AIB responded openly to Revenue, says Mulcahy

"Mr chairman, members of the committee, we have asked to appear before this committee because we wish to set out the facts surrounding the recent controversy on non-resident accounts and, in the process, set the record straight on the misunderstandings surrounding this matter. I would like to thank you and your committee for granting an early hearing.

Let me now introduce my colleagues. Kevin Kelly is managing director of AIB Bank; Donal de Buitleir is general manager, office of the group chief executive; Philip Brennan is the head of group taxation, and Deirdre Fullen is our chief tax manager dealing with this area.

But before I begin to address the various aspects of this complex issue, I must make it clear that AIB has responded, and will continue to respond, openly to Revenue's enquiries on the matter of tax on non-resident accounts.

At the outset, let me make four things very clear:

Firstly, bogus non-resident accounts up to 1991 were an industry issue.

Secondly, AIB accepted Revenue proposals in 1991 for resolving this issue; we did all we were asked to do. We did not do any deal with the Revenue for £14 million.

Thirdly, we did not mislead the Revenue on the extent of the problem at AIB.

Fourthly, the figures quoted in the public domain about bogus non-resident accounts at AIB are seriously unreliable.

Prior to the introduction of DIRT, Revenue was aware of the problem of bogus non-resident accounts and there were many meetings held with Revenue, and circulars issued by the head offices of banks to bank staff in an effort to address it. However, this did not lead to a resolution of the problem and did not deter individual customers from opening such accounts across the industry.

Deposit Interest Retention Tax, or DIRT as it has come to be known, was introduced in the Finance Act 1986. The legislation placed an onus on all banks and building societies to deduct tax from interest earned by all resident depositors. Let me repeat that, because it is important - what we are talking about is the banks acting as tax collectors on behalf of the State by deducting tax from the interest earned by the depositors.

As with the reporting regime that preceded it, non-residents were again permitted exemption. However, the new declaration to secure exemption was capable of inspection by Revenue. There were transitional provisions to apply whereby the old non-resident declaration, which was not inspectable, would suffice also to exempt the account from DIRT up to April 5th, 1987, but these provisions did not apply where more than 25 per cent of the account balance was withdrawn between January 29th 1986 and April 5th 1987. This clearly demonstrates the sensitivity of the government of the time and the Department of Finance to the possibility that there was a real risk of funds moving out of the country.

It is also worth noting that the new DIRT provisions for the first time afforded confidentiality to residents who paid their DIRT, in that the Banks did not have to make a return of their interest to the Revenue Commissioners.

In August 1987, following a meeting with the Minister for Finance, the IBF communicated with all members of its fiscal and legislative committee stating:

`Council were informed that, in connection with DIRT, the question of Revenue inspection for declarations pertaining to non-resident deposits arose, and that it was evident that the Minister was very much aware of the possible consequences and the fears of depositors that sensitive information might pass between Revenue authorities in different jurisdictions. There were, it was understood, indications that the government seemed disposed to deal with this difficulty in the 1988 budget, while recognising that bogus non-resident accounts presented a particular problem, which needed to be addressed. The overriding concern of the Minister, as conveyed to the delegation on the day, was to entice back deposit funds which had flown the economy, largely because of the advent of DIRT.'

It was obvious, therefore, that bogus non-resident accounts were still an issue across the industry.

Budget 1988 announced a general tax amnesty. In documents issued by Revenue at that stage, specific reference was made to the attractions of this amnesty to taxpayers who had not disclosed (and I quote) `monies held with Irish deposit takers (banks etc) under non-resident names and addresses.' Clearly, Revenue also were aware that this was still a problem.

I will now move on to the 1991 meeting with Revenue but first let me summarise the environment.

1. Across Ireland, and indeed across other countries, many savers sought confidentiality and had an aversion to paying tax on interest.

2. There was a long-standing background of residents masquerading as non-residents in order to do this.

3. There was sensitivity in successive governments to tackling the problem due to the legitimate fear of a flight of funds and the resulting effects on a fragile economy.

Let me turn now to what I will refer to as the Revenue initiative of 1991. At the outset, I should say that we have detailed notes of proceedings at that time.

On February 5th, 1991, AIB had a telephone discussion with a senior inspector of the investigation branch of the Revenue. In the course of that discussion, the senior inspector, Mr Mac Carthaigh, stated that he would (and I quote) `like to widen the agenda for a forthcoming meeting somewhat and, rather than dealing only with two specific cases, to deal with the situation as it relates to branches of AIB in the Republic as a whole.'

He also stated that (and I quote) `if AIB is prepared to be pragmatic, the Revenue is prepared to look forward rather than back.'

