Office of the Comptroller and Auditor General - Dirt Investigation - Chapter 9

Chapter 9 : Bank of Ireland Group

Background

The Bank of Ireland Group comprises the following financial institutions

Bank of Ireland Ltd.

Bank of Ireland Finance Company Ltd.

Investment Bank of Ireland Ltd. (IBI)

Irish Civil Service Building Society (ICS)

Bank of Ireland Limited operates through a network of 297 branches. The branch network of Bank of Ireland Limited also services the ICS.

Non-Resident Deposit Levels

The Bank of Ireland Group's share of the non-resident market as at 30 November 1998 was 18.65%.

The value of its non-resident book varied between ?770m and ?1,688m during the period 1986-98.

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

Year

Number of Non-Resident Accountsa

Percentage of Deposit Book by Valueb

1998

80,097

16.9%

1997

76,187

16.8%

1996

72,740

15.4%

a Information supplied by the bank

b Calculated using Central Bank data

Staff Instructions and Procedures

Following the introduction of DIRT the bank approached all depositors of funds who had previously declared that the interest beneficiary was non-resident and sought the fresh declaration required by the DIRT legislation after 6 April 1987.

The bank has written procedures covering the opening of non-resident accounts. These procedures include instructions on

obtaining evidence of identity and address

the completion of an account opening form

the completion of relevant non-resident declaration forms

the retention of declaration forms.

The bank confirmed the operation of such procedures throughout the period under review and assured me that over the past number of years its procedures have always reflected all required obligations. The bank also has detailed procedures in relation to Special Savings Accounts and other DIRT exempt accounts.

In oral evidence I was informed by the Chief Executive of the Group that in the early years of DIRT if branches believed that the account holder was a genuine non-resident but had some difficulty getting the required documentation, they dealt with the substance rather than the form although the legislation was quite clear that both need to be in order for the depositor to qualify for exemption. He also stated that, at the time, the bank was conscious of concerns about outflows of funds from the country. In addition he stated that the numbers of bogus non-resident accounts discovered in this period was low, amounting to approximately 200 accounts.

It was the practice of the bank to obtain a form F in the period 1986-1993.

It was also the policy to obtain an affidavit in cases of doubt about non-resident status.

Internal Management Review

Internal Audit

Extent and Frequency

Since the introduction of DIRT it has been the practice in the course of branch audits to carry out reviews of accounts classified as not liable to DIRT. The extent of review has varied throughout the period as follows

Following the introduction of DIRT, samples of non-resident accounts were examined and the sizes of such samples were gradually increased to a point where in June 1988 the bank began examining 100% of accounts

In 1993 the sample size was reduced to 20%

Since 1995, reviews are carried out on the basis of sampling accounts opened within the previous year on which interest has been paid gross and reviewing the authenticity of non-resident status.

This work is currently carried out in branches in accordance with the audit cycle which ranges from 12 to 48 months depending on the risk grading of the branch.

Authenticity checks included examining a selection of accounts or transactions for

activity on accounts i.e. non-resident accounts with frequent transactions

non-resident accounts linked to other accounts in the same name which were resident/active

accounts with a non-resident address but a local statement address

references to resources on lending files.

They were further addressed by including non-resident accounts in the circularisation of customers to verify balances/transactions and discussions with branch staff.

If the activity on any of the accounts selected for audit or any other factor gives rise to any doubt as to the genuineness of their status it was recommended that the account be made liable to DIRT until the position is clarified and clawed back if necessary.

In oral evidence I was informed by the head of internal audit that the bank felt that the problems in relation to non-resident declarations was not an issue of the same dimensions after 1993. In the period up to 1993 internal audit felt that non-resident accounts were an issue that was deserving of 100% testing to ensure that the problem was resolved as quickly as possible. The internal audit department's approach thereafter was that only in an exceptional situation would they undertake a 100% examination of a particular area.

