1. Introduction This is the Report of a Parliamentary Inquiry into tax evasion. The immediate focus of the Inquiry is the evasion of Deposit Interest Retention Tax (DIRT) from its very introduction in 1986 up to 1998 (the relevant period). The practice was large-scale systematic and carried out over many years. The basic facts are well known and established at this stage. Interest on non-resident deposits was and remains free of DIRT. From its inception in 1986, DIRT was evaded by depositors through the opening of bogus non-resident accounts. Deposit-takers knowingly facilitated the practice. Discoveries were made of bank officials organising the opening and operation of bogus non-resident accounts for customers and indeed of establishing them for their own use. It is now also apparent that the evasion of DIRT was practiced in a wider culture of more generalised tax evasion. Specifically in addition to the simple evasion of DIRT, bogus non-resident accounts were employed as a means of concealing otherwise taxable income from Revenue so as to ensure the evasion of other taxes due on those monies. This phenomenon of bogus non-resident accounts and the accompanying technique of deposit splitting to evade tax dated in fact from the early 1960s. An allied technique of back-to-back deposit and loan accounts was similarly employed as a means of reducing the full liability to DIRT. 2. The Hearings On 31 August 1999 the Committee of Public Accounts (PAC) Sub-Committee on Certain Revenue Matters commenced its Public Hearings (the Hearings). These Hearings continued through the month of September and into early October. They concluded on 12 October last. The Sub-Committee in the course of the Hearings examined the State and its Agencies, certain deposit-taking institutions, their External Auditors and the industry representative bodies. One hundred and forty two witnesses gave evidence before the Sub-Committee at these Hearings and the Sub-Committee sat in public session for 26 days. 3. New Powers This was the first occasion on which an Oireachtas Committee carrying out an Inquiry used extensive new powers. The principal Acts granting these powers are the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997 (The Compellability Act, 1997) and the

Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions) Act, 1998 (The Special Provisions Act, 1998). 4. Historic Nature of Inquiry The Hearings were historic from another point of view. They were broadcast live on television by TG4. In addition, they were carried live every day on the world-wide web (1). The website also published the daily transcripts of the proceedings. All of these developments – the enhanced powers of the Committee of Public Accounts, examination under oath, live broadcasting and rapid publication of the proceedings – represent a major advance and modernisation of the parliamentary process and parliamentary scrutiny. The Hearings therefore represent an historic moment in our parliamentary development. Since the conclusion of the Public Hearings the Sub-Committee has met regularly to consider and prepare this Report. A small working group comprising advisors, assistants and members of the secretariat also worked to the Sub-Committee. This volume (Volume One) sets out the background to and the findings, conclusions and recommendations of the Sub-Committee on the matters under examination, the operation of Deposit Interest Retention Tax (DIRT) during the years 1986 to 1998 and related matters.

What is DIRT? Deposit interest is a form of income and is therefore liable to assessment to income tax. Deposit Interest Retention Tax (DIRT) is a specific tax on this interest income. DIRT is in fact a collection tax. In this regard it is broadly similar to PAYE and VAT, in that it is calculated and collected at source by the deposit-taker according to rules laid down in law, with any final settlement to be determined subsequent to collection. From a tax administration viewpoint, DIRT is a self-assessment tax. The relevant deposittaking institution, that is the bank or building society, must therefore accurately assess the amount of DIRT for which it is liable as a collector and return this amount to the Collector-General. In fulfilling its obligations as a collector on behalf of Revenue, every bank or building society must also complete a retention tax return for each tax year. This DIRT return must be filed with the CollectorGeneral within a specified time period. The return must show the amount of interest paid and the retention tax on that interest. The tax shown to be due on the return is self-assessed and must be paid by each deposit-taker on or before the due date. Under the law there is no obligation for an Inspector of Taxes to estimate and assess DIRT due, unless the tax has not been paid by the due date. Deposit-takers, in complying with the law, must also make an interim payment every year by 20 October. The interim payment is also self-assessed and must not be less than the retention tax accruing day-today for that interim period. From a compliance perspective, a bank or building society must deduct DIRT at the standard rate of income tax from all interest credited to ordinary deposit accounts. Tax must also be deducted at 20 per cent from interest credited to special savings accounts (SSAs). The law furthermore requires that account holders must allow the tax to be deducted. Non-compliance with the law on DIRT by depositors or deposit-takers is a Revenue Offence.

6. Immediate Background The immediate backdrop to this Report is the Meetings of the Committee of Public Accounts in April and October 1998, the Public Hearings (31 August 1999 to 12 October 1999) and also the Report of the Comptroller and Auditor General (C&AG) into the matters under examination - Report of Investigation into the Administration of Deposit Interest Retention Tax and Related Matters during the period 1 January 1986 to 1 December 1998. That Report was published in July of 1999 and was itself the outcome of a seven-month investigation by the C&AG. The investigation by the C&AG comprised two elements - an investigation by the Comptroller and an independent audit of accounts in financial institutions by Ms Aileen Barry (the Appointed Auditor), partner in the UK firm of Arthur Andersen. All relevant State Agencies and financial institutions were written to by the Committee requesting them to identify inaccuracies in the C&AG’s Report. Other than some minor inconsequential items, all of them confirmed the factual accuracy of the Report. 7. Report of Comptroller and Auditor General In 1998 there were reports in the printed media concerning the use by AIB of bogus non-resident accounts as a means of evading DIRT. The Committee of Public Accounts immediately initiated enquiries and both the Chairman of the Revenue Commissioners and the Group Chief Executive of AIB duly appeared before the Committee in October 1998. Within days of this evidence the Committee of Public Accounts submitted a Report to the Dáil. A Resolution of the Dáil followed which asked that the Committee of Public Accounts examine and report inter alia on any purported settlement between financial institutions and the Revenue Commissioners in respect of undeclared DIRT and information known to the financial institutions and regulatory authorities concerning the use of bogus non-resident accounts. The C&AG’s investigation was requested by Dáil Éireann to facilitate the work of the Committee of Public Accounts. The investigation of the C&AG established that evasion of DIRT was pervasive throughout the Irish deposit-taking system and was not confined to AIB. Furthermore, the C&AG established that the relevant authorities were very well aware of the problem. 8. The State Agencies The Parliamentary Inquiry has examined the Department of Finance, the Central Bank and the Revenue Commissioners under the following headings: the extent of their knowledge of a problem in relation to bogus non-resident accounts and related matters and the scale of such problem; their powers and obligations in relation to such problem; the actions (if any) taken by them to deal with the problem; and the contacts and communications (if any) between them or between any one of them on the one hand and financial institutions on the other. 9. Financial Institutions The Inquiry set out to examine the role of deposit-takers with regard to: the extent of knowledge of bogus non-resident accounts and related matters within the financial services industry generally, or, where appropriate, within individual institutions;

the extent and knowledge of all appropriate boards, senior management and external auditors of such problems; the actions, if any, taken by persons or bodies referred to above to deal with such problems; where any such persons or bodies were unaware of the problem (or the scale thereof) the reasons for such lack of awareness; and the extent, if any, to which bodies representative of the sector contributed to governance within that sector. In carrying out this Parliamentary Inquiry the Sub-Committee has sought to come to an understanding of the forces and factors that gave rise to the large scale tax evasion discovered by the investigation of the C&AG. Such an understanding is critically important in framing appropriate recommendations. 10. Two Theories Two possible theories emerge in seeking to understand the events and phenomena inquired into by the Sub-Committee. The basic approach taken by the Sub-Committee in preparing this Report was to examine the oral evidence given at the Hearings, the documents discovered to the Sub-Committee, and raised in the evidence, the Report of the Comptroller and Auditor General and evidence given at earlier meetings of the Public Accounts Committee with a view to determining to its satisfaction which of these alternatives is the more plausible 11. The First Theory The first theory is discernible in the response of Mr John Keogh, Group Financial Director of AIB, to allegations made in 1991 by Mr Tony Spollen, Group Internal Auditor at AIB. On 10 March 1991 Mr. Spollen alleged, inter alia, in a memorandum to the Audit Committee of the board of directors of AIB Group concerning the independence of his position, that AIB faced a potential liability of £100 million in DIRT arrears as a result of the operation of bogus non-resident accounts at the bank. These contentions of Mr. Spollen became the subject of an internal examination by a Sub-Committee of the Audit Committee. There followed the preparation and submission by Mr. John Keogh of a rebuttal of the allegations. The thesis on the problem of bogus non-resident accounts underlying his rebuttal is that the problem was a recognised and endemic issue. It dated from the 1960s. "The introduction of DIRT brought new complexities…which in the case of AIB is being worked out slowly but progressively in intermittent dialogue with the Revenue Commissioners. Our customers are, of course, an important constituent in this matter, as is the pace of implementation of Revenue requirements by our competitors and, indeed, the concern of Government overall lest over enthusiastic action by anyone should lead to a flight of funds as Exchange Controls diminish." This is a coherent proposition, even if it sits somewhat uncomfortably alongside the law as enacted. What this theory amounts to is a statement that the phenomenon being investigated represented a recognised problem and was being dealt with over time in a planned and co-ordinated fashion. If such a proposition is to hold, one must be able to demonstrate that the financial institutions understood themselves to be working to such a plan or programme and acted accordingly. One should also find that the State and its Agencies clearly understood themselves to be a party to such a pragmatic workout. And the theory must show that concern about capital flight made sense in the economic circumstances of the period so that there was justifiable cause to act in this phased fashion over time.

12. The Second Theory There is an alternative theory. This set of propositions posits that in dealing with the issue there was no coherent plan or understanding on the part of deposit-takers or the State and its Agencies, whether formal or informal; there was on the part of deposit-takers and the State and its Agencies incoherent, spasmodic and ad hoc engagement with the problem; on the part of the State, these spurts of activity were sometimes administrative and sometimes political in origin but they contained no strategic vision or overview; occasionally, the control systems of deposit-takers triggered corrective action; and competition in the market for deposits continued throughout partly on the basis of connivance with illegality, that is the facilitation of false declarations and the operation of bogus non-resident accounts by resident depositors. These alternative theories carry quite different implications. If the first theory were to hold against the observed facts, one would be inquiring into the rational, strategic management of a problem with its objective, the restoration of compliance and legality in the market for deposits. Whether such an approach was entirely appropriate is open to question. However if the matter had been successfully dealt with in this manner one would now be dealing essentially with history. If the alternative theory is more applicable to the observed facts, then very serious implications arise for the system of public administration and the supervision and the conduct of banking in Ireland. The Sub-Committee finds: There was no coherent or planned approach to the DIRT issue. There was an incoherent, spasmodic and ad hoc engagement on the part of the deposit-takers and the State and its Agencies with the issue of bogus non-resident accounts. Implausible the supposed pragmatic resolution of this problem using the capital flight argument to support the cautious phased implementation of the law.




Mr. Pairceir: Well, I think that the core of the problem was, and we were aware of it for a long time, that it was, that the multi-account business which preceded the DIRT, and the DIRT afterwards, that it was a factor of competition between the banks and there was a demand for it from the customers because if the demand weren’t there from the customers, the banks wouldn’t be providing the service. Chairman: The demand for what exactly? Mr. Pairceir: For not paying taxes, which is not an unusual demand.

Evidence of Mr. Seamus Pairceir, Chairman, Revenue Commissioners 1984 – September 1987 Hearings 28 September 1999, Afternoon Session

In explanation of its finding in favour of the second theory the Sub-Committee turns now to its consideration of the actions of the State and its Agencies. What is the evidence gleaned by this Parliamentary Inquiry on the behaviour of the State and its Agencies that convinced the Sub-Committee to adopt the second explanation as the more plausible explanation of events? 1. Inseverability The Sub-Committee finds that the events of the relevant period (1986 – 1998) cannot be severed or separated or understood without reference to earlier events. Many witnesses who gave evidence during the Hearings made this point. The essential urge that gripped depositors engaged in evasion was a flight from disclosure to Revenue. To again quote from the evidence of Mr. Pairceir: The concealment of capital in deposits was a huge problem and had been a huge problem for a long time, but we didn’t have any solution. Hearings 28 September 1999, Afternoon Session 2. The Examination of the State

For the purposes of this Parliamentary Inquiry, the State and its Agencies comprise the Department of Finance, the Revenue Commissioners and the Central Bank of Ireland. The Sub-Committee also examined the five Ministers for Finance who held office during the relevant period. The present Minister was not examined as he had been in office just a few months when the DIRT issue first came into the public domain. In arriving at its conclusion on the probable explanation of the observed phenomenon of the persistent presence on a very large scale of bogus non-resident accounts, the Sub-Committee was especially influenced by a number of particular episodes. There are events generally through the years prior to 1986 that are inseverable from the decision to introduce DIRT and from what later happened between 1986 and 1998. There is in the prior period, the episode of the Affidavit Initiative – the abortive proposal in the 1983 Finance Bill to require as part of the documentary requirement for opening a non-resident account an affidavit from the applicant. There is the initiative of the Bank of Ireland, begun in 1983 and persisted with until 1987, to influence the Revenue Commissioners to introduce a Code of Practice for deposit takers (banks and building societies). There is the episode in 1986 of the non-implementation of machine readable forms – the failure to implement the proposal to require banks to make returns to Revenue in the form of computer tapes that could be read by Revenue computers. There is the preoccupation with and handling of the economic theory of capital flight as relevant to the problem of bogus non-resident accounts. All of the relevant agencies of State bought into this theory as being relevant. It became the Official View. There is the episode of SIM 263, the Superintending Inspector’s Memorandum governing the administration by Revenue of DIRT. The instruction suspended inspectability by Revenue of documentation held by the banks supporting non-resident accounts. There is the state of affairs generally at Revenue, in particular in the Office of the Revenue Commissioners itself and in its relationship with the Revenue service. There is the functioning of the inspectorate – in particular Investigation Branch (IB) and Special Inquiry Branch (SIB) during the period under examination. Finally, there is the approach taken by the Central Bank to the problem, in particular its approach to the operation of Exchange Control and to prudential supervision generally. We treat each of these episodes in turn in setting out why and how we came to the conclusion that the second of our two competing theories is the most plausible in understanding the persistence of a large scale evasion of tax through the abuse of the banking system. However before engaging with the analysis of the Sub-Committee it is appropriate first to provide brief descriptions of the principal actors. 3. The Department of Finance

A Department of Finance and a Minister for Finance are provided for statutorily in the Ministers and Secretaries Act, 1924. Article 28 of the Constitution also refers to the Department. The Ministers and Secretaries Act, 1924 states that the Department is responsible for "… the administration and business generally of the public finance of Ireland and all powers, duties and functions connected with the same, including in particular the collection and expenditure of the revenues of Ireland from whatever source arising…" Over time the Department has been assigned additional duties and responsibilities. It oversees economic planning and the public service as well as dealing with monetary policy and banking. At present the Department enjoys principal responsibility for the implementation of a significant reform of the Irish Public Service – the Strategic Management Initiative (SMI) launched in February 1994 and a new budgetary system, multiannual budgeting (MAB). The Department is organised into six Divisions. Three of these Divisions, Budget and Economic Division, Public Expenditure Division and Finance Division, are relevant to the work of the Sub-Committee. The Budget and Economic Division in the exercise of its budgetary function "formulates the overall budgetary parameters within which the annual budget and medium-term budgetary policy is framed. The Division prepares the annual Financial Statement of the Minister for Finance, as well as the Finance Bill and legislation on taxation matters in general." The Division is also responsible for forecasting and monitoring tax revenues, and for advice on all questions of taxation policy. Public Expenditure Division has responsibility for the monitoring, evaluation and advice on semi-state companies and agencies. In addition to this general responsibility it had, during some of the period in question a specific duty to "advise the Minister for Finance on policy issues relating to the ACC and the ICC." During the remainder of the period this responsibility was transferred to Finance Division. Finance Division has responsibility for monetary and banking policy generally. This includes relations with the Central Bank and ACCBank. 4. The Office of the Revenue Commissioners

Tax collection was assigned under legislation in 1924 to a newly formed entity, the Office of the Revenue Commissioners. The Commissioners were established as a unified tax collection and administration service, replacing in a single body the Inland Revenue and the Customs and Excise Service of the British administration. The statutory base for the Office of the Revenue Commissioners is a Statutory Instrument, the Revenue Commissioners Order, 1923. The Office has something of the status of a non-Ministerial Department of State on the one hand, yet it is a service scheduled to the Department of Finance, no different than the Office of Public Works. The Commissioners act independently of Ministerial control in exercising their statutory powers in regard to the liability to tax of the individual taxpayer. Two Revenue sections were directly involved in the administration of DIRT – the Office of the Collector General and Dublin Audit District 5. In addition, Investigation Branch could become involved if DIRT related matters came or were brought to its attention. Finally Special Inquiry Branch could direct information to Investigation Branch for further processing. In its administration of DIRT, Revenue had the following powers in law. All financial institutions were required to make Retention Tax returns twice yearly. Revenue also had power in law to inspect

declarations of non-residency. Access to bank accounts was limited to certain circumstances, the bank accounts of named resident individuals could be accessed with the permission of the High Court. Certain powers normally available to Revenue to assist it in its investigative role are either not available or are abridged in the case of banking transactions. 5. The Central Bank

The Central Bank of Ireland was established in 1943 after the enactment by the Oireachtas of the Central Bank Act, 1942. A central bank carries out four important functions. It is traditionally the Government's banker. It also protects the integrity of the currency, reflected in its management of the interaction of the exchange rate, interest rates and inflation. It is the supervisor and regulator of deposit takers and it acts as the banker of last resort. It was not until the enactment of the Central Bank Act, 1971 that the Central Bank began to acquire the substance of a traditional central bank. The Act of 1971 gave to the Central Bank the power to license and supervise banks. In 1972 the Central Bank took over the Exchequer Account from Bank of Ireland. After Ireland became a founding member of the European Monetary System the Bank managed an independent currency, the Irish pound. With the enactment of the Central Bank Act, 1989, the Building Societies Act, 1989 and the Trustee Savings Bank Act, 1989 the supervisory and regulatory duties of the Bank were further enhanced. The enactment of the Central Bank Act, 1997 laid the framework for the introduction to the Irish monetary system of European Monetary Union. For the Central Bank the main implications are the removal of monetary sovereignty and the membership of the Bank in the European System of Central Banks under the European Central Bank (ECB). We turn now to those episodes the detailed consideration of which led us to the conclusion that the second of our two competing theories is the more plausible in understanding the persistence of a large scale evasion of tax through the use of bogus non-resident accounts.


1. Ministers for Finance

In the course of its Hearings, the Inquiry heard evidence from five former Ministers for Finance i.e. those Ministers who held office from the enactment of the Finance Act, 1986, through to 1997. The Sub-Committee also decided to ask its Legal Assessors to question the Ministers on its behalf. The reasons for this decision were: 1) the fact that the Public Accounts Committee under its Standing Orders is uniquely, and properly, excluded from questioning policy matters; 2) that the Committee has a long tradition of avoiding party politics and acting in an all-party manner in pursuing probity and efficiency in the public finances; and 3) the Sub-Committee wanted to ensure that there could be no suggestion that Ministers were questioned either too sympathetically or too harshly, by colleagues or opponents, but rather in an absolutely evenhanded way. It should be pointed out that the Legal Assessors, in putting their questions to Ministers, were also bound by the provisions of Standing Orders ("The Committee shall refrain from enquiring into the merits of a policy or policies of the Government or a member of the Government or the merits of the objectives of such policies") (1). The Minister for Finance is politically accountable for his Department, the Central Bank and the Revenue Commissioners to the Oireachtas. His relationship with, and day-to-day control of, both the Revenue Commissioners and the Central Bank is restricted by law. He is not accountable for the day-to-day management of these agencies. They have statutory independence. He is, however, responsible for their overall performance, resources and the legislative framework within which they operate. The Sub-Committee has considered the Ministers’ role in relation to all three agencies. It has also considered allegations made by two former Secretaries of the Department of Finance, one of them also a former Governor of the Central Bank, who cited a "failure of political will" as an explanation, at least in part, of the DIRT scandal. Finally, the Sub-Committee has considered the Ministers’ role in relation to the ACCBank of which they were the sole shareholder. 2. Right of Initiative

The right of initiative in relation to public finance, including taxation, is vested in the Government. This is provided for under Article 17 of the Constitution.

Under Dáil Standing Orders only a member of the Government can initiate a Bill that imposes or changes taxation. Therefore, taxation, in common with financial policy generally, is a Government decision subject to the approval of the Oireachtas. Government decisions are taken by Ministers. In the making of decisions the rule of collective cabinet responsibility applies. Civil Servants give advice – which may or may not be accepted. 3. Relationship between Ministers and Secretaries

The relationship between Ministers and their Departments and officials during the period in question was governed by the Ministers and Secretaries Act, 1924. Ministers and Secretaries Act, 1924 provides the respective roles: Minister as corporate sole Civil Servants as advisors The Constitution of Ireland: the role of Government and the Department of Finance in taxation (Articles 17 and 28) Right of Initiative and Ministers and Secretaries Act, 1924 - interactions This, from the point of view of the relationship between the Government on the one hand and the public administrative system on the other, was commented upon by a former Secretary of the Department of Finance, Mr. Maurice Doyle, referring to the Report of the Comptroller and Auditor General, in evidence to the Sub-Committee: Mr. Doyle: I don’t know the phrase the "permanent Government" Chairman……The point I would like to make here is that, to the extent that there is a decision to be made about this so-called balance, and I will return to this question of a balance later, the decision was not one for the Department of Finance much less the Central Bank; it was a decision for Government and, moreover, one that the Government took. It may be necessary to point out that Departments of State do not formulate policy, they formulate policy proposals, which are put to their Minister. The Minister may accept or reject or amend these proposals. If he rejects them, that is the end of the matter. If he accepts them or amends them, they become his proposals. They are now the Minister's proposals, not the Department's. The Minister in turn then either takes a decision on the basis of what he has decided or puts the proposals in turn to the Government if they require a Government decision. At that point the Government may accept these proposals from the Minister, it may reject them or it may amend them. If it accepts or amends these proposals, then these become Government decisions and Government policy. Hearings 31 August, 1999, Morning Session, The Sub-Committee is perplexed as to how the Department of Finance which proposed the drastic course of action of an Affidavit in 1983 without any apparent regard to the consequence for capital flight could now oppose the introduction of DIRT on precisely these grounds. Nor were any proposals to strengthen the law ever made to the Minister. Mr. S. P. Cromien was Secretary of the Department of Finance from 1987 to 1994. He gave the following evidence to the Sub-Committee:

Chairman: The question which you didn't answer Mr. Cromien was - did you do anything, did you make any recommendations? If so, will you tell us briefly what they were? Mr. Cromien: I realised that there was no point in recommending to Ministers that Revenue should be given these powers and if I were to do it, I think I would be worried myself that they would cause the outflows. Chairman: So you made no proposal? Mr. Cromien: I found it wasn't in the national interest to make proposals. Hearings 31 August, 1999, Afternoon Session The Sub-Committee has established that, while there was internal debate on the subject in 1993, at no time did officials at the Department of Finance make any proposals to the Minister to amend or strengthen the law in relation to the operation of DIRT during the period 1986 to 1998. The Sub-Committee has also established that none of the Ministers of Finance ever sought to influence the Revenue Commissioners, or any of its officials, in relation to the content of any of its operating instructions or in any other way affecting the application of the law. Indeed, the Sub-Committee was struck by the fact that Ministers were unaware of the mechanisms within the Revenue Commissioners by which the law was applied and, specifically, had no knowledge of the existence of SIMs. The Sub-Committee, while commending the Ministers for not interfering, directly or indirectly, with Revenue operations, finds it surprising that Ministers were so poorly informed of the Revenue Commissioners operating procedures. The Sub-Committee concludes that Ministers should have satisfied themselves that there were adequate procedures and resources in place within the Revenue Commissioners to ensure the proper and fair application of the law as enacted by the Oireachtas. The Sub-Committee finds unconvincing the contention by the two Senior Officials that the dropping of the requirement for affidavits for non-resident accounts from the Finance Bill of 1983 by the then Minister was the reason why, after 1986, no subsequent proposals were brought forward to improve DIRT collection. This is especially in view of the fact that DIRT itself was a major new initiative that changed significantly the regime in relation to interest on deposit accounts. The Sub-Committee finds implausible the argument that a more rigorous enforcement of the 1986 Act could not be applied to DIRT because of fear of provoking a flight of capital while at the same time asserting the merits of a more severe affidavit requirement. In the light of the above, the Sub-Committee concludes that claims of failure of political will are groundless insofar as no proposals were made to Ministers by officials and, therefore, none were turned down on political grounds. The Sub-Committee also considered how Ministers ran the Department of Finance, and how they related to the Secretary (Secretary-General) and other senior officials of the Department. The Sub-Committee finds that none of the Ministers had adequate information systems in place to ensure that they were fully informed and kept up to date on all issues of significance in all sections of the Department or the other agencies for which they had responsibility. This is best illustrated by the fact that

meetings between the Minister and the Department’s Management Committee (MAC) only occurred intermittently and that the MAC had no written agenda or no minutes for most of the period under review. Nonetheless, the Sub-Committee concludes that successive Ministers were remiss in not having a properly structured management system within the Department and this undoubtedly was a contributory factor to their lack of knowledge and, consequently, their lack of action in relation to the DIRT issue. The Minister is the sole shareholder in ACCBank and appoints its Chairperson and Board. The section of this Report that deals with ACCBank expands on this issue. Suffice to say that the Minister for Finance could reasonably be expected to set the standards for Ministers in other Departments concerning how State Companies are run and held to account. Given the scale of the rescue of ACCBank in 1988, successive Ministers should have been alerted to the problems in ACCBank. By their omissions, none of the Ministers appear to have discharged their responsibility for the ACC in an appropriate manner.


1. Terms of Reference of Sub-Committee Under the Terms of Reference of this Parliamentary Inquiry the Sub-Committee is confined to examining events in the period 1986 to 1998. However the Sub-Committee in coming to its understanding of these events concluded that they are inseverable from the earlier years, particularly the period 1963 to 1986. This also was the conclusion of the C&AG in conducting his investigation. The Report of the Comptroller is valuable in the account that it gives of the inquiries of the C&AG and documents discovered to him during that investigation. The Sub-Committee cannot examine this earlier period. However it has studied aspects of the period and observes as follows. 2. Finance Act, 1963 Up to 1963 the payment of income tax on interest income was a voluntary affair. In other words it was up to the individual taxpayer to make a declaration of interest earned for the purposes of liability to income tax. In 1963 this changed. Under the provisions of section 17 of the Finance Act, 1963 banks were obliged to make yearly returns to Revenue of all interest paid or credited by them on a gross basis to the accounts of depositors. 3. Disclosure Limits The regime as introduced in 1963 did provide a disclosure threshold - only information on accounts generating interest income, initially exceeding £15 a year, was required to be returned. In addition, returns were not required for accounts in the beneficial ownership of non-residents. In respect of this latter category, the depositor was required to serve a notice on the bank, known as Form F, declaring non-residency and requesting non-return of information on interest income to the Revenue. The information supplied in the notice included the name and address and country of residence of the depositor. Crucially, while deposit takers were required to retain these Forms F, they were not inspectable by Revenue. 4. Economic Background It should be recalled that until the 1960s, Ireland was an underdeveloped, poorly performing economy. Emigration, poverty and unemployment were pervasive. Put simply up until the 1960s economic conditions were such that there was little economic activity to tax and the tax system was correspondingly rudimentary. The 1960s by contrast were years of exceptional industrial growth, economic development, social transformation and rising incomes and living standards in Ireland. During this decade, the taxation system was the subject of intensive examination and indeed was subject to radical change. 5. Commission on Income Taxation 1957 - 1962 A Commission on Income Taxation, chaired by Mr. Justice Cearbhall O Dalaigh of the Supreme Court, sat between the years 1957 and 1962. The Commission produced seven highly detailed Reports and made many recommendations in respect of virtually all aspects of the tax system.

The Commission, its work programme and its interaction with public policy appears to have followed a well-structured approach in the identification of problematic taxation issues, the arrival at conclusions and recommendations and finally, the resulting policy and administrative action. 6. Seventh Report In its seventh and final Report published in 1962, the Commission, recommended the change introduced by section 17 of the Finance Act, 1963, disclosure to Revenue of information on deposits. The Commission had recommended disclosure of information on amounts on deposit, which is to say capital amounts. The Government opted instead for disclosure of interest paid. The Commission itself did not recommend inspectability by Revenue of detailed bank records. 7. Debate on Income Tax Bill, 1966 and Income Tax Act, 1967 The approach contained in section 17 of the Finance Act, 1963 was confirmed by the Income Tax Act, 1967. The Act of 1967 was a consolidation measure and was at that point the single most complex legislative measure brought before the Houses of the Oireachtas. The consolidating nature of the Act obviously required the inclusion of the 1963 measure. Section 17 was consolidated as section 175 of the Income Tax Act, 1967.During the progress of the Bill through the Oireachtas a controversy arose as to the constitutionality or otherwise of certain provisions (even though it was a Consolidation Bill). The provisions that were controversial related to Revenue powers of search. The eventual outcome was that the Bill was passed into law through a complex procedure whereby it was simultaneously amended by an Amendment Bill with that Bill removing the sections of controversy. In the 1960s therefore, as the tax law was being modernised, the issue of Revenue powers was already controversial. 8. Capital Flight Theory It should also be noted that, as the C&AG’s Report states, the recommendation of the Ó Dálaigh Commission on Income Taxation favouring disclosure of deposit amounts was not unanimous. Two dissenting voices make mention, by way of argument against disclosure, of the possibility of capital flight in reaction to the imposition of a disclosure regime: "Two members of the Commission dissented from the recommendation, citing the danger of undermining confidence in the banking system and encouraging capital outflows."[2] The two members dissenting were Mr. Owen Binchy and Professor James Meenan, Professor of Political Economy and the National Economics of Ireland (UCD). Professor Meenan was also at this time a director of the Central Bank.
(2) Page 8 of C&AG Report

9. Composite Rate Tax (CRT) In 1973 the issue of disclosure was complicated by the introduction of Composite Rate Tax (CRT) for building societies. The tax was introduced under the Corporation Tax Act, 1976. Under the CRT regime, the building society paid a tax on the total gross interest it paid on personal deposits. The tax was set at a percentage of the standard rate of income tax. In particular, as it was not computed at the level of the individual account, CRT did not discriminate between resident and non-resident accounts and the standard rate was deemed to have been discharged on the individual’s behalf. Individuals, meanwhile, were required to declare interest income from building society accounts in order to pay tax on the income at the marginal tax rate subject to a tax credit for tax paid on the interest at the standard rate. In direct contrast however with the banks, building societies were not required to file returns on individual accounts with Revenue. This aspect was marketed by the building societies as "guaranteed confidentiality", which came to be a significant grievance within banking circles. 10. Seeds of the Problem We can now see that the seeds of what would become the DIRT problem were sown in the Finance Act, 1963. Section 17 of the Finance Act, 1963 introduced Form F. There was in this measure as implemented

the opportunity to make false declarations in establishing bogus non-resident accounts. Forms F were not inspectable. The measure also created the potential for deposit splitting, again practiced with a view to escaping disclosure to Revenue and, as with bogus Forms F, evading tax. The implementation of CRT for the building societies, in particular the "guaranteed confidentiality" aspect compounded existing problems in the banking sector. The measure created an uneven playing field in the deposit market. This development resulted in its own pressures on banking at a time when Irish banking was modernising, consolidating and having to finance its own rapid growth in the context of significant national economic growth. Revenue and the Department of Finance were aware of the impact of this inconsistent regime in the taxation of interest income. They were aware of the spread and extent of illegality in the market for deposits and the abuse of the banking system to conceal income and capital from tax. The investigation of the C&AG discovered a memorandum prepared in Revenue in 1976. The Report of the Comptroller contains an extract "The main area in which bank officials seem to facilitate, if not encourage tax evasion, is in relation to Section 175 of the Income Tax Act, 1967, that is, the section which provides for returns to the Revenue of interest amounting to more than £70 paid by financial concerns without deduction of tax. This was an antievasion measure introduced by the Government in 1963, following a recommendation by the Commission on Income Taxation and one would have expected that national institutions would have been concerned to see that Government objectives would have been carried out. In this particular area, however, it appears that bank officials are deliberately frustrating this objective. Evidence of this is available in a considerable number of instances – sufficient to show how widespread the practice is."(3) Revenue memo quoted in the Comptroller and Auditor GeneralReport of Investigation into the Administration of Deposit Interest Retention Tax and Related Matters during the period 1 January 1986 to 1 December 1998. It is apparent therefore, that the seeds of the ensuing DIRT scandal were sown after 1963 by the manner in which public law was implemented.
(3) Page 8 of C&AG Report

11. The Affidavit Initiative (1983) In 1983 the issue of bogus non-resident accounts occupied the minds of two senior officials at the Department of Finance, Mr. Seán Cromien and Mr. Maurice O Connell. They launched a proposal for an affidavit to be sworn by all bank customers proposing to open a non-resident account. The Minister accepted the idea and it was incorporated into the Finance Bill for 1983. During the Dáil debate on the Bill, there were serious reservations expressed about the proposal as it stood. At the same time, within the Department of Finance, Mr. O Connell met with the banks. They made a case for what was in effect the status quo - an affidavit would only be required if a bank official was not satisfied with the genuineness of an application. In a memorandum to the Minister on the issue written by Mr. O Connell, he expressed himself as being "impressed by the case" put by the bankers. As a result, the affidavit proposal was amended in such a way that it was substantially weakened. While the incident of the affidavit pre-dates the period under examination it is relevant. It represented a serious attempt to deal with bogus non-resident accounts. It came three years before the retention tax initiative. Withholding tax was under discussion within the Department. The affidavit initiative was also one that must have had implications for capital flight (if this theory was at all relevant to the bogus nonresident accounts issue) yet this did not seem to worry the Department at that point.

The Sub-Committee finds that the affidavit initiative was a proposal developed by two senior Officials at the Department of Finance. It appears to the Sub-Committee on the basis of the oral evidence that it was very much a personal initiative by Messrs. Cromien and O’Connell. It did not represent an element in a strategically thought out plan or programme in tackling the issue. The Sub-Committee is struck by the absence at the time of concerns on the danger of flight of capital, a consideration that in subsequent years, dominated official thinking on DIRT related issues. Three years later when the Office of the Taoiseach proposed a withholding tax on deposit interest income this concern was to the foreground in Departmental thinking in opposition to the Government decision to adopt the proposal. 12. The Bank of Ireland Initiative on draft Code of Practice 1983 – 1987 "Yes but I don’t see how Mr. Hely-Hutchinson comes into that. Mr. Hely-Hutchinson and I would not be discussing tax evasion. That was my business. He was a banker." Mr. S Pairceir, Chairman, Revenue Commissioners 1984 – 1987 Hearings 28 September 1999, Afternoon Session Mr Cromien receives a letter "Dear Cromien,At the request of Mr. Hely Hutchinson, Chief Executive of the Bank of Ireland, I had discussions with him recently on the question of the relationship which exists between the Revenue and the Bank of Ireland. The discussions centred mainly on the less desirable practices engaged in by the Bank’s employees in recent years in advising customers of methods of evading tax by spreading deposits over different branches and accounts."You will see from the enclosed copy letter that the Chief Executive is anxious to put an end to such practices and his forthright statement in this aspect is gratifying …" (4) Letter from P McMahon Chairman, Revenue Commissioners To Mr. SP Cromien, Second Secretary, Department of Finance. 25 October 1983
(4) DFIN.0003.222

The conviction of Mr. Hely-Hutchinson, his desire to rid his own bank of the problem of deposit splitting may have been gratifying to the then Chairman of the Revenue Commissioners. However Mr. HelyHutchinson’s proposal for a code of practice that would be adopted by Revenue and applied throughout the deposit taking sector was never adopted and implemented. It was pursued with Revenue over the following years by the bank. However by 1986 Mr. Pat Molloy of Bank of Ireland in a paper to his board of directors concluded that: "…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…" Memorandum dated 11/12/86 to Board of Directors, Bank of Ireland – extract. In his evidence at the Hearings, Mr. Seamus Pairceir, Chairman of the Commissioners 1984 to 1987, Commissioner 1980 – 1984 and on his retirement, having served forty years in Revenue, gave his view of Mr. Hely-Hutchinson’s overtures. Deputy Rabbitte: Do you recall at all Mr. Pairceir … if you look at the covering letter from Mark HelyHutchinson … where he went to on talk to you about a code of practice for deposit takers.

