Collusion by the banks in tax evasion

The Comptroller and Auditor General's report on DIRT points to public sector, private sector, political and societal failure. This week, we heard how the Apollo 11 astronauts had 30 seconds of fuel left before oblivion. John Purcell's report highlights an aspect of how close this country was to its last 30 seconds of financial credibility. We should never forget this, particularly since we are now feted as superb financial managers. We should never have ended up facing the desperate need for tax revenue and the threat of capital flight. This was not the fault of banks.

But banks should hang their heads in shame at this report, and some banks much more than others. It is clear that there was significant collusion by bank personnel with tax evasion, practised by many people from all regions of the State and, one can safely assume, all social classes. Some banks may also have to write hefty cheques to the Collector-General in respect of un-met DIRT liabilities. That process will not be quick, given the legalities of the situation.

The report demonstrates that tax evasion on a large scale by the use of bogus non-resident accounts was known to many people for a long time. Ignorance was not the problem. It was a fear that tackling evasion could have led to a flight of capital out of the State, raising interest rates and damaging the exchange rate.

Mr Purcell says the policy question is, "did the executive at all times get the balance right between the competing demands of guarding against the potential flight of capital out of the country and creating an effective anti-evasion tax regime as far as DIRT was concerned?". Unfortunately, the answer to this question will always be a matter of opinion. It is astounding that, all the time, the Government had no reliable information about the extent of the problem. Reflecting an official view, Mr Purcell states, "The information available was based on anecdotal and circumstantial evidence which it was exceedingly difficult, if not impossible, to substantiate". This judgment, which some will read as excusing public officials, applies to a problem which persisted from 1976 until 1993, or even 1999. "At no time were studies or investigations undertaken to ascertain the level of bogus non-resident accounts," says Mr Purcell. Even attempting to gather information may have led to capital flight, it is implied, but Mr Purcell does not sound convinced.

Over this long period, the Department of Finance, numerous ministers for finance and members of many Governments of all hues, except green, relied on "subjective or generalised", "anecdotal and circumstantial" information on a tax problem which had the potential to undermine the national economy. The fear of capital flight could only have been based on anecdote and subjective judgment too, as there could be no definitive evidence for it, except after the capital had bolted. In this context, the IMF's recommendation in 1986 that the Revenue should be allowed access to non-resident accounts sticks out awkwardly. Surely the IMF, if anyone, would know about capital flight? The implication is that the IMF thought the lesser risk to the economy lay in accessing bank accounts rather than causing capital flight, the opposite of the view that prevailed at all times here.

As for now, Mr Purcell says, "The changed economic circumstances of the later 1990s and the greater focus on . . . a compliance culture in our financial institutions, coupled with advances in financial regulation, have all contributed to an environment where it was considered appropriate to introduce greater powers of access by Revenue to the records of financial institutions as enacted in the Finance Act 1999."

Those changed circumstances include tax levels which are not at the confiscatory highs of the mid-1980s. A 35 per cent basic rate of income tax on all deposit interest over £50 drove people to evade tax. At a certain point, tax evasion is an expression of a lack of consent to be governed. It is not that we have become more civic-minded. The rate of tax is simply not as indefensible as it once was.

And then the euro removed the capital flight threat. A large movement of funds out of the Irish banking system would still cause problems for the banks, but not for interest rates and the exchange rate. We are saved the worst by the euro. No wonder officials embrace the external discipline of the EU. In 1991, a Department of Finance memo stated, "Overall it would probably be more prudent to await developments before any action is taken on non-resident accounts". After this report, I think the writer would agree we have to make developments, not await them.

Oliver O'Connor is managing editor, Fintel Publications