Results of Internal Audit

I reviewed schedules prepared by the bank which summarised on a six monthly basis information extracted from branch audits in relation to non-resident and charity accounts in the period October 1987 to March 1991 and from October 1992 to March 1993. I also obtained a listing of all branch audits undertaken in the period 1986 to 1998. From this list I randomly selected and examined a sample of 30 audit reports as follows

10 from the period April 1987 - March 1991

12 from the period April 1991 - September 1992

8 from the period October 1992 - December 1998

The schedules prepared by the bank indicated that the level of compliance was quite low in the beginning but had improved by 1992-93.

Six Month Period Beginning Comments
October 1987 Up to 85% of non-resident declarations were not available for samples examined in individual branches. Many branches had exception levels of 40%-44%. In this period a Form F served as a DIRT declaration for interest posting. I noted that in a significant number of cases neither Form Fs nor non-resident declarations were available
April 1988 Up to 95% not available. Very high exception rates noted.
October 1988 Up to 90% not available. Very high exception rates noted.
April 1989 Exceptions still arising, highest around 45%.
October 1989 Exceptions still arising, highest around 15%.
April 1990 - March 1993 Still some instances but getting less over time.

I received extracts from 19 audit reports from the bank which contained a commentary on DIRT or non-resident accounts. The bank certified that the reports of the other 11 audits did not contain any other relevant commentary.

April 1987 - March 1991

In relation to this period the bank supplied 8 extracts. The issues noted correlated with the summary already provided by the bank. Details were as follows

Boyle - December 1987

The branch has accepted non-resident declarations from approximately 40 customers who were known to the branch to be resident and was paying interest gross to those customers despite explicit instructions issued by management. Since receipt of a branch circular issued on 19 October 1987 the Branch had begun to contact customers.

Athy - April 1988

44% of declarations not available

76% of Form Fs not available.

Killorglin - May 1988

There were 440 accounts (?2.4m approx) at the branch where interest was paid gross. In the sample examined (101) the required non-resident declarations had not been obtained for 70% and Form Fs had not been obtained in 68% of cases. The branch had made efforts to obtain the required documentation by way of mail shot, but the response rate was very low. Follow-up was receiving attention.

Skibbereen - May 1988

Total non-resident accounts were ?1.5m. From an examination of relevant supporting documentation held for 82 accounts to a value of ?1.3m, it was noted that DIRT declarations were available in only 49 cases.

Claremorris - September 1988

It is clearly evident from "Non-Resident" records that gross interest was paid to some customers who were resident within the State. Accounts of this nature were generally opened in the Irish version of the customer name - this ploy was used to prevent returns being made to accountants and the Revenue Commissioners.

An audit sample of 265 accounts was undertaken (i.e accounts with balances in excess of ?2,000). DIRT declaration forms were not held in 80% of the sample examined (monetary value ?3.25m) or 21% of branch resources.

Blanchardstown - June 1989

7 declarations not available - value ?8,500

Roscommon - September 1989

Declarations were not available in 25 cases with a value of ?162,000 - 14% of all accounts.

Mullingar - January 1991

Three accounts (value ?39,000 approximately) did not have Form Fs or DIRT declarations and were still obtaining gross interest. This was due to a branch error when converting these accounts in December 1990. They were all adjusted during the course of the audit.

April 1991 - September 1992

I received 9 extracts from the 12 reports requested for this period. In general the comments in these audit reports refer to deficiencies in the completion of non-resident declarations and Form Fs. A number of cases were noted where affidavits should have been obtained but were not. There were only two cases where the non-resident declaration was not available. The only issue of note was a report of the Buncrana branch audit in November 1991 which stated that the standard of completion of the non-resident declarations and Form Fs was considered to be less than satisfactory, with many relevant sections not completed as required. In many instances the customer's signature was all that was obtained and all other relevant sections were left blank. It was recommended that a review of this area be undertaken. Again these extracts confirmed the previous information supplied by the bank.

October 1992 - December 1998

I received 2 extracts from the 8 reports requested from this period. Neither extract contained any material issues.

General Overview - Audit Results

The bank stated that

There was inevitably a "bedding in" period for the new DIRT arrangements as branches sought to obtain the new DIRT declarations before interest posting in March 1988 since Form F ceased to operate as a DIRT declaration after April 1987. If the account was coded non-resident during that period but the new declaration was not yet in place, auditors would give the branch a negative rating.