Mr. Pairceir: Yes. Deputy Rabbitte: Apparently he had that going – those discussions with you – for a while I think. Mr. Pairceir: And with my predecessor. Deputy Rabbitte: And with our predecessor, that’s right. Mr. Pairceir: It didn’t get anywhere. Deputy Rabbitte: It didn’t get anywhere. Why do you think it ran adrift, or ran aground rather? Mr. Pairceir: Well, it was an exercise to see whether … between the banks and ourselves … they could come to some kind of … this was in the days of the multiple accounts … Revenue had no function in arbitrating between the banks and so, I think, it would have required a great deal more of good will than as we now know at present. Hearings28 September 1999, Afternoon Session. The proposal of the Bank of Ireland was never adopted. 13. Disclosure and Machine Readability 1986 - Mr. Bruton’s Plan Disclosure of comprehensive information on bank accounts was a long-term ambition of Revenue. It had long pushed for significant disclosure, including information on capital amounts as well as interest income. In 1986, very soon after the Budget that introduced DIRT, a change of Minister occurred with the appointment of Mr. John Bruton TD as Minister for Finance on 13 February 1986. Shortly after taking up office Mr. Bruton became personally involved in the detail of the Finance Bill proposals on DIRT and disclosure. He quickly developed an initiative of his own, after discussions with the Revenue Commissioners. The Minister put his thoughts on paper. In a Memorandum discovered to the Sub-Committee dated 21 February 1986 he wrote "…I have been giving some further thought to how to manage the problem created by the deposit interest retention tax and its applicability to non-liable persons. I feel that the burning sense of injustice that will be created by this tax will create an insuperable objection to its long term continuance.I have discussed the matter with the Chairman of the Revenue Commissioners who feels that while an exemption for charities is possible this year that any other exemption would be both administratively impossible to administer, and lead to pressure for so many exemptions as to render the tax totally inoperable. It seems that the primary objective for the tax in the first place was to achieve a certain yield in 1986. It was not conceived of as a long term tax at all..." (5)
(5) DFIN.004.178

This Memorandum presents a detailed proposal that at heart envisages DIRT as a one year tax. Essentially, the memorandum regarded it as delivering an opportunity to fast track implementation of a full disclosure regime for the banks. It provides for very limited exemptions; and sees the 1987 Finance Bill as the opportunity to pursue a final arrangement based on automatic and automated disclosure rather than taxation at source. Deputy Bruton: I favoured the full disclosure of all accounts to the Revenue on a generalised basis, including savings certificates, that there should be in the world that I wished to see one where there would

be complete and open disclosure of all such accounts, not just in regard to declarations but as to the accounts themselves. Hearings 29 September 1999, Morning Session Critical to this scenario was the need to introduce in the 1986 Finance Bill "…detailed administrative arrangements to enable this to be done, including the provision of information by all financial institutions in machine readable form…"(6) What was envisaged was an automatic and automated or computerised return of records by the financial institutions to the Revenue. This was not pursued – in spite of the fact that there is evidence to suggest that if the Revenue authorities had any strategic objective at the time, it was to ‘get into the bank accounts’, achieving disclosure of information by the banks on capital amounts and deposit makers to Revenue.
(6) DFIN.004.178

Revenue objected to the Minister’s detailed proposal. Mr. Bruton: … This advice … this advice is to me … from Mr Seamus Pairceir of the Revenue Commissioners, not from Mr. Maurice O Connell, I’m sorry. But the advice was as follows: "The proposal to announce during the course of this year’s Finance Bill the reintroduction next year of the disclosure requirement in relation to bank deposit interests which was abolished this year and to extend disclosure to building society interests is bound to give rise to adverse criticism. … The effect of such announcement at this juncture on external deposits in the Irish banks and building societies would be likely to be extremely unfavourable … It would create a climate of total uncertainty in an area where there should be reasonable stability. The conclusion is inescapable that the timing of such an announcement for this year’s Finance Bill would be unwise and most likely to be counterproductive." My recall would be that that line of advice would have been also reinforced by the Department. … Hearings 29 September 1999, Morning Session. What were enacted were Revenue powers of inspectability, not automatic disclosure to Revenue. The confidentiality that had applied to the building societies under their CRT regime was conceded to the banks. The banks, as the C&AG Report charts, and as was evident at the Hearings, continued lobbying against the Act on grounds of complexity and administrative difficulty. However inspectability was also a significant issue. The banks were opposed to anything that suggested of a right of access to account information by Revenue, however limited. The detailed proposal for automated or computerised disclosure on a comprehensive basis by financial institutions as advocated by the Minister was not pursued. Such an approach would have solved the problem of bogus non-resident accounts while the scale of disclosure envisaged by the Minister would have yielded significant information on other forms of capital holding. 14. Preoccupation with Capital Flight Theory By 1987 there was a change in Government, there was a new Minister for Finance and there was the beginnings of a change in attitude towards DIRT. It was yielding significantly more than had been projected and forecast. However disclosure, or rather inspectability, remained a pressing question for the financial institutions. In the course of 1986 there were media reports in Northern Ireland to the effect that Revenue was about to institute large-scale inspection of deposit accounts in the Republic. These reports arose out of a speech given by a tax accountant in Northern Ireland. The concern in Northern Ireland was that information on Northern Ireland depositors would be exchanged between the Revenue and UK Inland

Revenue. A statement was prepared for the Minister the purpose of which as to assure Northern Ireland non-resident depositors that these reports were without foundation. The statement did not issue. There was also around this time (late June 1986) some net outflow of currency and pressure on the exchange rate. There had earlier been a currency crisis resulting in an EMS realignment. A minute by Mr. P. Neavyn, Principal Officer, in the Department to Messrs Maurice O’Connell and Seán Cromien (with the Secretary also to see) states inter alia, that "…Finance Division has advised that on 24 June there was a significant net demand for foreign currency reversing the trend of almost continuous net supply since the EMS realignment. It is not known whether the Northern Ireland situation has a significant bearing on this development. There was a further net demand situation on 25 June…"(7)
(7) DFIN.004.369

Concerns about flight of capital and disclosure on deposit accounts were again being linked and intertwined. Serving officials and former officials of the Department repeatedly made this connection in evidence to the Sub-Committee. However the intertwining of the two issues - tax evasion and monetary policy concerns - was not occurring in vacuo. Repeated currency crises occurred from the late 1970s through to the mid 1980s. In 1986 itself, there were two realignments. The most dramatic picture of the context is that of Mr. Maurice Doyle, former Secretary at the Department of Finance and a former Governor of the Central Bank: "The second question arising here is the so-called balance between the question of guarding against the flight of capital and creating an anti-evasion tax regime. I have to ask: balance, what balance? The C&AG’s report does not discuss the dangers of capital flight but it has to be seen against the context of the time.What is the context? Without being too precise about dates, between roughly 1979 and 1987 we had balance of payments deficits of never less than £1 billion. They ranged up to £1.6 billion, which was 14 per cent of GNP in 1981. The current budget...another way of putting that is that for every £6 that the country as a whole earned, it spent £7. The current budget deficit never fell below £1 billion and ranged up to £1.4 billion, which was between 7 and 8 per cent of GNP in 1986. The Government was spending £6...sorry, was spending £7, was earning, taking in, £6 in tax and borrowing £1, and not even repaying the £1 at the end of the year but borrowing again to roll that over. The Exchequer borrowing requirement ran between 12 and 16 per cent of GNP over those years. Government debt rose from 85 per cent of GNP to 133 per cent of GNP. We had a higher foreign debt per head of population than Poland, we had a higher national debt as a percentage of GNP than Brazil, both of which were widely regarded as basket cases at the time. ... That was the state of affairs at the time. Inflation was running between 7 and 21 per cent. Unemployment rose from 8 to 17.5 per cent. Growth fell from 3.5 per cent a year to 0.2 per cent, which is well within the margin of error in the calculation. The reserves - our primary index of credit worthiness ... lay between £2.5 and £3.5 billion over that period ...The interventions by the Central Bank in order to support the currency over those years ran between £1 and £1.5 billion a year. These are the statistics of a Third World country and against that background must be judged whether or not there was a potential flight of capital out of the country. I have to say, Chairman, to my mind the miracle is that there wasn't a flight of capital out of the country - it wasn't a potential danger. And against that one is expected to balance the creation of an effective anti-evasion tax regime as far as DIRT was concerned." Hearings 31 August 1999, Morning Session The period selected and described here by Mr. Doyle virtually precedes the introduction of DIRT. This is a passionate and dramatic expression of what might be termed the Official View.

Witnesses at the Hearings repeatedly proposed it, though perhaps never again in so dramatic a fashion. However the question remains: was there in fact a connection? This is a critically important question as the view expressed above predominates in the official mind in the evidence to the Sub-Committee and also in the documents discovered to the Sub-Committee - whether the source of those documents is the Department, Revenue or the Central Bank. One former officer at the Department, Dr. Michael Somers, now head of the NTMA, differed in his analysis of the situation. Given that his analysis contrasts so sharply with that of for example, Mr. Doyle, it is also worth quoting at some length. In discussing the issue of evasion and bogus declarations, he stated in his evidence that: Dr. Somers: There is not an awful lot, at the end of the day, that authorities can do about this if people are prepared to make false declarations, and the experience here seems to be that people are prepared to make false declarations. It is an area that I would be doubtful that you will ever get full compliance because if people want to be dishonest in this area, it is probably one of the easiest areas to be dishonest on. If you buy a bottle of alcohol or cigarettes or whatever you have to pay the excise and the VAT on them - there is really no escape - but if you have cash you can put it in other areas. I mean we did have all this great discussion during the 1980's, which I don't think ultimately was resolved, about the famous black hole - that there was money leaving this country and nobody seemed to be quite sure where exactly it was going or who was taking it out or what, in fact, was the total quantum of it. But there was a certain amount of…… Chairman:…… What I want to find out from you as, I suppose the pre-eminent expert in this area in the country, was there any real danger of a flight of funds from the banks because of this policy or if this policy was enforced and applied could there have been a flight of funds? Dr. Somers: I think there probably could have been some flight of funds. I think, in fact, given the overall magnitudes that were involved, it was probably fairly small beer because we were dealing with billions of pounds flowing in and out of the country at that stage. I think with a lot of small people, and I think a lot of these people who are making these false declarations were presumably small businessmen, or whatever, or people with relatively small amounts of cash, there would be a big inertia factor with them. I mean, we used to hear the stories about all the accounts that were held up in Newry, I think it was in the Square in Newry, and the banks would send out their calendars to their good clients up in the Square in Newry and they would all be returned, person unknown or whatever. This was going on. Now it was much easier, of course, if you just had to sign a declaration, you didn't even have to go to Newry then with your bagful of cash. As I say there is an inertia factor in all these things. I do not think that we would have seen vast amounts of money move out.……at the time we would all have been extremely concerned about any kind of flight of capital. Now I am saying that maybe a lot of these DIRT accounts were small beer and it wouldn't have made a major impact on what was happening. But we did have a situation where our national debt was rising at an outrageous rate and something had to be done. Hearings, 31 August 1999, Afternoon Session The Sub-Committee is struck by an absence in the discovered papers and in the oral evidence of rigorous debate on and analysis of currency pressures and currency crises and the resulting policy options open to the Department. The issue of a withholding tax simply appeared interminable, bogged down in the perceived threat of a flight of capital. 15. Taxation and Fairness - SIM 263 " ... if you're trying to do your job fairly and a large section of tax evasion is cut off to you, who exactly are you, in effect, picking on then?"

PMP Donnelly, Inspector of Taxes Hearings 8 September 1999, Morning Session Mr. Donnelly's is a very important question, central to the work of this Sub-Committee. With the enactment of the Finance Act, 1986 responsibility for implementing and administering the tax now clearly passed in the normal way to the Commissioners. In administering taxes the practice in Revenue is to provide Officials with instructions or orders through a system of Superintending Inspector's Memoranda - SIMs. The title of the Superintending Inspector has been changed to Chief Inspector. Each SIM was numbered. On 24 July 1986 the Superintending Inspector’s Office issued SIM 263 on the operation of DIRT. The instruction is highly detailed and runs to several pages. Included in the instruction is: "……Further instructions on the examination of declaration forms will issue in due course and Inspectors should not call for declaration forms from relevant deposit takers pending receipt of those instructions…"
(8) (8) REV.027.2

This instruction was never countermanded, but was effectively rescinded when in 1998 the DIRT issue and other banking controversies broke into the public domain. Despite intense examination of a number of past and current senior Officials of Revenue including Commissioners and Chairmen, the SubCommittee never received full clarification on this incident. The person who authored the instruction was not identified by Revenue officials to the Sub-Committee. No papers relating to the drafting of the SIM were discovered to the Sub-Committee and no papers exist according to the current Revenue Chairman. Obviously the ideas of fairness and legality (compliance with the law) are essential to the operation of any tax system and any specific tax. Inspectors must act fairly and therefore, in assuming office, they make a statutory declaration to apply the law fairly. A central question for the Sub-Committee is whether in fact the law on DIRT and indeed the taxation system generally was applied in a fair manner in the years under examination (1986 - 1998) particularly having regard to the existence of SIM 263. This matter was explored at the Hearings with Mr. PMP Donnelly, Inspector of Taxes, who drew the attention of the Sub-Committee to the existence of the statutory declaration. Mr. PMP Donnelly, in his evidence talked of how he had been troubled by what he saw as a clash between his declaration and SIM 263. Chairman: Mr. Donnelly, in your brief opening statement you mentioned that inspectors of taxes upon appointment make a statutory declaration to apply the law fairly. Isn’t here a classical case where the Revenue were not applying the law fairly, where compliant taxpayers were let down badly by the failure to apply the law fairly? Mr. Donnelly: I have to agree with you Chairman. Chairman: But was this something that was ever discussed among inspectors of taxes that you weren’t in fact living up to your declaration? Mr. Donnelly: We were living up to our declaration. It is a way of binding the inspectors of taxes to apply the law fairly, subject to directions. Chairman: But do you think a direction should have been challenged that wasn’t fair, or had the effect of not applying the law fairly?

Mr. Donnelly: It would be difficult to challenge it, given the weight of the establishment above you. I’m sorry we never did it and I do regret it, but perhaps the atmosphere will change now as a result of your Sub-Committee’s work. Chairman: But, is this something that was raised in discussion between inspectors from time to time? Mr. Donnelly: I think we were fairly disgusted with it, but we did nothing concrete. I’m sorry. Hearings 8 September 1999, Afternoon Session Mr. D. Quigley, present Chairman of the Revenue Commissioners admitted unequal treatment of taxpayers when applying the law: Deputy Rabbitte: …but I think I have to put to you the question that the inaction on DIRT over the years effectively created two classes of taxpayers. I know that that very concept is anathema to yourself but the objective fact is that that is what happened. Mr. Quigley: Well, I think it is correct to say, Deputy Rabbitte, as has already been pointed out in the hearings to date, that there was certainly separate treatment, different treatment, as regards the financial institutions and other taxpayers…… Hearings 9 September 1999, Afternoon Session The Sub-Committee finds that tax administration in Ireland during the latter half of the 1980s and through certainly to the early 1990s was not implemented fairly under the law. Revenue was not applying the law fairly. SIM 263 was critical in this regard. In the Inspectorate particularly, this was clearly understood by officials. However, this hugely important issue could not be pursued within the then Revenue organisational structures. There was no proper management structure, no institutionalised procedures and there was no effective management from the top of the organisation. The conclusion of the SubCommittee, on the basis of the evidence of a number of Tax Inspectors at the Hearings, is that the existence of SIM 263 and the failure to countermand it adversely affected morale within the Inspectorate. Furthermore, the situation, leading as it did to a scenario of taxes going uncollected, contributed to problems for Governments as they grappled with a fiscal crisis and the restoration of order in the public finances. In evidence at the Hearings the former Taoiseach and Minister for Finance Albert Reynolds TD remarked: "DIRT, I don’t recall anybody saying that DIRT was a problem or that DIRT was a gold mine or that there was a pot of gold there in DIRT because I can tell you, if what’s been said around this chamber recently was available then of course we’d all run after it. Of course we’d try and get more revenue in, as much as we could." Hearings 29 September 1999, Afternoon Session 16. The State of Affairs at the Revenue Commissioners One of the first actions of the new Irish State on establishment was the creation of an Office of the Revenue Commissioners. This new organisation was intended as a unified tax collection entity, merging into a single entity the Inland Revenue and Customs and Excise. Until very recently it would however appear that the merger of the two services and their organisation as a unified body was never in reality

implemented. Furthermore, the three Commissioners functioned as equals and even independently of each other. The general approach was described by a former Commissioner and Chairman, Mr. P. Curran, and is quoted at length as it is a remarkable portrait of an essential organisation: Mr. Curran: The work of the office is divided between three Commissioners. I was Commissioner, Revenue Commissioner, from '83 to '87, September '87. During that time I was responsible for the Customs and Excise part of the office which up to that time operated virtually as an independent separate department. I was not involved in any of the discussions or correspondence leading to the DIRT tax. I was unaware of any of the factors involved leading up to the provisions in the Finance Act and, when I became chairman, I continued to deal with the customs and excise part of the organisation in addition to assuming the particular additional functions of the chairman arising from his position as Accounting Officer with responsibility for the Vote and so on, general matters of organisation. The other part of the taxes organisation reported to the two other Commissioners. Specifically the chief inspector's office did not report to me.I have to say when I was appointed chairman the DIRT tax had been in operation for a year or more. Whatever instructions needed to be issued had been issued. As far as I was concerned, the tax was launched and running. It took its place with all the other taxes which were at that time operating. I didn't...I was not aware that there was any particular major problem that required my intervention in relation to the DIRT tax. This is...nothing emerged within the office to suggest that to me. Now, of course, the chairman also has to be receptive to influences from outside the office and there again there was nothing came to my attention which suggested that there was a very major widespread problem which would require my attention. Deputy Foley: … …Could you explain the high level policy decision-making process within the Revenue Commissioners? Mr. Curran: If you mean did we have regular board meetings at which we decided things----Deputy Foley: I'm coming to that. Mr. Curran: -----the answer is no. I continued the practice which had been there for years previously which was that the Commissioners ran various sections of the office and there were lots of informal contacts, of course. But, in relation to the statutory responsibilities of running the various taxes, a commissioner had full authority to act himself in relation to any of these and normally he wouldn't have required to get a consensus with his colleagues. We didn't have any - well I'm not saying we didn't have any, there were occasions when we had meetings. They would largely have had to do with staffing matters, organisation matters, resources and so forth. Deputy Foley: During your time as chairman, how often did the board members meet or the Revenue Commissioners? Mr. Curran: Well, as I said, we seldom had formal board meetings. Once a month, perhaps. Deputy Foley: Yes. Mr. Curran: I'm only guessing now. Deputy Foley: Would you have had a set agenda for these meetings? Mr. Curran: Not really; it wasn't a formalised procedure. If I found it necessary to convene a meeting, I would certainly have told my colleagues that we want to discuss such and such and we'll meet at 11 o'clock, whatever. But there wouldn't have been a formal written agenda.

Deputy Foley: Are minutes taken of such meetings? Mr. Curran: No. Deputy Foley: How would you follow up on something you discussed at a meeting at the following meeting? Mr. Curran: If it was something I had to do - oh, at the following meeting. Well, if it was something I had to do I would take a note of it and make sure to remind myself to do it. If it was something that one of the other Commissioners was involved in, my own notes would lead me to ask, maybe a few weeks later: oh, by the way, what happened about such and such. That's the way it worked. Deputy Foley: Was there any reason for not taking minutes or keeping minutes, as a matter of interest? Mr. Curran: No particular reason, we just didn't do it. Deputy Foley: … During your time as chairman, Mr. Curran, what level of knowledge did the Revenue Commissioners have of the situation regarding abuse of non-resident accounts and when did this situation come to your attention? Mr. Curran: I'm not sure if I fully understand the question but I think the point is this, that we all knew; you didn't have to be Revenue Commissioners to know that the whole system as brought in was subject and liable to abuse. That was common knowledge. I think it was even knowledge the Government knew and the Dáil knew; they were doing the best they could in the circumstances. What we didn't know was that there was a very large widespread problem. We weren't aware of the scale of it. Hearings 7 September 1999, Morning Session The picture painted by Mr. Curran is of more than historical interest. It is relevant to this Inquiry to the extent that it provides a portrait of the organisation responsible for implementing DIRT. This was the Revenue Commissioners of the mid-eighties and at least up to the early 1990s. Since then some changes have been made. The Sub-Committee has heard that there is now a functioning Board, in the sense as normally understood. The taking of minutes was introduced in 1993. The Sub-Committee was told that a Management Committee (MAC) is being put in place. The present Chairman understands his position to have primacy. He indicated in oral evidence that this is now clearly the position under the terms of the Public Services Management Act, 1997. However during a most critical period in the fight against tax evasion and in the fiscal and economic history of contemporary Ireland the Office of the Revenue Commissioners on the description of Mr. Curran cannot be said to have been functioning coherently in any real sense. In 1985 the Commission on Taxation 1980 - 1985 in its final Report (October 1985) stated that: "The administration of taxation in Ireland has virtually broken down. Non-compliance is a major problem. The situation will get worse unless the evident problems are tackled quickly and with determination. Radical measures are needed." The Sub-Committee finds this statement to be no exaggeration. And from it, is derived a critical point for this Inquiry. The Revenue should be central to any strategic plan by the State and its Agencies, including the capacity to approach the Financial Industry, or any individual Bank, to deal with matters that arise from time to time. The Revenue should be capable of taking an active leadership approach in such

circumstances. On the evidence the Revenue was not capable of leading any such initiative. Despite the changes in the organisation of the Revenue Commissioners the problem persisted up to 1998. 17. Mr. Moriarty’s Paper Mr. Gleeson: And tell me this, what happened to the file? Mr. MacCarthaigh: The file lay in my room…… Mr. Gleeson: But I mean, when you move on to some other appointment, do your files get taken up by somebody else and do you usually do a note on the file telling the person where the story has got to. What is the custom? Mr. MacCarthaigh: Not really, not really. Cross examination by Mr. D Gleeson SC representing AIB of Mr. MacCarthaigh, Senior Inspector of Taxes, Revenue Commissioners Hearings 11 October, Afternoon Session Mr. Moriarty comes to Dublin In 1989 Mr. Sean Moriarty, Inspector of Taxes, working many years in provincial Ireland, was transferred on promotion to Dublin. Mr. Moriarty was destined to move rapidly through the management ranks, eventually to become an Assistant Secretary and Head of Human Resources Division in Revenue. His initial posting in Dublin was to Tax Arrears Project Management and the National Audit Programme. This gave him responsibility for Investigation Branch (IB) and Special Inquiry Branch (SIB). His experience in the provinces left him well qualified for his new posting. Mr. Moriarty: … I … worked for fourteen years in provincial Ireland and I had a reasonable opportunity to observe, at close quarters and, indeed across all my career, a contact base that you tap into to know what happens in the real world, but I have to say that for all that I had very little hard evidence at the end of it other than the cases which my colleagues have detailed … Hearings 3 September 1999, Morning Session In the line of command, Mr. Moriarty reported to Mr. C Clayton, Chief Inspector of Taxes, who reported directly to the Commissioners. With the information coming from his colleagues in IB and SIB and with his experience of close quarter contact with the real world of provincial Ireland, Mr. Moriarty began to think, analyse and research and, in 1991, to write a paper. He was encouraged in his endeavours by the Chief Inspector. His paper would eventually acquire a title – Tax Evasion, The Role of Concealed Deposit Accounts and Other Forms of Investment. The paper evolved into a detailed examination of the routes to tax evasion – evasion of Exchange Control to transfer wealth out of Ireland and the use in Ireland of bogus non-resident accounts, Single Premium Life Insurance Policies and investments in Unit Trusts to hide wealth from Revenue and thus evade tax. Mr. Moriarty also sketched out possible courses of action by Revenue. Unfortunately, for the prospects of the Paper, he appended a final section, ‘The proposed Amnesty for funds illegally held abroad’.

Mr. Moriarty: What I did was … I tried to carve out a range of measures, which might fly in an environment where I took certain things as given. The certain things I took as given were that we were unlikely to get new powers because that was the environment. Hearings 13 September 1999, Morning Session By February 1992 Mr. Moriarty had finalised his paper. He gave his superior, who had encouraged him in his endeavours, an advance copy. The Chief Inspector did not like what he read. Mr. Clayton: It was not a paper that I myself would have written in that particular way. Hearings 11 October 1999, Morning Session The Chief Inspector did not respond to Mr. Moriarty. Mr. Gleeson: It takes about 20 to 25 minutes to read Mr. Moriarty’s paper, I think. Mr. Clayton: It might take 20 to 25 minutes to read it but it would take a great deal longer to study it and to analyse it. Mr. Gleeson: Absolutely. It would require a lot of brooding and reflection. It was a very substantial and serious piece of work. Mr. Clayton: Indeed. Hearings 11 October 1999, Morning Session Mr. Clayton did contact Commissioner Quigley. For the next four months nothing happened. In May 1992 the Chairman of the Commissioners, Mr. MacDomhnaill, got to hear about the existence of the Moriarty paper and asked to see it. On 15 May Mr. Moriarty forwarded the paper to the Chairman through Mr. Clayton’s office. On 25 May 1992 Mr. MacDomhnaill met with Mr. Moriarty in the office of Mr. Clayton, the Chief Inspector also attended. Mr. MacDomhnaill rejected the paper.Mr. Moriarty: He was unhappy with the paper, I have to say. … He said there was very little evidence for the conclusions I was drawing and in the light of where we were coming from, I think it is a valid criticism. We were plucking at scraps of information from …because of the fact that we couldn’t access the banking records. We couldn’t do any kind of sample surveys so we were trying … what I was trying to build was a framework of perceptions of experienced investigators that was leading us in a certain direction. Hearings 3 September 1999, Morning Session The direction in which Mr. Moriarty was moving was towards considering the usefulness of an amnesty. This was not on the Chairman’s menu and it did not receive the imprimatur of the Chief Inspector either.

Mr. Moriarty: I understand to some extent why the chairman would feel so strongly about any attempt, even marginally to come down in favour of it, but I have to say, the backdrop against which I was working in terms of what I suspect to be the entire amount of funds, of all kinds of investment products, which was and was likely to continue to be off limits to Revenue, that it seemed to offer some possibility … that if we could go some way towards starting again, it offered some possibility so to that extent I attempted to tease out a little bit, both sides of the argument ---Hearings 3 September 1999, Morning Session Part of the backdrop was a political climate and part of it was the continuance of SIM 263. Both were linked. Mr. Clayton: Now at the time I didn’t expect that the proposals would be actually approved because of the references in the paper to the possibility of an amnesty and there had been ongoing correspondence with the Department of Finance which indicated that the Minister didn’t want any changes in the position about access to non-resident accounts. There had also been the Minister’s Budget Statement in late January where he … clearly stated that …he proposed to extend the Revenue power to seek information from taxpayers, their agents and third parties, excluding financial institutions. So, the prospects didn’t look good for the basic approach as regards powers. Hearings 7 September 1999, Morning Session While Mr. Moriarty was grappling with the intricacies of patterns of wealth accumulation in Ireland, he also had an administrative headache. Revenue was undergoing structural change and associated with this were industrial relations problems. Mr. Moriarty: This paper I had been working on, I have to say, right during 1991, and I was interrupted several times because of the pressures of re-organising … the industrial relations issues around organising the chief inspector’s office. It should really have been ready summer to autumn … it drifted because of a very difficult industrial relations situation at the time. Hearings 3 September 1999, Morning Session Apart from the upheavals of reorganisation and associated confusion, morale was also at a low ebb in the inspectorate. The scale of suspected evasion and the apparent inability of the Commissioners and the Government to tackle it was damaging to morale. The inspectorate was reduced to trying to get through to Government via their trade unions and using the ICTU in its negotiations with Government on a new wage deal. In particular, junior Inspectors were outraged by bogus non-resident accounts. Deputy Rabbitte: … to quote the phrase in the representations from Congress (ICTU) "Mr. Maxwell said that two of the Revenue Unions were claiming that the non-resident procedure was a joke … That would imply … that … the more junior ranks of the Revenue had a pretty good feel for it and were pretty disgusted about apparently nothing happening? Mr. Moriarty: That’s fair comment Deputy, I think, but our own ---- The feed through from the more junior people and the people in the field would have been coming through to Investigation Branch. … But yes, it’s fair to say that a lot of junior people had a very good feel for what was happening. Hearings 8 September 1999, Morning Session

It was against this backdrop of the fixed views of the Commissioners, internal re-organisation, industrial unrest and low morale that the 1991 negotiations of Mr. MacCarthaigh and AIB took place and the file was subsequently consigned to the corner of Mr. MacCarthaigh’s office. Deputy Doherty: And there was no follow up as we now know in relation to many things that we thought had been entered into and agreed with AIB. Mr. Moriarty: That seems to be correct. Deputy Doherty: And the certification that was promised by AIB wasn’t submitted either and wasn’t asked for after 1991. Mr. Moriarty: That appears to be the case. Deputy Doherty: … Would there not be a series of events and a pattern of behaviour and a use of words that, while no deal, no amnesty … everybody seemed to be looking the other way … Wouldn’t that not be a reasonable assumption? Mr. Moriarty: No, I don’t think it would, Deputy. First of all the most important point is, as we keep saying, we had no idea that there was a huge hidden undercurrent of a very significant amount of tax. We were shooting in the dark. Hearings 3 September 1999, Morning Session Dr. Donal de Buitléir, former Assistant Secretary of the Revenue Commissioners and now in the Office of the Chief Executive of AIB Group summed up the position in his view. Dr. de Buitléir: I think that if you look at the behaviours of the parties involved, you look from Mr. Mac Carthaigh's proposal to Mr. Moriarty, which we only saw when these proceedings started, that this rampant problem be tackled without pursuing arrears, the very significant effort communicated to the Revenue, the substantial increase in our DIRT payment and the fact that the Revenue didn't do anything about it, speaks volumes …… Actions speak much louder than words in this area and I think what the Revenue have to choose between is absolute, utter incompetence and negligence or there was an agreement, de facto that there was an agreement. That's my view. Hearings 12 October 1999, Morning Session


1. Prudential Supervision The predominant theory of central banking emphasises what is called the prudential aspect (prudential supervision). Prudential supervision is primarily concerned with guarding against individual and systemic risk. At its most simple the concern is with guarding against a run on a bank - depositors en masse withdrawing their funds, initially possibly from one bank (individual risk) arising from a loss of confidence. The danger in individual risk is that it may quickly degenerate into a generalised run (contagion) on the banking system (systemic risk), thus causing a systemic collapse and the need to engage as lender of last resort. Prudential supervision in this sense has its principal origins in the world-wide banking crises of the 1930s. 2. Risks in Banking There are a number of sources of risk in banking. The sources of risk are intrinsic to the nature of banking. A bank is at risk vis-B-vis its borrowers, who may get into financial difficulties and default (credit risk). In the international setting a bank may be at risk in relation to its international activities (country risk). Banks may also emerge as negatively exposed on interest rates (interest rate risk). A major bank may also find itself defaulting on a payment, causing knock-on effects through the system (payment risk) or miscalculating on exchange rate movements (exchange risk). Other relevant types of risk are reputational risk and legal risk. We can see in this outline of banking risk, the embryonic role of the supervisor. A supervisor must concern itself with the quality, competence and experience of those who propose to enter banking. It must be confident that the capitalisation of the licensee is adequate in the context of the business purpose of the licensee. It must ensure that controls (internal and external) are appropriate and effective. 3. Banking and the Welfare of Society All of this is from the point of view of ensuring as far as possible that banking risks are minimised and ideally, eliminated. In the end all of this is to ensure that the banking system functions in such manner that the society and the economy can have confidence in particular Banking institutions and the Banking system in general. Banking is central to the well being of society and critical to the health of the economy - what in the Constitution is termed "the welfare of the people as a whole". Any breakdown in banking will have the most serious of consequences. Banks are different from any other form of business enterprise. This is why banking requires to be so heavily regulated and why the highest ethical and business standards are expected of banks and bankers. 4. Approaches to Supervision The supervisor may define its role narrowly. It may focus on narrow ground - key indicators such as capital adequacy ratios, levels of lending to particular sectors, relationships with connected parties, levels of self-dealing and so on - various forms of financial statistical indicators. It may further compartmentalise its supervisory activities to the exclusion of the 'big picture': themes of, for example, ethics and reputation, probity, systems of remuneration and so on. In a small, less developed economy with a small, basic banking system and perhaps a largely unbanked society, this might be appropriate. In a developed and growing economy playing a full and expanding role in the global economy and with an ever more

developed financial sector ever more implicated in the general life of the society such an approach would be clearly inappropriate and insufficient. The present Governor of the Central Bank is Mr. Maurice O’Connell. Prior to his Central Bank career Mr. O’Connell was a senior official in both Budget Division and Finance Division of the Department of Finance. In 1994 Mr. O’Connell became Governor of the Central Bank. Mr. O’Connell therefore, has seen the DIRT problem and related matters (including problems with the taxation of deposit interest prior to the introduction of DIRT) from the perspective of two critical organisations. It may be noted that one other witness had similar experience, Mr. Maurice Doyle, who held the rank of Secretary (now Secretary General) at the Department of Finance and also went on to be appointed Governor of the Central Bank. In fact there is a tradition that an outgoing senior officer of the Department (usually the Secretary General) is appointed Governor of the Central Bank. The relationship between the Department and the Bank is extremely close. Deputy Ardagh: In the Department of Finance or in the ... it is very difficult to separate entirely the Department of Finance and the Central Bank. Mr O’Connell: I know it is. Hearings 1 September 1999, Morning Session Mr. O’Connell as a senior officer at the Department of Finance had knowledge personally for an extended period of the deposit account problem. Our purpose in this section is to concentrate on the Bank and what the Bank knew. In this regard Mr. O’Connell stated repeatedly in evidence that the Bank knew of both the deposit accounts problem pre-1986 and the problem of DIRT evasion after 1986. The following is typical of Mr. O’Connell on this theme: Mr. O’Connell: Chairman, the Central Bank participated at various times in discussions about the taxation of interest on deposits and non-resident accounts. The Bank believed there was a problem regarding false statements on non-resident's status but it had no direct knowledge of the amounts that might have been involved, however, because the focus of its inspection is prudential and it does not embrace taxation. Hearings 31 August 1999, Morning Session And again on the following day: Mr. O’Connell: We had a knowledge of a DIRT problem. We had no way of quantifying it. We had no legislative authority to go in and quantify it. We were unhappy about it. We shared with the Department of Finance our views on this. We discussed ways and means ... as to how we might find a solution. Hearings 1 September 1999, Morning Session And later that day, under questioning by Deputy Seán Doherty: Mr. O’Connell: And I have made it quite clear that we were aware - I repeat and I am repeating myself now - we were aware of this problem. We had no way of quantifying it, no way at all. We were unhappy about it, I said that already. I said we discussed this with the Department of Finance and that's all

recorded here and so on and I said it's a tax matter to be solved by the tax system and all the parties involved were agreed on this. Hearings 1 September 1999, Afternoon Session There is no doubt that the Bank knew of the problem going back before 1986 and that it discussed the matter with the Department of Finance. Furthermore, the two organisations discussed how the matter might be tackled, in general and in respect of specifics. The general discussion was of course around the taxation of deposit interest income. The specifics included the option of using the Exchange Control to tackle the problem of bogus non-resident accounts both before and after DIRT was introduced as part of the solution of tackling the problem of the evasion of taxation on interest income. Consideration of the Exchange Control option would be relevant to any consideration of the problem by the Bank and the Department in consultation. This is because the Exchange Control was operated by the Bank on behalf of the Minister between 1965 and 1993 when the Control was finally abolished. 5. Exchange Control An Exchange Control is used to protect the international value of a currency (the exchange rate) and the amount of financial resources held domestically (the reserves) thus providing a high degree of certainty for international trading and maximising financial resources available for domestic economic activity. There are two key elements to the operation of an Exchange Control. First, it is illegal for residents to hold, in the extreme, any case or capital abroad and it is required under law that residents quickly return to home any foreign currency earned abroad. Second, residents’ transactions with the rest of the world are heavily policed by an Exchange Control Department to ensure compliance. The whole purpose of an Exchange Control is to ensure that residents hold their cash and wealth at home rather than abroad. In 1954 Ireland established an Exchange Control. Residents were prohibited from holding non-resident accounts except under restricted conditions for the purposes of foreign trade. The convention also was, in line with international practice, to place non-resident accounts outside the Exchange Control. Resources held in non-resident accounts were therefore free to roam the world. Between 1954 and 1965 the Control was operated by the Minister for Finance. In 1965 the Minister delegated the Control to the Central Bank on his behalf. The Bank in turn delegated its agency to the commercial banks (as it was empowered to do). The commercial banks to which the Exchange Control was effectively delegated were directed as to how to behave by Exchange Control Notices issued by the Central Bank. In evidence Mr. P. Dalton of the Central Bank explained: "One of those notices, issued in November 1981, exchange control notice EX7, clearly set out the rules and the regulations with regard to the operation of non-resident accounts. It also clearly defined the definition of residency for exchange control purposes and it also clearly set out that the beneficial owner of any account was the responsibility of the institution to where the account was opened." Hearings 1 September 1999, Afternoon Session Mr. Dalton went on to state, repeating evidence of Mr. O’Connell, the Governor of the Central Bank, that: "As the Governor has said earlier on, there were no powers of inspection under the Exchange Control Act." The Bank as agent of the Minister and supervisor of the operation of the Exchange Control, the operation of which it delegated to the commercial banks, did not have the power of inspectability in relation to the operation of the Exchange Control.

Mr. Dalton: ... the onus and responsibility was always with the financial institution to whom the account belonged and the question of tax or otherwise - and I think as Mr. Doyle referred to yesterday, if there is some kind of devious concept going on between the account holder, the clerk of the bank and the bank manager ... and the Central Bank had no powers of investigation, it was extremely difficult for the Central Bank to go into any institution and look at accounts. Hearings 1 September 1999, Afternoon Session This has a certain familiar ring to it. While inspection in the sense that Mr. O’Connell is referring to was indeed not possible, other powers for establishing the authenticity of non-residency claims were available to the Central Bank and detailed in Exchange Control Notice EX7. "Individuals In the case of persons, nationality is not decisive in the determination of residential status. Moreover, residential status for Exchange Control purposed may differ from that applicable for tax purposes. In general, a person is considered to be a resident if he is currently living in the State and has been so living for at least three years. A person who is newly arrived in the State is considered to be an Irish resident if he intends to live here for an indefinite period or for a period not less than three years. It is the residential status of the beneficial owner of the deposit which is relevant in the Exchange Control context. It is therefore essential that the residential status of the beneficial owner be established and such status marked clearly on the relevant documentation. Authorised Dealers and Specified Financial Institutions should verify, when an account is being opened that the address given for the account is the permanent place of residence of the account holder. Cases of Doubt Where there is doubt as to a person’s correct residential status, the case must be referred to the Central Bank of Ireland for decision. To enable the Central Bank to give a ruling, the following information should be decided(a) Date of taking up residence in the State(b) Residential intentions for the next three years(c) Full details of residential history for the preceding three years(d) Reasons for taking up residence in the State" Extract from Exchange Control Notice EX7 Rules 9-11 of Notice The use of the Exchange Control in tackling the DIRT Problem An External Account is an IR£ account opened and operated within the State by a non-resident. Under the Exchange Control all non-resident accounts were automatically designated as External Accounts because of their beneficial owners claiming non-residency. Between 1963 and 1979 accounts falsely employing accommodation addresses outside the sterling area were therefore in breach of the Exchange Control. From 1979 to 1992 non-resident accounts were bogusly non-resident were in breach of the Exchange Control by virtue of the bogus declared nonresidency. Between 1979 and 1992 Exchange Control operated generally. The sterling area (including Northern Ireland) was subject to the Control. The practice in the Central Bank was to distinguish between External Accounts and Foreign Currency Accounts (i.e. non-resident accounts denominated in a foreign currency). For the purposes of the Exchange Control the same procedure applied to both categories of non-resident account. The distinction in this sense is technical.

The possibility of using the Exchange Control in combating bogus non-resident accounts was examined at a very early stage – even before the relevant period. This would have entailed the Central Bank examining accounts flagged as External Accounts and checking for authenticity of non-residency. A change in the law to allow for such a strict inspection of the already established accounts by the Central Bank would have been required. However, the 1981 Exchange Control notice EX7 detailed above becomes acutely relevant in the context of the Central Bank satisfying itself as to the authenticity of non-residency claims on the opening of any new External Account. What the Sub-Committee finds inexplicable is the failure of the Central Bank to effectively discharge its responsibilities in administering the operation of the Exchange Control on behalf of the Minister for Finance. On the delegation of its powers to the commercial banks, it would appear to have simultaneously absolved itself of the responsibility to oversee the enforcement by the commercial banks of Exchange Control Notice EX7 – Accounts of Non-Residents. In a confidential Department of Finance internal Memorandum written by Mr. WP Ryan, dated 1 March 1984[1] forwarded to Mr. Doyle, the then Secretary, the practices employed by the commercial banks in the operation of the Control are described: "…It is suspected - though we have no evidence - that the banks "satisfy themselves" rather too easily and that a not insignificant number of External Accounts (i.e. non-resident IR£ accounts) are in fact opened by residents under assumed external addresses. Such accounts would be opened primarily for tax evasion reasons." EX7 stated inter alia that the principal obligation of banks "… is to satisfy themselves before opening an External Account that the account holder is non-resident for Exchange Control purposes and not acting as nominee for a person who is resident in the State." Exchange Notice EX7 provided for a ruling by the Central Bank where any doubt arose as to the authenticity of new non-residency declarations. Furthermore, it very explicitly laid out the information which was required to be obtained by the banks and submitted to the Central Bank where a ruling by the Bank was called for. Mr. O’Connell: The possibility of invoking the exchange control legislation as a means of addressing the problem of non-resident accounts appears to have been raised as early as 1982. The response of the Central Bank at the time was that it would be more effective to take action against offenders under tax legislation ... This response was entirely correct. The motive behind false residency statements was taxrelated rather than a desire to transfer funds abroad for purposes, such as currency speculation. Hearings, 31 August 1999, Morning Session What the Governor’s statement amounts to is the proposition that invoking Exchange Control legislation as an avenue to combating tax related bogus non-residency was relevant but inappropriate given that the motive for establishing such accounts was indeed tax related rather than driven by exchange rate considerations. The conclusion of the Sub-Committee is that the motive behind a breach of the law is not relevant to the issue of enforcing that law. The fact is that there was in place at the time an Exchange Control Act, responsibility for which had been delegated to the Central Bank, which was being routinely flouted.

