National Irish Bank is being sued by former customers who are facing hefty tax bills as a result of investing with Clerical Medical International and other offshore institutions.
The bank has confirmed that proceedings have been issued against it by L K Shields, a firm of Dublin solicitors who are acting on behalf of former customers.
A number of additional claims are expected to be filed by the solicitors shortly.
The Revenue Commissioners pursued a number of NIB's clients after it emerged in 1998 that they had availed of offshore bonds being offered by the bank to selected high net worth customers. The Revenue invoked a little-used power to demand the names of the customers who had bought the bonds and the bank was forced to hand them over.
NIB Financial Services sold the bonds to around 280 of the bank's customers who invested about £50 million. The offshore investment bonds were with Clerical Medical International and Scottish Provident International in the Isle of Man, and also with Old Mutual, in Guernsey.
Most of the customers were existing clients of the bank and had substantial deposits. They withdrew the funds and invested them in one of the offshore bonds, effectively putting the money outside the jurisdiction of the Revenue Commissioners and potentially avoiding tax.
CMI and the other investment companies then put the money back on deposit with NIB in Dublin. Customers could have access to their money in Ireland by cashing the bond. This type of bond could be legally sold only to non-residents because of the tax implications, but it emerged in 1998 that NIB had sold them to some of their Irish clients. Some 100 resident customers invested £14 million in the products.
It is understood that the customers who are suing the bank maintain that they bought the bonds in good faith and were not aware of the possible tax problems. Bank sources say that the legal action puts them in a difficult position. "If it was a case of genuine misselling, then that would be one thing, but we can't compensate people who try and evade tax and then get caught," said a source.
NIB has already paid compensation to a number of clients who were victims of systematic overcharging at five branches which also came to light in 1998. The bank has repaid more than £130,000 to the 370 customers. Both the overcharging and the offshore bonds are being investigated by two High Court inspectors appointed after an investigation ordered by the Tanaiste, Ms Harney, in 1998.
The Tanaiste said last week that she felt the inquiry by Mr John Blayney, a retired Supreme Court judge, and Mr Tom Grace, a senior partner at PricewaterhouseCoopers, would be completed before the end of the year. Bank sources believe the investigation, which has cost in excess of £1.5 million to date, is unlikely to be completed until next year.
Along with all the other leading banks, NIB has also been investigated by the Public Accounts Committee over the issue of bogus non-resident accounts. An audit of the bank carried out for the committee by the Comptroller and Auditor General, Mr John Purcell, found that a substantial number of non-resident accounts opened at the bank between 1986 and 1998 did not comply with all the requirements of the legislation.
Some of this money was eventually put into the offshore bonds. NIB has put aside £1 million to meet potential tax liabilities on these accounts.