Auditors would not distinguish between low and high value accounts in rating the quality of documentation.

The discovery during audits of DIRT-free bogus non-resident accounts of which branch staff were aware was infrequent. The negative ratings accorded to branches predominantly related to documentation deficiencies.

In oral evidence the Chairperson of the Audit Committee while acknowledging the time taken to achieve documentary compliance stated that, in her view, management were doing everything they could possibly do to ensure compliance. The culture of the bank was always to adhere to the regulations. While, perhaps, progress was somewhat slower than one would have aimed for, there was no support whatsoever for not conforming. The group head of internal audit informed me that while the first circular issued to branch managers in response to internal audit findings was not issued until May 1988 the issue had been raised prior to this. In October 1987 he had a meeting with the head of the bank's Retail Division, at which he raised the results of internal audit as regards DIRT non-compliance. He in turn raised the issue immediately with his general managers with whom he had monthly meetings.

He also informed me that in the period 1986-89 there was confusion in the system with regard to the documentary requirements

A number of branches held one or other of the Form F or a non-resident declaration, but not both, because they misinterpreted the documentation requirements. They got rid of all the Form Fs and introduced the new non-resident declaration.

Other branches had the Form F and had not obtained the proper declaration.

There were a lot of these cases in this period but the scale was diminishing very rapidly. Internal Audit did detect the fact that there were some bogus non-resident accounts but not in huge numbers. By and large he felt the bank was experiencing non-compliance in relation to documentation requirements and by late 1988 or 1989 the situation had improved dramatically.

He also added that once highlighted in an audit, in virtually every case when internal audit carried out the subsequent audit of the branch, documentation deficiencies had been corrected.

I also asked him if any arrears were calculated and paid to the Revenue Commissioners in the cases where there was not a declaration in place at the time of audit. He was not aware of arrears having been calculated in those situations.

Reporting of Internal Audit

The group chief internal auditor submits half-yearly reports to

the Audit Committee of the Court of Directors

the Chief Executive’s Office via the Group Chief Financial Officer.

Up to March 1992 the group head of internal audit reported exclusively to the Audit Committee. A copy of the reports were submitted to the Chief Executive's Office. Following an external review of the internal audit department in 1991 it was decided that from March 1992 the Group Chief Internal Auditor would report to both with only the more important issues reported to the Audit Committee whereas all issues arising would be reported to the Chief Executive's Office.

The group head of internal audit informed me that his reports and comments to the Audit Committee were formulated on the basis of his belief that the issues raised related to technical non-compliance as opposed to a more general non-compliance. In such reports he was making the point that the matters raised were issues in more than just an isolated branch, that they arose from ignorance or carelessness or just other priorities getting in the way, but nonetheless it was serious enough to warrant highlighting as a general comment to the Audit Committee.

Audit Committee

Issues in relation to DIRT or non-resident accounts were raised in a number of reports,

Six Month Period To Comments
March 1988

Deficiencies in customer accounts showed an increase in the level of inadequate ratings. This is mainly due to the high incidence of branches which have not fully complied with instructions regarding DIRT/non-resident accounts. The situation as reported in a number of branches could have serious implications for the bank. The subject had been discussed with Managing Director - Retail who has initiated corrective action.

September 1988

65% of branches received negative ratings in the area of customer accounts. In the main this reflected non-compliance in relation to DIRT.

March 1989

64.5% of branches received negative ratings in the area of customer accounts mainly due to the absence of documentation in relation to designated non-resident accounts.

September 1989

67% deficiency

March 1990

While the situation is improving the frequency of comment in audit reports is disappointing.

September 1990

While a significant improvement is evident in DIRT documentation in branches, deficiencies continue to be identified despite assurances given by branch managers to their regional offices.

March 1991

The problems previously identified in relation to DIRT have largely disappeared due to initiatives undertaken by line management. However some deficiencies continue to be identified.

March 1993

Despite management directives and attention many branches are still failing to comply fully with procedures.