6. Flight from disclosure The Sub-Committee agrees with the Governor in his hypothesis as to the actual tax related motive behind the establishment of these bogus External Accounts. However the implications of the Governor’s view on this issue are also significant in considering the merits of the preoccupation with capital flight theory in the context of the bogus non-resident issue. It does not follow that in conditions giving rise to speculative pressures on the reserves and resulting capital flight, that all monies technically able to move (i.e. in External Accounts) will necessarily do so. In particular External Accounts that represent flight from disclosure (tax related bogus non-resident accounts) will not be driven off-shore (i.e. convert from an Irish pound denomination into a stronger currency) by speculative currency considerations. The Sub-Committee draws the conclusion from the facts before it that the motive for false residency declaration was primarily that of tax evasion. When there was capital flight as there periodically was in the late 1970s and the 1980s the evidence demonstrated that these accounts did indeed remain denominated in Irish pounds. Indeed in its written opening statement filed with the Sub-Committee the Central Bank analysed capital flows over the period: "Outflows of capital were a constant problem from the late 1970s. In the year to August 1986 outflows were over £2 billion which was more than four times what would normally be expected. ... The analysis undertaken at the time, however, confirms that the main factor, by far, behind the deterioration was the leading and lagging of foreign receipts and foreign payments rather than tax evasion or tax avoidance. ... It is obvious from correspondence at the time that there was no means of getting an accurate picture of this phenomenon (tax evasion and avoidance)…" This analysis concluded that: "… The evidence would suggest, however, that non-resident account balances were not being transferred out of the State on a big scale and that they remained generally stable."[2] Against the evidence of the Governor and the content of the Central Bank's filed opening statement, there is a passage in the Ryan Memorandum that states that in the context of the 1983 affidavit proposal: "The potential volatility of non-resident deposits led the Central Bank to oppose the proposal for increased documentary evidence of non-residence ... The banks, whose argument the Central Bank supported, claimed that the "expense and inconvenience" involved for non-residents would cause over 50 per cent of non-resident deposits to move abroad "possibly within a very short period". It is understood that the basis for this view was that foreign currency banking and financial operations would be inhibited while the IR£ depositors would take alarm."[3] No evidence was provided to the Sub-Committee that the Central Bank or the Department of Finance ever built a model of capital movement for Ireland that would have been useful in capturing the demonstrated immobility of bogus non-resident accounts for exchange rate policy purposes. Findings and conclusions of the Sub-Committee in respect of State Agencies We now turn to our findings and conclusions in relation to the public administrative and policy system.

MINISTERS FOR FINANCE – FINDINGS The Sub-Committee finds: 1. No official proposals for strengthening the law in relation to DIRT were made to any Minister for Finance in the period from 1986 to 1998. 2. There was no instance where a Minister for Finance improperly intervened with the Revenue Commissioners during the period in question. 3. It remarkable that successive Ministers had so little awareness of the Revenue operating procedures. 4. It is incomprehensible that Ministers as the sole shareholder should not have been informed of the situation at ACCBank. 5. Resulting from the inadequacy of reporting procedures concerning ACCBank, Ministers were unable to discharge their responsibilities for the Bank in an appropriate manner. 6. Claims of failure of political will are groundless as no official proposal ever reached the Minister and the proposals by one Minister to provide for full disclosure based on computerised returns of all bank accounts were not proceeded with because of official advice.

STATE AND ITS AGENCIES - GENERAL The Sub-Committee finds: 1.There is no evidence that there was a coherent, systematic approach or commitment, formal or otherwise, to a working out over a period of the endemic problem of tax evasion through the use of bogus non-resident declarations. 2.The relationship between the Department of Finance, the Revenue Commissioners and the Central Bank in the relevant period is defined by a certain informality while at the same time characterised by certain features of territoriality. 3.The grip of the theory of capital flight and its intertwining with the problem of bogus non-resident accounts is indicative of an absence of rigorous analysis. The story of the affidavit of 1983 – how it emanated, was introduced and withdrawn – again is illustrative of a certain ad hoc approach, informality and lack of rigour. This applies not simply to the Department but also to the two related agencies, Revenue and the Central Bank, during the relevant period and in respect of the issue of bogus nonresident accounts. 4.There was a particularly close and inappropriate relationship between banking and the State and its Agencies. The evidence suggests that the State and its Agencies were perhaps too mindful of the concerns of the banks, and too attentive to their pleas and lobbying.

DEPARTMENT OF FINANCE The Sub-Committee finds:

1. There was a certain informality within the Department of Finance, for example, meetings of the Management Committee (MAC) did not have agendas and minutes were not kept for most of the period under review. The Department today is an elaborate organisation of divisions and assignments of duties and responsibilities. Yet on the evidence given to the Sub-Committee by officials past and present, there was in the relevant period, and there may be today, insufficiently clear management information systems. 2. The Department did not fully inform Ministers during the relevant period (1986 to 1998) in relation to the problem of bogus non-resident accounts. 3. Reliance by senior Finance officials on the fear of capital flight as the reason for not tightening up on the operation of DIRT cannot be reconciled with their advocacy of mandatory affidavits in 1983. 4. There was no proper analysis of the capital flight theory - along the lines for example of, confronting the proposition expressed by Dr. Somers with the more conventional view. This was despite the fact that the evidence was, even at the time, that non-resident accounts stayed put in the midst of currency upheavals, and that bank deposits resident and non-resident grew progressively throughout the period. REVENUE COMMISSIONERS The Sub-Committee finds: 1.During the relevant period Revenue’s freedom of action in relation to deposit takers as taxpayers was restricted by law as compared to its powers vis B vis taxpayers generally. 2. During the relevant period, given the scale of DIRT evasion, it is clear that the law was not applied equally as between categories of taxpayer. 3. There was no structured, formalised policy evaluation process in the Revenue Commissioners. There was no organised research programme. The one piece of original policy and research work undertaken was that of Mr. Moriarty in his paper. This was a personal initiative, albeit by a very senior official, and the Commissioners did not act on it. This was a failure in strategic and policy management 4. Given the conviction in Revenue about bogus non-resident accounts, it was a serious lapse on the part of the Board of the Revenue Commissioners not to have taken an industry-wide initiative with a view to getting the Financial Institutions to apply the law. 5. The absence of a countermand to the prohibition in SIM 263 is a major failure on the part of the Revenue Commissioners. The prohibition in SIM 263 was temporary yet it was not rescinded during the relevant period twelve years. 6. SIM 263 immensely compounded the problem of bogus non-resident accounts. The problem was further compounded by the fact that the banks knew of the reality of non-inspectability even if they did not all know of the existence of SIM 263. 7. The limited powers of inspection that were put in abeyance by SIM 263 would have had a deterrent effect. The Sub-Committee heard evidence from Tax Inspectors that this restriction hampered their work and led to unfairness in the tax system in that it enabled large scale tax evasion to be organised through the deposit taking system. 8. There were well motivated officials in Revenue doing their best in an environment lacking overall professional management and strategic direction and consequently there were some quite inexcusable lapses.

9. The failure to tackle the DIRT problem was a contributing factor to the fiscal crisis of the time and delayed the process of restoring order to the public finances. 10. While some improvements are being implemented in the overall management, coordination and direction of the Revenue Commissioners, these will need to be evaluated against performance.

THE CENTRAL BANK The Sub-Committee finds: 1. Bogus non-resident accounts were breaches of Exchange Control and the Central Bank took no action. 2. Exchange Control could have had a role to play in tackling the problem of bogus accounts during those years of the relevant period during which the Control was in place (1986 to 1992). 3. The Central Bank had responsibility for defending the exchange rate in its protection of the integrity of the currency. No evidence was provided to the Sub-Committee that the Central Bank ever built economic models of capital movement, currency speculation or currency crises that incorporated the demonstrated immobility of bogus non-resident accounts for exchange rate policy purposes or for regulatory purposes. 4. The flight from disclosure hypothesis was recognised within the administrative system and that there was also empirical evidence to support the hypothesis. The possibility of using Exchange Control in an attack on the problem was examined and was rejected. 5. The constant intrusion of the capital flight theory into discussion of the problem of bogus non-resident accounts was inappropriate. The more relevant hypothesis was not capital flight but flight from disclosure and flight from taxation - tax evasion. 6. There is nowhere in the evidence given at the Hearings or in the documents discovered to the SubCommittee evidence supportive of the view that the Central Bank was engaged with deposit takers in working out the problem of bogus non-resident accounts. The evidence suggests that the Bank saw itself as having no role in tackling the problem. 7. The Central Bank had an inappropriate and outmoded approach to supervision given the growing sophistication of banking and the changing role of banks in society. 8. There was an insufficient concern with ethics and supervision other than from the standpoint of a traditional and narrow concern with prudential supervision in the Central Bank. 9. The Bank knew of the problem. It was, with the other two agencies, Revenue and the Department of Finance, conscious for an extended period before and after the introduction of DIRT of the existence of evasion.


1. Overview Turning next to the corporate life of Banking and the institutional setting of Banking in Ireland, we consider certain dimensions of the structures within which non-resident accounts were operated. Such an examination is useful in the search for any evidence of a pragmatic workout of the problem of tax evasion through the use of bogus non-resident accounts – if such was ever in place. For instance one might expect to find such evidence in the control environment – internal and external audit and the interaction of control with the life of the board of directors. Similarly one might expect to find such evidence in the deliberations and actions of the industry representative bodies such as the Irish Bankers Federation or the Institute of Bankers. We turn initially to the role of the board of directors. 2. The Role of Boards of Directors of Financial Institutions Mr. Kilroy: As far as I am concerned, I, the chairman or governor and the board have to take ultimate responsibility and, indeed, if you choose to censure this bank, then my name should be at the top of the list but that doesn’t mean that I should know all the detail that’s going on and the underlying affairs of the bank. Evidence of Mr. H Kilroy, Governor of the Court of Directors, Bank of Ireland. Hearings 22 September 1999, Afternoon Session It is appropriate to rehearse the principal features of the responsibilities of directors. The directors of a company have a legal responsibility under the Companies Acts to prepare and present financial accounts that show a true and fair view. The duty of directors is to ensure that proper accounting records are kept. It is furthermore the duty of the directors to prepare and approve annual financial accounts for shareholders. The board of directors has a duty to present the financial accounts to a general meeting of shareholders and to file such accounts with the Companies Registration Office. Directors must also ensure that the financial accounts are sent to those entitled to receive them. The directors have a collective responsibility for the financial accounts as evidenced by the requirement that the accounts must be signed by two directors on behalf of the board. The evidence of Mr. Kilroy brings into focus the balance that must be struck in the life of the board. The board must take ultimate responsibility for the actions of the institution. Yet it cannot know everything about these actions. The board must delegate day-to-day responsibility to senior management for those matters for which it retains ultimate responsibility. However, this delegation does not absolve the board from overall responsibility. As a practical matter, the board in organising its affairs and conducting its business must operate a committee system. In the context of this Inquiry the key relationship under examination is that between the audit committee of the board and the board. The remit given to the audit committee, the reporting relationship between the audit committee and the board and the reporting procedure for management and audit to the audit committee must deliver a clear line of communication that informs the board fully in undertaking its responsibilities.

Chairman: … I am just reading from a document, a KPMG review of corporate governance … One of the points is it has an important role – this is the audit committee – it has an important role in building high standards. Mr Spain: Yes and the audit committee of National Irish Bank and subsequently the European audit committee has fulfilled that role and national Irish Bank operates to high standards and has operated and the proof of the pudding is in the good results which have come out in this whole area. Chairman: Well let’s pursue this thing then of "5.3 Offshore Accounts: We understand that a number of other NIB group banks are sending major non-resident accounts off shore in order to reduce documentation risks. We should consider doing likewise for major non-resident accounts. This area needs to be researched before making a final decision. …" Now that is certainly a very troubling paragraph as far as I am concerned. Deputy Ardagh: Were you surprised when you read it? Mr. Spain: I was surprised when it was drawn to my attention two days ago and I am – I was pleased to hear that there is a simple explanation to it. Deputy Ardagh: Which you don’t know. Hearings 17 September 1999, Morning Session Mr. Spain is a prominent professional accountant. He served for 10 years a member of NIB’s Audit Committee and also as Chairman of the Board of Directors of the Bank. He is a former President of the Institute of Chartered Accountants in Ireland and was Managing Partner of KPMG in Ireland from 1977 to 1984. This is not the only evidence of some static in lines of communications between management and directors and consequent confusion in the minds of directors discovered by the Sub-Committee during the Hearings. Deputy Foley: … was there any mention to you of the problem AIB were facing in ensuring a strict compliance culture with all aspects of the non-resident accounts, in particular with documentation, on the one hand, and being satisfied clients were … bona fide non residents? Mr. Sutherland: No. Deputy Foley: If it was not mentioned to you, do you think it should have been brought to your notice? Mr. Sutherland: I think that the issue first came to my notice, as I described, when the events which have been discussed today resulted in the investigation which took place. The issue of non-resident accounts and DIRT was an issue which was essentially one for management. Management, as I understand it, believed that the issue was under control … Hearings 24 September 1999, Afternoon Session.

Mr. P.Sutherland, former Chairman of the AIB Group, is an eminent lawyer, a former Attorney General, a former Commissioner of the European Communities, former Director General of GATT and a CoChairman of British Petroleum, European Chairman and Managing Director of the international Wall Street bankers, Goldman Sachs. Mr. J. Culliton, also a former Chairman of AIB Group, Director and former Chairman of the Audit Committee explained part of the problem facing directors. "The point I am making Deputy is that non-executive directors would only be present in the bank for 3.5 per cent of the working days in the year. Now I think that highlights the importance of the information we get, the way it's given to us and the trust we have in the competence, particularly of the audit team, to make sure they’re doing their jobs. We then would also have the external auditors at every meeting as, sort of, a further safety net under what the audit committee was doing." Hearings 28 September 1999, Morning Session And again, at Bank of Ireland, there was some confusion in communications. Deputy Rabbitte: But for the period of these documents, you know the problems recur or the problems appear on a different branch or whatever, you know, right down through, whether it’s ’87 or ’89 or ’91 or whatever. I mean, it was your task, wasn’t it, to see whether the stern action being taken by senior management was, in fact, effective? Dr. Downes: Yes, it would have been and we would have been expressing concern and management would have been then taking even further action, and that’s evident throughout this documentation, I think. Deputy Rabbitte: Did you…what was your practice in terms of bringing this to the attention of the board? Dr. Downes: Of the board, well, as the chairman has just said, it would have come through the audit committee minutes which are also in our papers here. I have not any recollection – I was not then the chairman of the audit committee – but I have not any recollection of this specific item being discussed at the board. Hearings 22 September 1999, Afternoon Session. Dr. M. Downes is a Director of the Bank of Ireland and is Chair of the Audit Committee. 3. External Auditors Limited liability and incorporation are constructs of the State established in law to facilitate commerce and economic activity. Accompanying the statutory provisions that enable incorporation and the operation of limited liability there are statutory duties, responsibilities and requirements that are placed upon companies under the Companies Acts. Directors have responsibilities. Management has responsibilities. Creditors have rights and so on. Boards of Directors must be established and must meet, proceedings must be recorded, returns must be made to the Companies Registration Office, mortgages and charges must be registered. As detailed above, the responsibilities of directors extend to requirements placed on them in regard to the financial information and financial statements and accounts. Financial accounts must be drawn up and independent, professional opinions of competent external experts must formally be sought and recorded.

All of this is in place so that society, the State, customers, creditors, employees, shareholders, potential investors – the various stakeholders – can have trust in incorporation and limited liability. It allows for an expectation that they can take such comfort from the financial statements. That is the ultimate point to the formal, legal system of financial reporting and disclosure. The same principles apply to the unpublished annual statements of private companies. The role of Government in Financial Reporting "Government as "manager" of the economy is interested in the quality of published financial statements. In this role the responsible government departments are particularly concerned with the credibility of the statements, the apparent absence of disciplinary action following perceived audit failure, the independence of auditors and the differing interpretations of the "true and fair view’" However, it is not simply as manager of the economy that government has an expectation of financial reporting. It also has a legimate expecation as creditor (in the case for example of grants, the supply of energy, etc.). It furthermore has a sovereign interest in that it imposes taxes and these must be paid across to its agent, the Revenue. The State must also ensure that the framework of company law, the company law code, is appropriate to conditions and to ensuring that standards of corporate governance, reporting and disclosure requirements and rules are to the highest standard. Banks, because of their special importance in the society and the economy are subject to additional checks - the system of supervision and regulation of financial institutions. However banks as much as any other company must comply with the Companies Acts. Duty to appoint external auditors Directors of a company must account to the shareholders for their stewardship. From this point of view the Companies Acts place an obligation on the directors to lay financial statements (the balance sheet and profit and loss account) before the annual general meeting of the company (the shareholders). The financial statements must capture, materially true and fair, the position of the company in respect of expenditures and revenues, cash movements and position and assets and liabilities. For example does the profit and loss account give a materially true picture of the amount of income earned? And does the balance sheet state the materially true position in respect of liabilities? To address such concerns the financial accounts must be accompanied by an external auditor’s Report – the statutory auditor’s Report. Theory of external audit The theory of external audit is that it provides an independent professional opinion. The purpose of this opinion is to express an independent view to the shareholder on the financial statements prepared by the directors. The directors prepare the financial statements in order to present to the shareholders an account of their stewardship of the company during a particular period, usually a year. The shareholders, therefore, gain assurance from the auditor that the financial statements give a true and fair view of the financial results of the company for a year and of its financial position on a given date. In effect, the external audit is a means of providing shareholders, who may or may not have financial expertise, with an independent expert opinion on the veracity of the annual financial summary by the directors of what they have done with the shareholders company during the year. Others also have an expectation of the statutory audit from their own point of view. Auditors are not the authors of the accounts. The preparation of the accounts is the responsibility of the directors of the company, who are appointed by the shareholders. The accounts are approved by the board of directors prior to their presentation to the shareholders. At this point also the external auditor

forms his view and makes his Report on the financial statements as approved by the directors. The auditor is required to provide an opinion - the statutory auditor’s Report - on the accounts. The audit opinion is a matter for the professional judgement of the auditors. The principal responsibility of the external auditors is to form an opinion on whether the company’s annual financial statements give a true and fair view of its financial position at its year end. The statutory auditor’s Report is to the shareholders and the statutory auditor is appointed in law by the shareholders. In law the engagement and reporting relationship is with the shareholders. In practice the engagement of the external auditor is almost always made by the board and approved by shareholders. Auditing standards In reporting to shareholders, auditors must observe auditing standards. These are written regulations, developed and provided by the auditing profession and are mandatory in their application for all registered auditors. In forming their opinion, external auditors are expected to satisfy themselves, among other things, that adequate provision has been made for all potential material liabilities. In the case of large public companies and economically important, the stakeholders – suppliers, creditors, customers and even society – will expect to be able to derive comfort from the published financial statements including the professional opinion of the external auditor. An issue here as far as the auditing and accountancy profession is concerned is what it calls the "expectation gap". The issue was raised by Mr. N. Deasy of PricewaterhouseCoopers and external auditor of Guinness & Mahon and member of the 1991 Ryan Commission. Mr. Deasy: By the expectation gap I refer to the differences in expectations between the work which is carried out by external auditors and the results which arise from their work, the generalised expectation which the public and many others appear to have of the work of external auditors. Hearings, 13 September 1999, Afternoon Session The critical question to be asked of the financial statements in their totality, including the professional opinion of the external auditor is, as put in the Ryan Report, "Are published financial statements providing what users think they are providing or more importantly what they believe they need?" The Work of External Auditors The work of external auditors involves informing themselves of the financial position of a company. This is with a view to preparing their opinion. The formal opinion itself (the true and fair view) is critical to the view formed by the various users (stakeholders, customers, government) and ultimately therefore, to the trust placed by them in the integrity of limited liability and incorporation. One typical statements of the way in which external auditors go about their business is that of Mr. C. Cullen of accountants KPMG and the audit partner responsible for the NIB external audit. Mr. Cullen: ... our responsibility in relation to reporting to the bank is to report that our testing would have a reasonable, what should I say, a reasonable chance of detecting material mis-statements in the financial statements which arise either through irregularities or fraud… …

... our considerations would be as to whether the compliance or non-compliance with regulations could cause material mis-statement in the annual financial statements, to the extent that those financial statements might not give a fair, a true and fair - view of the financial position of the entity ... of its results for the period… … ... where errors are encountered they’re brought to the attention of management ... Hearings 21 September 1999, Afternoon Session In its examination of external auditors, the Sub-Committee sought to understand the work undertaken by the various firms in establishing whether a provision for DIRT liability ought reasonably to have been provided for in the financial statements under audit. With respect to a self-assessment tax such as DIRT, external auditors would need to satisfy themselves that there is a system in place that correctly measures and collects DIRT. Mr. R. George, KPMG and External Auditor Ulster Bank. Deputy Ardagh: And where do you consider DIRT? Is it in the context of the Deposit as a liability or is it in the context of the taxation situation? Mr. George: The key issue in relation to DIRT for us is to make sure that there is a system operating that correctly picks up the liability of the bank to pay DIRT across to the Revenue……. Deputy Ardagh: Right. Mr. George: ….. and that that is operating materially correctly such that there will not be a misstatements within the financial statements as a whole. And in doing that work what we do is we look at the system that is operated, what controls there are in that system, and what checks there are to make sure that everything is operating appropriately through the period to make sure that the DIRT liability is being properly accounted for. Hearings 16 September 1999, Morning Session Internal and external audit Mr. Deasy: The internal auditor in financial institutions is generally concerned with conducting exercises which are aimed at ensuring that the assets of the organisation are properly safeguarded. He is generally concerned with conducting efficiency exercises. He’s also concerned with ensuring that the operating procedures and practices of the organisation as codified and defined are properly applied in practice. Hearings 13 September 1999, Afternoon Session The method of working in internal audit is one essentially based on statistically valid sampling of accounts and associated support documentation in order to determine whether the approach of banking officials conforms with procedural rules and manual which in turn must reflect clearly ethical and statutory duties and obligations. There are two aspects to the relationship between external and internal audit. On the one hand it is appropriate that external audit can have confidence in the working of internal audit. On the other hand this

is achieved in part by external audit acting as a check on internal audit. This check gives management and the board of directors an independent evaluation of the internal audit function. This is necessary from the point of view of the duties of management and the board of directors. Secondly the check also is the means whereby external auditors can have confidence in the internal audit function in drawing on the results of internal audit work. A firm on taking up a role as external auditors might make intensive inquiries and studies of the internal audit. Mr. George: ... We, at the early stages, looked in some detail at how the internal audit department operated their procedures. We went on visits to branches as part of joint teams and we saw how internal audit check the system of DIRT, how it’s actually operating…... We do some tests every year from the internal audit Reports that are produced ... back to the source documentation to check that what is being reported is ... properly represents what they found on the ground in the branches when they did the tests, that it’s properly reported within the internal audit Reports… … …… and forward from the internal audit Reports to the summary Reports that get presented to the audit and compliance committee of the board ... Mr. R. George, Partner, KPMG Hearings 16 September 1999, Morning Session On the basis of the evidence the Sub-Committee would observe that there was as a practical matter a general tendency on the part of the external auditors examined to derive some comfort from the work of internal audit. Mr. George: What we’ve done in more recent years is just check the integrity of their work by going back to the source work papers. We have done direct tests, I might say, ourselves in the two other deposit taking parts of the bank, that’s in Lombard and Ulster Banking and in Ulster Bank Markets because the frequency of visit by internal audit into those deposit taking institutions might not be as high as it is in the retail bank and the DIRT mightn’t have been checked specifically in those institutions in each year. Mr. R. George, Partner, KPMG Hearings 16 September 1999, Morning Session The approach described by Mr. George is not untypical. Mr. Cullen: … in relation in particular to branch audits, we determine what plan the internal audit has, what work they carry out and we, in turn, do a certain amount of testing to establish whether the results of internal audit tests are capable of being relied on. Now, in such a situation in a branch a retail bank with a lot of branches, we would place reliance on the work of internal audit. We would occasionally do certain tests... limited sample tests. We would not repeat the work of internal audit… Mr. C. Cullen, Partner, KPMG Hearings 21 September 1999, Afternoon Session The Sub-Committee was struck by the small level of sampling and field work undertaken by externals as background to forming their professional view. Again Mr. Cullen and this was not untypical.

Mr. Cullen: We roughly visit approximately three branches a year, I think, and we would have one or two people at those branches. It might vary. There is no hard and fast rule about that. There would be a programme for work to be done at that branch … One or two people would be involved. Hearings 21 September 1999, Afternoon Session The Sub-Committee observes that this certainly is not over-auditing. Audit Fees Under law it is envisaged that the shareholders should fix the fee for the audit. By common practice the directors agree this fee. In law they report to and are appointed by shareholders. In practice they are appointed by the directors and their fee is set by the board. Essentially they rely for their appointment and their remuneration on those very directors and managements on whom they report. One of the difficulties for external auditors in demonstrating their independence from the company is this intermingling of the reporting and engagement relationship. An added problem is the setting of the fee level. The issue of who sets the auditors fee and the level of that fee when compared to non-audit assignment fees, also set by the directors, is central to the perceived and actual independence of the auditor. Deputy Rabbitte: This is, presumably, a very lucrative account? Mr. Cunningham: AIB is a very valued client Mr. W. Cunningham, Partner, PricewaterhouseCoopers Hearings 8 October 1999, Afternoon Session The modern day reality is that statutory external audit functions in a complex setting. For the large accountancy firms, in particular, statutory audit is but one type of business. The typical large firm is engaged in much more than this type of business – the compliance business. The large firms (and many of the mid-sized practices) are typically also engaged in client relationships with the companies that they audit on behalf of the shareholders. Modern, large accountancy firms work as tax advisors, as management consultants, as compilers of Long Form Reports, as corporate strategy advisors, as executive recruitment advisors and so on. A key consideration is how the issue of fees can be managed in such a way to clearly protect the interests of the shareholder. There may be no perceived benefit to the directors in resourcing a more rigorous external audit. Directors may not place a significant value on the external audit process and this is reflected in the relatively low level of audit fees in comparison with other assignments, for example taxation advice or consulting assignments. In such a situation there is a risk that fees are not set at a level appropriate to maintaining the confidence required to support limited liability, incorporation and the reliability of financial statements. In short, the shareholder can be the loser in a situation where audit fees are solely at the discretion of the directors. The external auditor is in a setting inside the firm where he interacts with other partners and staff in the firm. For example the audit partner may look to the tax partner for an opinion on the tax provision. As it was put typically by Mr. Cullen of KPMG "We would take a view and the advice of our tax colleagues on the issue as to whether they had any views on it and those were the major considerations we would … the major determinations we would make in considering that particular liability."

Hearings 21 September 1999, Afternoon Session The pattern generally among the external auditors examined was to refer to the tax partner for a check on the computation of the corporation tax charge contained in the accounts. This tended to be the essential input of tax partners. Mr. P. Lacey: As a matter of routine, every year we would consult with our tax colleagues in order to get their input to the elements of the financial statements on which they have got expertise and that typically involved their sign off on the corporation tax principally, but also it would involve seeking their advice from time to time on technical issues that might impact upon the establishment of a liability in respect of other taxes, such as VAT or DIRT for that matter … Mr. P. Lacey, Partner, PricewaterhouseCoopers Hearings 23 September 1999, Morning Session Yet in a number of instances the taxation side of a firm was deeply involved in relation to tax advice with the Bank being audited. As such it could have been a source of additional information to the statutory audit function in arriving at a view and opinion. The complication is that there can be potential for conflict between the statutory audit function and the client business undertaken by other divisions of the firm for the Bank being audited. The client relationship will require confidentiality. The entwining in a firm of statutory and commercial (client) business relations is a fact of modern accountancy. It is also a complication from the point of view of statutory audit. This complication was very much evident at the Hearings. Mr. Kerrane: … I might explain that in relation to compliance with DIRT requirements the bank group filed its own DIRT returns and we as a firm have been involved to a very limited extent only … Deputy Rabbitte: I thought I just heard your colleague saying that you were extensively involved. Mr. Kerrane: Yes, that is in the provision of technical advice on DIRT related issues as and when requested. Deputy Rabbitte: … so you are drawing a distinction between your advice being solicited on technical matters, but that on the various accounts that we traced yesterday you … your advice expressly was not sought. Mr. Kerrane: No, I have never been consulted in any of those matters. Mr. J. Kerrane, Former Joint External Auditor/Sole External Auditor, PricewaterhouseCoopers, Hearings 23 September 1999, Morning Session These "Chinese walls" would appear also to extend into the audit side of the business. In other words audit partners do not talk to each other about the various banks being audited by them. Deputy Durkan: … we had earlier as witnesses a number of people from your firm. We had a Mr. O’Connor. You are familiar with Mr. O’Connor …?

Mr. George: I know Mr. O’Connor, yes. Deputy Durkan: And we had Mr. McGowan Mr. George: Yes Deputy Durkan: And we had a Mr. Cooke. Mr. George: Yes…. Deputy Durkan: …Did you ever discuss the issue of DIRT with Mr. O’Connor or Mr. Cooke? Mr. George: No. Hearings 16 September 1999, Morning Session Mr. George in evidence stated that he was conscious of a DIRT problem Mr. George: … I was always aware that there was an issue in relation to DIRT and DIRT free accounts but I would have to say that I was not aware of the extent of the problem as it’s become apparent in recent months. Deputy Ardagh: Yeah. Mr. George: But because the Revenue – let’s say the regime was lightly policed by the Revenue, there was always, I suppose, a risk that if financial institutions weren’t diligent, that a situation could become unsatisfactory. Hearings 16 September 1999, Morning Session Mr. O’Connor indicated that he was never really aware until the evidence from "the tribunals". Mr. O’Connor: … To the extent that we were prompted to look at this more than we previously would have it flew initially, it came initially from the earlier tribunals …… Our initial assessment was that we weren’t aware and hadn’t previously identified DIRT as being an area of significant exposure in the context of the work we had to do as auditors – in other words that there would be a significant mis-statement on the financial statements or material mis-reporting to shareholders in relation to DIRT. Hearings 13 September 1999, Afternoon Session ACC - the Long Form Report and Statutory Audit (1992) The detailed story of the Long Form Report and interactions of the Long Form Report and the statutory external audit at ACC in 1992/93 are dealt with in detail and at length in Part 4. Accountants Ernst & Young are the long-term external auditors of ACCBank. The firm has also grown and developed client relationships with the Bank. In 1992 the Bank commissioned a Long Form Report and Ernst & Young undertook the compilation of the Report.

The Long Form Report was an exercise conducted in a commercial context. It was not a statutory audit. It was preparatory to the proposed disposal of the bank by the shareholder, the Minister for Finance. It was in the end to feed into a contract of sale in effect. The intended privatisation was to be by a trade sale rather than a flotation. To assist the sale process it was necessary to prepare an assessment of the Bank. The assessment included an assessment of ACCBank in effect as an assemblage or collection of assets and liabilities. Such an assessment had to be rigorous. Any prospective purchaser would look to the Long Form Report for a full and comprehensive picture of the business it was proposing to purchase. A prospective buyer would undertake its own due diligence, however a weight of importance would be attached to the Long Form Report of the external accountants in making a conclusion as to the materially true situation and the price to be offered. This led to an extremely large sampling of the deposit accounts to assess DIRT liability and the examination of PAYE/PRSI liabilities. A first draft of the Long Form suggested a liability for arrears of DIRT of £17.5 million. The Long Form exercise also discovered underpayment of PAYE/PRSI and a voluntary disclosure and settlement was made with Revenue for this latter discovery. At the same time as the LFR exercise was under way the same firm and the same partner were required to undertake their duties as statutory auditors. This they did by making an unqualified Report on the financial statements for 1992 that did not include a provision of any kind for unpaid DIRT. The statutory external audit of the accounts gave a Report that they gave a "true and fair view" without any provision being made in respect of possible DIRT arrears liability. Here it is simply necessary to state that the view of the Sub-Committee is that the firm gave a higher weight and status to the work on the Long Form Report than to the statutory audit. In the end this is a matter for the competent State authorities and the professional bodies – to develop a framework for statutory audit function that is capable of protecting the integrity of audit. 4. The Industry and Representative bodies "……you know, if people are actively competing with each other, they can say all the right things at top level but the branches don’t ever carry it out." Mr. M. Hely Hutchinson, Former Chief Executive Officer, Bank of Ireland. Hearings 21 September 1999 Afternoon Session Chairman: Well then just tell us what did the banks standing committee deal with? Mr. Molloy: I never went there. Mr. P. Molloy, Former Chief Executive Officer, Bank of Ireland. Hearings 21 September 1999 Afternoon Session There are three representative or institutional bodies that might have a role in setting, instilling and operating standards and ethics in deposit taking. These are the Irish Bankers Federation (IBF), the Bankers Institute (mainly an educational body) and the

Irish Mortgage and Savings Association IMSA (formerly the Irish Building Societies Association). At around 1986 there was also another a fourth representative organisation, the Irish Banks Standing Committee (IBSC). The role of the representative or industry bodies was probed with a number of witnesses, senior banking executives active and retired as well as representatives of the organisations themselves. In some of the evidence at the Hearings the precise line between the Irish Bankers Federation and the Irish Banks Standing Committee was somewhat vague. The Standing Committee predates the Federation, which only came into existence in 1973 when Ireland joined the then EEC. The Federation has a much broader base of membership than did the Standing Committee, which was a body representing the interest of the four clearing banks and which had a principal role of operating a cartel on interest rates. This cartel was insisted upon at the time by the Central Bank. The impression generally communicated at the Hearings by witnesses was that the Federation was principally a loose discussion forum and a lobby group directed at influencing public policy. The IBF has no effective role in setting standards or ethics. Chairman: ... we know for instance that the Medical Council ensures certain standards for doctors or the Law Society in respect of solicitors ... Is there any equivalent standards committee in banking or are there any ethical standards laid down? Mr. Kelly: No, Chairman, there isn’t, certainly in the federation, no. Chairman: There are no ethical standards? Mr. Kelly: No. It’s a loose association in a way, you could describe it, of the members and the issues that are raised are tabled by the members at the council meetings. Hearings 1 September 1999, Afternoon Session Mr. Kevin Kelly, Finance Director, Allied Irish Bank, is the present Chairman of the Council of the Federation and has served as a council member for six years. In his opening statements to the Sub-Committee Hearings, Mr. Kelly also remarked that "The IBF has no role in the governance of the banking sector. The Central Bank of Ireland has responsibility for the regulation and supervision of the member banks of the IBF." Hearings 1 September 1999, Afternoon Session In his oral evidence he remarked that: (The Federation) is something close to a trade association and, and issues that it deals with are issues which are raised individually by members. I’m chairman this year and I have been chairman in 1996 and I can tell you it is very hard, because of the competitive nature of the industry, to get a consensus on many, many issues, and it is only around broad issues, say, the Euro or the year 2000, that there is a strong consensus that the industry ... should act together ... Chairman: Are you saying that it comes through even ... It comes through even possibly to the extent of undermining standards?

Mr. Kelly: I’m not saying for a moment that it would come through to the extent of undermining standards but I, I think that ... the view of individual members would be that ethics and standards are the responsibility of the individual institutions and that, as of now, the thinking has been it’s not a matter for the federation. Hearings 1 September 1999, Afternoon Session Mr. Mark Hely-Hutchinson in his evidence saw the industry associations generally in much the same light. This explained why Bank of Ireland put such emphasis on discussing standards with the Revenue. Chairman: Because there was no banking forum that you’d any confidence in? Mr. Hely-Hutchinson: You could put it that way but, I mean, among competitors a forum is a ... you know, if people are actively competing with each other they can say all the right things at top level but the branches don’t ever carry it out. And in this case we’re talking about policing. We’re not really talking about a voluntary thing. Chairman: …Well then just tell us what did the banks standing committee deal with? Mr. Hely-Hutchinson: What did the banks standing committee deal with? (To Mr. Molloy) Mr. Molloy: I never went there. Mr. Hely-Hutchinson: Not much, I think, is the answer, Chairman. Not much of significance. Hearings 21 September 1999, Afternoon Session There is evidence discovered to the Sub-Committee that the Federation did at one stage have discussions with the authorities on a Code of Conduct on DIRT. It is in the minutes of the council meeting 8 February, 1988. "D.I.R.T. - Code of Conduct The Council noted the Report on the meeting of the above mentioned Technical Committee held on 2 February, which had been circulated previously. The Department (of Finance) officials’ attitude to the proposed Code of Conduct had been rather negative. On subsequent reflection, these requirements were found by some banks, at least, to be unduly onerous and and they were disinclined to pursue the matter further. Council discussed the question at some length. It was suggested that the Revenue had the choice of either accepting the proposed Federation code or, alternatively, enforcing inspectability. Finally, Council decided that efforts should be renewed to agree an appropriate code of conduct with the Authorities." An agreed Code never emerged. On the other hand the Irish Mortgage and Savings Association (IMSA) has issued a number of Codes of Practice and has agreed terms with the Authorities. The IMSA represents the building societies. However IMSA codes tend to govern particular areas of relationship between building societies and their customers - such as the handling of arrears (a code in place) and charges (a draft currently being discussed with the

Director of Consumer Affairs). There would appear to be no codes dealing with governance as such or ethics. The Sub-Committee was struck by the fact that there is no profession of banking as such in Ireland. There is no profession in the sense that exists in for example the associated fields of accountancy or the law. The Institute of Bankers is a professional training body. It is a voluntary organisation with some 16,000 individual members and a system of examination and certification. Courses tend to be taken, according to Mr. B.J. Goggin, President, Institute of Bankers in Ireland (IBI), in evidence, "more by junior bank officials than people advanced in their careers. ... It is a voluntary programme ... But in reality it would not extend to the more senior levels in banking." Mr. Goggin: ... We teach those standards. We encourage our students to apply those standards. We have no authority, we have no responsibility to monitor their subsequent application. Hearings 1 September 1999, Afternoon Session Mr. Kelly: I’d feel that the council of the federation, Chairman, in regard to this issue would probably wait until your deliberations are complete to see how it might react. Hearings 1 September 1999, Afternoon Session

GENERAL FINDINGS The Sub-Committee finds: 1. That the problem of DIRT evasion was an industry-wide phenomenon. 2. Boards of Directors of Financial Institutions generally betrayed an overly relaxed attitude towards discharging their statutory and fiduciary duties in respect of the operation of DIRT. 3. No evidence emerged in an examination of the behaviour of the Boards of Financial Institutions generally to suggest the operation of a planned and pragmatic work out of the problem of bogus nonresident accounts. 4. Given the eminence of many of the members of the Boards of Directors of Financial Institutions, it is surprising that they did not bring a greater weight to bear on the enforcing of ethical standards either within their organisations or the banking sector generally. 5. The industry representative bodies exercised no role in developing a code of practice that would have addressed ethics in banking. 6. Individual Financial Institutions generally regarded corporate governance and banking ethics as being outside the remit of industry-representative organisations. 7. It is surprising that Board members of different Financial Institutions have not recognised the need for an effective industry-wide forum to set and enforce standards. 8. The deliberate exclusion of industry representative bodies from any role in regulation of banking has negative repercussions for industry standards.

