as the situation evolved or developed, no payment was due, no payment was subsequently demanded and the question never came up in discussions with Revenue.

?14 million "Uplift"

There was some confusion at the meeting of the Committee of Public Accounts on 15 October 1998 regarding an increase of ?14 million in AIB DIRT payments over the period 1990 to 1992 and the extent to which the increase was due to the bank’s reclassification of bogus non-resident accounts. At the earlier meeting on 13 October 1998 there was a suggestion that the ?14 million might have represented a type of settlement. It was established that this clearly was not the case.

The ?14 million "uplift", as it has come colloquially to be known, is the approximate difference between the DIRT payment for the tax year ending 5 April 1990 viz. ?49.9 million and the DIRT payment for the tax year ending 5 April 1992 viz. ?63.5 million. The bank had acknowledged in evidence before the PAC that the increase of ?13.6m was attributable to a combination of changes in the tax rate, interest rate and business volumes as well as to the reclassifications of accounts previously DIRT exempt. The bank has analysed the increase and its best estimate of the effect of the reclassification on the increased DIRT proceeds is that, after allowing for a reduction in DIRT rates, it represented about 30% of the increased yield over the two years.

Correction of Revenue Evidence Given to Committee of Public Accounts

In the course of a meeting of the Committee of Public Accounts on 28 April 1998, Mr Cathal MacDomhnaill (then Chairman of the Revenue Commissioners) stated in relation to DIRT

"In 1991, we approached all the financial institutions on the basis of our own analysis of the movement in accounts".

As this statement strongly suggested that Revenue had adopted an industry wide approach to the problem of bogus non-resident accounts as contended by AIB, I enquired of Mr Mac Domhnaill as to the basis of the statement. In responding, Mr MacDomhnaill said, in evidence to me, that he might have mistakenly referred to 1991 and perhaps the transcript should have been corrected. He pointed out that he didn’t have any briefing papers with him at the PAC meeting at the time so he was giving the best information he could.

I also raised the statement with the current Chairman of the Revenue Commissioners, Mr Dermot Quigley in the course of hearing his evidence. He responded that he had checked as best he could but he did not think that anybody was aware of any letter or approach to the financial institutions generally.

On 24 June 1999 I received a letter from Mr Quigley in this connection stating

"I am writing pursuant to the point you raised last week with my predecessor and myself in relation to material on page 52 of the Committee of Public Accounts Second Interim Report on the Appropriation Accounts 1996.

The minutes record Mr MacDomhnaill as saying at the hearing of 28 April 1998:

"In 1991, we approached all the financial institutions on the basis of our own analysis of the movement in accounts".

You will recall that this particular hearing of the PAC was called to hear a progress report on prosecution policy but that discussion came to range much more widely. Unfortunately, the statement above is not factually correct. Since last week I have spoken with Mr MacDomhnaill. He agrees that there was no approach to all financial institutions in 1991 (such an approach had been made in 1984 in the context of the then mooted Code of Practice in relation to deposit accounts).

The position is that a number of financial institutions - including the two main banks - were approached by individual Investigation Branch officers in the period 1990 to 1992 arising from irregularities in compliance with the DIRT legislation in specific cases; none of these approaches was based on an analysis of movements in accounts generally.

I hope this clarifies the position. The confusion in the matter is regretted as is the omission to correct the factual error when the minutes were being certified.

I have shown this letter to Mr MacDomhnaill before issue."

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