March 1998

Internal Audit occasionally highlight situations in branches where accounts were incorrectly classified as non-resident and interest paid was not subject to DIRT. These situations usually arose as a result of an oversight in the branch in not re-designating previously non-resident accounts as resident when the account holder returned to Ireland. The numbers of accounts involved were small and the associated values were low.

The reports to the Audit Committee also contained references to the incidents in Miltown Malbay and Roscrea which are outlined below.

The minutes of the Audit Committee referred to the non-resident issue on a number of occasions at which the committee expressed disappointment that the control objectives set by management, particularly in respect of the retail branches, had not been met.

I asked the Chairperson of the Audit Committee if the committee were happy with the pace of the improvement as non-compliance in relation to DIRT was a recurring theme in successive six monthly reports. In oral evidence I was informed that ideally the bank seeks perfection but within any large business organisation such as the Bank of Ireland one will never get 100% compliance. However, it was not of enormous concern to the Audit Committee or to the Court because it was being addressed so seriously by management at the time who were absolutely adamant that the regulations must be complied with. In oral evidence the group head of internal audit also informed me that the terms of reference for internal audit were amended in 1994 to include a review of the effectiveness of management's follow up in dealing with audit issues.

Reports to Chief Executive's Office

The six monthly reports to the Chief Executive's Office contained a number of references to DIRT or non-resident accounts in addition to the reports submitted to the Audit Committee.

Half Year Report To Issue Raised
March 1992

The main deficiencies reported previously continue to apply. A concern relating to DIRT continues with an unquantified liability, in respect of unadjusted interest on deposit accounts redesignated resident from non-resident status.

This report also noted a major control weakness in the audit of IBI Accounts, Settlements & Valuations. This related to the allowing of overdrawn balances on deposit accounts without any formal credit approval process, and the netting of debit interest against deposit interest, which could have had DIRT implications. Management’s response was that no liability to DIRT arose in IBI. This view was based on legal and taxation considerations. Some improvements to put matters beyond any doubt were put in place.

March 1993

Claremorris was rated seriously deficient. A major control weakness in relation to the validity of non-resident status of some accounts coupled with an attempt to mislead the auditors contributed to the seriously deficient control rating in this branch.

March 1993

An assistant manager in Tullamore was personally involved in the operation of fictitious accounts and the resultant evasion of DIRT.

March 1994

In Killester, there were serious irregularities in the status of a small number of sizeable customer deposits. The position arose as a result of actions by both the current and former manager. A retrospective DIRT liability may exist but the situation has not been clarified as yet. Management's response was that all the accounts involved had been regularised. The delay in dealing with the DIRT liability issue was due to the prolonged absence of the Killester Manager through illness and whose retirement has now been agreed. The District Manager would now deal with this issue.

March 1994

International banking issues noted were DIRT compliance and control over hold or blocked accounts. Management’s response was that all issues raised by the audit of Account Services were being addressed by management under advice to internal audit.

September 1996

In Pearse St. Mullingar the branch manager was queried during a Credit Review about some closed and undocumented loan accounts. In addition a DIRT liability of around ?10,000 arose.

In relation to his report to the Chief Executive's Office for the six month period to March 1992 which referred to an unquantified liability in respect of DIRT on reclassified accounts I asked the group head of internal audit if he was concerned at that stage about the possibility of a financial exposure to the bank. In oral evidence he informed that he was acknowledging that the possibility did exist but that he wasn't concerned that it was substantial or widespread.

I also referred to the extract from this report which noted control weaknesses in IBI accounts, particularly the netting of debit interest against deposit interest which had the effect of reducing IBI's DIRT liability. I asked the group head of internal audit how he satisfied himself that no DIRT liability arose and why the Revenue were not consulted. He informed me that this issue was brought to the attention of management and was treated as a serious issue. It was examined in detail by the bank's tax advisors who concluded that a DIRT liability did not arise.

I also referred to the four particular cases mentioned in his reports to the Chief Executive's Office viz. Claremorris, Tullamore, Killester and Mullingar, and asked if arrears of DIRT were paid in these cases. His information was that in Claremorris it probably was not paid. The manager was let go as a result of that particular incident and a new manager took over and focused on sorting out the documentation requirements. As a result he did not cover the question of DIRT clawback. In Mullingar and Tullamore arrears were paid. In relation to Killester he was informed that arrears were possibly paid but he had not been able to confirm this.