9. That the Boards of Directors must accept full responsibility for the companies over which they presided and clearly the role of the Board and individual directors in Financial Institutions requires new guidance, vetting and checking by the Central Bank.

EXTERNAL AUDITORS - FINDINGS The Sub-Committee finds: 1. There were a number of serious defects and weaknesses in relation to the statutory external audit function, which contributed to the continuance of the bogus non-resident problem, and these require to be addressed urgently.


The Sub-Committee now turns to consider individual deposit-takers. Six deposit-takers were directed by the Sub-Committee to make discoveries of documentation and to give oral evidence. Those banks that were directed were ACCBank plc, AIB Group, Bank of Ireland Group, Irish Life and Permanent, National Irish Bank Group and Ulster Bank Group. These six deposit-takers account for the vast bulk of the deposit market in Ireland. Including the six banks directed by the Committee a total of 37 deposit-takers were examined by the Comptroller and Auditor General in the course of his investigation. All of the other deposit-takers examined by the Comptroller and Auditor General in his Inquiry were invited to give evidence and declined the invitation. However the Sub-Committee will take account of the C&AG’s Report these deposit-takers and the documents disclosed. Before turning to the consideration of the individual deposit-takers it is appropriate to recall two aspects of what this Parliamentary Inquiry involved. Form-filling Deputy Rabbitte: …did you ever see an application form for headage payments, Mr. Hely-Hutchinson? Mr. Hely-Hutchinson: No, I can’t say I have, Deputy. Deputy Rabbitte: Well you can take it from me that they are immensely complex and what I’d like you to tell the committee is, how is it that the same farmer, who manages to fill in an application form for a headage payment, has difficulty with a non-resident form? Mr. Hely-Hutchinson: Well, if he is a farmer, which means, by definition, he is a resident, part of his difficulty might be that he doesn’t know quite which answers he ought to give to make sure that he evades the tax. Hearings 22 September 1999, Morning Session. All of the deposit-takers that gave evidence at the Hearings reported deficiencies in the paperwork supporting non-resident deposit accounts. This is the principal problem reported by the bankers. In the light of this it is appropriate to consider the "paperwork problem". There is but one piece of essential paperwork to be completed to support a non-resident account. This is Form 37. Form 37 is a one-page document. It comprises three panels – panel A into which must be entered the name and address of the deposit-taker, the bank in other words; panel B, into which must be entered the name and address of the depositor, the beneficial owner of the proposed account; and panel C, a declaration by the applicant that he or she is the beneficial owner of the account, is a non-resident and will undertake to notify the Bank if they become resident. Panel A must also hold the account number in the box provided for this record.

In processing the application, officials may ask for an affidavit if they have a doubt about authenticity of the declaration made in panel C. Beyond this the form must be kept on the file opened to support the deposit. After that there is a duty on the deposit-taker to monitor the account for risk indicators. Form F was even simpler than Form 37. It was a prepared declaration and required only a description of the account and the signature and date of signature of the person (the depositor) serving the notice. 2. The Reports of the C&AG and the Appointed Auditor In preparing his Report the C&AG appointed an auditor (the Appointed Auditor) to carry out, on his behalf, on-site investigations of the individual financial institutions. The Appointed Auditor carried out investigations in the branches of individual institutions during 1999. Her work provides evidence of the level of compliance in selected branches across the sector at 1999. The Appointed Auditor made a number of comments on compliance culture in Chapter 8 of the Report of the Comptroller and Auditor General. Significantly, the following comments were made in relation to the culture of compliance that appears to have existed: "There appears to be a widespread lack of understanding of the full requirements for DIRT exemption. In particular a belief that eligibility as advised by the customer matters more than the holding of a written declaration evidencing that eligibility appears to exist throughout the sector." Hearings 9 September 1999, Afternoon Session and; "Institutions did not appear to make use of the affidavit, even in cases where a particular deposit showed identifiable risk indicators." Hearings 9 September 1999, Afternoon Session The C&AG in his Report found that as late as 1999, 27 per cent of non-resident forms exhibited compliance deficiencies at the date of his work. Almost 18 per cent of accounts examined for authenticity purposes were found to exhibit risk indicators and most pointedly the unavailability of evidence to verify the address disclosed in 27 per cent of forms tested in respect of principal place of residence. UK Compliance Scheme In her evidence to the Sub-Committee the Appointed Auditor described the operation of a compliance model currently operated in the United Kingdom. The system operates broadly as follows: The Inland Revenue produce Guidance Notes to clarify their expectations of compliance; Where risk factors appear, or are known at the time that the deposit is taken, the bank official prepares a deposit-takers certificate noting evidence supporting the assertion that the deposit-maker is genuinely non-resident; If the percentage of missing, late or invalidly completed declarations exceeds 5 per cent of the sample tested the Inland Revenue seek to extrapolate their findings across the entire deposit population, unless the deposit-taker undertakes a complete review and makes a settlement based on actual liability; The Inland Revenue seeks tax on any interest paid on a deposit, if at the time of paying the interest, the deposit-taker was not in possession of a validly completed declaration;

In recognition of the importance to the financial community of customer confidentiality institutions can, at their own cost, appoint an independent auditor, approved by the Revenue, to audit their compliance. The Appointed Auditor also commented that financial institutions might be encouraged to appoint an officer responsible for compliance in this area and to put in place training schemes for relevant staff. 3. Purpose and Approach of the Sub-Committee The ultimate purpose of the Sub-Committee is to make findings, draw conclusions and produce recommendations. The approach of the Sub-Committee was to determine to its satisfaction which of two competing theories is the more plausible theory for the presence in the banking system of bogus nonresident accounts in the period 1986 to 1998. According to the first theory what the Sub-Committee is inquiring into is history – the history of a planned and pragmatic, phased work out of an inherited problem. Alternatively we are examining an incoherent, spasmodic and ad hoc engagement with the issue of bogus non-resident accounts. What is the evidence in support of one or other of these theories in the behaviour of the six deposit-takers examined at the Hearings?


"I feel decidedly uncomfortable about the position in the Rep. of Ireland. When DIRT was first introduced there was a move to clean up the position but then word went round the Branch system that Revenue would not exercise their rights to review the position at Branches and progress more or less ceased… In general there is not a major problem in Dublin or the East Coast Area, but from West Cork to Donegal the position is bad in a large number of Branches." Mr. H. O’Brien, Head of Inspection Unit - Ireland, AIB Letter to Tony Spollen, Group Internal Auditor 9 October 1989 1. Mr. MacCarthaigh’s Initiative By early 1991 Mr. D.A. McCarthaigh, a Senior Inspector at Revenue’s Investigation Branch (IB) had a growing awareness of the existence of a major problem in the banks in regard to the proper administration of DIRT. He had also concluded that it was time to take some action. Mr. McCarthaigh was one of the Senior Inspectors in Investigation Branch. He was in effect a member of the management team at the Branch. Mr. MacCarthaigh had little objective evidence for his belief. He was proposing to act on little more than a hunch and lore. There had existed for a considerable length of time, a widespread belief in official circles – notably in the Revenue, the Department of Finance and the Central Bank - that there was a problem with bogus non-resident accounts dating from the 1960s. However, there was an absence of a significant volume of cases helpful in substantiating further relevant details of the practices in operation. Part of the difficulty in establishing cases or securing an accurate picture was the special position in law of the banks vis-B-vis the Revenue and the existence of SIM 263. Nonetheless Mr. MacCarthaigh decided to take some action. He started with AIB Group as his first candidate for investigation. Some of the few cases of DIRT evasion that he had come across had occurred in AIB branches. During November 1990 he was in correspondence with Group Taxation in AIB about two such cases. In early 1991, he was still dealing with these two cases. He invited AIB to attend a meeting to discuss the ongoing situation. This meeting was scheduled for 5 February. However that day AIB sought and received a postponement. The interview was then re-scheduled for 13 February, 1991. 2. Inside AIB At this time, and unknown to the Revenue Commissioners, there was what would become a raging internal controversy developing inside AIB. This was provoked by the Group Internal Auditor, Mr. Tony Spollen’s decision to focus on the DIRT issue (arising from figures brought to his attention within AIB). Mr. Spollen's engagement with the issue of DIRT was sudden but also carried a certain significance. The internal audit function is one of the key control mechanisms employed by the board of directors in exercising their stewardship role.

"The board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets." The role of the internal audit function in the internal control framework is to provide the board of directors with assurance that procedures and controls instituted by them to manage the day to day running of the business are operating effectively. Internal controls would normally include mechanisms to ensure compliance with regulations such as the DIRT legislation. Independence is, naturally, a key component of the effective internal audit function. Without independence – from executive management and staff, who operate the business internal controls on a day to day basis – the internal audit function cannot genuinely provide the directors with assurance that internal controls function properly. Usually this independence requirement is supported by making the internal audit function accountable only to a Sub-Committee of the board, comprised of non-executive directors – the Audit Committee. Internal audit at AIB is organised to reflect the AIB Group’s divisional structure. Consequently, the Irish branch network has its own internal audit team, capital markets is audited separately and so on. The Group Internal Auditor retains overall charge of the Group Internal Audit (GIA) function. Mr. Spollen was the Group Internal Auditor of AIB Group for the period that we are considering. 3. Moving Mr. Spollen The story is also somewhat complicated by the fact that on 18 January 1991 Mr. John Keogh, Group Financial Director informed Mr. Spollen of the decision by the Chief Executive Officer to transfer him from his position as Group Internal Auditor. Mr. Spollen did not accept the transfer. This created its own mini inferno in the higher echelons of the Bank and led to its becoming enmeshed in the DIRT issue. There was significant upset and argument and conciliation and peace overtures were called for. The matter of Mr. Spollen's position remained unresolved until early February, when the proposed transfer was dropped. By the end of January Mr. Spollen had come to understand that the "Form F problem", the problem of bogus non-resident accounts, "could run into hundreds of millions of pounds." In other words, the total amount of money on deposit in the Bank in bogus non-resident accounts ran to hundreds of millions of pounds. This was in the context of a total non-resident deposit base at the Bank at that point of around £1 billion. On 30 January 1991, he wrote to Mr. Don Walsh, Head of Internal Audit Ireland, effectively asking him for a figure for AIB Ireland. He wrote, inter alia, "Please quantify immediately the amount of False Form F money on the books of the Group. The estimate (£350m - £400m) which you have given me is frightening." In March Mr. Spollen would finally calculate an estimate of the liability of the Bank for DIRT including arrears. His DIRT arrears estimate would be £100 million, excluding any interest and penalties. At the time that Mr. Spollen produced his figure the profits of AIB were of the order of no more than £100 million. On Mr. Spollen's calculations there was a very serious problem indeed at AIB. In particular there was, if Mr. Spollen's calculations were of a reasonable order of magnitude, a very serious problem for AIB Group Taxation, the section responsible for ensuring that AIB correctly paid all taxes due. Moreover, the reputation of the bank would be very seriously put at risk. The matter would hardly have been possible to keep secret. AIB was a public company with its share price quoted on the stock exchange. Its accounts were published and they would, if Mr. Spollen's contentions proved valid, have to reflect the true situation. In terms of our narrative this, however, was in the future. 4. The issue at hand Mr. G. Scanlan, Former Chief Executive Officer, AIB Group.

"…It was in a sense, Deputy, his job or my job." Hearings 27 September 1999, Afternoon Session In early 1991 the Chief Executive of AIB Group was not appraised of the DIRT issue which was then exercising the minds of some of the most senior executives in the bank. In fact, he explained in his evidence to the Sub-Committee that he was not aware of the scale of the issue, although he was aware that negotiations were ongoing with the Revenue in relation to DIRT. His approach was one of delegation. He was also satisfied that these negotiations were effectively dealing with the issue. His evidence regarding his state of knowledge in relation to the issue is encapsulated in the following exchange; Deputy Doherty: I just can’t understand why the Chief Executive in the period that is central to the bank’s interests – I have no view on either side of the case of this argument, but I just simply want to know how you didn’t know. Mr. Scanlan: I have already told that I knew negotiations had been going on between the tax department and the Revenue people and that the outcome of that was satisfactory from the bank’s point of view. People were feeling good about it in simple terms. Hearings 27 September 1999, Morning Session The issue which appears to be most on the mind of Mr.Scanlan at this point was the very serious allegations made by the Group Internal Auditor, regarding claimed interference in the Internal Audit. These allegations stemmed from discussions in 1990 regarding the restructuring of the Group Internal Audit function and a disagreement as to whether these were beneficial to the function. Ultimately the matter was decided by the Board of Directors resolving to set up a Sub-Committee of the Audit Committee to investigate Mr.Spollen’s allegations. Mr. Scanlan was very eager to make it clear to the Sub-Committee that there was no connection between the DIRT issue and the transfer of Mr. Spollen. Mr. Scanlan: …if they want to understand the background of the effort to associate the DIRT issue with Mr. Spollen’s transfer or intended transfer. And I will hope to be able to satisfy you Deputy and the other Deputies and the Chairman that you shouldn’t be trying to put them together. Hearings 27 September 1999, Morning Session Nonetheless, Mr.Scanlan assured the Sub-Committee that the calculation of the Group Internal Auditor in relation to DIRT was effectively groundless. In describing the calculation made by Mr.Spollen, he stated: Deputy Doherty: …Is it correct for me to interpret the basis on which that estimate or calculation was done as very infantile or very childish, really? Mr. Scanlan: I agree with you. It is infantile. Deputy Doherty: I put you the question in case it’d be inferred that I’ve had any conclusion drawn about it. You would agree that it’s an extraordinary basis for calculation. Mr. Scanlan: Yes. It’s a back of beyonds calculation---

Deputy Doherty: Unscientific in its – in the absolute. Mr. Scanlan: ---the only way to describe it. Deputy Doherty: No grounds for sustaining such a calculation as reflecting a £100 million liability. Mr. Scanlan: Well now, Deputy, I’m conscious of how we will be recorded in the minutes. Deputy Doherty : Oh, I don’t want you to say anything that’s not within your capacity to… Mr. Scanlan: I’ll just say to you that it is not a basis of calculation on which I as Chief Executive would form a value judgment. Deputy Doherty: And at that time you didn’t, as we have established, have any real contact about this matter. Mr. Scanlan: That’s right. Hearings 27 September 1999, Morning Session It is unusual that such a contrasting approach to the two problems was adopted by those senior executives reporting to Mr. Scanlan. He was fully informed of the "Transfer" issue. He was not informed of the scale of the DIRT problem. In his evidence Mr. Scanlan told the Sub-Committee how important he considered the DIRT arrears. Mr. Scanlan: Is £100 million material? Deputy Doherty: Yes. Mr. Scanlan: It’s a lot of money. Deputy Doherty: Well I’m delighted to know that and you have helped me in so far as you did express what "material" means. Do I take it then that the £100 million was sufficiently material to be brought to your notice? Mr. Scanlan: For sure. Deputy Doherty: But you have no recollection of it being so brought. Mr. Scanlan: In any formal sense, no. Hearings 27 September 1999, Morning Session In the event Mr. Scanlan distanced himself from both of these important issues, as soon as the board decided to appoint a Sub-Committee of the Audit Committee to consider the issues then gripping the bank in relation to Mr. Spollen. 5. Background AIB The Sub-Committee has traced concern in AIB Group about DIRT back to 1989. This was the year that threw up the first documented concerns within the Bank in relation to DIRT. A number of senior figures in

AIB either became aware or ought to have been made aware of the problems that were building up in the Irish deposit base. Mr. Jim Culliton was also appointed Chairman of the Audit Committee of the board of directors in November 1989, a position he retained throughout this critical period until July 1991 It was also in 1989 that a problem with Composite Rate Tax (CRT), the UK equivalent of DIRT, in the United Kingdom crystallised. 6. CRT Problem in the UK AIB managed an active deposit base in the United Kingdom. Depositors in Britain were also subject to a withholding tax CRT. British banks similarly offered CRT free accounts to non-residents. During 1989, the UK Inland Revenue carried out audits in a number of AIB's UK branches which resulted in the ultimate payment by AIB of Stg £3.7m in taxes, comprising arrears due on bogus non-resident accounts. This experience may be considered as having flagged a warning to the Bank in respect of its much larger Irish deposit base, given the close similarity between the UK CRT and its Irish equivalent, DIRT. This connection was clearly made in 1989 by a senior AIB executive, Mr. Henry O’Brien. 7. "From West Cork to Donegal" In 1989 Mr. O'Brien was Head of Inspection Unit Ireland, and on 9 October he wrote a letter to Mr. Spollen. What happened to this letter gives significant insight into the state of knowledge that existed within AIB group by February 1991. In the letter Mr. O'Brien wrote inter alia: "I feel decidedly uncomfortable about the position in the Rep. of Ireland. When DIRT was first introduced there was a move to clean up the position but then word went round the Branch system that Revenue would not exercise their rights to review the position at Branches and progress more or less ceased. Following a discussion with Jimmy O’Mahony we carried out a 100 per cent sample at a number of Branches and the outcome was disconcerting. In general there is not a major problem in Dublin or the East Coast Area, but from West Cork to Donegal the position is bad in a large number of Branches. If a decision was taken to put our house in order forthwith there would be implications for the Bank by virtue of (a) higher interest rates payable on Resident Deposits and (b) a probable loss of Deposits. On the other hand the Bank is acting improperly at best in paying interest gross when the required forms are not held and it could be contended that we are not exercising due diligence in this area. There is a school of thought that 1992 will fix everything but I don't believe this. I would like to see a gradual move towards putting our house in order and I propose to discuss this with Pat O’Mahony … also with Jimmy O’Mahony." Mr. Spollen confirmed in evidence his having received this letter and having copied it to Mr. John Keogh, then Group Finance Director. Mr. Keogh subsequently copied it to Dr. Donal de Buitléir, then recently appointed Head of Group Taxation, having previously served as an Assistant Secretary in the Revenue Commissioners. Prior to reaching this rank in Revenue, Dr. de Buitléir had also served as Secretary to the Commission on Taxation 1980 - 1985. Collectively, it can therefore be seen that in 1989 an important group of very senior executives within the Bank were aware of the concerns expressed by Mr. O'Brien. However, there is no evidence to indicate that anyone in this group brought Mr. O'Brien's letter to the attention of the Group Chief Executive Mr. Scanlon, the chairman of the Audit Committee Mr. Culliton, or ultimately to the Board of the Bank itself.

On 8 November 1989 Mr. J. O’Mahony, Group Taxation Manager, wrote a memorandum that stated inter alia: "In Britain Allied Irish Banks plc. is being audited by the Inland Revenue… So far this audit has revealed that out of 300 accounts ... 123 have defects in our documentation ... as an interim step in the Republic ... I am recommending that we identify the extent of the problem." So, in the course of 1990, elements of senior management at the Retail Division Ireland, the division responsible for the Irish branch network, contemplated the necessity of a detailed examination into the incidence of bogus non-resident accounts in the network. Mr. Brian Wilson, who was in overall charge of the Division and had previously worked in the UK network, was in discussion with Mr. Don Walsh who was responsible for internal auditing of AIB's branch network in Ireland. Between them, they agreed a work programme to be instituted by the Irish Internal Audit Section in 1991 to address the problem. Mr. Spollen might have been expected to initiate some action to determine the extent of the bogus nonresident account problem at that time. However, he took no immediate action. He did not raise the issue again until 28 January 1991, some 15-16 months later, when he wrote to Mr. Wilson quoting "hundreds of millions of pounds" as a result of further information received from Mr. Walsh. Throughout the period 1986 to 1991, the internal audit function, headed by Mr. Spollen, noted only documentary deficiencies relating to DIRT. In particular, it did not test or check for authenticity. Every bank account must be supported by appropriate paper work, documents, forms, declarations and so on. Any deposit account that had interest paid gross (that is, without the deduction of DIRT) must be supported by either a Form F or later Form 37. These are necessary and it is required that they are fully and correctly filled in and that they contain no false statements or declarations. If a form contains a false declaration, or is improperly or not fully completed then the interest cannot be paid gross, and DIRT must be deducted. These forms are therefore, a risk factor for potential mispayment of DIRT. If a mistake, an incompleteness, a false declaration is not detected then DIRT is underassessed and underpaid by the bank. An offence is committed and arrears are due. Auditors would therefore be expected to test the declarations for completeness and for authenticity - that the beneficial account owners were genuine non-resident. Group Internal Audit (GIA) did not test for authenticity of declarations. Nor did GIA address the potential liability to which documentary deficiencies or undetected false declarations gave rise. Asked by Deputy Seán Ardagh if there was inspection of declarations by internal audit programmes between 1986 and 1990 Mr. Spollen answered "Yes". Deputy Ardagh: And were the results of these inspections brought out and shown to you? Mr. Spollen: Yes they were. Deputy Ardagh: And in those, did you not perceive a problem? Mr. Spollen: I didn't, I'll tell excuse me Chairman or Deputy - I think, as I understood it, and this is to the best of my recollection, I think the feeling was that once the declarations were complete or once the declarations were there, and in some instances even if they weren't, that once the depositor said: "I am a non-resident", then I think that was almost taken as good enough. Now, in the audit side we had to make sure, because obviously under the law if you didn't have a declaration or an incomplete declaration then you should have deducted DIRT tax.

So I would honestly say, Deputy, if you were to look at every audit report, and obviously I’m subject to correction, I don't think you’d see the word "bogus" mentioned anywhere and secondly, I don't think you'll ever see a money quantification as to the amount of the Form Fs which were incomplete or missing. Hearings 24 September 1999, Morning Session Earlier, in his opening statement Mr. Spollen commented that: "… many audit reports showed that declarations were inadequate or, in fact, just didn't exist. This was reported always to the audit committee, but in the context of administration because the focus was not on checking on authenticity. So the audit committee were told in relation to it it was more poor administration than anything… "The fact is I never undertook a critical appraisal of the authenticity of non-resident deposit accounts in the Republic of Ireland or the extent to which those accounts may not have been genuine." Hearings 24 September 1999, Morning Session At best this was an extraordinary oversight that went unchecked for 5 years. In evidence to the SubCommittee, Mr. Spollen also admitted a lack of knowledge on the laws relating to DIRT. He expressed the view that he would necessarily have relied on Branch and Regional Managers to ensure legal compliance. The importance placed on Mr. O'Brien's 1989 memorandum by Mr. Keogh, the Group Finance Director and Dr. de Buitléir the Group Taxation Manager is not clear. It can be assumed both gentlemen and certainly Dr. de Buitléir, given his own acknowledged expertise in and knowledge of the taxation field, would have understood the implications of the concerns expressed by Mr. O'Brien. In any event between the end of 1989 and the controversy triggered by Mr. Spollen in 1991 it is difficult to see what action, if any, was taken. It is not surprising that when in early 1991 Mr. Spollen first drew attention to his concerns on this matter, there were expressions of surprise within the Audit Committee. Mr. Culliton, Chairman of the Audit Committee of the board of directors expressed his personal reaction in the following manner: Deputy Rabbitte: And what did you think when you got Mr. Spollen's memorandum? Mr. Culliton: I was absolutely flabbergasted, the figure of £100 million for DIRT. So were my members because I think, Deputy, you said a few days ago, how did the liability to DIRT rocket from nil to £100 million in about eight weeks, and that was our reaction too, how did it rocket, and that made us sceptical about the £100 million, not about Mr. Spollen or not about his judgement in terms of the way he perceived it but like, how could it become £100 million from nothing eight weeks earlier? Hearings 28 September 1999, Morning Session 8. The Meeting For AIB therefore, the February 1991 meeting with Revenue occurred at an acutely sensitive time. Prior to the meeting Mr. MacCarthaigh approached three of his colleagues (Mr. D Roddy, Mr. P.S. O Donghaile and Mr. L Liston) with a request to attend the meeting. They agreed. These four officials

constituted in effect the management of Investigation Branch. AIB would be faced by a phalanx of Senior Inspectors from Investigation Branch. On the AIB side there were only two persons in attendance, J. O’Mahony, Group Taxation Manager and Ms. Deirdre Fullen, Tax Compliance Manager and responsible for DIRT compliance at the Bank. These two persons reported directly to Dr. de Buitléir, Head of Group Taxation. When on 5 February Ms. Fullen had requested a postponement Mr. MacCarthaigh agreed but also indicated that he wished to broaden the agenda, from the few specific cases he and AIB Group Taxation were dealing with, to a more general discussion of DIRT within the Irish branch network of AIB. He also indicated that he would wish Mr. Pat O’Mahony, General Manager, Branches and Information Technology, to also attend. In the event, Mr. Pat O’Mahony did not attend. The meeting lasted some two hours. Both parties at the meeting knew from their own points of view that this was no ordinary occasion. In Mr. MacCarthaigh's letter of 15 February the meeting is referred to as an interview. The interviewee was one of the biggest businesses in Ireland. 9. Psychological Warfare Mr. MacCarthaigh's approach to the meeting was framed on psychological grounds. This approach was to create an air of gravity of occasion to put pressure on the bank. This was why he asked three of his associates to attend with him at the meeting. He saw himself engaged in psychological warfare and having to so act given the weakness of his hand. He himself recognised that he knew virtually nothing of the scale of the phenomenon within the AIB branch network and furthermore, he was not in a position to secure sufficient hard information. The banks occupied a special position vis-B-vis Revenue as taxpayers and SIM 263 was still in force. Deputy Rabbitte: ... weren't AIB playing their cards very close to their chest. Here they had this meeting. They presumably thought that when you weighed in with four senior inspectors that you really had cottoned on to something and you were going after them and you were going after the whole lot when in fact all you did was met Mr. Roddy down the corridor and said, ‘Jaysus, will you give us a hand out here, I have a meeting on this morning and I need a bit of help’ and you rounded up the lads and you were trying it on. You really didnt know a great deal about the scale of it. Mr. McCarthaigh: That's right…… Deputy Rabbitte: Isn't that fair, that it was a psychological confrontation? Mr. McCarthaigh: Oh, it was absolutely a psychological confrontation, yes. Hearings 8 September 1999, Morning Session Mr. J. O’Mahony on the other hand was acutely aware of what was happening in AIB Bankcentre, that there was a problem of bogus non-resident accounts, that Internal Audit had initiated a work programme, that the Group Internal Auditor was making his own inquiries and that there were guesstimates of the scale of the problem beginning to be made. He would give none of this away at the meeting. In the course of the meeting AIB did not make full disclosure. Ms. Fullen in evidence said that the matter of full disclosure would not have arisen given the nature of the meeting. In particular there was no agenda, only the expressed desire of Mr. MacCarthaigh and his associates to broaden the agenda into a general discussion of DIRT including reference to other cases. In the course of the cross examination by Mr. Eoghan Fizsimons SC for the Revenue Commissioners, Ms. Fullen said:

"Our understanding of when we went into the meeting in February ... our understanding was that the Revenue knew about the problem in the industry, were anxious to do something about it and wanted us to, if you like, join with them in working towards getting the matter sorted out going forward. ... no preparation was done by ourselves because we weren't too sure what was involved exactly. Initially it was set up to deal with two specific cases ... When I rang him (Mr. MacCarthaigh) on 5 February he mentioned at that point in time that he wanted to widen the agenda ... We had the meeting, or understanding as I say, that they wanted us to sort the matter out. We went back to the office, we discussed the matter with relevant people and we set the, set the ball rolling, if you like." Hearings 11 October 1999, Afternoon Session There are a number of different accounts of the meeting. These different accounts are at variance with each other in some respects. This is so even though one person, Ms. Fullen of AIB, wrote three of the accounts. One of Ms. Fullen's accounts is a minute of the meeting. It was written on the same day, from detailed shorthand notes that she herself took during the meeting. These shorthand notes provided the basis for her minute. Ms. Fullen's minute is the most comprehensive and detailed note of the meeting that exists. Mr. MacCarthaigh also wrote an account of the meeting, a minute, and his three associates also took notes. However Mr. MacCarthaigh's account is not at all as comprehensive as Ms. Fullen's and the notes of the other Senior Inspectors in attendance are at best fragmentary. In addition to different accounts of the meeting, two very different and conflicting views have emerged as to what transpired at it. The view of the AIB Group Taxation is that it achieved at the meeting a particular deal, an amnesty in effect. One part of the alleged deal was that Revenue would write off any DIRT not paid prior to April 1990. There would be no retrospection. Mr. J. O’Mahony: "…In February 1991 we believed that we had secured the agreement of the Revenue Commissioners to a process that would enable even more stringent controls on our part to be combined with an industry-wide approach on the part of Revenue… That arrangement was to be a prospective one with Revenue indicating that DIRT would not be collected in respect of interest paid prior to April 1990. Specifically, AIB was invited to examine all non-resident accounts up to a specified cut off date, initially agreed as 30 June ‘91 and get its affairs in order …" Hearings 28 September 1999, Morning Session Revenue strongly and vehemently opposes this account of what transpired at the meeting. Revenue contends that no such deal was offered, no such deal was done and that it would have been impossible for the officials concerned to suggest or make such a deal. AIB Group Taxation received a letter dated 15 February 1991 from Mr. MacCarthaigh setting out his understanding of the meeting of 13 February. 10. The Letter The letter would give rise to internal problems at AIB. The AIB Group Taxation understood immediately that it could not be construed as granting the write off of tax that they claimed they were offered at the meeting. Critically the letter stated that "Any cases discovered prior to the 30 of June, 1991, will be the subject of a DIRT payment to be negotiated at this Branch without penalty and without publication."

Stated in this way it was simply impossible to assert that there was any amnesty or arrangement or a deal that foregave arrears of DIRT arising from reclassification. Group Taxation knew that it would have to seek clarification from Revenue. 11. The Phone Call AIB Group Taxation claims to have received the necessary assurances that there was an effective tax write off in a telephone conversation with Mr. MacCarthaigh on 26 February 1991. The AIB files contain a short note of this alleged telephone call: "J O’Mahony telephoned D.A. McCarthy for clarification re the penultimate paragraph of his letter dated 15 February, 1991. ‘D.A. McCarthy confirmed that, if relevant, any D.I.R.T. payment to be negotiated would relate only to that on interest paid subsequent to 5th April, 1990.’" There is no record of such an alleged call in the Revenue papers. Mr. MacCarthaigh claims no memory of the call, and, if it did take place, he denies absolutely that he would have granted the write off alleged. Apart from any other consideration, the Revenue contend he would not have been empowered to grant such a write off without reference to the Board of the Revenue Commissioners and, the Board were never informed of any such request. However, the AIB Group Taxation representatives claim that Mr. MacCarthaigh did indicate at the meeting that he was acting on the authority of the Board of the Revenue Commissioners. 12. Dr. de Buitléir's Memorandum Time was now pressing. The end of the Bank's financial year (31 March) was approaching as was the end of the tax year (5 April) Mr. Keogh, whose responsibilities included advising the Audit Committee of the board of directors on the question of the financial accounts, needed advice on the question of provision for taxation in the accounts. He turned to Dr. de Buitléir, head of AIB Group Taxation. It was his responsibility to make sure that the correct amount of tax was paid. Dr. de Buitléir supplied Mr. Keogh with a short memorandum setting out the view of AIB Group Taxation on 12 March 1991. "They (Revenue) now wish to provide AIB together with all other financial institutions an opportunity to put their house in order with no retrospection prior to 5th April, 1990… …There can be no certainty about the final outcome, since we are relying on understandings with the Revenue Commissioners and their good faith… …my best judgement is that any supplementary payment, should it arise, will not be material." This was an absolutely critical note. Mr. Keogh took from it comfort on the question of the provision or otherwise in the accounts for a liability to DIRT arrears. Mr. Spollen also was pressing AIB Group Taxation. In particular he was raising questions about the veracity of the claim by AIB Group Taxation that it had an arrangement that contained the alleged write off. He was therefore, pressing for a letter from Revenue confirming the claimed arrangement. On this he th was informed by Mr. J. O’Mahony on the 28 February 1991, that "Your request for a further letter from the Revenue authorities… …cannot be complied with… …To seek what you require would mean legislation and this is not desirable for this type of issue." However on March 10, two days before Dr. de Buitléir wrote to Mr. Keogh, Mr. Spollen had yet again put pen to paper.

He was now confirmed in his position as Group Internal Auditor. He had his responsibilities to the board of directors in respect of advising the directors on the annual financial accounts. He was unhappy with the absence of a written confirmation of the alleged deal by Revenue. He had also already done his own calculations. He had asked the IT Department to write a computer programme that would yield information on the number and value of deposit accounts in AIB Group's Irish operations and the split between resident and non-resident deposits. He had been given a rule of thumb, a guestimate, as to the percentage incidence of bogus non-resident accounts. The Sub-Committee failed to identify who precisely gave the figure. However, it emerged from Bankcentre and appears to have emerged from a meeting of Regional Managers, the Head of the RDC and Mr. J. O’Mahony held on 4 March 1991. He did a straight calculation and concluded that the liability of the bank to arrears of DIRT could be £100 millions. 13. Mr. Spollen's Memorandum On 10 March Mr. Spollen completed a detailed memorandum containing his estimate, dealing with a number of other problems for the accounts and also alleging that his independence was under threat. He submitted his memorandum to the Audit Committee of the board of directors. The memorandum states inter alia that "This Irish Tax Problem is now nearing a critical stage as is borne out by the communications from the Revenue Commissioners. It is a problem that must be addressed … …It is estimated by the Group Taxation Department and Group Financial Control that the D.I.R.T. payment which should have been made to the Revenue in October 1990 in respect of the bogus accounts is in the region of £10 million for the 6 month period. This must be provided for in the Group accounts for the year 31/3/91. The amounts which would have to be set aside for the years since D.I.R.T. was introduced (1986) would be very large indeed. As there is no amnesty there is a huge contingent liability (probably close to £100 million) and consideration must be given as to how this will be reflected in the accounts of the Group." Earlier in the memorandum Mr. Spollen observed in respect of the 13 February meeting between Group Taxation and Revenue: "It was stated by the Group Taxation Department that a determined effort was made to eliminate all bogus non-resident accounts by April 1990. This is clearly not the case." The Audit Committee of the Board of Directors was now fixed with the knowledge that the view of the Group Internal Auditor was that there was an enormous problem with DIRT at the Bank. It would also soon be advised by the Group Financial Director, John Keogh, in his rebuttal of the Spollen memorandum that his advice from Dr. de Buitléir and Mr. J. O’Mahony was that "that all financial institutions have, in effect, an amnesty for the past provided we fully regularise the position by 30th June,1991." 14. The Audit Committee The response to the crisis now gripping the Bank was to establish a Sub-Committee of the Audit Committee - the 'Audit Committee on Control Issues’ raised by the Group Internal Auditor'. Its remit was to inquire into and advise on the conflict that now existed between the Group Financial Director and the Group Internal Auditor. The personnel issue was now again interwoven with the DIRT issue.

The Audit Sub-Committee, chaired by Mr. J. Culliton considered the issue from 11 March through to the circulation of its Report. In the Report the Audit Sub-Committee concluded inter alia that "We consider that the issues and allegations have received and are continuing to receive full and proper attention within the Group, and that there has been no failure to deal with them in a proper way." and "The treatment for the accounts and the amount of requisite provision are matters for the determination by the (Group) Audit Committee and not by the Internal Auditor and will be dealt with appropriately by the Audit Committee at the proper time." While the Audit Sub-Committee had examined in detail the issues over a number of meetings, it is also clear that the full board of directors was given all of the information and was informed. It was up to the full board to make the decisions. Deputy Rabbitte: ... what I’m trying to get at seeing that it was never done - how did the audit committee conclude that Tony Spollen's case was undermined and had no basis? ... did you do any of this work before Tony Spollen's case was blown out of the water? Mr. Culliton: No, but it was open to the board to do it. We were making recommendations based on our investigation. We were not deciding any issue. Our job was to investigate the allegations and to assemble all the information we could and we put that before the board not just in the slim document but in quite a voluminous one as well that accompanied it. And it was for the board as a whole to determine the issues and what to do about them. Deputy Rabbitte: Right. Mr. Culliton: We had no powers of decision. Hearings 28 September, 1999, Morning Session The financial year-end had now passed. With its passing there was also a new problem: the financial accounts for the year would have to be decided on by the Audit Committee proper and in this regard it would have to make a decision about liability - a provision in the accounts. The board of directors would also have to consider the Report of the inquiry into "Control Issues raised by the Group Internal Auditor". When the financial accounts came to be decided upon, it was decided to make no provision for arrears of DIRT. The Audit Committee and the board of directors took comfort from the memorandum of Dr. de Buitléir of 12 March, which stated that there was a deal with Revenue but also that the deal was subject to the good faith of Revenue. The directors also took assurance from the assertion of the External Auditors that no provision for any liability for arrears of DIRT required to be made. But how precisely were the financial accounts for the year just ended approved by the two relevant parties - the Directors and the External Auditors? How did they arrive at their separate decisions to provide for no liability for arrears of DIRT? Critically, did the External Auditors, as they were required, reach their conclusions independently? 15. The Financial Accounts for 1990/91 Mr. Eoghan Fitzsimons SC for the Revenue Commissioners sought to establish the date of the alleged deal:

Mr. Eoghan Fitzsimons SC: I'll ask the question once more for the last time. When do you say, you Dr. de Buitléir, former secretary of the commission of taxation, head of the bank's taxation department, now working in the chief exeutive officer's department in the bank, when do you say that the bank, in law, no longer had a liability for the tax that was due for the year commencing 5 April 1990? Give me a date. Dr. de Buitléir: Some time towards the end of 1991. Mr. Fitzsimons: And is that as precise as you can be? Dr. de Buitléir: That's as precise--Hearings 12 October, 1999, Morning Session Notwithstanding this, the financial accounts for the year ending 31 March 1991 were signed off 26 May 1991 by the External Auditors, the Audit Committee and the board of directors without any provision being made for a liability to DIRT arrears. The caution of the Group Internal Auditor, Mr. Spollen, was rejected and the assertion of Dr. de Buitléir, that there was a deal, was accepted. In his evidence, Mr. W. Cunningham, the responsible audit partner, PricewaterhouseCoopers, indicated that he sought to rely for his decision on the 12 March 1991 memo of Dr. de Buitléir. He stated that he also sought to rely on the conclusions of the Audit Sub-Committee into the Spollen crisis: "…I'd also been conscious of the process that by this stage - by the time I was looking at it - the bank had already gone through in, in the form of the audit committee reviewing both the information, if you like, put forward by Mr. Spollen and the responses of Mr. Keogh … and I believe all of that taken together was sufficient evidence for me to accept their representations that they’d entered into an arrangement---" Hearings 8 October 1999, Afternoon Session In further support of the view he had taken he referred to oral accounts given to him by key AIB personnel: "…I think the key, to my mind, the key initial statement is that by Dr. de Buitléir, where he summarizes what his view of the position is, and Dr. de Buitléir was the head of the group taxation department so he would be the person who you would expect in the first instance to, if you like, to form a view on the matter. That was then, I believe, considered by Mr. Keogh and, in particular, considered in the context of the question marks that Mr. Spollen had raised..." Hearings 8 October 1999, Afternoon Session What was required of Mr. Cunningham was nothing less than his professional opinion, as Statutory External Auditor under the Companies Acts. His professional opinion was that no provision need be made in respect of the £100 million liability the Group Internal Auditor had advised might exist. Mr. Cunningham would be aware that his opinion on this matter would carry great weight with the nonexecutive directors. However as a professional External Auditor, Mr. Cunningham, while he might listen to the directors, should not allow anything the directors might say to unduly influence him in his professional opinion.

