"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 loan-book 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, semi-state 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.

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:

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.