In relation to these cases he informed me that these were very untypical and hence they warranted particular mention at the highest level. In any situation where there was a serious abuse of requirements, it would have been the subject of a special report and the four cases outlined would fit into that particular category.

Administrative Review and Action

Board Policy

Following the introduction of DIRT, the bank’s senior management were concerned that their strict interpretation and application of the law would leave the bank at a competitive disadvantage in relation to other institutions who were not applying the law as diligently. The issues involved were discussed by the Board at a meeting on 16 December 1986. A paper prepared by the bank's management concluded:

"I believe that the bank cannot condone any relaxation of policy in respect of its obligations under the law to collect DIRT payments; even in face of clear evidence that this is placing us at a competitive disadvantage and could have serious profit implications. We will take action to encourage the Revenue Commissioners to introduce a Code of Practice for deposit takers and to use the new powers of inspection available to them to police it in an effective way. The relevant legislation incorporates penalties for corporate bodies (and/or its officers or directors) who are convicted of failing to deduct tax, when required, failing to make required tax returns, and/or failing to prevent such offences when aware that abuses were occurring. It is not at all certain that the Revenue Commissioners have the will or capacity to effectively police the DIRT regime or enforce a Code of Conduct. Should they fail in this respect, the bank may very well stand alone in adhering to the requirements of the law."

The Board decided, in accordance with the terms of the Finance Act 1986, that DIRT should be deducted from interest on deposits when branches were not satisfied that the interest beneficiary was non-resident.

Management Directives

In addition to dealing with internal audit findings as they arose in specific cases, the bank’s management response to DIRT related issues raised by internal audit were set out in a series of directives sent from the Managing Director to Area General Managers in May 1988, August 1988, January 1989, September 1990 and August 1992. These directives emphasised that competitor activities or market practices could never justify departing from the bank’s policy on these matters. Line managers at area and region level had responsibility to ensure that the corrective action programmes were implemented. In 1990 each Branch Manager formally confirmed that all accounts on which gross interest was paid or credited, were to the best of his/her knowledge genuinely not subject to DIRT and that appropriate declaration(s) were held.

Bank of Ireland Analysis of Non-Resident Deposits

The bank supplied me with the following table which details the average deposit volume in each year (April to March) and at April (point-in-time) for non-resident Irish pound deposits.

Year

Average in Year

?m

Point in Time

?m

1986-87

1987-88

1988-89

1989-90

1990-91

555

441

417

403

415

April 1986

April 1987

April 1988

April 1989

April 1990

April 1991

572

456

438

391

407

436

Source : Monthly Central Bank Returns of Bank of Ireland, ICS Building Society, Bank of Ireland Finance and Investment Bank of Ireland. Due to the unavailability of some returns for ICS, BIF and IBI, it was necessary to make some interpolations from available data. According to the bank these are not material in establishing the overall trends.

The bank interpreted the fall in volumes in the first year as reflecting a combination of

withdrawal of funds by genuine non-resident depositors due to concerns over confidentiality and the greater inspectability of the new non-resident declarations

withdrawal of funds by other depositors because the bank was not prepared to facilitate gross interest

some reclassification of deposits from non-resident to resident status.

In oral evidence the bank informed me that there was a fairly consistent message coming back from their network in that they were seeing other institutions in the market place being considerably less scrupulous with DIRT compliance than they were endeavouring to be at the time but no specific cases were outlined to me in evidence.

External Review

Central Bank Review

The bank confirmed that no matters were raised in regard to its administration of non-resident accounts by the Central Bank of Ireland.

External Audit Review

The issues raised by external auditors which were reported to the Audit Committee were

Year Ended Issues Raised
31 December 1986

ICS Building Society

The report noted that interest was being paid gross, to certain account holders, even though the relevant declaration form had not been received. Management comment stated that procedures had been implemented in February 1987 to deal with this matter.