And most especially he should not at all rely on the Audit Committee of the board - it was the Audit Committee that might rely on him in making its decision. The Chairman, Mr. Culliton, described the assurance that his Audit Committee derived from the agreement of the external auditor with the decision not to make a provision for DIRT arrears. Mr. Culliton: …Now, the audit committee relied heavily on what I would call the external's power, external auditor's power of veto. All they had to say was, "No, we're not happy; there should be contingent liability or a liability inserted in the accounts. And, of course, in practical terms, Deputy, if we went against his views, there would be a note in the accounts. So, that was the comfort and that's what I sought from Mr. Cunningham on 30 April in the run up to the recommendation to the main board… Hearings 9 October 1999, Afternoon Session In response to later questioning, some differences were noted between the beliefs of Mr. Culliton and Mr. Cunningham: Deputy Rabbitte: Do you think there is any danger, do you think there is any possibility that the audit committee were waiting for you to sign off before they concluded their findings? Mr. Cunningham: I don't believe so. I believe the audit committee formed their own view and I formed my view. …the audit committee of the board had gone through a very detailed process, assessing both the representation made by Mr. Spollen and, indeed, the points put forward by Mr. Keogh as, if you like, counters to those and had gone through a very… what I considered to be a well structured and informed process and it itself had come…they themselves had come to the view that there was no need to make a provision in the accounts. Hearings 8 October 1999, Afternoon Session Chairman: But would you read the note again that you just read from the auditors? Mr. Culliton: I will. "Audit committee 30 April '91. Mr. Cunningham reported that Coopers & Lybrand had reviewed the provisions in considerable detail and had, at the request of management, conducted an extended level of review in Britain. In response to the chairman..." - because I specifically wanted to know had they any concerns about the provisions - " response to the chairman, he confirmed that he was familiar with problems concerning deposit interest taxation in the UK and Ireland. He noted that a payment had been made to the UK revenue authorities and that contact was ongoing with the Irish revenue authorities and that a liability was not expected to arise…" Chairman: Okay, let's read this… Mr. Culliton: " … and he confirmed that he was satisfied that the provisioning policy was conservative and that the provisions proposed in the individual cases and in aggregate were appropriate." Hearings 28 September 1999, Morning Session

The directors made no provision because they relied on the memorandum of Dr. de Buitléir and the assurance they received from the Audit Committee that the External Auditors required no additional DIRT liability provision. Buitleir’s evidence to the Sub-Committee was that there was no deal until December 1991 at the earliest. In other words, it was not until December of 1991 that there could be said to be in place an th arrangement between Revenue and AIB and other deposit-takers involving no retrospection prior to 5 th April 1990. The picture therefore communicated in the memorandum written by Dr. de Buitleir on 12 March 1991 was incorrect and ill-judged. The board of directors in exercise of their responsibilities under the Companies Acts and the external auditors in the formation of their professional opinion placed reliance on this incomplete account of the true position. The precarious nature of the deal, again if it existed, through the course of 1991 was also described by Ms. Fullen at the Hearings. 16. Precarious nature of deal In her written opening statement to the Sub-Committee Ms. Fullen observed that: "The nature of the arrangement which we had with Revenue evolved over time. Mr. McCarthy seemed to have an idea in his mind as to how the matter could be resolved but this idea was really only teased out over time as the exercise in AIB plc and other financial institutions as we were led to believe was carried out. The meeting of 13 February was only the start of a process." And in response to cross examination by Mr. Eoghan Fitzsimons SC for the Revenue Commissioners: " ... my view is that really when it concluded when I felt that the Revenue had accepted that the position was as we had understood at the meeting on 13 February was when I had a telephone conversation with Mr. MacCarthaigh in December of that year, when he (MacCarthaigh) basically said AIB have done their bit, it's up now to the Revenue to give us guidance to enable us to continue and to ensure going forward we'd be fully compliant. That's when I would have felt that matters had been resolved, if you like, finished or finalised at that point in time." Hearings 11 October 1999, Afternoon Session The precarious nature of the arrangement as today viewed by AIB Group Taxation is also to be found, in a memo prepared by Ms. Fullen, who was tax compliance manager, on 29 November 1991. Recording a telephone conversation she had with the then group internal auditor Ian Howley, she states: "I agree with Ian that there was a contingent liability there but it would be impossible to quantify same without bring the matter to the attention of the Revenue Commissioners, and, obviously, we do not wish to go this route!" In the months of April and May 1991 AIB re-classified deposit accounts with deposits of almost £400 million 17. Postscript On 31 May 1991, Mr. Keogh reached retirement age and retired from the Bank. On 30 June 1991 Mr. Spollen left AIB on terms agreed between himself and the Group. On 9 July 1991 Mr. Culliton retired by rotation from the position of Chairman of the Audit Committee of the board of directors. He later became Chairman of the Board of Directors for the period 1993 to 1996.

In April 1991, there further meetings and correspondence between Revenue and AIB. No assessment was ever raised. On 16 April 1991 Mr. J. O’Mahony telephoned Mr. MacCarthaigh to inform him of a further substantial reclassification of non-resident deposit accounts. He said that there would be an uplift of £2.5 million in the next DIRT payment. The certification that was promised by AIB wasn’t submitted to Revenue and was never asked for by Revenue after 1991. On 5 April 1998 seven years after the events described, the content of the Spollen memorandum was leaked to and reported in the Sunday Independent. On 16 April 1998 Revenue wrote to AIB, re-opening the file. The AIB file remains open. Revenue has raised a £30 million demand without prejudice to a final figure. The matter remains unresolved. Pricewaterhouse Coopers continue to act as external auditors to AIB The Sub-Committee finds: 1. There was no deal, agreement or amnesty involving the write-off of tax. The fact that AIB was allowed to persuade themselves that they may have an understanding to this effect is due in part to the negligence of the Revenue Commissioners. 2. The Revenue Commissioners have offered no justification for their failure to follow up on the actions of 1991. 3. Nothing that transpired at the meeting of 13 February 1991 between AIB and the Revenue can be construed as a deal to write off arrears of DIRT. 4. AIB did not make full disclosure to the Revenue either at this meeting or subsequently. 5. There is nothing in the Revenue letter to AIB of 15 February 1991 signed by Mr. D. A. MacCarthaigh, that can be construed as a deal to write off arrears of DIRT. In fact it makes clear that any cases discovered prior to 30 June 1991 would be the subject of a DIRT payment. 6. That no reliance whatsoever can be placed on AIB’s note of their alleged telephone call to Mr. D. A. MacCarthaigh of 26 February 1991. 7. The assurance given in the memorandum of Dr. D. de Buitléir, AIB Head of Group Taxation, of 12 March 1991, on which others so heavily relied, is not sustained by the evidence. 8. PricewaterhouseCoopers, AIB’s External Auditors, were in error in relying on the findings of the Audit Committee of the AIB Board of Directors and the memorandum of Dr. de Buitléir of 12 March 1991 in relation to these matters. The Sub-Committee further finds that the External Auditors should have sought independent written confirmation to support the assertion of a deal especially since Dr. de Butléir’s own conclusion was dependent on "understandings with the Revenue Commissioners and their good faith" 9. Mr. J. Culliton and the AIB Audit Committee of which he was Chairman were entitled to attach some significance to the independent opinion of the external auditors that no liability for arrears of DIRT arose.

10. It's extraordinary that there appears to have been no significant involvement by the AIB’s then Chief Executive, Mr. Scanlan, in relation to the DIRT issue.


Mr. Hely-Hutchinson: I think a tax sensitive depositor is somebody who would give you their money either if there is no tax payable or, secondly, if tax is paid in a composite fashion ... without any revelation of their existence. In other words, it is money which the depositor does not wish the Revenue to know about, if I could put it crudely. Mr. M. Hely-Hutchinson, Former Chief Executive Officer, Bank of Ireland Hearings 21 September 1999, Afternoon Session Mr. P. Molloy: I find it very hard to understand why those situations arose, I’d have to say. They did arise and we stamped them out quite quickly and should I say that they were not particularly extensive in Bank of Ireland ... But having said that, to answer your question, I really find it very hard to understand how any member of our staff would have accommodated - knowingly accommodated - a bogus non-resident account. I really find it very hard to understand. Mr. Molloy, Former Chief Executive Officer, Bank of Ireland Hearings 22 September 1999, Morning Session 1. Introduction Historically the premier banking organisation in Ireland, today Bank of Ireland is number two to AIB. The Bank occupies a unique position in Irish banking history. At the core of the modern-day group is the old Bank of Ireland, the ancient institution established by royal charter in 1783. Bank of Ireland is the oldest bank in Ireland. From the beginning, it was connected closely with the leading banking family in Dublin, the Huguenot La Touche family. A member of that family - David La Touche - was the first Governor. The historic institution as well as being a commercial bank - a deposit-taker and a credit institution - was a Central Bank in embryo, much like the earlier established Bank of Scotland and Bank of England. Bank of Ireland operated the Exchequer Account and during the nineteenth century acted as something of a banker of last resort. Historically Bank of Ireland is a pillar of the Establishment, an Ascendancy institution. It has its historic peculiarities - such as the titles of the chairman of the board of directors (the Governor) and the title of the board itself (the Court of Directors). In evidence to the Sub-Committee, the current Governor of the Court, Howard J. Kilroy, stated that "…When I joined the bank in ’91 it was an interesting decision for me. ... I knew the bank rather well. I knew that it was not just professionally managed and conservative but it was a bank of integrity and a bank with the highest of ethics and nothing I have learnt or discovered in my eight years in the bank would change my views on that." Hearings 22 September 1999, Afternoon Session There is a culture of weighty responsibility, duty and ethical behaviour and a perspective of seeing oneself as being part of a national Establishment at the top levels of Bank of Ireland - the historic

contribution to the present bank of the core, original bank. This was certainly conveyed to the SubCommittee during the Hearings. More than the other banks that appeared before the Sub-Committee, Bank of Ireland gave evidence as to how seriously it concerned itself with ethics, with appropriate action on the part of the State and with maintaining its own internal behaviour scrupulously in conformity with the law and with having such rigorously policed through internal audit. 2. The Picture on the Ground and the Celebrated Cases Mr. Molloy: We paid what was agreed and it was ... I think, in that respect too, I think, you know, the bank got away very well on this one. Deputy Ardagh: They got away very well, yes. Hearings 22 September 1999, Afternoon Session. It is in Bank of Ireland that some of the most celebrated of the "celebrated cases" of non-compliance and bogus non-resident accounts have to date been discovered and disclosed. Thurles, Boyle, Roscrea (1990), Miltown Malbay (1991), Dundalk (1989/90), Killester (1992), Tullamore (1993), Mullingar (1996), Castlecomer, Clonmel, Ballybricken, Ballinasloe, Skibereen (1988), Dungarvan and, disclosed to the SubCommittee, Ballaghaderren (1998) and Ballygar (1999). One aspect of this list of cases that must be acknowledged is the policy pursued by Bank of Ireland of making a highly detailed disclosure to the SubCommittee. Included in the disclosure was a set of handwritten internal audit record sheets for each audit half year giving the relevant details for the branches audited in that period. 3. The record sheets of Group Internal Audit Deputy Rabbitte: But I mean, in that example that we mentioned of Ballyfermot, for example, 190 of 200 forms missing, is a pretty calamitous rate, isn’t it? Mr. Molloy: Yes, and that was the situation in the early days here. We just didn’t get on with it and didn’t get about getting the customers to send the forms back or complete them. Hearings 22 September 1999, Afternoon Session The internal audit record sheets provide a dramatic record of the compliance levels achieved in the branch network of Bank of Ireland during the life of DIRT. The picture is one of at best considerable disarray, certainly in the early years. Observations such as "Requirements generally overlooked", "Majority of cases", "Concern", "Generally not held" pepper the pages. Deputy Foley: ... How did you balance the competitive need to get deposits and the duty to obey the law of the land re. DIRT? Mr. Hely-Hutchinson: Well, I think the evidence is that we didn’t very successfully in the early years of DIRT. We lost market share because we were implementing the DIRT regulations and, certainly, from what we could hear by rumour - and none of this was ever, you know, hard evidence - other people were not. We certainly lost market share as Maurice Keane has said in his opening statement. Hearings 21 September 1999, Afternoon Session

Certainly the evidence from internal audit papers suggests that the Bank failed to successfully balance competitive need with the duty of compliance. The Bank has adduced evidence to show loss of business and suggested this loss (for example the loss of £120 million of non-resident deposits in the first year of DIRT) as evidence of its uncompromising stance on DIRT compliance. However as much as any other bank in respect of which the Sub-Committee has examined papers and witnesses, Bank of Ireland had significant compliance problems and these problems continue to manifest themselves even today. 4. Roscrea Incident (1990) - Mr. MacCarthaigh’s Discovery Wrongdoing at the Roscrea branch was not discovered by the banks own policing system of internal audit. It was in fact, discovered by Revenue officials. Mr. MacCarthaigh handled the case with Mr. T Tiúit, Principal Inspector of Taxes acting as his senior officer on the case. Initial investigations commenced with a single customer. On foot of this information, the Bank carried out its own inquiries and discovered a number of additional cases in the branch. The arrears had accrued over four years (1987 to 1990) since the introduction of DIRT regulations and the final negotiated settlement amounted to £75,000 in DIRT and interest. The offending Bank Manager was fined £2,500 - as Deputy Seán Ardagh put it "which was really a very small amount when you take into account what the Revenue were conceding". Mr. Molloy: With hindsight I’d have to agree with you. I think that, I think it was a very, it was a very light penalty. Hearings 22 September 1999, Afternoon Session Under the terms of the settlement between the Bank and Revenue, Bank of Ireland agreed to undertake an audit of Area South (the province of Munster). In inquiring into this aspect of the settlement it emerged that the audit of Area South was a most peculiar exercise. Deputy Ardagh: ... Let’s go to the next item - establish an audit team to examine every non-resident account in area south. Now this was an item which Revenue felt that, based on them not looking for the returns of interest paid gross that the bank would take very seriously indeed. Could you detail the ... how this audit was carried out and what action was taken as a result of it? Mr. Molloy: Well, what I’m, what I understand Deputy, about that exercise is that it was undertaken under the control of the then general manager for the area south ... And he appointed three people from within his own staff to conduct an exercise in every branch in his jurisdiction…… As I understand it, this now is based on the information that’s been given to me ... that their brief was to examine all non-resident accounts in every branch ... which we’re told they did - they did it over a period of time. Their reporting was back to the general manager as they went through it. They didn’t produce aggregate numbers, they didn’t produce a written report… Deputy Ardagh: They didn’t produce numbers and they didn’t produce reports…… Deputy Ardagh: Is there any evidence that they actually conducted an audit at all? Mr. Molloy: I believe they did it. I’ve no reason to disbelieve what I’ve been told. I’m told they did…… Mr. Molloy: ... with hindsight, looking at it, it was not something I was aware of at the time, but looking at it now, I think it is surprising that there wasn’t some internal audit involved that. It would have given a different quality and authenticity.

Hearings 22 September 1999, Afternoon Session Under the terms of the settlement agreement with Revenue the Bank was to debit the accounts of the offenders. Mr. Molloy: I suspect, in general, that the amount of recovery from depositors, probably because they would have departed the scene if deposits were not there at that point was probably --Deputy Ardagh: But the agreement was that the depositors’ accounts would be debited ... £75,000 was the settlement that was reached. The individual depositors were not debited, were they? Mr. Molloy: I can’t tell you. Deputy Ardagh: Yes. Mr. Molloy: We’ll find out and we’ll report back to you on that. Deputy Ardagh: Pay penalties and costs. Here again a big concession. Penalties and costs come out at £9,117. If all of your customers who had problems with the Revenue could come out with penalties and costs and interest of 11 per cent or something, 12 per cent ... anyway you paid what was agreed? Mr. Molloy: We paid what was agreed and it was ... I think, in that respect too, I think, you know, the bank got away very well on this one. Hearings 22 September 1999, Afternoon Session 5. Miltown Malbay - Mr. Livingstone’s "Score" On 13 March 1992 Mr. Pat McDowell and Mr. Michael Watson, Assistant Manager Retail Division, Bank of Ireland, attended a meeting at Setanta Centre with Mr. Sean Moriarty and Mr. Ó Donghaile of Revenue. The Bank of Ireland branch at Miltown Malbay was the subject of the meeting. It had been discovered by the Special Inquiry Branch that there was a significant problem with bogus non-resident accounts at the branch. Many local traders operated such accounts at the Branch and these actions were knowingly facilitated by the local branch manager. Settlement terms were agreed at the meeting. On 23 March 1992 Mr. Watson wrote a letter to Mr. Ó Donghaile summarising the Bank’s understanding of the arrangements agreed at the meeting with Revenue. The letter was suitably contrite and polite. It concluded "Finally, I would like to take the opportunity to say that Bank of Ireland will welcome new regulatory measures which will help to level the playing field in respect of accounts which are/should be DIRT paying". Accompanying the letter was a cheque for £200,572 in settlement of the case. This was the full arrears for liability to DIRT on the bogus non-resident accounts. It was also how Investigation Branch likes to do business - contrite, polite and the cheque accompanying the letter of settlement. However this was not the end of the matter for the Revenue, the Bank or the beneficial owners of the accounts. The Miltown Malbay case was as described at the Hearings, of intense embarrassment to the senior management of Bank of Ireland. Mr. Molloy: ... I was aware of the incident. I can recall that. Was I aware of the fine detail of it, I don’t know ... but I certainly was aware of the broad shape of the resolution of this Miltown Malbay situation, which was intensely embarrassing. It was an appalling situation.

Hearings 22 September 1999, Afternoon Session Milltown Malbay was embarrassing in more ways than one. It surfaced less than a year after the Roscrea settlement of discoveries of bogus non-resident accounts and was located again in Area South. The information came from Revenue to the management of the Bank. It was suggested that a number of local residents might be operating bogus non-resident accounts. It was also alleged that this was happening with the knowledge and assistance of the manager of the branch at Miltown Malbay. Internal audit had failed to detect the irregularity and the general audit of Area South, initiated after the discoveries in Roscrea, had also failed to discover the fraud. In the event a large-scale fraud against Revenue was discovered. The amount of unpaid DIRT was confirmed at £200,572. As the case unfolded, it became apparent that the manager had transferred to Limerick on promotion and brought some of the bogus non-resident accounts with him. The DIRT discovery at Miltown Malbay arose from an undercover operation by Revenue’s Special Inquiry st Branch (SIB) - the secret intelligence service established in 1979 and headed up until 31 August, 1993 by Mr. Livingstone. Miltown Malbay was SIB’s greatest "score". Chairman: You were able to get information about a bank account in that circumstance. Mr. Livingstone: That wasn’t how it happened. We examined a lot of taxpayers’ files going back over a long period, going back four or five years. And we examined a vast number of files and we made certain conclusions that we would go and speak to a certain number of them ... And we went and spoke to them and they admitted the delinquency, not all immediately…… Deputy Rabbitte: Well, sorry, sorry, a stupid question - why did you go to Miltown Malbay? Mr. Livingstone: We put ... It took over a year to put that together, and why it was selected was based on other intelligence that we got regarding trading patterns in that area and if I tell you that every trader in the country will know what not to do. I’d prefer not to say it, but there was a particular form of trading went on that came to light ... Hearings 2 September 1999, Afternoon Session 6. The Audit Committee In 1985 the Court of Directors established an Audit Committee. It meets at least five times a year and is solely comprised of non-executive directors. Dr. Margaret Downes has been a member of the Committee since its inception with the exception of two years from 1995 to 1997 and for the last two years has been in the Chair. Dr. Downes is a chartered accountant by profession and is a leading member of the profession in Dublin. The Audit Committee has in attendance at its meetings the Chief Executive, the Chief Financial Officer, the Group Chief Internal Auditor (GCIA), and the External Auditor. The Committee receives the twice yearly reports of the GCIA on the working of Internal Audit. Dr. Downes: ... Well the primary purpose of the audit committee is to assist the Court in fulfilling its responsibility right across the board of issues that would be addressed by the audit committee and for ensuring that proper financial and accounting reporting practices are in place. Hearings 22 September 1999, Afternoon Session

DIRT was brought to the attention of the audit committee for the first time in March 1988 and it was brought on a continuous half yearly Report from internal audit until 1991. Dr. Downes: The tenor of the reports that in the early years was that there was a problem, mainly emanating from lack of documentation. That was for the first three, sorry half years up to September ‘89. And this ... we were aware that there was a substantial number of problems there but we were fully informed that it emanated from lack of paperwork, in the main. Deputy Rabbitte: What do you say to that now, in hindsight ...? Dr. Downes: Well, with the benefit of hindsight, the role of the audit committee is to see that action is taken when problems are presented to it and we also have, here in our papers, memorandum sent by the Chief Executive, who was then Pat Molloy, and he sent memorandum in May ‘88, August ‘88, January ’89, A.B. O’Connell sent one in February ‘89, Pat Molloy again in September 1990 and Pat McDowell in August 1992, so there was continuous pressure from management to rid the bank of this problem. Hearings 22 September 1999, Afternoon Session In March 1989 the Report of the GCIA to the Audit Committee stated that "The main deficiencies encountered in branches during the half year are similar to those detailed in my last report and they relate, in the main, to the area of customer accounts." This was a reference to the compliance problem. Dr. Downes: This was the absence of documentation again, the March ‘89. Deputy Rabbitte: Why do you keep, why do you keep drawing that to my attention? Dr. Downes: I think at the time that we were comfortable that when the documentation was implemented and correctly put in place that the problem would be resolved. Hearings 22 September 1999, Afternoon Session Later in her evidence Dr. Downes observed that after 1989, the reporting on the problem improved and she interpreted this to mean that the directives were in fact having the desired effect and that by March 1991 the issue had effectively disappeared. "So it was gradually improving right through the period and obviously the directives were being achieved." Deputy Rabbitte: ... There is a pattern, isn’t there, of everything seeming to be done proper or properly by the senior management but, for whatever reason, very little changing on the ground? Dr. Downes: Well, that is emanating. But the role of the audit committee is to see that there is activity and action taking place to implement the ... or not to implement, but to resolve any problem that is presented to it. And therefore, the fact that management was taking this very seriously and was acting upon this was giving the comfort that would be required by the audit committee. Deputy Rabbitte: But isn’t it also a function of the audit committee to probe detail? Dr. Downes: Not necessarily, unless there is a major problem there. The function of the audit committee is to recognise problems and to see that action is being taken to resolve those. Hearings 22 September 1999, Afternoon Session

7. Investment Bank of Ireland (IBI) Bank of Ireland today is, like it’s competitors, a universal bank. The group operates in a highly integrated fashion across the full range of financial services, from retail deposit taking to investment finance and also assurance. Among its subsidiaries is the specialist bank, Investment Bank of Ireland (IBI). During the Hearings as a result of discoveries to the Sub-Committee it emerged that on Thursday 13 February 1986, in the immediate wake of the Budget and the passing by the Dail of Financial Resolution No. 12 executives at IBI convened a meeting to establish a small, expert group. The meeting took place at 23 Fitzwilliam Place, headquarters of IBI. The group met on a number of occasions over the following days. The remit of the group was to deal with "The Withholding Tax Problem". Specifically the group had as its brief "to try and devise mechanisms or instruments that would enable the Bank to continue to pay interest in a gross form to its clients without deducting withholding tax." The object was to identify ambiguities in the drafting of Financial Resolution No. 12 that might make possible the payment of interest on a gross basis to clients of the Bank. Schemes might be developed around relevant ambiguities to enable payment of gross interest. This of course was legal. The brief of the group might be considered to sit uncomfortably alongside the strictness of the senior management of the parent bank. Chairman: For a moment, can we go back ..."It’s brief is to try and devise mechanisms or instruments ...." What does that mean to you Mr. Kerrane? Mr. Kerrane: What it means to me Chairman, is that this was a financial institution which felt that the imposition of withholding tax was going to have a negative effect on its business and it was seeking to investigate methodologies whereby that negative effect might be lessened. Chairman: It’s a very troubling sentence. Hearings 23 September 1999, Morning Session In particular the focus of the group contrasts with the position stated to the Court of Directors by Mr. Pat Molloy in December of 1986. In a paper to the Court titled Tax Sensitive Deposits, Mr. Molloy wrote: "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." However the work of the group reflected the competitive reality in IBI’s relevant market for deposits. This was the specialised market for the cash accounts of fund managers, the accounts used to trade in shares and other forms of investment on behalf of their clients - pension and investment funds. In 1996 the interest paid to such accounts would be exempted from DIRT. However until then interest was liable to retention tax. One proposal examined in 1986 by the small expert group was for a scheme whereby an account could in effect function as both an overdraft and a deposit account. The account therefore, had two aspects payment of interest on deposit and deduction of interest on overdraft. If in any period the two interest streams were netted off then liability to DIRT might be on the netted interest accruing on the deposit side.

There would be a saving on DIRT paid. The scheme was not novel. It was modelled on a product, a current account paying interest when in balance, developed by Bank of Ireland in Britain. One effect in the British product was a reduction in liability to CRT. Mr. John Blake of accountants Craig Gardiner was sceptical. A minute of the meeting of 21 February 1986 records that "Blake is of the view that the netting off of debit and credit interest is not a workable solution." The idea did not die there. A version of netting was implemented at IBI. The particular accounts to which netting applied were supported by agreements known as Investment Management Agreements. In 1991 internal audit of IBI raised questions about the practice of netting as applied to accounts supported by Investment Management Agreements. The then management became concerned about the problem and approached their tax advisors Price Waterhouse (PW). At PW the tax partner and advisor to IBI was Mr. Joe Kerrane and he was about to become intimately concerned with the problem. On 31 January 1991 Mr. Kerrane met with Mr. Seán O’Dwyer and Ms. Anne Horan of IBI at the bank’s Head Office. In a file note written afterwards Mr. Kerrane recorded that at the meeting "Sean explained that if there are problems in this area they have existed since DIRT was introduced in 1986 and the exposures could be massive." Mr. O’Dwyer had a problem and Mr. Kerrane had an issue. The note also sets out an account of the work Mr. Kerrane undertook afterwards. "Jim McDonnell and myself subsequently worked on the figures ... We concluded that the daily interest balances were correct and, in producing each day’s results, it would not in practice matter as to whether principal had been set against principal or whether there had been an offsetting of interest against interest. In other words the calculations could be made to fit whatever facts were available." At the Hearings Mr. Kerrane was asked to explain what was meant by this. Mr. Kerrane: It’s a rather unfortunate way of expressing a proposition that the relationships weren’t clear. I wouldn’t write that now Deputy…… What I meant .... I know this is wide open to misrepresentations, but what I meant ... Deputy Rabbitte: I’m only doing a job Mr. Kerrane. I’m quite willing to hear a benign explanation. It’s just that it jumped out at me in the early hours of this morning. Mr. Kerrane: I’m not surprised at that. What I meant was that the contractual relationships between the parties - in this case it would have been the bank and the customer - were not clear to us when we started upon this and we got a piece of paper and we were trying to figure out, well, you know, what does this tell us about the nature of the contractual relationships between the parties? ……What I think we had in front of us was a memorandum account and there were debit interest figures in one column and credit interest figures on another and what we couldn’t conclude was what was the nature of this? Was that memorandum simply for the internal purposes of the bank or did it reflect the nature of the agreement between the bank and its customer? Hearings 23 September 1999, Morning Session

The memorandum account recorded the daily calculation of interest. Administratively however, the customer’s account had interest credited twice yearly in May and in November. The daily details were, according to IBI, not communicated to customers and were for kept for record purposes only. However, if customers inquired about their balances the position recorded in the memorandum account was quoted In his professional opinion as advised to IBI in a letter on 25 February 1992, Mr. Kerrane set out his understanding of the nub of the problem: "DIRT is operated on the amount which is credited at those times …May and November… However, in arriving at the amount credited in May and November, account is taken of any debit interest which may have arisen in the interest period due to the account having a cleared debit balance at any particular time. The essential issue which arises is: should DIRT have been operated on an amount of interest before taking account of the debit interest, or was it correct to operate DIRT only on the amount of interest credited to the client’s account?" The central issue at question was when did credit interest accrue and therefore, when did the corresponding DIRT liability arise? Twice yearly? Or daily as recorded? It might be regarded as an arcane point but the answer proved problematic. There was no clear-cut answer, even when Mr. Kerrane had given his issue and the Bank’s problem all of his most careful consideration. "There are arguments suggesting that IBI has not operated DIRT correctly on interest offset accounts but it is also possible for IBI to justify its method of operation." His professional opinion stated "... that on balance there is sufficient substance in the arguments which can be called up to justify the present arrangements, to enable IBI to take a view that it has not failed to make correct DIRT returns. However I cannot guarantee that the arguments are strong enough to withstand a serious Revenue challenge, in the event of a thorough audit." It was decided that Counsel’s opinion should be sought. In the event, the legal advice taken was received from the internal Group Legal Adviser Finbarr Murphy. On 9 April 1992, he concluded that an argument by Revenue that DIRT had been incorrectly applied would be difficult to sustain and "…I think both internal audit and Joe Kerrane of PW were correct to express concerns ... and I would support Joe Kerrane’s suggestions for revising the operation of the accounts. It is true that telephone queries would appear to have been answered with a statement of ‘interest’ earned on the account. This is unhelpful and should cease immediately:... Nonetheless, there is nothing in written format (as far as I am aware) and there is nothing in the practical operation of the account as explained to me that would justify concluding that the customer has a contractual entitlement to interest other than at the end of the interest period." But for the Bank at what point did the obligation to deduct DIRT arise? As the computers calculated interest or when the administration accrued it to the account? And, related to this, should it be applied on gross interest or on the netted figure? Mr. Molloy: Provided it, it is the principal that is offset against the principal. But if interest is calculated on a daily basis or on a monthly basis and then if the interest is offset against the interest - it is a very fine point, I’d have to say - but that if the interest is offset against the interest, then the gross interest as opposed to the net interest is subject to DIRT."

Hearings 22 September 1999, Afternoon Session In March 1992 internal audit in its half yearly Report to the Chief Executive reported inter alia that "Action has been taken to correct the position regarding overdrawn balances, and the question of the possible DIRT liability is at present being clarified. A formal response is awaited. The management response was that "I am advised that no liability to DIRT arises in IBI. This view is based on legal and taxation considerations. Some improvements to put matters beyond any doubt are being put in place." No provision was made therefore, in the financial accounts. IBI a "Related Issue" The problem at IBI was not illegality. It was not illegality in the sense of bogus non-residency, false declarations, missing or incomplete paper work, the principal focus of the Parliamentary Inquiry being here reported. The IBI problem is a "related issue", to use the terminology of this Inquiry. It represents another aspect to the clash between the competitive imperative and the necessity for compliance in a market place for deposits that had become increasingly liberalised and largely unregulated. Even in legal banking there were problems as ambiguities and nuances came to be explored and became increasingly vital to achieving volumes in resource growth. An almost theological exploration of the meaning of the law became essential to resource and profit growth. 9. The Draft Code of Practice One of the first actions of Mr. Hely-Hutchinson on taking office as Chief Executive in 1983 was to give his support to the idea to the development of a Code of Practice for deposit taking in Ireland and to have this Code supported by the Revenue Commissioners. For five years Mr. Hely-Hutchinson pushed his idea with the Department of Finance, with the Minister and with the Revenue Commissioners. Mr. Hely-Hutchinson: As far as the actual code of practice is concerned they did respond to it and they did issue a code of practice which is, if not word for word, is very similar to the one that we had offered…… But my problem was that they weren’t then policing it ... they weren’t enforcing it Hearings 22 September 1999, Morning Session Chairman: ... but you never approached the Central Bank on the question of standards or ethics in banking. Mr. Hely-Hutchinson: I answered that question before. I’m sure I mentioned it. Yes, I’m sure I did. Chairman: Do you ever recall getting any meaningful response?

Mr. Hely-Hutchinson: Oh, it would have been a very, sort of, warm polite response, "What a pity these other people don’t have the same ethics as you do." But the Central Bank simply didn’t see it and it wasn’t, within the legislation, within its function to police these things. Hearings 21 September 1999, Afternoon Session. The senior management of Bank of Ireland placed enormous faith in the idea of the State regulating deposit taking. This it saw as the key to order in the market place. The Bank’s ambition in this direction was never realised and even in 1986 Mr. Pat Molloy, in his paper to the Court of Directors was concluding that "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." Mr. Kilroy: As far as I’m concerned, I, the chairman or the governor and the board have to take ultimate responsibility and, indeed, if you choose to censure this bank, then my name should be at the top of the list but that doesn’t mean that I should know all the detail that’s going on and the underlying affairs of the bank. Hearings 22 September 1999, Afternoon Session 10. Postscript On the basis of advice no provision was made in the financial accounts of IBI for liability to DIRT. Revenue went on to collect around £1.8 million more in unpaid other taxes from the depositors who operated the bogus non-resident accounts in Miltown Malbay. The owners of these accounts are at present suing Bank of Ireland on the grounds that if they had not been discovered they would have been able to avail of the 1993 Tax Amnesty. The Bank estimates that its liability to unpaid DIRT is in the range £1 million to £1.5 million. The Bank is in discussion with Revenue on the issue of DIRT during the period 1986 to 1999. The Sub-Committee finds: 1. The most senior executives in the Bank of Ireland did seek to set an ethical tone for the Bank and unsuccessfully sought Revenue assistance in promoting an industry-wide Code of Practice. 2. Notwithstanding the Bank of Ireland’s formal commitment to compliance, there were serious breaches throughout the branch network over a number of years. 3. Despite undertaking to conduct an extensive audit of Area South (i.e. Munster)– following the discovery by Revenue of breaches of DIRT at their Roscrea Branch - the Bank never disclosed the outcome of the audit to Revenue. 4. There is no evidence that the exercise undertaken in Area South was a reliable audit, and it was never written up or documented. Nor did it discover very serious breaches at the Bank of Ireland’s Branch at Miltown Malbay which were uncovered by Revenue a few months after the audit of Area South.

5. The discovery at the Miltown Malbay Bank of Ireland Branch of serious breaches of DIRT would not have been overlooked if the extensive audit of Area South, promised by the Bank, had been properly carried out as indicated. 6. The Revenue failed to follow-up on the commitment by Bank of Ireland to conduct an audit into Area South and Revenue again failed to secure disclosure of the "audit" after discovery of Miltown Malbay. The Sub-Committee finds these failures inexcusable. 7. The Bank of Ireland was in error in not calculating a liability in respect of the bogus non-resident accounts brought to its attention by Internal Audit and for not making full disclosure and payment to the Revenue. 8. The issue disclosed in relation to the Investment Bank of Ireland (I.B.I.) highlights how the competitive imperative gained supremacy over the compliance ethos and that the Bank ought to have sought guidance from the Revenue in this case and failed to do so. 9. Given the quality of the Internal Audit Reports and material, the Bank of Ireland Audit Committee could reasonably have been expected to assimilate that information and bring its implications to the attention of the Board and failed to do so.


"Well, clearly I took over a situation in the Southern region which is obvious from the figures … where compliance was very poor, very poor indeed." Mr. O. Lynas, Chief Inspector, Ulster Bank, 1991 Hearings 15 September 1999, Afternoon Session In 1991 Mr. R. Kells had as he saw it a documentation problem. Mr. Kells was at the time the executive responsible for branch banking at Ulster Bank. The bank did not have a significant non-resident deposit base. But it did appear to have a problem with the non-resident accounts held in branches. Necessary documentation seemed either to be absent or faulty or incomplete. This was being picked up by internal audit or as it then was the Bank’s inspectorate at the time headed by Mr. Lynas. And the problem was being communicated to management through the inspection reports of Mr. Lynas’ inspectorate. The reports indicated for non-resident accounts very high levels of non-compliant documentation (absence of forms and incomplete forms present) in the branch network. For the following two years Ulster Bank abandoned the established procedure of the epistle from head office. It instituted an annual review process managed from the top. Mr. Kells explained as follows: Mr. Kells: … through the period from 1986 to about 1991 I would have been picking up what we would have called then inspection reports … on branches whose paperwork was not as compliant as I would have liked to have seen and I would have dealt with that directly with the (three) area directors (responsible for the south of Ireland). … this became a more important issue to me around 1991 when I could see that we were not making the progress in improving the standard of compliance within our branches and at that stage we decided that we needed to take a different approach to it. We had been sending memos from head office, we had been having area directors having direct visits to branches … what we decided was we had to take a different approach and so in 1991 we did a review of the position. Hearings 15 September. 1999, Afternoon Session The new approach also coincided with the establishment of an audit committee of the board of directors. The effect of the concerted action was a definite improvement in the picture although according to Mr. Kells "there were branches whose compliance and whose standard of paperwork frankly were not up to standard." Deficiency levels (no forms and other deficiencies) as measured by internal audit sampling dropped dramatically at Ulster Bank from 1991 through to 1994, having peaked in 1991 at 69 per cent within the sample. By 1994 the sample percentage was down to 8 per cent. It is claimed by the Bank that it never found cases of staff collusion with customers in operating bogus non-resident accounts. Indeed the number of bogus non-resident accounts identified was minuscule. Mr. Lynas: We did not identify any cases of Ulster Bank personnel colluding with customers to draw up false forms or provide addresses of that nature. There were managers censured because their nonresident documentation was not of the standard we had expected.