A meeting was held on February 13th, 1991, between AIB group tax department and representatives from the Office of the Revenue Commissioners, investigations branch led by Mr Mac Carthaigh. Our records show that all four senior inspectors of taxes in the Revenue investigation branch attended that meeting.

At that meeting, AIB stated that a process had started since April 1990 whereby a determined effort had been made to ensure that only genuine non-resident accounts had been exempted from DIRT by AIB. The discussion was wide ranging but our detailed file note of the meeting would suggest that AIB did not make any attempt to deny that there was a serious problem nor were we asked to quantify the number of problem accounts.

It is also relevant that Mr Mac Carthaigh stated that (and I quote) `the intention of Revenue is to talk to all financial institutions in order to create the proper environment'.

Mr Mac Carthaigh also stated (and I quote) `for the first time, the Revenue are very serious about cleaning up the position once and for all.' The very fact that Revenue gave us several months to complete the exercise confirms that what was under discussion was a major exercise, not just a small number of accounts.

This meeting was the beginning of a process, which we were advised was taking place across the industry where, in essence, AIB was given the opportunity to look at all non-resident accounts up to a specific cut-off date (initially agreed as June 30th, 1991, and subsequently extended to September 30th, 1991) and get its affairs in order.

With regard to any problem cases uncovered after that date, the bank would have to pay the DIRT if the account was incorrectly classified and take appropriate action if staff complicity was an issue. There would be no penalty or publication for issues up to the cut-off date. Bank management in each branch was required to sign off that the process was completed. What Revenue proposed was (to again quote from the senior Revenue inspector at the February meeting) `an amicable solution of the whole issue'. The clear intent was that:

the arrangement was forward looking;

it was to apply across the industry;

there was to be no penalty nor publication;

more stringent procedures in relation to the completion and acceptance of non-resident declarations were to apply going forward.

As far as we were concerned, it was designed as a pragmatic solution to a sensitive issue.

The Revenue subsequently wrote a letter to AIB on February 15th, 1991, and extracts from this letter have been leaked to the media. Among other things, the letter referred to the fact that (and I quote) `any cases discovered prior to June 30th, 1991, will be the subject of a DIRT payment to be negotiated at this branch without penalty and without publication'. However, as events unfolded, it became clear, as had been represented both before and during the meeting, that this was a forward looking arrangement.

This was clearly evidenced by subsequent telephone discussions. For example, in a telephone discussion on March 5th, 1991, with the group taxation manager of AIB, the senior Revenue inspector stated that he viewed the arrangement as an `amnesty' up to June 30th, 1991. AIB management of the time was also anxious to ensure that this arrangement was being entered into with the knowledge of the senior inspector's superiors. In response to this, the senior inspector stated that it was with the agreement of the board of the Revenue Commissioners that investigation branch had been asked to contact all banks to clear this matter up once and for all.

AIB advised the senior inspector that it was its intention to have the exercise concluded by April 2nd, 1991, and that, in view of earlier action, the DIRT payment for October 1990 had already increased.

Because of this, AIB was of the view that it would be evident from the next DIRT payment that matters were in order. Discussions continued between AIB and the senior inspector on operational procedures for non-resident accounts.

There was a further meeting on September 6th, 1991, at which AIB met senior Revenue officials and at which the senior inspector advised that (and I quote): `The response by financial institutions to the retention tax clean-up has encouraged the Revenue to look at the entire issue in-depth and things are now happening. The castle is involved at this stage and the issue is gathering some momentum as the desire to have a level playing field has become very obvious.'

At no time during these subsequent discussions was the issue of a monetary settlement ever raised by Revenue. It was clear that the exercise had worked, certainly in the case of AIB. The AIB Group DIRT payment for the year to April 5th, 1991, increased by £9 million on the previous year and by a further £5 million in the following year (i.e. £14 million in total). Some of this related to volume and interest rate movements but it was clear that part could be attributed to the review of non-resident accounts.

By September 30th 1991, all branches were required to have signed off stating that they had completed their review of non-resident accounts. The review can be summarised as follows:

all branches were to examine all accounts exempted from DIRT by reason of the beneficial owner of the interest being non-resident and confirm the bona fides of that status by having the declarations of non-residence countersigned by a member of management;

where declarations were not in place, or the residential status of the account holder was in doubt, the account was to be recategorised as liable to DIRT;

a member of management was to sign a written confirmation that the exercise was completed, that all the necessary declarations were in place and that the account holders were, to the best of the knowledge and belief of the member of management, genuine non-residents;

all new non-resident accounts opened after that date required to be countersigned by the accepting official;

branch management were advised that the acceptance of declarations of non-residence from anyone other than genuine non-residents would be dealt with in the most serious terms by both the bank and the Revenue.