March 1990

ICS Building Society

During the course of their interim audit it came to the external auditors' attention that DIRT was not being deducted on payment of interest to a number of savings shareholders. No documentation is available to explain the exemption from DIRT which has been granted to these account holders.

March 1991

Issues involving the failure by branches to have the proper documentation in place for accounts not liable to DIRT came to the attention of the external auditors. The auditors acknowledged the steps taken by the bank to improve control over this area but noted that further liabilities could arise until all matters relating to DIRT were resolved.

March 1992

The external auditors noted that compliance with current legislation in relation to the deduction of PAYE, DIRT and Basic Rate Tax (BRT) needed to be enforced within the branch network. The failure by branches to ensure that proper documentation was in place for accounts not liable to DIRT and BRT continued to be an issue

March 1993

The auditors noted a number of instances where appropriate documentation was not held or was incorrectly completed for non-resident accounts. In a number of instances SSA declarations were not initialled by management to confirm completion in all respects. Management comment was that it would strongly reiterate the control requirements in relation to Special Savings Accounts. A Self Audit control checklist introduced to all branches over the previous 9 months was being extended to include a specific compliance section on legal and regulatory requirements including those relating to DIRT and Special Savings Accounts. Branch managers would be required to sign-off on a quarterly basis that they had reviewed the position in this regard and would immediately rectify any deficiencies identified.

The auditors also noted that in relation to ICS Building Society, there were a number of instances where the appropriate documentation was not held or incorrectly completed.

Significant Cases

Roscrea - 1990

Revenue advised the bank in early 1990 that a named resident taxpayer who had come to their attention had apparently operated a non-resident savings account with Bank of Ireland, Roscrea for approximately 2 months prior to January 1988.

The bank initiated an internal audit enquiry at the branch in May 1990. This audit concluded that there were a number of other customers at the branch who continued to receive gross interest on savings accounts but who did not appear to be entitled to it.

The bank then initiated an exercise at the branch to identify the amount of DIRT which should have been paid to the Revenue Commissioners for the years 1987, 1988, 1989 and 1990. This exercise was conducted by branch staff under supervision of internal audit.

In October 1990, the Branch Manager confirmed that ?65,893 DIRT had not been deducted from interest paid to at least 31 resident customers over the period in question. A settlement of ?75,000 was agreed with Revenue.

The last internal audit carried out in Roscrea prior to the special audit undertaken as a result of Revenue enquiries was in December 1988. This audit drew attention to the serious irregularities (acceptance of completed non-resident declaration forms from resident account holders) in "Customer Accounts" area which was rated "Seriously Deficient".

This case is more fully outlined in Chapter 7 - Section 3.

Miltown Malbay - 1991-1992

In late 1991, Revenue advised the bank that they had become aware that a number of resident taxpayers may have operated savings accounts with non-resident status at Bank of Ireland, Miltown Malbay branch. It was alleged that these accounts had been operated with the knowledge and assistance of the branch manager.

The bank initiated an investigation at the branch by the group internal audit department. This investigation concluded that the allegations were substantially correct and that a significant amount of DIRT which should have been paid to Revenue since 1986 had not been so paid.

The branch then initiated an exercise to identify the amount of DIRT which should have been paid but which had not been. This exercise included a number of accounts which transferred to a branch at 94, O'Connell St. Limerick in 1988 on the transfer of the then manager of Miltown Malbay to that branch. The exercise was carried out under the supervision of group internal audit and the amount of unpaid DIRT was confirmed at ?200,572 in January 1992 and paid over to Revenue.

As a result of the Miltown Malbay incident a number of persons have initiated a legal action against the bank seeking compensation. The essence of their claim is that the Revenue Commissioners became aware of the non-resident accounts as a result of breach of banking confidentiality by the bank and/or its current or former employees. In the absence of this breach, they claim they could have availed of a tax amnesty and claim damages in the amount of the difference between what they could have settled for under the amnesty and the amounts of the settlements they actually made with Revenue. The bank is defending this action which remains extant.

The last internal audit of DIRT or non-resident accounts carried out in Miltown Malbay prior to the special audit undertaken as a result of Revenue enquiries was in June 1991. There was no reference to DIRT or non-resident accounts in the audit report.