Hearings 16 September1999, Morning Session The pattern also was one of putting documentation in order. When it came to it in many instances the documents were found – it was to a considerable degree all about very poor administration and management in the branches. 1. Re-classification – absence of records While there was an avowed pursuit of compliance at Ulster Bank and it did involve reclassifications there is a distinct dearth of documentation on re-classification. Chairman: … To what extent were accounts reclassified? Can you recall what percentage of accounts were reclassified from non-resident to resident? Mr. Kells: Unfortunately I don’t have any documentation to give you a figure on that, but I do think that there is one form that we managed to get hold of, which was the reclassification of the forms in the city region in one year – I think it might have been for 1993… Hearings 15 September 1999, Afternoon Session The explanation offered for the dearth of documentation on re-classification was that the information was held in the personal papers of the area directors. Deputy Ardagh: What happened that the papers aren’t available to document or quantify the number of accounts that were closed or reclassified in each branch? … Mr. Kells: Those papers would have been part of the papers which the area directors would have had, and the three area directors involved would each have retired. And it was not part of our document retention policy to, you know, to retain their personal files and so their personal files, as they were, must have been destroyed. Deputy Ardagh: And would that be good banking practice …? Mr. Kells: … I wasn’t suggesting that they were personal property. It was just in their particular file. Now the documentation regarding the audits, the branch audits … that would be available, but these were various papers which they would have had and which they used simply in the administration of their branches. And … Again, on reflection they are papers that I would very much like to be able to produce to this committee today but --Hearings 15 September 1999, Afternoon Session The policy also in Ulster Bank to date has been to impose DIRT only from the point of reclassification – a no arrears policy. In his evidence Sir George Quigley, Chairman of the Ulster Bank Group explained the policy as follows: Sir G. Quigley: … DIRT was only paid from the date of reclassification. I think that this was done on the basis that, since the branches were under very clear, pellucidly clear instructions as to what should be done, that they would, in fact, have got the declarations in all cases. And there is some support for that view in the fact that, when branches were pushed to it, in fact, declarations were found – they had been mislaid, they were in other branches or whatever. … But I am bound to say that we have reviewed this. I

don’t think that that is the kind of safe assumption we can make. My guess is that there were some cases, probably, in which forms were not available from the beginning and, therefore, our own view is, without any reservation, that arrears of DIRT should be paid from the start … Hearings 16 September 1999, Morning Session 2. Look-Back Ulster Bank has not as yet made a settlement with Revenue in respect of arrears of DIRT payments for the years 1986 to date. It has engaged in a look-back and made a calculation of what it believes to be a worst case scenario. The figure that it estimates is £900,000 and the belief in the Bank is that this is a worst case scenario. Deputy Durkan: In relation to identification and reclassification, you have a provisional figure of £900,000 or thereabouts set aside for that purpose? Mr. Lynas: In a worst case scenario – we expect that to come down. Deputy Durkan: Does that include penalties --Mr. Lynas: No it does not include penalties. Deputy Durkan: --- for late payments or for --Mr. Lynas: No, it doesn’t. Deputy Durkan: --- for non-compliance or whatever the case may be? Mr. Lynas: No, it doesn’t. Hearings 16 September 1999, Morning Session The computation was explained by the Head of Taxation, Mr. Crawley. The exercise was undertaken very recently and against a backdrop of a newly emerging compliance problem in 1998. Mr. Crawley: … that figure was computed against a background looking at a disimproving situation … and looking at the overall trends of audits over the period from 1986 forward. And I made that calculation at the time using a fairly crude but probably correct assumption that you could interpret no forms being available and documentation problems with forms as indicating invalidity of forms and therefore giving rise to a technical liability. And we cross-multiplied to the numbers against the average balances during the period and worked out a £900,000 figure. … I’m satisfied that it reflects the non-compliance rates both in terms of no forms available and deficiencies in forms as produced by Mr. Lynas from audit reports over the years. Hearings 16 September 1999, Morning Session

3. 1998 Deterioration In the last two years, 1998 and 1999, there has been a distinct deterioration in the record of compliance as discovered by Internal Audit at Ulster Bank. The management and chairman of the Bank in evidence at the Hearings emphasised that this was in their view a blip and did not represent an increase in activity in bogus non-resident accounts or actual non-compliance by depositors. There were technical reasons for the upsurge in the figures for 1998 and underlying the ‘blip’ were staff problems. Essentially the strong growth in the economy is being shared by the Bank and staff turnover is on the increase. Mr. Lynas: The branches that we inspected in ’98 were those branches which we considered high risk which had poor audits in the previous two to three years, therefore, the figures in 1998 are skewed. However they are --- There is undoubtedly a deteriorating trend. … Chairman: It’s a very sudden disimprovement. I mean --Mr. Lynas: It is, I agree, Chairman. I’ve given you the reasons but all I would say … I don’t wish to suggest that it is not a deteriorating situation; it is, but the results of those audits are poor because we are inspecting very poor branches … you’ll find the inspectors are drawing attention to some quite serious deficiencies in the … what they have identified. Hearings 16 September1999, Morning Session Ulster Bank is the third largest deposit-taking institution on the island of Ireland. The Bank is a subsidiary of the UK NatWest group. It operates 113 branches in the Republic of Ireland, which accounts today for 60 per cent of its business, the rest being accounted for by Northern Ireland. The Sub-Committee finds: 1. Whereas a scrupulous adherence to formal compliance seems to have been dictated from the top at Ulster Bank, this was at variance with the practice discovered by Internal Audit in parts of the branch network. 2. Although the Ulster Bank Internal Audit regime on the surface seems impressive it did not in fact check for authenticity thus diminishing the value of the Internal Audit process. 3. Where breaches were discovered in Ulster Bank, there is no evidence that disclosure was made to the Revenue or that arrears of DIRT were paid. 4. It is difficult to understand why the results of Ulster Banks 1993 review are available for the city branches but not available for branches outside of the city area and therefore, finds that the figures for the city area alone cannot be relied on by Revenue in computing any liability.


"The question of bogus non-resident accounts has never been discussed as a significant issue in National Irish Bank, because it has never been a significant issue." Mr. Alex Spain, Chairman of NIB, 1989 – January 1999 Hearings 17 September 1999, Morning Session "In a recent trawl of our deposit accounts flagged D.I.R.T. exempt, I was surprised to find a number given on the print-out as either "c/o branch" or with an address in the Republic of Ireland. What I would fear is that the declaration forms held in support of these accounts might contain similar information. Should we find declarations incorrectly completed and then be requested by the Revenue Commissioners to produce these declarations you do not need me to tell you the implications for both the customer and the bank." Mr. J.F. Brennan, General Manager, NIB Circular to Regional Managers, 7 August 1991 "Results of this audit are very disappointing and management must take immediate steps to improve the situation. The structure of the whole area can be improved but the level of non-compliance is too high. It appears that there needs to be an organisation-wide change in attitude to the whole area. Rating : December 1994 – Unsatisfactory." National Irish Bank DIRT Theme Audit December 1994 National Irish Bank (NIB) is the old Northern Bank network in Ireland. The Northern is one of the old clearing banks, the four members of the old clearing house and the Irish Banks Standing Committee. In Northern Ireland the network still operates under the name of the Northern Bank. The Bank today is owned by National Australia Bank (NAB) having been acquired from the Midland Bank in 1987. The Irish and Northern Ireland networks constitute two separate banks structurally and corporately with two separate boards and management systems. This change was made after the acquisition from the Midland, prior to which the all-island network functioned as a single bank with its head office in Belfast. However, in very recent times it would appear NIB has come again to be directed to a significant degree from Belfast, the headquarters of NAB’s Northern Bank subsidiary. The present chairman of NIB is Sir David Fell from Northern Ireland and the Chief Executive, Mr. D. Price, is also from Northern Ireland (and from Northern Bank). Both these appointments date from early 1999. 1. Mr. Spain’s Lack of Knowledge Between 1989 and January 1999 Mr. A. Spain was Chairman of the Board of Directors of National Irish Bank. In his evidence to the Sub-Committee Mr. Spain communicated a significant lack of knowledge of the underlying state of affairs in NIB during his occupancy of the chair in respect of non-compliance with the law as regards DIRT.

He stated that the detailed documentation of the senior management that showed recurring concern about non-compliance was not brought to his attention, to the attention of the audit committee or to the attention of the Board of Directors. This did not in any way surprise Mr. Spain. On the question of the Theme Audit of DIRT carried out in 1994, and which rated the performance of the Bank "Unsatisfactory", Mr. Spain stated that he was not informed of its detailed contents and that he is not surprised that he wasn’t. Deputy Ardagh:…..your reluctance to be able to…..or your inability to be able to answer… doesn’t look good in the eyes of … my eyes anyway. Mr. Spain: Well I can’t help that, Deputy Ardagh. Deputy Ardagh: Can you not? OK. Chairman: No, we can’t leave it at that. You were chairman of the audit committee at that stage? Mr. Spain: Absolutely. Chairman: And this is regarding the DIRT Theme Audit? Mr. Spain: Yes but that is not a document which came to the audit committee Chairman: It didn’t. Are you surprised that it didn’t ? Mr. Spain: I’m not a bit surprised. Chairman, the individual audit reports do not come to the audit committee, and that’s normal with all audit committees. A summary of the key points of any particular audit or any particular activity…comes to the audit committee… Hearings 17 September 1999, Morning Session According to Mr. Spain "audit committees do not get into detail – they just couldn’t function otherwise. Remember that audit committees……consist of non-executive directors….There’s a very limited time input that non-executive directors can put into any company that they are involved with but it is very critical what they do, absolutely critical." Hearings 17 September 1999, Morning Session Mr. Spain has a deep and expert knowledge of corporate governance, management, the responsibilities of directors and the role of audit. He is an accountant by profession, was Senior Partner in the accountancy firm SKC (now KPMG), has been a director of many companies and was one time Chairman and Chief Executive of the B and I shipping line. In the course of his evidence Mr. Spain supplied many definitions – of the role of a director, of the role of a Chairman, of the role of an audit committee and so on. All of his definitions tended to emphasise the technical, technocratic, organisational and the procedural. They did not tend to deal with issues of governance, behaviour and ethics.

On the role of the audit committee Mr. Spain opined that its role is: "to provide the framework and the infrastructure so that the whole of the audit process can work effectively, to see that there is an appropriate audit resource, an audit function, in place, that it’s staffed by competent and capable people and that it functions in an independent fashion." Chairman: But you do not see that the audit committee’s …. A fundamental function of any audit committee would be to ensure probity, efficiency and effectiveness of the organisation? Mr. Spain: Yes, and I don’t think – I think what I’ve just said fully encompasses that. Chairman: Well I didn’t hear it mentioned, but…. Hearings 17 September 1999, Morning Session Mr. Spain’s definition of the role of the Chairman of the Board was also technical and organisational: "I see it as his responsibility to ensure that the board is properly organised, properly constituted, meets regularly and deals with the normal board agendas in a proper way. The board has one very significant responsibility which is to ensure that there is proper management in place to manage the bank and the key to that is the Chief Executive,…" Hearings 17 September 1999, Morning Session Mr. Spain was Chairman of the audit committee as well as of the main board. The committee met quarterly and was present with summary information. Mr. Spain:……what did come to our attention is here, Deputy Ardagh, and I’m sure that all sorts of communications, either written or verbal, take place between executives within any organisation, but that only that which is relevant to the audit committee will be selected by the head of audit……or senior management if they want to bring things to the audit committee. Hearings 17 September 1999, Morning Session Mr. Spain’s vision of a board including non-executive directors is one meeting periodically but with limited time available and the board putting its trust in a management put in place to do the job of management and external auditors as a final check. Directors deal essentially with "high level issues or macro issues" and it is the duty or the initiative of management to bring information to the board. The most critical decision for the board in this scheme is the selection and appointment of the Chief Executive Officer. The initiative after that is with management and not really with the board in Mr. Spain’s model. 2. Management Initiatives On 7 August 1991 the general manager responsible, Mr. J.F. Brennan, circulated to regional managers at NIB a private and confidential notification. He reported that over the previous twelve months Revenue had been "extremely active in the pursuit of what they term "bogus" non-resident accounts." It was this circular that reported the general manager’s own research, his trawl of the computer system, and what that discovered. The circular also referred to earlier cautions from his office: "As far back as October 1989 I wrote to each branch manager on this thorny subject. This was prompted by comments made in our auditors letter when it was disclosed that their random sample….illustrated an

absence of correct documentation to support tax exempt status. I followed this with a second letter in January 1990 at which time I sought, and later received from all branches, confirmation that declaration forms were held for all non-resident accounts." 3. Mr. Hunt’s Memorandum Deputy Ardagh: Mr. G. Hunt, or is it Miss G Hunt or Mr. G Hunt – G Hunt?… Mr. Spain: Gerry Hunt. He was an executive within the bank. Deputy Ardagh: And what was his responsibility? Mr. Spain: Again, I couldn’t tell you what his responsibilities were at the time. This is a---Deputy Ardagh: Was he a senior executive? Mr. Spain: You’re asking me about an internal memorandum. This is a document, of course, which would not have come to the audit committee also. Hearings 17 September 1999, Morning Session In November 1993 Mr. G. Hunt wrote a memorandum to Mr. Brennan and senior management on the issue of DIRT. He reported that he had received three phone calls from Revenue and the Department of Finance on the 1993 tax amnesty. The officials were "clearly unhappy about the alleged actions of a number of bank officials ." He reported that over the previous 12 months non-resident deposits had grown enormously. He had talked to other executives. There was a feeling that documentation problems existed on non-resident deposits. He concluded: "It is essential to advise all managers of the immediate risks and the personal penalties. There can be no longer be excuses for sloppiness in this area and we have been given advance warning." Roughly a week later the general manager, Mr. Brennan, circulated to a wider group of managers a memorandum based on that of Mr. Hunt. All branch managers were also circulated that day by Mr. Brennan with a notice on how they must handle DIRT exempt accounts and news that they would within days be presented with computer print out to assist review of their branch deposits. A compliance certificate, a declaration, was also included to be completed and returned by 20 December at the latest. Head Office was again sending out a big compliance signal. But did the board know of any of this and how was the board to know if at all? 4. What Mr. Brennan said During the Hearings Mr. Spain explained to Deputy Bernard Durkan: "…that’s what Mr. Brennan said. The auditors did not raise any serious issues in a serious way in relation to DIRT in my experience at any time in the history of the bank… the outside auditors. Despite the fact…and I think it’s a good indication of the quality of the operation of the National Irish... The board was not alerted to significant problems within the bank by the outside auditors at any stage and that reflects… again I don’t question, in hindsight, their

judgement on that because I think that it reflects the true position that this bank has been in good shape on this issue throughout those ten years." Hearings 17 September 1999, Morning Session 5. Theme Audits Theme Audit is an innovation by the owners of NIB, NAB, introduced in 1994. Conventional audit is multidimensional. It examines an organisation over a period according to a cycle of inspection and testing. It examines and tests performance and compliance in all defined areas of material risk. Theme Audit adds to the normal internal audit cycle the periodic auditing of an organisation on one theme only. From this perspective an organisation is examined at a single moment or in a very short and concentrated period. Theme Audit is a highly focused snapshot of an organisation from the point of view of the theme examined. To date two themes have been instituted within NIB. The first in 1994 concerned DIRT compliance. Legislative compliance was the subject of the second Theme Audit in 1998. The second audit embraces DIRT although it obviously also extends beyond. The rating of the Bank in both audits was "Unsatisfactory". DIRT was chosen as the initial theme because the normal internal audit cycle was detecting evidence on a regular basis of problems in the area. The 1994 DIRT Theme Audit involved visiting, testing and sampling at twelve branches. It tested DIRT compliance in its two critical dimensions, the residency rules (non-residency) and Special Savings Accounts (SSA) rules (SSAs attracted a reduced rate of DIRT). The branches sampled accounted for 40 per cent of SSAs and 40 per cent of non-resident accounts in the network. The results were dramatic: In general there was a lack of clear and concise guidelines on DIRT compliance issues; SSA notice requirements were not being clearly imposed; An unacceptable high proportion of declarations were missing or incomplete – 40 per cent of nonresidents, 20 per cent of SSAs and 53 per cent of charities. The summation was "very disappointing and management must take immediate steps to improve the situation." And the rating was "Unsatisfactory". No provision was made in the financial accounts arising from the results of the Theme Audit. 6. Mr. Lacey’s Lassitude Deputy Rabbitte: And the theme audit that we have been considering is essentially, you know, a kind of end of term report on your own stewardship. Hearings 16 September 1999, Afternoon Session. On 20 April 1994 Mr. J. Lacey ceased as Chief Executive of NIB. Eight months later internal audit completed and circulated its first Theme Audit Report. The Theme Audit dealt exclusively with the compliance of the Bank with the law in relation to DIRT. The Theme Audit was a snapshot of compliance performance for the year 1994 and was issued on 24 January 1995. Therefore, when the Report of the Theme Audit was finalised and circulated Mr. Lacey had left the Bank.

Mr. Lacey was Chief Executive from 1988 to 20 April 1994. The rating by the Theme Audit of the Bank in respect of compliance of the Bank with the law on DIRT was summed up in one word on page one. The word was ‘Unsatisfactory’. 7. Building the Bank In his period at the top of NIB Mr. Lacey pursued a policy of resource (deposit) growth. In evidence, Mr. Lacey described the background, and the efforts by NIB during his tenure as Chief Executive to build up its deposit base. Mr. Lacey: …When we inherited the bank (in 1986) and started to run it as a bank, it was the first time it was run as a bank in the Republic of Ireland. Prior to that it was run as a range of branches just from Belfast. The bank we started out with had lost £11 million the year before we started. … But we did always have a focus on trying to grow our deposits because we knew that as a small bank in the midst of large banks, we had to be able to fund ourselves because if we were relying on the interbank market, the inter-bank market was predominantly supplied by the two big banks and they, you know, wouldn’t have done us any great favours … Hearings 16 September, Afternoon Session In growing the deposit base, the resources of the Bank, Mr. Lacey said that he and his team did not concentrate on non-resident accounts. Deputy Doherty: And what did the non-residency deposit book represent? Mr. Lacey: … it wasn’t something that I focused on at the time … I think it’s something in the region of 20 per cent is the figure as I recall it from reading the documentation here. But it wasn’t something I focused on, or indeed we focused on as a bank. Hearings 16 September 1999, Afternoon Session What the Bank did focus on was intense marketing directed at customers to grow deposits, the Bank’s life-blood. One such marketing effort was in 1992 after the introduction of Special Savings Accounts (SSAs) in the Finance Act, 1992. These accounts attracted a low rate of DIRT but were restricted in a number of ways. Withdrawal rights were restricted, advance notice of three months was required. The accounts had to be denominated in Irish pounds. Only one account per person was permitted. There was also a ceiling of £50,000 on the amount that could be held on deposit in an SSA. Deputy Ardagh: …… and on one of the save extras, you actually said you’d pay the first year’s DIRT. Mr. Lacey: We saw it as an opportunity. Interest rates might have been 16 or 20 per cent, whatever they were at the time. We saw it as an opportunity to try and build our deposit base and say "look, we'll pay the first year’s DIRT for you". Hearings 16 September 1999, Afternoon Session Apparently, this effort also had some consequences for DIRT compliance. Deputy Ardagh: It didn’t work out that way. There was 91 per cent error rate on the forms.

Mr. Lacey: Yeah, the 91 per cent…I don’t know the background to that. I don’t know how many withdrawals they’re talking about because you must remember, as I said, Deputy, that on special savings accounts, it’s not an account that you’d have regular withdrawals on. That’s more like the passbook account where people would be going making regular--Deputy Ardagh: Well you shouldn’t have regular withdrawals on it. Hearings 16 September 1999, Afternoon Session. 8. Other Evidence of a Problem The 1994 Theme Audit was not the first intimation that NIB had of a problem with DIRT compliance. Successive internal audit reviews had highlighted instances of non- compliance. The external auditor had raised the issue in management letters on several occasions. The Bank had identified serious noncompliance in a number of branches. Mr. Lacey also had acquired experience of the problem in other banks and was alert to the problem. Deputy Durkan: So there was an ongoing alert to what other financial institutions were doing as well during that period? Mr.Lacey: Well sure, Deputy, you see, when you’re operating throughout the country in towns, as you know, unless you were asleep, you would know what was going on. And certainly, I knew what was going on. I mean, I travelled around the country as well… Hearings 16 September1999, Afternoon Session. The Comptroller and Auditor General in his Report of his Investigation highlighted two cases of Revenue investigations that linked three branches of NIB, Artane, Malahide and O’Connell Street, Dublin between the years 1988 and 1992. The cases involved a web of deceit and illegality and entangled National Irish Investment Bank (NIIB) and banks in the United Kingdom and the Channel Islands. The conclusion of Revenue at one stage was that NIB was proving "obstructive" and "uncooperative". Mr. Lacey: Yeah. I’ve read the section in the report and I’ve tried to talk to people about it at the time and I really can’t get any wiser than what was here, but I wasn’t aware of it... Hearings 16 September 1999, Afternoon Session This was the backdrop to the 1994 Theme Audit, the first focused attempt by NIB to audit the scale of the problem. 9. Mr. Lacey’s Response The Chief Executive regularly was in attendance at audit committee meetings. As Chief Executive internal audit also had direct access to Mr. Lacey. He was also active in promoting his view that the bank had an obligation to ensure compliance with the DIRT legislation, as regards both documentation and authentication of status. In his evidence Mr. Lacey referred to the procedures documentation circulated to branches. He was also very specific on what he saw as the responsibilities of the branch managers in relation to bogus non-resident accounts. Mr. Lacey: …we said, "Look, if it’s a non-resident you have to be satisfied and certainly there has to be nothing to indicate to you in any way that the person is resident".

Hearings 16 September 1999, Afternoon Session. Mr. Lacey described a structure informed by procedures and guidelines laid down by the board of the bank, within which he would be surprised if branch officials considered acting in a non-compliant manner. Deputy Doherty: And on identification, how did you deal with that? Mr. Lacey: Identification was that the staff had to satisfy themselves and take reasonable care to satisfy themselves that the person was non-resident… Deputy Doherty: That would include what kind of proofs? Mr. Lacey: The main proof on that was, as our branches were throughout the country and mainly in provincial towns, the main proof was that the branch staff had to ensure, in as far as practical, that the person was a non-resident and I always quoted the example that if that was a person that was living down the street from you or a person that you were meeting going to Mass or in a pub or that, don’t tell me or tell anybody else that that’s a non-resident. So we tended to focus on that basis … Hearings 16 September 1999, Afternoon Session In evidence to the Sub-Committee, Mr. Lacey was satisfied that he had dealt fully with the only significant DIRT problem arising during his tenure as Chief Executive. This was in Castlebar, where a major investigation into a branch revealed significant non-compliance and resulted in disciplinary action. Mr. Lacey: … Now I can only recall one particular one, I think, and I think it is here somplace, Castlebar…where the report was graded unsatisfactory due to a combination of events, one of them being significant problems with non-resident accounts and action was taken as a result of that report. A major investigation was carried out in the branch to really go through it in detail. The manager had moved out of the branch about three or four months before the audit took place to another branch … We took the manager … out of the branch network system and demoted and placed in a head office position where he would have had no role in relation to deposit accounts …So that, as far as I can remember now was the only one I can highlight … Hearings 16 September 1999, Afternoon Session Mr. Lacey believed that the issue, in so far as it existed at all, was merely documentary. He did not believe that documentary problems should trigger a DIRT liability. No calculation of potential liability was made where deficiencies were identified. The Chief Executive was satisfied that there was not a significant problem where DIRT compliance was concerned. The findings of the 1994 Theme Audit do not support this claim. 10. Mr. Spain’s Radar Screen In oral evidence Mr. Spain described to Deputy Bernard Durkan the impact on the audit committee of the dramatic 1994 Theme Audit: Mr. Spain: The first time it (DIRT) became an issue was the about the theme audit, and don’t forget we that was report to us in the February ‘95 quarterly report and in the subsequent and following quarterly

report, the May ‘95 quarterly report, it was reported to us that, that the corrective actions which were indicated earlier would be taken. It was reported to us that they had been taken and after that the issue disappeared off the radar screen… Hearings 17 September 1999, Morning Session Mr. Spain did add that "the action taken by management following the Theme Audit is again one of the key contributors to the clean position of the bank, the very satisfactory position which emerged in 1998." 11. 1998 Theme Audit What emerged in 1998 was the result of a second Theme Audit. The result of that Theme Audit was a rating of "Unsatisfactory". The Theme Audited in 1998 was legislative compliance, which is to say compliance with the law generally in NIB. As the operation of DIRT is so surrounded with legal compliance requirements (in respect of non-residency and the operation of SSAs as well as selfassessment on the part of the banks) the 1998 Theme Audit is relevant to this Parliamentary Inquiry. The 1998 Theme Audit was in effect a second DIRT audit. The Theme Audit concluded and reported that: 18 per cent of sampled non-resident accounts were found to be erroneous when tested against current legislative requirements; 21 per cent of sample SSA accounts were in error against the same test; 79 per cent of withdrawals from SSAs examined were made without the required notice being given; up to 4 per cent of customers with SSAs may be ineligible for these accounts; controls at branch level have not been effective despite confirmations to the contrary from branch management. The Theme Audit Report commented in respect of non-resident accounts and SSA accounts that inter alia: "It was evident that in some cases blank declarations had been signed by customers and branch staff had not subsequently ensured that the declarations were fully completed." This was the situation at 1998 as determined by the Theme Audit. Critically the Report concluded that: "In order to place the Bank in a better informed position prior to any negotiation with the Revenue Commissioners it is recommended that the planned 100% review of the SSA and NOR account populations commences immediately and is sufficiently resourced to enable a fast resolution." The 100 per cent review did emanate and quickly – a similar approach, a full review of accounts, followed the 1994 Theme Audit. The results of the 100 per cent review would prove critical to the offer of settlement that would be made to Revenue in 1998. 12. CMI: Letter to Revenue On 28 September1998 Mr. Richard Bowden of NIB wrote a highly detailed four page letter, Strictly Private

and Addressee only to Mr. P.S. Ó Donghaile of Revenue at Setanta Centre. Mr. Ó Donghaile was a senior official present involved in prosecution policy within Investigation Branch, which is a section of the Office of the Chief Inspector of Taxes. The letter’s concluding sentence was: "We therefore request that you accept this proposal as reasonable in all the circumstances and allow NIB to proceed forward with its daily business while recognising that a number of non tax related issues still remain unresolved." This letter was the culmination of correspondence and meetings between NIB and its tax advisors KPMG (also the Bank’s external auditors) and Revenue through 1998. From KPMG Mr. McEvoy was the tax advisor. The activity was concerned with two areas, CMI operated through National Irish Investment Bank (NIIB) and secondly, ordinary non-resident accounts. Revenue insisted that NIB itself assess for Revenue its ongoing obligation for the ten years 1988 to 1998 to make full and complete returns for DIRT. 13. The Letter, the Tax Advisor, the Hundred per cent Check and the Look-Back The core of the letter of 28 September 1998 is the presentation of the look-back calculation. In March 1998, NIB estimated, as a result of a total check, that it had total deposits of £606,498 in respect of which "non-resident deposit declarations have not been completed". It is important to understand what this phraseology means. Mr. McEvoy: Well, I took the strong view that if the form was missing the bank had a clear liability and that basically an amount of tax should be offered up to the Revenue Commissioners. In relation to the other deficiencies, I felt that that was a matter for discussion with the Revenue Commissioners in relation to those deficiencies. Hearings 21 September 1999, Afternoon Session In other words the calculations relate only to absence of documentation and to no other deficiency. The starting figure therefore, is not a full estimate. The second step was to work out a formula for the lookback. Mr. McEvoy: …It all vacillates back from the £606,000 worth of forms which basically were not available for examination. And that….as a percentage of the total deposit book of £263 million gave an error rate of 0.23 of 1 per cent. That error calculation was applied to the first six months of 1998, also to 1997 and 1996. However, because of the impression that the position was somewhat worse in 1995 and 1994, that error rate was doubled, and because of the further impression that the position was significantly worse in the earlier years, that amount was multiplied by ten. And that is the basis of the calculations. Hearings 21 September 1999, Afternoon Session The exercise also did not use the bank’s accounts data but rather the returns made by the Bank to the Central Bank, which has a different definition to the Revenue of non-residency. Nor did the exercise avail of the results of the 1994 Theme Audit ( the 1998 Theme Audit was still to be completed). A figure of £412,000 was determined. 14. The Financial Accounts for 1998 The lookback calculation and the presentation to Revenue coincided with the end of the financial year at NIB – its fiscal year is the end of September. It therefore, fell at the same time to the Bank and its external

auditor (KPMG being the audit partner) to consider the accounts. It was decided to include in the accounts for 1998 a provision for a potential liability of £1 million in DIRT payment to Revenue. The basis for the figure was the calculation of £412,000 adjusted for interest and penalties. Again the 1994 Theme Audit was not drawn upon and of course no provision was included for other than missing declarations.

The Sub-Committee finds: 1. Letters urging compliance from top executives in NIB mattered for very little throughout the branch network where deficiencies were widespread and uncorrected. 2. The introduction of the Theme Audit by National Australia Bank was a valuable innovation the findings of which were largely ignored by senior management of NIB. 3. In respect of the widespread breaches discovered by the 1994 Theme Audit NIB failed to take effective action. 4. Notwithstanding the grave warnings accompanying the 1994 Theme Audit, the results of the 1998 Theme Audit were not markedly different. 5. NIB failed to disclose the contents of the 1994 Theme Audit to Revenue although they were in correspondence with Revenue on the matters encompassed by the audit. 6. NIB relied on a formula worked out with their tax advisors KPMG for their negotiations with Revenue which ignored any risk factor other than absence of documentation and which disregarded the findings of the 1994 Theme Audit. 7. The Audit Committee of the NIB Board of Directors lacked effectiveness, influence and direction.


1. Irish Life & Permanent (formerly Irish Permanent Building Society) Irish Life and Permanent is a rapidly evolving and growing new universal bank in Ireland. It is in essence a merger of Irish Life and Irish Permanent plc, the demutualised building society, the Irish Permanent. In 1994, the Bank also acquired Guinness & Mahon Bank. All of these developments occurred within the period covered by this Inquiry. In 1986 the Irish Permanent was a building society applying Composite Rate Tax to its deposit base. Its business was that of home mortgages. From 1989 the Society entered new arenas as a result of the enactment of the Building Societies Act, 1989. This liberalised the building societies among other things, allowing them to enter businesses other than mortgage provision. In 1994 the Society demutualised and floated on the stock exchange. In 1994, it took over Guinness & Mahon and in 1998 it merged with Irish Life, the principal life assurer in Ireland. The merger was completed in 1999. Irish Permanent therefore, has gone from being a simple mutual mortgage provider in the home loan market (where it was the dominant player) to being a bank focused on growth and with a quoted share. While it was the main mortgage provider it was in its management structure, procedures and controls a relatively unsophisticated entity until comparatively recently. Reflecting perhaps its origins and the approaches of an earlier era the Irish Permanent was from the management point of view characterised until the mid to late 1980s by a certain informality of approach, an absence of paperwork and highly personalised at the top level with the organisation such as it was dependent on one or two people. In evidence Dr. E. Farrell, former Chief Executive Officer stated: "When I went in originally there was no formalised structure in 1975. There were two departments who were trying to cope because the previous chairman, managing director and secretary, namely my father who died in 1975, had as his right hand man the chief accountant and secretary, who had died in 1974. My father was taking over the Provident Building Society .... He was dealing with a situation of explosive growth, for I think we acquired 20 to 30 branches in the early ‘70s. The whole structure was overloaded, it was on the verge of collapse." Hearings 10 September 1999, Morning Session So Dr. Farrell put in place a departmental and regional structure with a general manager established. Internal audit was subsequently introduced and an audit committee of the board established in the early 1980s and training was enhanced. "My main function was to put an administration in place ... The money was pouring in, thanks to the composite rate and the confidentiality and the fact that the banks had a history of inspectability and strikes. So if you like, the societies were the haven of choice - and I don’t mean haven in any sheltering sense - for Irish savers. ……So we had to increase our staff numbers ... We then had to find a head office to accommodate them, which we eventually did in 1981 approximately."

Hearings 10 September 1999, Morning Session While Dr. Farrell was putting in place an administration and management system there was still a high degree of informality at the top. Dr. Farrell was managing director. The offices of assistant managing director, company secretary and chief accountant were all held by one person, Mr. George Tracey. This would appear to have remained the situation up until 1993 or thereabouts. A new internal auditor was appointed in 1987. It was also only at that stage that a branch audit programme was begun. The programme from the beginning tested DIRT documentation. Between 1987 and 1992 the audit programme was comprehensive and intensive. Mr. D. Kelly, Head of Internal Audit stated: Mr. Kelly: I aimed to achieve 100 per cent coverage of all of the branches every year and then there were rotational plans to cover other activities ... arrears ... investment services ... And then similarly, on the agency network, a programme was put in to visit each agency on a number of occasions each year. That work was delegated to regional managers and assistant regional managers who completed programmes of work specified by the internal audit department ... Hearings 10 September 1999, Morning Session It was also the practice at the then Society to require application forms to be returned to Head Office for inspection and approval. Dr. Farrell: ... Deputy Ardagh, the non-resident account could not be opened unless the declaration was physically vetted in Head Office and if it didn’t arise and an application for same came up which was designated as non-resident, interest would be deducted in the absence of a declaration. Hearings 10 September 1999, Morning Session In 1992 the internal audit cycle ceased testing DIRT as a risk area. The bank was becoming a conventional lender and had access to capital from other than savers alone. Mr. Kelly: ... for a number of years the Irish Permanent - the emphasis of the Irish Permanent was on investment accounts. We literally had people who were prepared to go on waiting lists for mortgages because we simply hadn’t got the money coming in. That situation changed dramatically in and around around 1992, when we had access to wholesale funding and the emphasis of the organisation changed from being a deposit taking institution to being a lending institution and I felt that internal audit should reflect that change ..." Hearings 10 September 1999, Morning Session 2. Killarney Mr. Kelly: It was just mind-boggling Hearings 10 September 1999, Morning Session

In the Killarney Branch of the Irish Permanent in 1991 Mr. Kelly’s internal audit detected dubious paper work supporting non-resident accounts. There was an investigation. It discovered that there was a very large scale operation of bogus non-resident accounts at the Branch. It was being organised and abetted by the Manager. Internal audit insisted on a mass reclassification - accounts with deposits of more than £5 million were reclassified as resident. After the reclassification the manager claimed to his regional manager that the branch had lost deposits - more than £1 million - through not being able to accommodate residents seeking to establish bogus non-resident accounts. Internal audit also discovered that the branch continued to open bogus non-resident accounts after the inspection and the reclassification. This led to further action by Mr. Kelly in policing the deposit taking system. Mr. Kelly: I can only say what action I took, which was that I responded very quickly, and in what I now regret was quite a heated manner, pointing out that I felt this letter was totally unacceptable, that it seemed to me that the Killarney manager, putting it very crudely, was saying "here’s all the money I’ve lost because you’re making me play by the rules", and I just didn’t accept that for a second. I mean I thought this was just absolutely totally unacceptable ... Chairman: Some of them were opened after the reclassification exercise? Mr. Kelly: Yes. All he was doing to my mind was saying you know "I can’t be as high a performer as I used to be in the past because you’ve tied my hands by making me follow the rules". I over-reacted perhaps but I thought that was just ludicrous. ……I wrote a memo, an extremely heated memo ... pointing out the defects in the logic in projecting this whole argument. Chairman: This loss was one branch in Killarney. Is that right? Mr. Kelly: No. I felt this was spurious, that this was just absolute rubbish. …... I mean ... it was like saying "I’m losing all this business because you’re making me follow the rules." You know, so what? You must follow the rules. Hearings 10 September 1999, Morning Session In the case of Killarney - as was policy at Irish Permanent - Revenue was not informed and DIRT was not applied retrospectively. Explaining the policy during the Hearings the former Managing Director Dr. Farrell said that this was the understanding and it was never questioned. However according to the current Chief Executive Mr. David Went, since the present controversy arose the bank has sought a specific legal opinion on the issue. Deputy Rabbitte: ... ‘No arrears of DIRT was paid to the Revenue arising from the reclassification of funds.’ Now I am not entirely clear Dr. Farrell, having listened to you as to how it is that there wasn’t a retrospective liability in DIRT. Dr. Farrell: Well as I mentioned earlier Deputy Rabbitte in reference to the same question that was the view of the person who was responsible for those areas, namely audit, accountancy and taxation and he was the person upon whom the board relied in all these matters. ……I’m not certain that he (Mr. Tracey) took the matter to the Revenue. I think at the time and we have to put our minds back in time to a certain timeframe and certain scenario where you discover a one-off

situation, you feel you’ve rectified it and you feel that your duty is to pay tax going forward. I don’t recall that I was personally consulted or informed of any advices which stated that there was no contingent liability ... …

Mr. Douglas: …Since the current discussions on DIRT have started, we did seek legal opinion on that and the legal opinion informed us that the institution was fixed with the knowledge of its manager in terms of the opening of an account and that, therefore, we were fixed with that knowledge even though the manager was acting in a manner contrary to ... the practices and procedures of the institution. Hearings 10 September 1999, Morning Session In 1998 internal audit reintroduced testing of DIRT accounts for compliance having abandoned testing in 1992. Since obtaining its legal advice the Irish Permanent has entered into discussion with Revenue about Killarney. The matter has yet to be resolved. 3. Guinness & Mahon (Ansbacher Deposits) "I would regard it as a fairly unique situation, that there is this circuitous route of the same money going from residents in Ireland to Ansbacher Cayman and then a similar amount of money coming back on deposit, but that, as I say, is, I think, a reasonable situation." Mr. R. Douglas, Chairman, Irish Life & Permanent and Former Chief Executive Officer of the Irish Permanent Building Society Hearings 13 September 1999, Afternoon Session Guinness & Mahon (Ansbacher Deposits) is from the standpoint of this Inquiry, as with IBI in the case of Bank of Ireland, a "related matter". Ansbacher is being dealt with more totally in another place. When in 1994 the bank that is now Irish Life and Permanent acquired Guinness & Mahon Bank (G & M) it bought if not a problem, at least an issue. Between 1986 and 1993 Guinness & Mahon had a particular group of customers, beneficial owners of funds amounting to some millions of pounds at the Bank. The relationship between these clients and Guinness & Mahon was not straightforward. To begin with, these moneys were not placed in the normal way on deposit. The £37 million was formally placed on deposit at Guinness & Mahon by a foreign bank, Ansbacher Cayman. These accounts were also flagged DIRT exempt on the Guinness & Mahon system. They were classed as foreign currency deposits owned by a non-resident company (Ansbacher Cayman). When the Irish Permanent, as it then was, acquired Guinness & Mahon it inherited the consequences of these accounts (the Ansbacher Deposits) as they operated at Guinness & Mahon between 1986 and 1993. There were no consequences however until the publication of the Report of the McCracken Tribunal, which revealed the existence of the Ansbacher Deposits. The device used in the Ansbacher Deposits is simple. The Deposits used the law of contract and established and maintained sets of contractual relationships within this framework. Mr. Douglas: It’s clear from the documentation that there were certain depositors in this jurisdiction who had, effectively, placed money on deposit with Ansbacher Cayman, and that is one set of relationships.