The completion date for this exercise was extended, with Revenue agreement, to September 30th 1991 and the exercise was completed by that date. No settlement was made with Revenue and in continuing discussions with the senior inspector of taxes no settlement was ever sought nor was any query on this raised by Revenue.

On the recommendation of management, no provision in the accounts for a retrospective DIRT liability was made due to the circumstances outlined above. In addition, the Bank's external auditors, Coopers & Lybrand, reviewed all documentation and correspondence surrounding the arrangements on this matter as part of their audit. Their understanding, as auditors, was that AIB had an agreement which meant that no liability for DIRT arrears applied to AIB.

So to summarise the position of the Revenue initiative in 1991:

revenue approached AIB;

the approach was from a senior inspector in the specialist investigation branch, accompanied by three colleagues of equal rank;

we were informed that the approach was with the approval of the board of the Revenue Commissioners;

we were advised, on a number of occasions, that it was an industry-wide initiative;

we were given to understand that the arrangement was forward looking in nature, due to the sensitivity of the issue in terms of the national economy.

due to the nature of the arrangement, no provision in the accounts was considered necessary;

the exercise was treated extremely seriously in AIB and the difficulties which were in its system were addressed.

Let me be clear about this, because it is extremely important. AIB did not mislead the Revenue on the extent of this problem. We responded to their initiative which, we were told, was authorised by their board. We, at all times, acted in good faith. As far as we were concerned, a proposal was being made to the overall industry relating to a sensitive and long standing issue as was clear to everyone at the time - the Revenue, the Central Bank, the Department of Finance, Ministers for Finance and successive governments.

I think the general understanding of the agreement with Revenue can best be summed up in the way the AIB group financial director of the time advised the group audit committee of the time. He stated (and I quote): `We have the opportunity to rid our system of a deep rooted problem whose origins lie in an attitude on the part of citizens to the payment of tax. This attitude has become unacceptable over the years but, as any reasonable person would see, its correction involves very sensitive issues for our customer base, for the whole financial system and for the national economy. We are happy and eager to take this opportunity in the knowledge that the same is happening across the whole financial services sector'.

He went on in that statement to say (and I again quote) `The Central Bank has been informed by me of the continuing position.'

Before I move on, I should mention that, in April 1998, Revenue used its 1986 powers to check non-resident declarations in AIB. They notified us of their intention in this regard in January 1998. At a recent meeting, the Revenue indicated to AIB that there were no issues of substance arising from the audit.

I feel I should address the leaked documentation and the figures which are being quoted in the media as representing the extent of the problem.

As is no doubt clear from what I have said already, we are not denying that there was a problem in AIB with non-resident accounts in 1991. Due to the forward looking nature of the arrangement entered into in good faith with Revenue, we did not quantify the extent of the problem, nor were we asked to quantify it.

The whole emphasis was on getting things right for the future. At the request of Revenue in recent months we have attempted to estimate the extent of the problem but, with the passage of time and personnel, this is proving extraordinarily difficult. From the research conducted to date, however, we can say, based on an analysis of the underlying audit working papers and also on partly reconstructed records, the figures quoted by Mr A.J. Spollen, former group internal auditor, (which were included in the leaked documents) are over estimations and seriously unreliable as regards the balances exempt from DIRT by reason of non-residence, the numbers of accounts and the estimated liability due. The assumptions on which his figures were calculated had no basis in fact. The figures were not Mr Spollen's own and were never intended as a precise measurement of the situation. Mr O'Mahony has described them `as an off the cuff estimate to get people's attention.' We will continue to work on extracting historical data with a view to establishing the position.

Let me stress that we have been co-operating with Revenue since this matter first became public in April last. We have made a copy of the leaked documents available to the Revenue. AIB and Revenue have had a number of meetings to date. We are committed to resolving this matter and will continue to co-operate with Revenue and the public accounts committee towards an equitable conclusion to this complex and unprecedented situation.

Mr chairman, let me conclude by reiterating what I said at the outset:

bogus non-resident accounts up to 1991 were an industry issue;

AIB accepted Revenue proposals in 1991 for resolving this issue - we did all we were asked to do - we did not do any deal with the Revenue for £14 million.

we did not mislead the Revenue on the extent of the problem at AIB.

The figures quoted in the public domain about non-resident accounts at AIB are seriously unreliable.

Thank you for acceding to our request to set the record straight.

T. Mulcahy, October 15th, 1998.