This case is more fully outlined in Chapter 7 - Section 3.

Specific Reviews

"Area South" Review - 1990

Following an undertaking given to the Revenue Commissioners after the events at the Roscrea branch a review of "Area South" viz. Munster, was undertaken. The General Manager of Area South instructed three of his Area Office staff to conduct a review of DIRT compliance in all branches in the area. The branches in the area were divided among the three staff who visited them over a period of 7-8 weeks.

During the visits they carried out a review of DIRT free accounts involving

checking the availability of relevant declarations

looking for any evidence that would suggest that non-resident accounts might not be genuine.

The bank informed me that some deficiencies were identified and brought to the attention of branch management, but, overall, they found that a high standard of compliance existed.

In oral evidence I was informed that this review was a local initiative and that a verbal report was given to the General Manager, Area South by the staff involved. There is no written report of the result of this review.

ICS Building Society - Special Review - December 1990

Following a directive issued to all retail general managers, a project team was set up in ICS to examine the ICS non-resident account book to ensure that the documentation held for those accounts complied with Section 37 of the Finance Act 1986.

The review found that in every case there was supporting documentation under Section 37 Finance Act 1986.

Administration of the Taxes Acts

Revenue Inspection of Declarations

Revenue have inspected declarations on six occasions.

Bank Date of Inspection

Sample Size

Declarations Missing

Queries Raised

BoI - Rathmines April 1998

85

0

9

BoI - Celbridge April 1998

35

0

6

IBI February 1999

50

0

10

ICS - Kildare March 1999

32

0a

6

ICS - Killester March 1999

94

0a

11

BOI Finance May 1999

51

2b

10

a 3 declarations in respect of Kildare and 12 declarations in respect of Killester were not available on the date of examination. These were "deposit link" cases where the declarations were held in a Bank of Ireland branch. The declarations were later faxed to Revenue.

b In addition, 3 accounts were supported by Form F only.

Issues arising following these examinations related to some declarations not properly completed, copies instead of original declarations were supplied in some cases and there were also a number of instances where there was a declaration for which there was more than one non-resident account.

Investigation Branch Enquiries

Other than the Roscrea and Miltown Malbay incidents no matters came to the attention of the Investigation Branch of Revenue which would have necessitated contact with the Group.

Interest Reporting

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

Liability Estimations

The bank has had a number of meetings in late 1998 and early 1999 with the Revenue Commissioners at which it outlined Bank of Ireland’s policy and procedures in relation to the application of DIRT. These discussions centred mainly on the period 1986 to 1991.

At all times, the bank has argued strongly that Bank of Ireland Group has sought to adhere to the letter and spirit of the law and that the issue of bogus non-resident deposits does not arise in any material way in the bank.

A meeting was held on 22 January 1999 at which a submission by the bank to the Revenue Commissioners, including the summary of internal audits, was considered. Following this meeting Revenue wrote to the Bank of Ireland stating that documents submitted by Bank of Ireland to Revenue revealed deficiencies in the operation of DIRT by Bank of Ireland but did not present a basis for quantifying the underpayment of DIRT. Revenue stated it was agreed at the meeting on 22 January 1999 that Bank of Ireland would supply to Revenue a quantification of the aggregate shortfall in DIRT payments made by the Bank of Ireland Group as a result of deficiencies in the operation of DIRT.

The Revenue Commissioners also required full details of the process whereby the aggregate shortfall was quantified including details of all assumptions and estimates made, and sampling and other statistical methods used in arriving at the amount of tax due.

In a response dated 11 March 1999 the Group stated its belief that the issue of bogus non-resident deposits was not material in Bank of Ireland. This was borne out by the results of branch audits. The eight audit periods reviewed included 360 branch audits and covered the entire network (80 branches more than once). The number of accounts which were treated as non-resident and paid gross interest but which auditors believed to be resident was in the region of two hundred. The relevant interest payment was in the region of ?670,000 with an associated DIRT liability of ?230,000.