For its part then, Ansbacher Cayman had placed the money on deposit with Guinness & Mahon and that’s a quite different and unconnected - in effect, as I understand the law - relationship. Deputy Rabbitte: Is it the same money? Mr. Douglas: Well, in effect, legally it’s not the same money. ... there was an amount equating with the amount that these Irish residents had placed on deposit… with Guinness & Mahon from Ansbacher Cayman. Deputy Rabbitte: So, you’d forgive the man in the street for believing that it was the same money? Mr. Douglas: I think that obviously there was a clear - it would appear from the documentation connection. Deputy Rabbitte: ... do you professionally consider, Mr. Douglas, that this is a fairly extraordinary legal construct? Mr. Douglas: To be frank, Deputy, I don’t. I think that is the simple straightforward set of relationships that exist between a depositor and a bank. Hearings 13 September 1999, Afternoon Session From the point of view of the law and the operation of DIRT the deposits at Guinness & Mahon were, in the view of Guinness & Mahon, owned by Ansbacher Cayman and were held in foreign currency. This made them corporate deposits, foreign currency deposits and non-resident deposits. Mr. Douglas:… The relationship between Ansbacher and Guinness & Mahon, as it then was, is one set of relationships and ... in relation to the accounts held by Guinness & Mahon from Ansbacher, ... the owner of those in law is in effect, Ansbacher ... . They in turn have a relationship of a similar nature with ... the Irish depositors that had effectively, placed the money on deposit with Ansbacher. Hearings 13 September 1999, Afternoon Session The Bank did not look behind the deposits to another set of relationships - between Ansbacher and certain Irish residents. Chairman: Is it not a classic case of laundering money? Isn’t it money laundering? Mr. Douglas: We are going back quite some time here Chairman. I think it is a procedure, looking at the evidence that we now have, that was designed to actually avoid paying tax on interest on deposits. Chairman: Well "avoid" is a mild word. Mr. Douglas: It may be "evade". Chairman: It may be "evade". Hearings 13 September 1999, Afternoon Session

Whether evade or avoid Irish Life and Permanent is resisting payment of full retrospection in respect of DIRT on these accounts. It’s contention is that only eight of the accounts are strictly under the law liable to DIRT. These eight accounts did contain Irish pound deposits and if they were to be exempt from DIRT would require to be supported by the relevant documentation. This was not the case and so, strictly, the Bank claims, these are the only liable deposits. There continues to be correspondence between the Revenue and Irish Life and Permanent on the issue of the Ansbacher Deposits. The Bank has paid a sum of £52,863 being the amount of relevant DIRT due (including interest and penalties) in its estimation. The matter remains unresolved and Revenue has indicated that it is going to do an audit of the Group. The Sub-Committee finds: 1. Whereas the response of Irish Permanent’s Internal Auditor to the serious breaches at Killarney is commendable, the Sub-Committee finds it unacceptable that no arrears of DIRT were paid to Revenue. 2. Given the breaches discovered, including Killarney, the decision of Irish Permanent’s Internal Auditor to abandon DIRT audits between 1992 and 1998 to be ill-judged. 3. The decision to abandon DIRT audits between 1992-1998 to be a significant contributory factor leading to the necessity to reclassify 2,380 accounts in June 1999. 4. Where breaches of DIRT legislation were found in Irish Permanent and led to reclassifications, payment of arrears of DIRT were generally not made nor was there disclosure to Revenue. 5. The contention by Mr. Roy Douglas of Irish Life and Permanent (now owners of Guinness & Mahon) that the Ansbacher device "is the simple straightforward set of relationships that exist between a depositor and a bank" is astonishing and lacking in any credibility. The Sub-Committee makes no other finding, since these issues are being inquired into elsewhere.


ACCBank 1992 - 1993 "Despite repeated exhortations to regularise matters, non-resident Declarations have continued to be the subject of comment in both Internal Audit reports and in the External Auditor's Management letters. Branches now have no choice in the matter and must proceed immediately to tidy up the position. Where no Declaration is held and none can be procured by 31 December the relevant account(s) must be switched to resident status." Jim Skelly, General Manager, Retail Banking,ACCBank General Notice to all Branch Managers, 2 December 1992. "The state of disarray which existed with the declarations, the failure of branches to comply with direct instructions on the issue and the fact that written assurances by Branch Managers in December 1992 were found to be materially untrue are indicative of an attitude to banking standards and to legal requirements which needs sharply to be reversed." John Roche, Internal Audit Manager, ACCBank Memorandum to Jim Skelly, 16 March 1993. 1. Introduction~ In November 1992, Mr. Billy Moore, Deputy Chief Executive at ACCBank, senior executive responsible for compliance and long-time employee of ACC had been given an additional responsibility. His task was to oversee the preparation of a Long Form Report. A Long Form Report is a Report prepared by external professionals for a company that is about to be sold or floated on the stock exchange. ACCBank at this point was owned by the Government — the Minister for Finance was the shareholder. The Government had decided to privatise the Bank and therefore, a Long Form Report was called for. This Report was therefore, to be of critical importance for the future of the Bank. Accountants Ernst & Young were preparing the Report. This firm was also the Bank's external auditor and tax advisor. The Bank and the firm knew each other well for many years and a team of twenty from Ernst and Young had spent some time carrying out their assignment to prepare the Report. At the end of November, Mr. Moore received a first draft of the Long Form Report. On the face of it the proposed privatisation of ACCBank represented a remarkable achievement, particularly by its Chief Executive Mr. John McCloskey. Mr. McCloskey became Chief Executive of the ACCBank in 1988, having joined the Bank in 1973. 2. On the Brink of Disaster When Mr. McCloskey was appointed Chief Executive the position had been vacant for a time. The then Chairman of the board of directors, Mr. Dan McGing, was also acting Chief Executive. Mr. McGing was grappling with a bank whose solvency and survival was in question.

Deputy Ardagh: … when you were initially appointed. Could we go back to that again. It was in 1987, is that correct? Mr. McGing: December '87, that's right. Deputy Ardagh: And the bank was, practically, insolvent is, I think the words you used. Mr. McGing: I believe so, yes. Deputy Ardagh: You came in … you were acting chief executive or chief operation officer … Mr. McGing: Well, my title was chairman. Now, de facto, there was no chief executive there at the time. There was a deputy chief executive who continued to be there and I was advised by him, and by management and by my colleagues on the board who had been there before me. Hearings 14 September 1999, Afternoon Session The Minister for Finance appoints the Chairman and the Board of Directors and the practice also is to include as a director, one civil servant from the Department of Finance. The Bank's main business in the 1980s was the provision of farm credit. It was for this purpose that the Bank was established by the State in the 1920s. However, during the 1980s agriculture in Ireland suffered a slump. At ACCBank bad debts became a problem — at one point almost 40 per cent of the Bank’s loanbook was non-performing. Only a guarantee of £18 million by the Minister for Finance prevented insolvency and all the consequent negative impacts for the banking system, the Irish taxpayer and the international reputation of the State. 3. Turnaround By the early 1990s this was in the past. The Bank was repositioning itself in the marketplace. It was no longer engaged largely in farm credit. It was expanding its role in deposit-taking, developing its corporate side and adding other services such as mortgages. It was in the process of becoming a small general retail bank and was reporting solid deposit and profit growth. ACCBank was achieving all of this in an increasingly competitive marketplace. In 1989 controls on building societies were removed. These mutual organisations were now able to expand their activities, offering financial services in competition with banks. The financial services sector in the early 1990s became an ever more competitive marketplace. The competition for deposits, the life-blood of banking, was intense. The State at this time also made its contribution to the reconstruction of ACCBank. It guaranteed deposits with ACC to the value of over £500 million. In 1992/93 it all seemed to have worked splendidly. ACCBank, back from the brink of insolvency, seemed to have a balance sheet value of the order of £38 million. 4. The Long Form Report A Long Form Report (LFR) is a normal information requirement in a sale or flotation. The purpose is to help prospective buyers as they undertake their due diligence investigations into the status and worth of a company, the position in relation to assets and liabilities and the health of the business. Ernst and Young commenced work on the Report in late 1992. By late November a first draft was ready. A team of twenty was led by an Ernst & Young manager and overseen by Mr. J Hogan, Managing Partner. Mr. Hogan was also the Audit Partner responsible for the ACC External Audit.

Testing of non-resident deposit accounts for documentary compliance suggested a deposit base riddled with non-compliance in respect of DIRT rules (bogus non-resident accounts and incomplete and faulty documentation). Taking a prudent view, the accountants counted faulty and incomplete documentation as non-compliance. They grossed up the sample, applying the percentages discovered across the entire deposit base of the Bank. The draft estimated that there might be a liability for DIRT of £17.5 million – before any penalties or interest that might be imposed by Revenue, if this was a true picture. The Bank had net assets of just £38 million For the second time in less than a decade ACCBank had serious financial problems. The crisis of the 1980s was due to a downturn in farming. The crisis of the 1990s, if crisis it was, appeared to be due to the Bank's involvement and complicity in large-scale flouting of DIRT legislation. In evidence to the Sub-Committee, Mr. McGing, then Chairman of the Board of Directors stated, he was never given a copy of the first draft of the LFR. He excused this as an isolated incident. The Minister for Finance, the shareholder, also was not informed. ACCBank has consistently disputed and criticised the methodology used to carry out the LFR since it was circulated in December 1992. The principal criticisms are inappropriate sampling technique; the short time taken to complete the task; and the inclusion of the most minor technical breach in relation to declarations as a risk factor in respect of authenticity. Therefore, ACCBank has contested the proposition that there was a material problem with compliance in its branch network. However the sampling approach, to visit eight branches to check whether the Bank was compliant with its statutory documentary obligations in respect of DIRT, was decided by Ernst & Young with the Bank's agreement. In total, the sample chosen tested 45 per cent of the entire non-resident deposit base at that time. Ernst & Young employed a rigorous technical approach, treating all accounts as potentially liable to DIRT if there was any perceived documentary deficiency. This exercise involved extrapolating from the results of branch visits, to the Bank as a whole for the 1987-1992 period. Asked by Deputy Seán Ardagh how he went about doing that part of the LFR relating to DIRT, the Ernst & Young Managing Partner, Mr. Hogan replied as follows: Mr. Hogan: Well … there was nothing specific in relation to DIRT initially. What happened was that one of the issues to be dealt with in the longform report was taxation. I discussed with my taxation colleagues the various issues under which we would look at, or get from the bank, details of their taxation position. In relation to DIRT, we decided that, in consultation with Mr. Moore, that we would examine the situation on the ground in relation to a number of branches and that’s where eight branches came to be selected for a visit. Mr. Hogan: The selection of the eight branches was done on the basis of those which contained the largest quantum of non-resident accounts – that was after receiving a schedule of branches and the level of non-resident deposits in those branches. Deputy Ardagh: You looked at every account … Mr. Hogan: Every account over £20,000. Then the result of that examination, and I would stress Deputy that we took an extremely – I’m trying to find the right word … we took a view that if any declaration, any account was in any way whatsoever not in absolute, strict compliance with the law, then … it fell into a category which was either questionable or well, obviously, when there was no declarations.

Deputy Ardagh: Could you describe that as a prudent way of doing it? Mr. Hogan: Yes, very prudent. Hearings 15 September 1999, Afternoon Session Some 45 per cent of the non-resident accounts in the Bank were checked in this sampling exercise. The information from the survey was then applied across the system and yielded the estimate of £17.5 million. Deputy Ardagh: Right. Now, £17.5 million, established on a very prudential basis. Was that a material amount? Mr. Hogan: Of course, it’s a material amount, Deputy, yes. Hearings 15 September 1999, Afternoon Session Deputy Rabbitte: But what would you have done differently, Mr. Hogan, if you were going about it again? I mean, here you set about----- You told Deputy Ardagh at the outset you selected the eight biggest branches in the corporation, you did every account above £20,000, you went in on the 18th of November and you prudently, very prudently or extremely prudently assessed the situation. Now, what would you do differently if you were doing it again? Mr. Hogan: I wouldn't do it any differently, Deputy. Hearings 15 September 1999, Afternoon Session Later Mr. Hogan stated: Mr. Hogan: I understood the Deputy to ask me, Chairman, would I have approached the exercise that I did in November 1992 on a different basis and I'm saying, no, I wouldn't. Chairman: Would you come to different conclusions? Mr. Hogan: In hindsight ... Deputy ... I probably would have been more careful in relation to the calculation of a liability because the exercise was not undertaken to calculate a liability and I would have been more careful in the manner in which that calculation was made. Deputy Rabbitte: Should an auditor not know the liability? Mr. Hogan: If a liability can be accurately calculated, Deputy, in this area, then, of course, you would know about it. Deputy Rabbitte: But weren't you in the process of an exercise that was far beyond the wildest dreams of any auditor? You had a sample range here that no auditor could possibly have or he wouldn't make the same margin of profit on the accounts if he engaged in this kind of sampling every time he went into a company. Mr. Hogan: That is correct, Deputy, yes.

Deputy Rabbitte: And, therefore, why wasn't it calculated? Well, of course, the answer is it was. Mr. Hogan: It was calculated, as I said before, on an extremely prudent basis. Deputy Rabbitte: Well, have you any idea----- You know, you say you'd do it on the same basis all over again and I don't understand the Chairman's question because it seems to me if you do it on the same basis all over again, you get the same answer but maybe you wouldn't. What do you reckon the figure is? Mr. Hogan: I don't know, Deputy, I haven't calculated it. Hearings 15 September 1999, Afternoon Session The response of Mr. Moore when he received the draft from the Ernst & Young manager leading the Long Form team was disbelief. Deputy Rabbitte: But like, did you not jump up and down … Mr. Moore: I did. I certainly did. Deputy Rabbitte: … when he brought you in the bit of paper first and said, "This is ridiculous"? Mr. Moore: Yes. Hearings 23 September 1999, Afternoon Session The first draft of the LFR was in effect rejected by Mr. Moore. The Long Form team now went on to prepare a second, revised draft. The DIRT calculation was later dropped. The reason given by Ernst & Young for its inclusion in the first draft was to highlight the potential gravity of the situation, to ensure that the matter was investigated in much greater detail and that appropriate steps were taken to establish the facts and address the situation. A further examination of all non-resident accounts and the accompanying documentation in various branches was carried out by ACC internal audit assisted by Ernst & Young audit staff under ACC's instructions. Mr. Hogan: But I think Deputy, the, the most important factor here was that it was, if you like, a warning that there was a serious problem and that more work had to be done, and that is why the additional examination of many thousands of accounts took place by the ACC subsequent to that in December 92 and January 93. Hearings 15 September 1999, Afternoon Session However, there was at this time an enormous problem with bogus non-resident accounts at the Bank. Management was entirely aware of this and in the months prior to the preparation of the LFR and during its compilation the General Manager of Retail Banking, Mr. Jim Skelly, sent managers instructions to regularise these accounts. One such circular was issued in August 1992. It drew attention to the comments made by the External Auditors in their Management Letter for the previous year (1991). Following a poor response there was a second circular in November and then on 2 December 1992 came Mr. Skelly’s most urgent plea:

"I wrote to all branches on two occasions recently asking for confirmation of the position re Declarations on non-resident accounts. Judging from the level of response my request was not regarded as a serious one by about 50 per cent of managers. At this stage Ernst & Young have visited eight branches and found varying levels of non-compliance … ……The problem is a serious one and we have very little time to rectify it. We have been told by the Revenue Commissioners that they intend carrying out an audit/inspection in January, looking specifically at our non-resident deposit book. We must, therefore, have the position regularised by 31 December." All three of these instructions issued through the latter half of 1992 were ignored and many managers misrepresented the true position as they continued to flout the law in relation to the operation of DIRT. Deputy Doherty: … This is not just about non-resident accounts. This is about breaking the law and, regardless of what other priority exists in branch, there must be an absolute regard for the law. … Now there was not legal compliance and, in actual fact, I'm amazed that none of your letters have spelt it out clearly that compliance with the law is what's the essential, at the centre of all of this. Mr. Skelly: Well, if it's not spelt out in those words, Deputy, the intention is … Deputy Doherty: Well, if you break the law, if you break the law or if you comply with the law, this is what's at issue. Were you conscious of the fact that the law was being broken? Mr. Skelly: I was conscious that, yes, that … Deputy Doherty: That the law was being broken. Mr. Skelly: … shortcuts were being taken and we weren't complying with regulatory requirements and that … Deputy Doherty: No, statutory requirements, statutory requirements. This is the law, the law states this. The law stated it in relation to declaration forms and the obligations in relation to the return of DIRT. Mr. Skelly: Yes. Deputy Doherty: So, you are saying - are you happy to say to me that there were breaches of the law and that that maybe should have been stated in the circulars or letters? Mr. Skelly: I am very happy to state it, Deputy, that there were breaches of the law and they were not condoned, I can assure you. Deputy Doherty: And what you were sending out circulars about was about breaches of the law, isn't that true? Mr. Skelly: That's correct. Hearings 23 September 1999, Afternoon Session 5. Revenue Examination Separate from the LFR exercise, ACCBank was in 1992/93 dealing with Revenue on another issue. Revenue was engaged in an examination of PAYE/PRSI and expenses tax compliance in the entire Semi-state sector. The Chief Inspector of Taxes initiated this examination as a result of publicity

highlighting serious irregularities in the then Telecom Eireann and Greencore, both, at that time, semistate companies. Mr. Denis O’Connell of Revenue was in charge of this general inspection. In his evidence to the Committee, Mr. O'Connell stated that before he began this general inspection exercise, he discussed the matter with the Department of Finance to establish that he was not encroaching on the supervisory role of the Department. ACC was advised by letter dated 11 December 1992 that inspectors intended to call to the Bank on the 7 January, 1993. The meeting did not take place on the date scheduled. Accountants Ernst & Young, External Auditors and tax advisors to ACC, on behalf of the Bank, wrote to Revenue on the 4 February 1993 making a voluntary disclosure in relation to PAYE non-compliance. Mr. D. O’Neill, Tax Partner of Ernst & Young and himself a former Revenue official, explained to Deputy Ardagh: Mr. O’Neill: We indicated to the Revenue, we had already started our longform work, and we indicated to the inspector that we wanted to make a disclosure in relation to the PAYE issues which we had uncovered as part of our longform exercise.…and we indicated to Mr. O’Connell that we would be completing our exercise in relation to the PAYE and that we would make a report to him detailing our findings … Hearings 23 September 1999, Afternoon Session In February 1993 Mr. O’Neill and Mr. Smith of Ernst & Young met with Mr. Aidan Nolan, Inspector of Taxes, in his office. No one from ACCBank attended this meeting. The outcome of the meeting was that Revenue was offered a settlement of £350,000 in respect of PAYE non-compliance. This was later approved by the Board of the Revenue on the 1 March 1993. According to Mr. O’Neill and Mr. Smith, non-resident accounts were never mentioned at this meeting of 9 February. In evidence to the Sub-Committee Mr. O'Neill stated that his colleague, Mr. Smith, received a phone call from Mr. Nolan on the 11 February, 1993 seeking to set up a meeting for the 18 February, 1993 and requesting that the issue of non resident accounts be discussed. Mr. Nolan told the Sub-Committee he "was not aware of that". His Revenue colleague, Mr. O'Connell stated he "did not remember it", but does not dispute Mr. Smith's assertion. In any event the meeting of 18 February now went ahead. Three days before the scheduled meeting, on 15 February 1993 Ernst & Young prepared a Report summarising the findings of the joint review initiated after the rejection of the first draft of the Long Form Report. The review was extensive and was carried out by ACC and the External Auditors. The document was an audit working paper prepared as part of the audit process for the year ending 31 December 1992. Amongst the issues it highlighted was a 35 per cent rate of incomplete or questionable declaration forms. Declaration Forms existed in respect of only 49.4 per cent of non-resident accounts. 6. The Meeting The meeting of 18 February 1993 was attended by representatives of ACCBank and its accountants Ernst and Young. For ACCBank, Mr. Moore, Deputy Chief Executive, and Mr. Duggan, General Manager

Finance attended. Mr. Moore had special responsibility for DIRT compliance. Revenue had indicated a wish that the Chief Executive of ACCBank, Mr. McCloskey would attend. He did not. From Ernst and Young Mr. O'Neill and Mr. Smith were present. Two Revenue officials attended. The two officials were, again, Mr. Aidan Nolan and accompanying him, Mr. Denis O'Connell, the senior for Revenue at the meeting. The meeting lasted approximately one hour. Neither of the Revenue officials took any notes during the meeting. Almost six years later on the 23 November 1998, they drafted a "joint note" for their superior officer, the Regional Director in Investigation Branch. Their note was an account of their recollection of the events that took place in February 1993. They recall the main headings for their agenda at the time as being: contracts outside the State; Department of Finance circulars in relation to contracts; and non-resident deposits. This last item, they state, was an "aside matter". They claim that they simply asked the ACC personnel if they were satisfied that their non resident account procedures were in order and as the Bank confirmed that they were, the Revenue took no further action at that time. However Mr. Moore of ACCBank took notes. His colleague Mr. Duggan did not. Mr. O'Neill of Ernst and Young also took a note of the meeting. Mr. Smith did not. Mr. Moore in evidence told the Sub-Committee that the issue of non-resident accounts took up the bulk of the meeting. Mr. O'Neill told the Sub-Committee the meeting began with the handing over of the cheque for the £350,000 in respect of PAYE non-compliance. He stated that Mr. O'Connell (Revenue) dictated the agenda for the meeting and a number of issues were discussed before non-resident accounts, the sixth item discussed. Mr. O'Connell outlined the Revenue historical position to policing non-resident accounts and Revenue's future expectation in respect of all financial institutions going forward. Mr. O'Neill asserted to the Sub-Committee that the Mr. Moore told the Revenue Officials about the Bank's problem with DIRT compliance in the past. He also told of the serious drive that had been undertaken to rectify the non-compliance problem and his belief the problem had been pretty much resolved. Mr. Moore did not say anything about the LFR and he did not Report the problems of Mr. Skelly in response to his blitz of circulars. However it is clear that non-compliance with the legislation was still a substantive issue at this time. Mr. O'Connell, the senior Revenue officer in attendance, told the Sub-Committee that what he said at the meeting was that there was an onus on the ACC to ensure that it was itself satisfied as to the bona fides of non resident account holders and to make the appropriate payment of DIRT on all "relevant accounts". However the Bank concluded, through its officials at the meeting, that it had reached an arrangement with the Revenue Commissioners "that no backdating of DIRT arrears would be applied to the ACC." The two Revenue officials and the Revenue Commissioners deny completely the claim that they were party to any such arrangement. Subsequent to the meeting with Revenue and on the same day, Mr. Moore the Deputy Chief Executive wrote to the Chief Executive, reporting the meeting. In Mr. Moore's note of the meeting, it is stated that

"..the operation by ACCBANK of the legal requirements relating to non-resident accounts. The bulk of the meeting was taken up with discussion on the last point." "In the course of a lengthy discussion on the operation of non-resident deposits it was acknowledged that we had had problems in this area in the past..." "I said that we had, through our Internal Audit Department, and otherwise, being taking steps to rectify any defects that existed and that we were now satisfied that any problems had been largely dealt with. I conceded that there were situations where the Declarations on file were defective e.g. in that they did not refer to all the customers' accounts, but that work was proceeding to deal with this also." The first sentence of the last paragraph of his memorandum states" ... I think it was a good meeting, but I believe we must be relentless in ensuring we comply with requirements of the tax legislation in regard to SSAs and non resident accounts." Mr. McCloskey: Yes, basically, Mr. Moore's has alluded to the fact that if we clear up our act, there'd be no problem. Let me just get that----"In summary, I think it was a good meeting but I believe we must be relentless in ensuring that we comply with the requirements of tax legislation in regard to Special Savings Accounts and Non-Resident Accounts. We must also bring the attention of the Revenue to any malpractices..." I don't think… Deputy Rabbitte: Please finish the sentence, Mr. McCloskey? Mr. McCloskey: ... which we detect on the part of our competitors." I don't think Mr. Moore would have used the phrase "it was a good meeting", if he had in his mind that we were going to be billed for £17.5 million tax. Hearings 15 September 1999, Morning Session Deputy Rabbitte: But, I mean this surely was a matter of some moment for the bank and here is the deputy chief executive, following that momentous meeting, writing an account of it, and all you can point me to is that he said: "In summary, I think it was a good meeting" and we should ride shotgun on our competitors. Is that not what it says? Mr. McCloskey: No, I don't think so. Deputy Rabbitte: We must also----- Let's read it then for the record and I am quoting: "In summary, I think it was a good meeting but I believe we must be relentless in ensuring that we comply with the requirements of tax legislation in regard to Special Savings Accounts and Non-Resident Accounts. We must also bring the attention of the Revenue to any malpractices which we detect on the part of our competitors." Now, what's there that causes you to believe that the Revenue had written off the back tax? Mr. McCloskey: In point of fact a senior executive of the bank who wrote a memo to me, and if he had an understanding that it would be back dated, that would be the key piece of information to bring to my attention and its not brought to my attention.

Deputy Rabbitte: We are in agreement on that. Hearings 15 September 1999, Morning Session There is no evidence whatever in this note that indicates or reports that Revenue would not be raising an assessment for DIRT arrears against the ACC arising from past non compliance. The Ernst & Young note of the meeting states inter alia that "BM explained the bank's attitude towards the non-resident declarations and while admitting that there had been some difficulties in the past, he emphasised that the attitude of management has always been that this was a very serious matter and it was an issue which was being closely monitored. …he pointed out that there man be some weaknesses to the extent that declarations may not have been amended to reflect that fact that the customer might have opened more than one such account… …We were left with the clear impression that he would not be pursuing the issue of defective declarations in prior years" Neither the Ernst & Young representatives or the ACC executives mentioned the Long Form Report at the meeting – even though they had drawn on it in the PAYE settlement. Given the information available to them of the state of compliance within the ACC branch network, it appears that less than full information was disclosed to Revenue, as recorded in the Ernst & Young minutes of the meeting. Mr. Moore was asked at the Hearings about the text of his letter to the Chief Executive. He asserted that he told the Chief Executive verbally of the deal. He could only guess as to the reason why he had not made mention to the actual "non backdating of arrears in the letter". His guess was that if the letter found its way to branch mangers, they would become complacent about compliance. In evidence Mr. S. Duggan, ACCBank said: Chairman: Just so that we're clear, does that mean that you've no recollection of the Revenue people saying, "We'll forget about the past"? Mr. Duggan: That wasn't said…... Hearings 15 September 1999, Morning Session Mr. O'Neill's only indication of any arrangement is the last sentence of his note "we were left with the clear impression that Revenue would not be pursuing the matter". No written confirmation from the Revenue Commissioners was ever requested by the Bank or the External Auditors. On 16 March 1993 the Internal Audit Manager for the ACC, Mr. John Roche wrote to Mr. Skelly. In the letter he stated that the "written assurances by Branch Managers in December 1992 were found to be materially untrue are indicative of an attitude to banking standards and to legal requirements which needs to be sharply reversed".

Letters written by the Retail Manager, Mr. Skelly dated 25 March, 1993 and 12 July, 1993 (on Special Savings Accounts) highlight the ongoing compliance problem after the 18 February, 1993. Nothing happened arising out of the Long Form exercise. There was a change of Government and the privatisation plan was shelved. That was the end of the matter. 7. The 1992 Financial Accounts All of these events happened against the background of the end of the financial year at the Bank. The Bank’s financial year coincides with the calendar year. The financial accounts for the year ending 31 December now had to be drawn up and a question would arise. Should the financial accounts include an appropriate provision against DIRT liability? This would have to be decided by the management and then by the board of directors and finally the statutory External Auditor would be required to give his professional opinion on the accounts. The critical day was 24 February 1993, six days after the meeting with Revenue. This was the day that the audit committee sat to consider the accounts for they year ending 31 December 1992. No provision was made by the Bank and the External Auditor approved the accounts without qualification. Both the Bank and Ernst & Young relied on what they took to be a clear indication of the Revenue's position. The audit partner from Ernst & Young with responsibility for the ACCBank external audit was Mr. J. Hogan, the most senior audit partner at the firm. It was Mr. Hogan who was also overseeing the Long Form exercise. In arriving at his opinion on the financial statements to 31 December 1992, Mr. Hogan formed the view that no provision for a liability for arrears of DIRT was appropriate. In forming this view, he relied on a claimed clean up of documentary deficiencies that had commenced in the period under review and on the meeting with Revenue that ACC purport granted them an amnesty in relation to arrears of DIRT. Deputy Ardagh: Right. So let’s look at the completion of the 1992 audit and the reasons why the provision, or no provision, was put in for DIRT. Why was no provision put in for DIRT? Mr. Hogan: Because in my judgement the likelihood of that provision … liability falling on the bank at that time did not seem to exist. Chairman: Just one second. Was it a likelihood … were the banks legally liable for that money at that time? Mr. Hogan: In the strict interpretation of the regulations, yes, Chairman. Chairman: And why wasn’t provision made then? Mr. Hogan: Because based on the meeting which was held with the Revenue and based on the interpretation of that meeting which was given to me by my tax colleagues I made the judgement that this liability was not likely to fall on the bank at that time. Hearings 15 September 1999, Afternoon Session In spite of the possibility of such strictness of interpretation, despite having no written confirmation of the Revenue deal, Ernst & Young dismissed its own LFR team's calculation of a £17.5 million and never sought to replace it with any other alternative exercise.

Chairman: Just to summarise the situation, as it occurs to me anyway. The writing-off or the cancellation of this assessment of £17.5 million depends completely on your understanding of what the Revenue are supposed to have indicated at the meeting of 18th of February - is that right? Of 1992? Mr. Hogan: Well, first of all, Chairman, it wasn't assessed but a calculated amount that has been discussed was not provided in the accounts of the bank because - and I formed the judgement that it wasn't necessary to make that provision, based on that information. Chairman: In other words, if that meeting had never taken place, or no exchanges had taken place, you would have had to stand by your original calculation? Mr. Hogan: Well, I would have certainly had to make an assessment of what possible potential liability would arise. That is correct, Chairman. Chairman: Yes. But... okay.. one thing would be clear would be a substantial sum, it might vary a little up or down from £17.5 million. You have already told us that there is no provision... that is tax foregone and there was no provision for interest or penalties. But doesn't that leave the ACC now in a very serious situation that there is no commitment by the Revenue? Mr. Hogan: I mean, the judgment I made, Chairman, was made at the time on the information that was available to me at that time. Chairman: But without any written confirmation, without any legal advice, without having regard to the state of the law which you've admitted required where there was incomplete documentation tax must be paid? Mr. Hogan: I made the judgment at the time, Chairman, on that basis. Hearings 15 September 1999, Afternoon Session Ernst and Young in its closing submission stated that "ACCBank plc and Ernst & Young believe that they were entitled to rely on face to face discussions with senior Revenue representatives in such circumstances." Accordingly, in relation to the annual audit carried out in that year, 1992, no provision was made for liabilities owing to Revenue. ACCBank 1996 - 1998 8. Ms Joyce is appointed After the crisis of 1992/93 life at ACCBank seems largely to have returned to normal, until 1996, when Ms Gary Joyce was appointed Chairperson. Ms. Joyce does not have a background in finance. However, the issue of bogus non-resident accounts did soon become a concern: "I first became aware of isolated incidences of non-compliance shortly after my appointment in April 1996 from a consideration of the internal audit reports. I was constantly assured by senior management throughout my term of office that any non-compliance problems were being addressed by them." Hearings 14 September 1999, Afternoon Session However while she initially accepted what she was told by the management she did after a time begin to doubt.

Deputy Doherty: And how much later was it before you came to realise that there was non-compliance – …? Ms. Joyce: I’d say within 12 to 14 months of my appointment. Deputy Doherty: And who would have responsibility for briefing and informing you on the standards of compliance? Ms. Joyce: Chief executive. Deputy Doherty: Chief executive, and you’re telling me that the chief executive did not inform you of the level of non-compliance or the fact that it had been commented on and reported upon both in internal audits and the external audits? Ms. Joyce: It was his view, as I recall, that it wasn’t a serious problem, that these were isolated incidents, that there was not a problem of non-compliance and in fact, it became a … Deputy Doherty: And when he told you, what did you think? Did you agree with his finding? Ms. Joyce: I accepted that until I had reason, I think, not to accept it. Ms. Joyce: I became concerned when particular branches came up the second year in a row, or where there were issues which the board had asked to be dealt with and those items had not been dealt with, when, you know, subsequently we came to question, you know, had certain procedures been put in place and the had not. So as a consequence of that I became concerned, as did other members of the board, that there was an issue here. Hearings 14 September 1999, Afternoon Session When she ceased to have reason to accept the advice of the Chief Executive, Mr. McCloskey, she eventually commissioned consultants KPMG to prepare a Report on compliance and compliance systems at the Bank. Arising from its work KPMG made a presentation in July 1998 to the Audit Sub-Committee. The documentation concluded among other things that "Control weaknesses have arisen" and that "Compliance with regulatory matters in Bank is weak." KPMG also remarked that "… in general, procedures do not appear to include regular review or follow up of the matters raised. Ongoing monitoring of management’s control of risk appears to be delegated to internal audit. However, weaknesses in the control environment, which are brought to the attention of the (Audit) Committee (of the board of directors) by Internal Audit, generally do not appear to be followed up…… "Internal Audit staff are not regarded as senior personnel of the Bank and do not appear to be particularly experienced. In addition we understand that the department is currently two staff members short of agreed levels." The final Report by KPMG was submitted to Ms. Joyce on 21 September 1998. On 25 September 1998 Ms. Joyce forwarded the Report to the Minister for Finance, Mr. C. McCreevy TD. The Central Bank was also informed.

9. ACCBank Non-Compliance, an Historical Problem The events of 1992/93 and the events of 1996 to 1998 are not isolated incidents. There is a history of complaints and allegations of non-compliance against ACC going back many years. There is evidence also of long-term non-compliance in regard to the operation of deposit accounts. And there is evidence that the Department of Finance and the Central Bank as well as the Revenue Commissioners were aware of the complaints and some of the evidence. Non-resident accounts were first provided for in the Finance Act of 1963. Since the 1970s, compliance with the law in relation to the operation of non-resident accounts has presented problems for the ACC. The Comptroller and Auditor General's Report outlines the many examples which the Sub-Committee has noted. Some of the background, even in the mid 1980s, in this respect was explained by the former chairman, Mr. McGing. Mr. McGing: … Now if you remember even at that time as well, or, sorry, you wouldn’t be aware of it Deputy, but quite a number of our branch managers because of the ethos on agriculture were agricultural science graduates rather than buisness graduates. Deputy Ardagh: I wasn’t aware of that, no. Mr. McGing: Well, they were, believe it or not, and they were local people and they were prominent people locally. They were got … They were brought in because of their contact in local communities and things like this. Deputy Ardagh: So they wouldn’t have had any … Mr. McGing: They were good footballers, they were hurlers. Deputy Ardagh: … huge training in the Institute of Bankers? Mr. McGing: What? Deputy Ardagh: They wouldn’t have had ethics training … Mr. McGing: They wouldn’t necessarily. Deputy Ardagh: … in the Institute of Bankers as such … Mr. McGing: They wouldn’t. Hearings 14 September 1999, Afternoon Session The then Chief Executive, Mr. McCloskey, in the course of his evidence also provided an insight into the way that the bank had treated this issue. The Sub-Committee, in considering the evidence presented to it, was struck by the absence of memoranda or instructions issued by the Chief Executive in relation to the DIRT issue. His approach involved delegating reponsibility for the communication of management policy on the matter to the deputy Chief Executive. Deputy Durkan: What sort of directions were issued?

Mr. McCloskey: The deputy chief executive was a few doors away, the general manager of retail banking, I would go into their office and I’d say "Look, look at that report, it has got to be addressed and addressed quickly. Deputy Durkan: ……would you not have considered it necessary to put your directions or instructions in writing? Mr. McCloskey: If you….I would say, what I did was, I delegated that function to a deputy chief executive exclusively dealing with that and you’ll find that most of the directions came from him or they came from the general manager, retail banking. Hearings 14 September 1999, Afternoon Session It is common practice in many large organisations for the Chief Executive to delegate reponsibility for issues to his subordinates. This does not absolve the Chief Executive himself from overall responsibility for the particular matter delegated. In his evidence Mr. McCloskey explained how he had monitored the progress of the DIRT issue. Deputy Durkan: And did they report to your satisfaction? Mr. McCloskey: Yes, and particularly there was…Every memo that went out from the retail manager ….. general manager, retail banking, I got a copy of it, and every memo that went out from the deputy Chief Executive in charge of compliance, I would have got a copy of it. Hearings 14 September 1999, Afternoon Session And on the results of this effort to deal with the situation: Deputy Durkan:Okay. And do you feel now that your response was adequate to their reports Mr. McCloskey: Yes I do. Deputy Durkan: On what basis do you come to that conclusion? Mr. McCloskey: Because over time we have actually turned the bank around and simultaneously improved the compliance culture in the bank Hearings 14 September. 1999, Afternoon Session The bank has recently made a voluntary interim payment to Revenue of IR£1,349,898 in respect of outstanding DIRT. The Revenue are still considering the bank’s position. In September 1989, the District Inspector, for Dublin No. 13 District wrote to the Office of the Chief Inspector of Taxes drawing attention to the extraordinary high value of non-resident accounts given the nature of ACC's business and he suggested an investigation was appropriate. The Office of the Chief Inspector did not take any follow-up action to the request.