According to the bank the audit reports suggested that some amount of interest may have been paid gross to genuine non-residents in circumstances where relevant DIRT declarations (Form F up to March 1987) were not in place. Estimating the amount of such interest is made difficult by the fact that

only a sample of branches was audited in each period

in some instances only a sample of accounts in the branch was examined by auditors

audits did not always indicate total balances on those accounts where deficiencies existed, particularly in the first two periods

audits given no indication of the amount of interest credited to relevant accounts.

The bank maintained that it was clear from audit reports that when branches were audited and deficiencies identified, these were quickly addressed by the branches concerned. Typically, this involved making the relevant accounts DIRT liable immediately, pending provision of the appropriate declaration by customers. As one progressed through the audit periods, it would not be correct to extrapolate the findings. In each audit period, a small number of branches are untypical in terms of poor standards of documentation compliance. The bank contends that these should be viewed as exceptional and should not be extrapolated. As a working approach, the bank took the worst three branches in each six-month period as being exceptional.

Based on the above approach and using the information in the audit reports and the available data for total non-resident balances in its branches, the bank estimated that perhaps ?1.5m of gross interest was paid in 1986-87 without the relevant documentation being in place and ?1.6m in 1987-88. DIRT on these sums, at 35% would amount to ?1.1m.

The aggregate of the DIRT figures noted above for bogus and genuine non-resident deposits comes to ?1.3m.

The bank was not in a position to confirm whether there was a backdating of DIRT when accounts were regularised but there are indications that back-payments of the order of ?0.3m may have taken place. This leaves a residual figure of ?1m which is 0.17% of the banks cumulative DIRT payments since 1986 of ?590m.

Bank of Ireland stated it had made a determined effort to fully implement the DIRT regulations in the shortest possible timeframe. They believe there should be an acceptance on the part of the Revenue Commissioners that the DIRT regime did require a bedding-in period before a very high standard of compliance could be achieved. This was also a time when there was a shared concern on the part of financial institutions and the Government at the risk of a serious outflow of funds. Some tolerance towards genuine non-resident account holders was necessary while endeavouring to obtain the required documentation from them. It was their understanding that, in any event, genuine non-residents would be entitled to reclaim any DIRT deducted from their interest.

The bank contended that while some liability may exist in relation to the small volume of bogus non-resident deposits, the remainder of the estimated DIRT figure represents essentially a timing issue which should not give rise to a liability. They would also contend that in no sense has the bank sought to deliberately avoid payment of any taxes and that the issue of interest or penalties should not arise.

This issue is ongoing at 1 July 1999.

Result of Work Performed by the Appointed Auditor

The Auditor reviewed branches of the BoI at Ballybofey, Castlerea, Dundrum, Enniscorthy, Ennistymon, Loughrea, Sligo, Swinford and Tuam. In respect of ICS Building Society the Auditor reviewed accounts centrally. The following are the results of the review.

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

BoI

ICS

Sample

1,074

450

No Declaration held

19

1

Late dated Declarations

Undated Declarations

Declaration Validity Exceptions

259

23

29

4

28

14

Total Declaration Exceptions

330

47

Percentage Exception

31%

10%

Authenticity Risk Profile - Non-residents
Bank

BoI

ICS

Sample

985

290

Risk Indicator
Irish Address

93

5

PO Box or "Care of" Address

59

10

Hold Mail

21

41

Transaction Profile

30

0

Accounts with Liens

2

5

Other

5

0

Total accounts with Risk Indicators

210

61

Percentage Exceptions

21%

21%

Accounts also with documentary exceptions

114

9

Accounts where the group believes it holds

appropriate evidence of non-residence

175

61

19Documentary Compliance - other Exempt Accounts and SSAs
Bank

BoI

ICS

Account Type

Exempt

SSA

Exempt

SSA

Sample

125

97

41

30

No Declaration

12

0

1

1

Declaration Exceptions

36

0

1

0

Total Exceptions

48

0

2

1

Percentage Exceptions

38%

0%

5%

3%

Interest Reporting Exemption
Documentary Exemption (Form F)
Bank

BoI

ICS

Sample

760

123

No Form

230

45

Percentage Exception

30%

37%

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