Mr. Mullarkey, the Secretary General of the Department of Finance, stated that the only hard evidence in the possession of the Department of Finance was of cases in 1983 and 1987. Prior to the introduction of DIRT ACCBank was the subject of complaints to the Central Bank, the Revenue Commissioners and the Department of Finance. The Secretary General in evidence indicated all types of financial institutions were constantly accusing each other of malpractice regarding the administration of non-resident accounts. 10. The complaint of the Midland and Western Building Society This complaint, made in June 1985, involved, to some degree, all the relevant State agencies namely the Central Bank, the Department of Finance and the Revenue Commissioners. The complaint, by the general manager of a small provincial building society, the Midland and Western (since merged with the Educational Building Society) was made first to the Exchange Control Department of the Central Bank. It related to a number of banks including ACC. The Exchange Control Department passed it on to the Department of Finance as it related in part to ACC, which was owned by the Minister. In the Department the Taxation Section made inquiries of the Revenue Commissioners. The Revenue replied (24 July 1985) that the allegations in general contained in the complaint were most likely true: "Our experience with banks in the area of disclosure leads us to think that the statements in the letter from the Midland and Western Building society are probably true." In relation specifically to ACC the Revenue officer dealing with the query (Mr. Marcel Jacques) commented critically on the behaviour of ACC and also observed that if the Department had a concern it could ask the Department of Finance official on the Board of ACC to provide a Report. "The Midland and Western Building Society’s strictness on the A.C.C. fall into a separate class. This body has proved very unco-operative in the whole area of disclosure, most recently with regard to supplying returns of deposit paid or credited in the form of computer tapes. If the Department of Finance is especially worried about the corporation it might consider having its nominee on the corporation’s board to find out what is happening and then propose any measures necessary to correct abuses." Notwithstanding this advice from the Revenue Commissioners, a Department of Finance official, Mr. R. Bates, provided comments for a draft reply which stated: Mr. Giffney, I refer to your minute of 25 June about the abuses of form F and of Exchange Control procedures alleged by the Midland and Western Building Society. Since the main thrust of the letter concerns the alleged breach of Exchange Control regulations, your response to the Midland and Western Building Society might indicate that the Form F affidavit procedure is being kept under review, but that the Revenue Commissioners have no evidence of widespread fraudulent use of the procedure." Chairman [to Mr. Bates]: Would you like to explain that in the light of what Mr. Jacques actually said to you? Hearings 23 September 1999, Afternoon Session The Minister for Finance is the sole shareholder in ACCBank. The Minister also guaranteed deposits at ACCBank, as was the case with the TSB and the Post Office Savings Bank. The Department also had a policy role in respect of banking generally in Ireland. The Minister nominates all of the directors including the chairperson. Since 1983 it has also been the practice to have a civil servant from the Department on the board of directors. For many years the

practice in making the nomination was to choose a senior civil servant from Public Expenditure Division (PED) of the Department. This reflected the fact that PED was responsible for agricultural policy in the Department and was as such responsible for ACC. In 1993 responsibility for ACC passed from PED to Finance Division – the division responsible for monetary and banking policy. In evidence the Secretary General explained the approach of the Department: Deputy Foley: Would the civil servant on the board make a report to you during the course of the year? Mr. Mullarkey: No. the civil servant would not be expected and didn’t report in the normal way. That would be seen to be inappropriate. The civil servant was expected to play his ordinary role, the normal role of a board member in relation to a bank or in relation to any State company and … as I say, I think it would be unacceptable to a State company generally … for a board member for a Department to be reporting back regularly on operational matters. Hearings 23 September 1999, Afternoon Session The approach of the Department as described by the Secretary General was to give no instructions or guidance to the civil servant appointed to the board of the Bank. The approach also was and remains one of a complete arm’s length relationship. The civil servant has no reporting procedure to either the Department or the Minister. The Secretary General of the Department saw himself as having no direct connection with the Bank. Chairman: Mr. Mullarkey, you’ve said that the directors didn’t report to anybody in the Department of Finance? Mr. Mullarkey: No, there was no normal … They don’t have a reporting arrangement in relation to their ongoing business as a director of the board. … and the normal channel of communication would be from the chairman to the Minister. Chairman: … How many times have you met the chief executive of ACC? Mr. Mullarkey: Myself, I don’t think any more than … I’m not too sure if I ever had a formal meeting with him. There would have been regular contact between the Department and the ACC at a relatively senior level but I, personally, wouldn’t … I don’t know if I ever had a formal meeting with him. Hearings 23 September 1999, Afternoon Session At no stage was a civil servant director ever a member of the Audit Committee of the board of directors at ACCBank. Successive Directors from the Department seem not to have been aware of there being any serious compliance problems. 11. Postscript ACCBank is now again to be privatised, this time as part of a larger entity – a merged ACC/TSB entity. Mr. McCloskey is no longer Chief Executive at the bank. Ernst and Young continue to act as External Auditors to ACCBank. Mr. Moore has retired.

Mr. Skelly remains at the Bank in the position of General Manager – Retail Banking. On 30 October 1998, Mr. P.S. O Donghaile, Principal Inspector of Taxes, wrote to ACCBank, following media reports, requesting certain information on the operation of DIRT at the Bank. The issue between the Bank and Revenue remains unresolved. The Sub-Committee finds: 1. The contention by ACCBank, that what transpired at the meeting of 18 February 1993 with the Revenue Commissioners was tantamount to a deal to write off arrears of DIRT, to be without foundation. 2. The decision by Ernst & Young, external auditors and tax advisors to ACCBank, to drop their own calculation of DIRT arrears -without due regard for the legal obligations of the Bank in relation to D.I.R.T. to be without justification. 3. It impossible to reconcile the knowledge in the possession of Ernst & Young with the unqualified opinion given on the 1992 financial statements of ACCBank. 4. Arising from the calculation done for the Long Form Report, the senior management of ACCBank knew by 18 February 1993 that there was an enormous problem with arrears of DIRT. No disclosure of the scale of the problem was made to the Revenue. The Sub-Committee finds that this was especially unacceptable behaviour by a State bank. 5. Ernst & Young acted improperly in not challenging the non-disclosure by ACCBank at the meeting with Revenue of 18 February 1993 at which they were present, even though they were in possession of the information. 6. Notwithstanding the issuance of formal letters on compliance, that there was in ACCBank a general disregard for compliance insofar as DIRT was concerned throughout the period. 7. Remarkable the absence of any evidence to suggest that the DIRT issue ever exercised the Chief Executive of ACCBank. The Sub-Committee finds it incomprehensible that this state of affairs continued even after the Chief Executive received the first draft of the Long Form Report. 8. It was improper for ACCBank not to inform the shareholder, the Minister for Finance, of the implications of the first Long Form Report. 9. It was unacceptable that senior management withheld information from the board and latterly from the chairperson Ms. Gary Joyce. 10. It is incredible that the Department of Finance can claim to have been unaware of a serious compliance problem in ACCBank. 11. The extent to which the Ministers for Finance were never fully informed of the deficiencies within ACCBank illustrates the failure of reporting structures between the Bank and its shareholder. Successive Ministers for Finance, must accept responsibility for this failure especially in view of the rescue of the Bank by the Government in 1988.


The Comptroller & Auditor General examined and reported on 37 Financial Institutions of which 6 groups (covering 15 institutions) gave evidence before the Sub-Committee. All of the Financial Institutions were written to by the Sub-Committee requesting them to identify inaccuracies in the C&AG’s Report. Other than some minor inconsequential items, all of them confirmed the factual accuracy of that Report. Similarly, while not directed to attend the other 22 Financial Institutions were given the option of appearing before the Sub-Committee. None took up the option. These 22 Institutions were: EBS Building Society First Active plc Irish Nationwide Building Society TSB Bank ICC Bank plc ICC Investment Bank Ltd. An Post Barcleys Bank plc GE Capital Woodchester Bank Ltd. ABN-AMRO Bank N.V. Anglo-Irish Bank Corporation plc Ansbacher Bankers Ltd. Bank of America NT and SA Banque Nationale de Paris SA Citibank N.A. Equity Bank Ltd. Irish Intercontinental Bank Ltd. Smurfit Paribas Ltd. Chase Manhattan Bank (Ireland) plc Pfizer International Bank Europe Scotiabank (Ireland) Ltd. Westdeusche Landesbank (Ireland) plc The Sub-Committee notes the findings in the C&AG’s Report and those of the Appointed Auditor in relation to these 22 Institutions. The Sub-Committee did not hear evidence from these Institutions but had discovered relevant documents by them. However, the Sub-Committee accepts the Report of the C&AG and does not propose to add anything to it in respect of those 22 institutions at this stage. The detailed retrospective audit by Revenue of each Financial Institution, recommended elsewhere in this Report, will include all institutions including those from whom evidence was not heard, for this first Report, and accordingly the Sub-Committee will await the results of this lookback exercise before concluding in respect of the sector generally.


1. The Role of Parliament In any democracy the role of Parliament is central in: (a) deciding on legislation (b) establishing departments and other agencies of the State to implement fully and fairly legislation, (c) ensuring that Ministers, Departments and State Agencies are fully accountable to it, and (d) holding the Government to account 2. Series of Inquiries This Inquiry has come in the wake of several Tribunals of Inquiry, which the Oireachtas has found necessary to establish in recent years. 3. The need to strengthen the Oireachtas 3.1 Many of the issues which have been under inquiry could have been examined and dealt with earlier if the Oireachtas had been better organised and resourced. 3.2 Oireachtas procedures, practices and resources have not kept pace with the expansion of our economy and the modernisation of our society. Additional resources and staffing are required to ensure true accountability which would minimise the number of extra-Parliamentary Inquiries in the future. 3.3. Issues that need to be addressed include: i. Sessions of the Houses of the Oireachtas (the Plenary Session) being held at the same time as Sessions of the Committees; ii. Often several Committees are in session at the same time and sometimes these Committees will have some common membership; iii. Plenary Sessions and Committee Sessions often run in parallel with weekly meetings of Parliamentary Parties; iv. The rotation of speakers on bills and other debates is in recent years decided by the Whips rather than by the Chair.

v. Question Time has been subjected to frequent ad hoc changes the overall, and unintended, effect of which has been to diminish Question Time as an effective tool of Parliamentary accountability. vi. The Houses sit normally without a quorum, and this is accentuated by the factors listed in i to v above. vii. The frequent use, mostly by agreement, of motions beginning with "Notwithstanding anything in Standing Orders……" which is normally used to impose time limits on debate often curtailing examination of legislation. 4. Under Resourcing of Oireachtas The staffing arrangements in other Parliaments, including for example staffing plans for the newly established Scottish Assembly and Northern Ireland Assembly, are far more realistic for a modern Parliament than is the case in the Oireachtas. 5. Separate Roles of Oireachtas and Government 5.1 Accountability to the Oireachtas is weakened further by a lack of clear boundaries between Parliament and Government. 5.2 To illustrate the latter point the Committee of Public Accounts had, throughout the pre-Inquiry phase and throughout the Inquiry, to repeatedly seek sanction from the Department of Finance for staffing and resources and for other, even minor, expenditure. It is true that consent was always forthcoming, but that may not be so at some time in the future. Indeed, the process of seeking sanction can in itself cause to be disclosed prematurely matters likely to be investigated. This is of particular importance when, as in this case, the Department of Finance and, indeed, Government was part of the subject of the Inquiry. This is but one example of a totally unacceptable subjugation of Parliament to Government when one of Parliament’s fundamental roles is to hold Government to account. 6. Oireachtas Legal Advisor The Oireachtas is further hampered and disadvantaged by the absence of its own permanent legal advisor especially where urgent procedural or ongoing advice is necessary. Before the enactment of the Compellability Act, 1997, this was accepted by the Department of Finance which has agreed in principle to the establishment of such an Office. The present Inquiry was seriously inconvenienced in this regard. The fact that the Sub-Committee was not delayed by any legal challenges is a tribute to the preparation of the Sub-Committee on the basis of the legal advice received from its legal advisors. However, a great deal of their time was taken up with what would be considered normal procedural matters, and with correspondence. Moreover, the legal advisors had to familiarise themselves quickly with the detail and nuance of Parliamentary procedure. This present position can lead to absurd situations and long delays. 7. Oireachtas Committees need for Inspecting Officer The Committee of Public Accounts has, as one if its unique features, the services of the constitutional Office of the Comptroller and Auditor General. In the present Inquiry he effectively took on powers akin to a High Court Inspector but reported to the Oireachtas rather than to the High Court. No analogous office exists to provide a similar service to other Oireachtas Committees. If Parliamentary accountability is to be developed and enhanced in future by instituting further Parliamentary Committees of Inquiry this void must be filled.

8. Fundamental Oireachtas Reform 8.1 The question of Oireachtas reform is a very large issue which is, in the first place, the responsibility of others in the Oireachtas. 8.2 Nonetheless, the Sub-Committee feels that no set of recommendations by it to address the DIRT issue, would be complete unless it includes proposals for Oireachtas reform. The Sub-Committee finds: 1. Oireachtas procedures and practices have not kept pace with the needs of modern society and additional staffing and resources are necessary.


1. Introduction If, in the future, the Parliamentary Inquiry is to be an ongoing feature of the apparatus of public accountability certain issues need to be commented upon and addressed. The nature, role, powers, duties and procedure of Parliamentary Committees of Inquiry and points for the future are set out herewith, some of which may also apply to Tribunals of Inquiry. 2. Role of Inquiries Generally Committees of Inquiry and Tribunals of Inquiry are usually both established where one or both Houses of the Oireachtas resolve that a definite matter of urgent public importance needs to be investigated. It is clear from past precedent, and it is emphasised by the Committee, that the powers of investigation now in place under the Compellability Act 1997 must only be used in specific circumstances and always with great care. 3. Inquisitorial Role of Inquiries The Sub-Committee is also strongly of the view that a Committee of Inquiry, like a Tribunal of Inquiry, is inquisitorial rather than adversarial in nature and procedure, and the Sub-Committee has striven to ensure that, in its own proceedings this, in fact, was the case. The Sub-Committee notes the Supreme Court's view that: "A tribunal is not a court of law - either civil or criminal. It is a body - unusual in our legal system - an inquisitorial Tribunal. It has not an adversarial format." and also: "...both in the United Kingdom and in Ireland, the principal function of such Tribunals has been to restore public confidence in the democratic institutions of the State by having the most rigorous possible Inquiry consistent with the rights of the citizen into the circumstances which gave rise to the public disquiet ... the underlying policy of the 1921Act, as subsequently amended, is thus not in doubt......." Both of these points would appear to also apply to a Parliamentary Committee of Inquiry. 4. Inquiries into Political and Policy Matters However, the Supreme Court went on to say regarding the purpose of a Tribunal: "It is to provide the machinery, wholly independent of the political process, whereby matters of grave public concern may be investigated and the true facts brought to light." Arising from this observation of the Supreme Court, and the Sub-Committee's own observations, it is clear that a Parliamentary Committee of Inquiry would not be the appropriate forum to probe issues which are essentially of a political or policy nature. 5. Right of Witnesses and Fair Procedures In the interests of fairness the Sub-Committee acknowledges that certain adversarial mechanisms are necessary to protect the rights of individuals. However, such adversarial procedure should be kept to an

absolute minimum so that the Sub-Committee is able to expeditiously complete the work it has been mandated to do by the Oireachtas. Specific recommendations in this respect are made later in this Report. 6. Terms of Reference The Sub-Committee recommends that, in all Oireachtas resolutions setting up either a Committee of Inquiry or Tribunal of Inquiry, the terms of reference be clear and concise with definite boundaries. What is important is that each Inquiry should have a specific focus, be finite in nature, and have a specific timeframe within which evidence must be heard, conclusions and reports completed etc. If further Inquiry and/or reports have to be sought or mandated, it is better to have a further Inquiry which also has a specific focus and is finite in nature rather than an elongated Inquiry of no certain duration. 7. Necessity of Speed in Parliamentary Inquiries The Sub-Committee is ever mindful of the fact that public accountability applies equally to its own workings and hence the emphasis on speed and focus and that this should apply to future Parliamentary Inquiries. The imperative for speed is, in any event, underlined by the temporary nature of each Parliament (i.e. an election can happen at any time), and by the competing demands of political and Parliamentary life. 8. The Importance Of Independence And Consequence For Political Comment Parliamentary Inquiries are established by the Oireachtas. Members of Committees have to be independent of parties and whips while acting intra vires their duties as a Member of a Committee while conducting an Inquiry, and must be seen to be outside party influences in considering issues and making any determination. The practice whereby other Members of the Dáil or Seanad make statements on Inquiry matters while the Inquiry is at Hearing could be interpreted as an attempt from outside to influence colleagues conducting the Inquiry. Some such comments were made during the course of this Inquiry but many more have been made in the course of recent Tribunals. Clearly, in the interest of fair procedure and the workings of the Committee, this type of commentary needs to be assessed urgently and rules drawn up in relation to it. This is of particular importance in relation to Parliamentary Inquiries. 9. Procedure of Parliamentary Inquiries With regard to specific procedural and practical matters the Sub-Committee makes the following recommendations: 9.1 The Chairman The Sub-Committee recommends that each member of the Oireachtas on taking up office as Chairperson of a Standing, Select or Joint Committee should be thoroughly briefed and trained in the details of how to run a Parliamentary Inquiry and the full implications thereof. This is necessary for the purposes of ensuring a Committee is fully appraised of its potential role, including limitations, and is in a position to undertake that role at short notice should the circumstances arise. All Chairpersons of Committees should be briefed on all legislation, rules of procedure, and standing orders as appropriate and briefing documentation to include a catalogue of all previous procedural rulings by previous Chairpersons of Committees of Inquiry so that pre-hearing procedural matters such as directions for discovery, direction of witnesses, collation and service of books of evidence can be done in good time before the work of an Inquiry proper begins. For this purpose, the Sub-Committee also recommends that a comprehensive Handbook on Parliamentary Inquiries should be prepared by the Secretariat of Committees. 9.2 Books of Evidence Any books of evidence, or more correctly, books of documentation, which are to be used by the Inquiry in the examination of witnesses and/or parties must be prepared well in advance of public hearings so that both the Committee Members and prospective witnesses, have a proper chance to assimilate and

understand the content and import of the documentation in accordance with fair procedure as set down in Re Haughey and the Compellability Act, 1997. 9.3 Discovery Under the Compellability Act 1997 the Committee has the power to direct discovery on oath of documents. This Sub-Committee found it necessary to make extensive use of this power and issued numerous directions for discovery which were complied with, and the Sub-Committee received some 150,000 pages of discovered documentation. Under the Comptroller and Auditor General and Committees of the Houses of the Oireachtas (Special Provisions) Act 1998 ("the Special Provisions Act, 1998), the Comptroller and Auditor General was given extensive powers which enabled him to investigate the DIRT scandal on behalf of the Committee of Public Accounts. One of the powers he was given was to direct discovery. The Sub-Committee in addition to retaining its own power of discovery recommends that documents discovered by the Comptroller and Auditor General and/or any other properly appointed inspector should be deemed to be discovered to that Committee. The Compellability Act 1997 allows for the direction of witnesses under Section 3. The Committee investigating must seek the permission of the ‘appropriate Sub-Committee’ of the Committee of Procedure and Privileges before such direction can issue. This mechanism is unnecessarily cumbersome and is likely to cause serious legal problems in the future. This is because a person maligned in earlier proceedings of the Committee who seeks to assert the rights enshrined in Section 10 of the Act, could have his rights denied by the ‘appropriate Sub-Committee’ which will not have heard any of the evidence. It can also cause avoidable delays. The Committee recommends that Committees of Inquiry be given a general permission to direct witnesses etc. by the Resolution establishing the Inquiry 9.5 Evidence and Sequence of Witnesses The Sub-Committee strongly recommends that, as far as is practicable, witnesses and parties called before a Committee of Inquiry who come under a common heading or subject matter, be sworn together before the Inquiry, their evidence taken together, or as near together as possible, and that they be required to attend throughout that particular session. This eliminates many delays and allows for earlier clarification and/or rebuttal. Moreover, by taking groups of witnesses around a Committee table rather than one witness at a time in a witness box (sometimes confused as a dock), a less adversarial atmosphere is created. 9.6 Cross Examination Insofar as is practicable cross examination should be kept to the end of the Inquiry or at least to the end of distinct sections. Members completing their questioning before cross examination commences preserves the Inquisitorial character and reduces the amount of cross examination necessary. 9.7 Direct one - Direct all A difficulty arises if there are two types of evidence before the Committee, sworn and unsworn, and to apply fair procedures the Committee would have to go back to the start of the procedure and swear all witnesses again and take all evidence again. The Sub-Committee recommends that as a matter of course all persons appearing before a Committee, to which the Compellability Act 1997 applies, should be directed and sworn and without any pejorative connotations. 9.8 PAC Evidence Always Under Oath The Committee of Public Accounts is the only Committee operating under the provisions of the Compellability Act 1997 and the Sub-Committee is of the view that, in order to avoid the sort of difficulties outlined above, all its business (including its ordinary business) in future should be conducted under the full terms of that Act i.e. under oath, privilege and direction and we so recommend.

In the interest of efficacy of Inquiry, a Sub-Committee of the main Committee, comprised of Members representative of the House and who have been vetted for conflict of interest, should be appointed to conduct the Inquiry. 9.10 Permanent Witnesses Where an Inquiry impinges on any Department or any State Agency, the exigencies of the Inquiry may require that an appropriate representative or representatives should be present throughout the entire Inquiry from that Department or Agency. This would facilitate the clarification of issues as they arise during the Inquiry – and thus avoiding delay – and also that the Department or Agency, having heard all the evidence, would be in a position to fully respond at the closing sessions of the Inquiry. The Sub-Committee believes that live coverage had a beneficial impact on how all involved in the Inquiry disported themselves. The Sub-Committee is of the view that all Inquiries of this nature, unless there were very special circumstances, should be Public Inquiries and be accessible to the public at large. This applies also to Tribunals of Inquiry. Therefore, it is the Sub-Committee’s view that Inquiries of this nature should be covered, insofar as is possible, live on TV and Radio. 9.12 Dissolution of the Dáil Another matter of concern to this Sub-Committee is the situation which may pertain when, during the sittings of a Committee of Inquiry, the Dáil is dissolved and a general election is called. In this situation all Committees cease to exist forthwith. If such circumstances were to arise, while a Committee was still taking evidence, it would mean the collapse of the Inquiry. This is a factor which must be taken into account when Parliamentary Inquiries are being contemplated 9.13 Logistics Frequently, there are simultaneous meetings of the Dáil, Seanad, other Committees and Parliamentary parties. This clash of business of the Oireachtas particularly when seen in the context of the fact that members of the Committees of Inquiry must attend all sessions of that Committee is highly problematical and serious attention must be given to it immediately by the Oireachtas. Similarly, there is a need to tackle the proper resourcing of Parliamentary Inquiries including the provision of additional specialist back-up staff e.g. Stenographers and Information Technology staff. 9.14 Comparative lessons As the DIRT Inquiry was the first Parliamentary Inquiry to take place under the 1997 legislation the SubCommittee recommends that the Department of Justice, Equality and Law Reform and the Office of the Attorney General carry out a study on the lessons to be learned on the work of this Sub-Committee, to compare and contrast the functions and role of the Parliamentary Inquiry and the Tribunal of Inquiry for the future and suggesting what improvements are required in the role, practice and procedure of the two types of investigation. Such an analysis should be provided to the Committee of Public accounts before 30 June, 2000.

PART VII CHAPTER 17 Proposals and Recommendations

It now falls to the Sub-Committee to make its recommendations. However before enunciating the recommendations it is appropriate to state that the Sub-Committee has also decided to make some remarks on its own work and on the nature of Public Inquiries. The Hearings of the Sub-Committee and the preliminaries to the Hearings represented the first use in Ireland of the Parliamentary Inquiry. There are lessons to be drawn. The approach taken in this Part of the Report therefore is to present a short discussion of Parliamentary Inquiries and Oireachtas reform, to restate briefly the background to the Recommendations, and finally to state the Recommendations. This inquiry This is the Report of a Parliamentary Inquiry into the evasion of Deposit Interest Retention Tax (DIRT), from its introduction to 1998. As at November 1998 total deposits of private households held in the licensed banks alone amounted to £24.5 billion. Private household non-resident deposits amounted to £4.1 billion or one sixth of the total. For deposit takers DIRT is, since 1987, a self-assessment tax. In that it is, this imposes a very significant duty of care on deposit takers. They must make a correct assessment and return and pay across to the Collector General the appropriate sum twice yearly. Failure to do so is a Revenue Offence. The duty that is placed on depositors in this context is that they must allow DIRT to be deducted. Failure to allow the deduction of DIRT is a Revenue Offence. Evasion of DIRT From the moment of its enactment through Financial Resolution No. 12 in February 1986 bankers began to explore means of continuing to pay interest gross on deposits. The use of bogus non-resident accounts – already long established as a means of concealing capital and income from the eyes of Revenue – now took on an added dimension. Bogus non-resident accounts became a route to evading yet another tax, DIRT. Banks facilitated this, as they had long facilitated deposit splitting and bogus non resident accounts prior to 1986. From 1987 Revenue took a view that the climate in Ireland was such that it was inappropriate to push for inspection and access to bank account information. This is most graphically illustrated in the nonissuance of a countermand to SIM 263. There is a view that the problem of bogus non-resident accounts receded and reduced significantly from around 1993. However this Inquiry has discovered persistent problems in the operation of non-resident accounts in the deposit taking sector in Ireland. The investigation of the Comptroller and Auditor General also established continuing problems with compliance. The Report of the Appointed Auditor commissioned by the Comptroller indicated that 27.3 per cent of Forms 37 sampled contained ‘declaration exceptions’, in other words were incorrect. In the sampling undertaken by the Appointed Auditor to test for authenticity, 17.6 per cent of that sample indicated risk, the principal risk indicators being Hold Mail, c/o address and Irish address. Approach of Sub-Committee In carrying out this Parliamentary Inquiry the Sub-Committee sought to come to an understanding of the

forces and factors that gave rise to the large scale tax evasion discovered. Such an understanding struck the Sub-Committee as critically important when framing appropriate recommendations. The conclusion of the Sub-Committee is that there was in general an incoherent, spasmodic and ad hoc engagement by deposit takers and the State and its Agencies with the problem of bogus non-resident accounts during the period in question. The problem also persists. 1. Retrospective Audit and Look-back In the interests of fairness to the compliant taxpayer and to all the financial institutions the Sub-Committee is of the view that a detailed retrospective audit for the entire period 1986 – 1998 of each of the financial institutions is necessary given that DIRT evasion was an industry-wide problem. Recommendation of the Sub-Committee The Sub-Committee recommends that the Minister for Finance in the Finance Bill, 2000 or as soon as is feasible make such provisions as are necessary to give effect to the following: There shall be a requirement on the Revenue Commissioners to undertake a full look-back audit to April 1986 of each financial institution to assess DIRT liability; The cost of the look-back be borne by the financial institutions being audited; The full interest and penalties be paid in respect of DIRT arrears assessed irrespective of any currently existing statutory time limits; That for the purposes of this review, Revenue may delegate the work in whole or in part to suitably qualified outside persons and/or may engage such consultants as it finds necessary to assist in the review; The look-back be completed by 1 September 2000; The Revenue be empowered and required to report for public information only, before 1 November 2000, to the Committee of Public Accounts, the results of its look-back in the case of each institution, specifying the DIRT arrears levied, the interest charged, the penalties imposed, any comments considered to be appropriate and if any appeal has been lodged; Measures to ensure that the appeals process is expedited; Provision is made for the results to be made public on determination. Review of Revenue Commssioners Deputy Rabbitte: May I ask you Mr. MacDomhnaill, whether you think the time has come for a modern Revenue Act? Mr. MacDomhnaill: Separate from the Finance Acts and … certainly, it’s something that should be given serious consideration. I would think that one very important thing which we, as commissioners, have enjoyed from the very beginning is a very strong degree of independence in carrying out our functions, and I would hope that any sort of structure that would be set up would preserve that independence. Evidence of Mr. Cathal MacDomhnaill Chairman, Revenue Commissioners 1990 – 1998 Hearings, 9 September, Morning Session The Sub-Committee was struck by the absence of founding primary legislation setting out the role, responsibilities and duties of the Revenue Commissioners. The Sub-Committee accepts the view of Mr. MacDomhnaill that such an enactment should be given serious consideration.

Recommendation of the Sub-Committee The Sub-Committee recommends – that the Minister for Finance prepare proposals for the enactment by the 28 Dail of a Revenue Act to provide a clear and modern framework in law for the Revenue Commissioners. The Sub-Committee recommends – that the drafting of the Bill be preceded by a general review by the Public Service Management and Development Division of the Department of Finance of the Revenue Commissioners and that the results of this review be reported to the Committee of Public Accounts within six months. The review should address the issues of independence and accountability, organisation, structures and practices and the desirability or otherwise of executive and non-executive Commissioners on the Board of Revenue. 3. Review Group of Auditors that a detailed examination be undertaken by a Review Group established by the Department of Enterprise, Trade and Employment and that the Review Group examines: Whether accountancy firms appointed to undertake external audit should be involved in the provision of other services to the same financial institution; Whether the external audit function is compromised or undermined by the extent of modern-day intermingling of functions – audit, tax advice, consultancy, etc; How the issue of fees can be determined in such a way as to give primacy to the interests of shareholders and in a manner that respects the central importance of the audit process; What the Sub-Committee perceives as possible over dependence of the external auditor on a management that in practice appoints and remunerates the external auditor; If the balance of relationships between audit and other functions is reflected correctly in the statutory provisions of the Companies Acts and related codes; The role of the external auditor in ensuring compliance with Statutory provisions (e.g. the D.I.R.T. legislation) and whether the existing statutory audit requirements adequately address this issue; The Sub-Committee’s view that the Central Bank should prescribe the scope of management letters issued by external auditors to financial institutions and that the Central Bank receive and discuss management letters with management and its external auditors on an annual basis; The Sub-Committee’s view that the specific audit standards pertaining to Financial institutions be strengthened; The suitability of having joint auditors to financial institutions one of which to be proposed and appointed by the Central Bank; The view of the Sub-Committee that there should be a maximum term of 5 years for any Auditor to a financial institution after which a new Audit Firm must be appointed. The Sub-Committee recommends – that the Review Group established by the Department of Enterprise, Trade and Employment reports back to the Oireachtas within six months of the date of this Report. 4. Deposit takers and Compliance Deputy Durkan: Can I ask you whether in your opinion the failure by a financial institution - in this case yours - to implement the terms of the Finance Act for a period of four years would seem to raise serious questions about the prudential behaviour of such institutions?

Mr. Molloy: Well, I think it certainly raises the question and, as I say, it is a fact right across all of our institutions here and it seems also in the United Kingdom. This proved to be a very difficult thing to get into place. You have to speculate why that is so. Hearings 22 September, Morning Session The Government is at present preparing for the establishment of a Single Regulator for the financial services sector in Ireland. This decision will require the enactment of a modern legislative framework for the operation of the financial services sector. Recommendations of the Sub-Committee The Sub-Committee recommends – that in preparing this legislation, the Department of Finance in consultation with the Department of Enterprise, Trade and Employment have regard to the following: That the Single Regulator address ethics, professional standards and corporate governance in the provision of financial services in Ireland; The requirement that each licensed and regulated financial institution appoints a Tax Compliance Officer, to be the Chief Executive Officer of the licensed institution; The detailed rules and requirements in relation to the duties of directors of financial institutions to be proposed for the Single Regulator; and A scheme and procedure for bank officials to report suspected wrongdoing. The Sub-Committee recommends – that within six months an outline of the proposals for legislation in this regard be presented to the Oireachtas. Independent Auditor In her evidence to the Sub-Committee the Appointed Auditor described the operation in the United Kingdom of a scheme operated by Inland Revenue with financial institutions to ensure full compliance. Under this scheme deposit takers may apply to Inland Revenue to be given Approved Deposit Taker status. Approved status permits the deposit taker to appoint an independent auditor to review documentation supporting non-resident accounts for compliance and for authenticity. The auditor reviews documentation, maintains genuine non-resident accounts customer confidentiality but reports factually to Revenue all that was found in relation to compliance, the extent of missing declarations. The Sub-Committee recommends – that the Minister for Finance consider implementation of the system of independent audit described by the Appointed Auditor. 5. Foundation for Investing in Communities "Well, before the introduction of the DIRT we would get no tax whatsoever on the interest that was not declared because we had a voluntary system of disclosure of the interest. The DIRT I always felt at leas, that’s assuming, as I did assume, that it would be applied, would at least accrue the Revenue the standard rate tax on all of the deposits, both honest and dishonest and otherwise … neither, by the way, did I think that the banks would move from being spectators in the evasion, from that into being participants. All of these proceedings quite astonished me, I must admit, in relation to that."

Mr. Seamus Paircéir Chairman, Revenue Commissioners 1984 – 1987 Hearings 28 September, Afternoon Session After DIRT became a self-assessment tax for the banks in 1987 banks in Ireland became participants with their customers in tax evasion. Prior to 1987 banks were aware of tax evasion taking place through their deposit networks and there are examples of banks facilitating and organising evasion on behalf of customers. However the effect of self-assessment was to make them participants in the evasion to the extent that they allowed it to happen through the use of bogus non-resident accounts. Foundation for Investing in Communities The Sub-Committee is aware of the Foundation for Investing in Communities, the national endowment currently being established by the Government, through the Minister for Social, Community and Family Affairs, with the involvement of IBEC. This Foundation represents an initiative by Government and employers in Ireland to develop for Ireland a Community Foundation. Community Foundations are well established in North America and in Europe. In Northern Ireland there is established the Northern Ireland Voluntary Trust (NIVT), which works closely with the Combat Poverty Agency on a joint, cross-border basis in administering the Peace and Reconciliation Fund (the ‘Delors Fund’). The Foundation for Investing in Communities is at present being established and comprises three strands – Business in the Community, a National Endowment and a specific, earmarked Trust within the Endowment to support child-related issues and initiatives. The Sub-Committee is of the view that the long-term participation of the banking sector in tax evasion in Ireland until the present day calls for an act of generosity and restitution. One such act would be a decision by deposit takers to make a significant seed funding contribution to the Foundation for Investing in Communities on its establishment according to the principles of Community Foundations. This would enable the National Endowment and the Children’s Trust to be established and the Foundation for Investing in Communities to be established paralleling the NIVT. Recommendations of the Sub-Committee The Sub-Committee recommends – that the Government ensure that the Foundation for Investing in Communities is established as a Community Foundation in line with the findings in the Report prepared by the Combat Poverty Agency, Community Foundations – an Introductory Report on International Experience and Irish Potential (1998). The Sub-Committee recommends – that the Government consider the imposition of a levy on the financial institutions the proceeds of which go towards the funding of the Foundation for Investing in Communities including the National Endowment, the Children’s Trust and Business in the Community. 6. Dormant Accounts There is in the deposit taking system an unquantified and probably very large, amount of money in accounts that are dormant for a considerable period of time. Dormant accounts represent, for financial institutions, free capital. Deposit takers have free use of these funds and they have effectively become part of the capital base of these institutions.

The Sub-Committee is of the view that the benefit of the use of funds in dormant accounts should accrue to society as a whole rather than deposit takers. Recommendations of the Sub-Committee The Sub-Committee recommends – that, as soon as is feasible, legislation be prepared by the Minister for Finance so that the resource represented by funds in dormant accounts may be used for specified purposes of societal and community benefit. There is a precedent in the Funds of Suitors provisions. The Sub-Committee recognises that this recommendation raises important considerations including property rights and liquidity issues. The SubCommittee recognises that the Minister for Finance should have discretion as to the timing and content of the proposal. 7. Parliamentary Accountability The modernisation and re-organisation of the Houses of the Oireachtas has not kept pace with developments in society. Further reform with an emphasis on improved accountability will ensure that events such as the Sub-Committee has inquired into will be less likely to recur. Recommendations of the Sub-Committee The Sub-Committee recommends – The establishment of an independent permanent Oireachtas Commission, similar to the UK Parliamentary Commission. The Commission should be chaired by the Ceann Comhairle and oversee and control the funding, staffing and organisation of the Houses of the Oireachtas; That the Committee system should be funded from a separate Vote and that the Ceann Comhairle should be accountable to the Oireachtas for the assistance to and approval of the Oireachtas Commission; That the Vote for the Houses of the Oireachtas be increased substantially for the year 2000 and future years; That the preparation of the Vote for the Oireachtas Commission be independent of the Department of Finance and should be proposed to the Dáil by the Ceann Comhairle. The Sub-Committee recommends – the establishment by Houses of the Oireachtas of an Oireachtas Law Agent to act as Legal Advisor to the Houses of the Oireachtas; and Provide ongoing legal and procedural advice to Oireachtas Committees and Sub-Committees and represent the Houses of the Oireachtas in any legal matter including procedures in Hearings under the Compellability Act, 1997. The Sub-Committee recommends – that provision is made in law so that the Houses of the Oireachtas may: Appoint from time to time a Parliamentary Inspector with powers similar to and adapted from those of a High Court Inspector; and Appoint persons as Parliamentary Inspector including certain Officers of State (e.g. the Comptroller and Auditor General).

The Sub-Committee recommends that A Parliamentary Inspection be initiated only by Resolution of the Houses of the Oireachtas; The Resolution sets out clearly defined terms of reference for the Inspector and designates a relevant Committee to which the Parliamentary Inspector shall report; The Committee’s remit in relation to the issue under inquiry be clearly defined in the same Resolution; and The Parliamentary Inspector should report directly to the Oireachtas Committee designated in the Resolution; and That the Committees of the Oireachtas are granted the Right of Initiative in proposing an Inquiry and any motion to that effect from a Committee should be decided upon in the Houses of the Oireachtas within 21 days and that Standing Orders of both Houses of the Oireachtas be changed to give effect to this. Legislating and Parliamentary Questions The Sub-Committee acknowledges that curtailed examination of Bills, especially at Committee Stage can lead to defective and ill-considered legislation and further that only a small number of Oral Questions are reached for reply and that this position has worsened in recent years thus reducing the accountability of Ministers and diminishing the role of non-office holding Deputies. The Sub-Committee recommends that 1. Urgent consideration be given to an increasing role for Oireachtas Committees in The passage of legislation, especially as a means of avoiding hasty scrutiny The taking of Questions for Oral Reply not reached in the House 2. Meetings of Committees should not be scheduled to run in parallel with Plenary Sessions of the Oireachtas. Accountability of Chief Executive Officers Recommendation of the Sub-Committee The Sub-Committee recommends – that where Ministers are not accountable for operational decisions of State Companies, the chairman and chief executive should be amenable to the appropriate Oireachtas Committee. Possible Conflict of Interest – Civil Servants Recommendation of the Sub-Committee The Sub-Committee recommends – that the Department of Finance report back to the Committee of Public Accounts within six months on proposals to avoid any conflict of interest where officials leave the civil service for employment in the private sector. 8. Future Parliamentary Inquiries Recommendations of the Sub-Committee

The Sub-Committee recommends that: – 1. Committees Each Chairman of an Oireachtas Committee is fully briefed on the modalities of Parliamentary Inquiries; A Handbook of Parliamentary Inquiries be prepared by the Secretariat of Committees; and Powers of discovery for Committees be amended so that any documentary Discovery made by any Parliamentary Inspector is automatically Discovered to the Committee. 2. Witnesses General powers of Direction of Witnesses be included in the Resolution of the Oireachtas establishing a Parliamentary Inquiry; The procedures for taking of evidence before a Parliamentary Inquiry provides for groups of Witnesses to be taken; and That all Witnesses appearing before a Committee to which the Compellability Act, 1997 applies should be under Direction. 3. Business All business, including ordinary business of the Committee of Public Accounts should be under direction; All Parliamentary Inquiries be conducted by a Sub-Committee of manageable size; Provisions should be made to have all further Parliamentary Inquiries and Tribunals of Inquiry broadcast live on television; and A comparative study be undertaken by the Department of Finance and the Attorney General’s Office into Parliamentary Inquiries and Tribunals of Inquiry in the light of this Inquiry and to report back to the Oireachtas by 1 December 2000.

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