Snapshots: PAC’s DIRT Inquiry

The Irish Times

By Colman Cassidy 22 September 1999

(1) Sutherland

The Board of AIB had reacted swiftly when it became aware that the bank might be facing a £100 million liability for unpaid DIRT, its former chairman, Peter Sutherland, told the Public Accounts Committee inquiry.   Mr Sutherland was responding to questions from  Deputy Pat Rabbitte, who suggested that the board had taken no action on the DIRT issue before 1991 “when Tony Spollen’s exocet missiles were arriving with a frequency not experienced in the previous eight years”.
Mr Spollen, the bank’s head of internal audit, and a personal friend of Mr Sutherland since their school-days at Gonzaga College, had expressed concern over the possible extent of the bank’s exposure in a memorandum, dated 8 March 1991.  Deputy Rabbitte sought clarification from the bank’s former chairman that the board’s decision to investigate Mr Spollen’s concerns in relation to DIRT, could not have been initiated much earlier.
He was surprised, he said, that the board had not considered it was an appropriate matter for its consideration up to then.
“The response was rapid,” Mr Sutherland said.  “We did everything possible to examine the situation and concluded that there was no past liability, on the basis of what the bank believed had been agreed with the Revenue Commissioners.  In terms of liability we were looking at the future.”
He had been “deeply concerned”, on first reading the letter, dated 28 January 1991, in which Mr Spollen drew attention to the bank’s potential liability, Mr Sutherland admitted.  But he was happy he said that the bank had taken the best course “in determining the facts” – the setting up of an independent sub-committee of the audit committee, which included a number of key figures including Sir Douglas Morpeth, one of Britain’s most eminent chartered accountants.
Deputy Rabbitte sought clarification on the “intermingling” of events culminating in the Spollen letter and the decision to transfer the head of internal audit to another area.   Mr Sutherland had phoned his friend, a month earlier, he reiterated, to convey to him the high opinion of his department expressed by Mr Jim Culliton at a meeting of the audit committee that he chaired.  There was no connection between these events, Mr Sutherland insisted.  He was responding to Deputy Rabbitte’s astonishment at the fact that a man who was being so highly praised for his work in the audit department, in respect of DIRT etc., was apparently being demoted, four weeks later.
There was no question of a demotion, said the former chairman, who admitted that he was not involved in day-to-day operational matters.  Such transfers were a common occurrence among senior executives.  In response to Deputy Bernard Durkan, he said he had never discussed the ‘promotion’ issue with Mr Spollen: “I think that the evidence is that the executives would see the transfer issue as not being related to any negative view of Tony Spollen’s performance.  None of the senior executives had suggested the proposed transfer reflected negatively on Mr Spollen: “I would have expressed my amazement, had this been the case, because as had been said the reputation of the internal audit department had been enhanced.”
As to the purported liability of £100 million, this was hotly disputed by management, said the former chairman: “I was confident that it would be thrashed out by the sub-committee, but I did not know that the results would be.”
The audit committee lost no time in investigating the matter, he added: “They concluded that the figure of £100 million was not remotely the case – if indeed there was a liability, which is debatable.”  There was agreement with the Revenue Commissioners “for the past”, he went on – and there was a commitment that there would be rigorous compliance for the future.
Deputy Rabbitte wondered why the bank had not paid £10 million which they agreed was liable: “How come nobody wrote a cheque and despatched the £10 million?” The AIB case was that there was a £10 million liability there “for a short period and that you were basing your case on the fact that there was an agreement”.  The cheque should have been despatched.
An agreement with the Revenue Commissioners was in place, replied Mr Sutherland.  Otherwise it would have been brought to the attention of the board.   The details of such an agreement were not a matter for the board, “but we would have expected to be fully informed”.  In any event, he added, even Mr Spollen was not arguing that the £100 million was correct: it was a dimension of something he got from somewhere else, said the former chairman.
“Why were you so quick to rubbish the figure when a month earlier you were phoning him and telling him he was doing a wonderful job?” Deputy Rabbitte asked.  Mr Spollen’s figures were based on information he had received “from someone else”, repeated the chairman.  It was nothing like the real dimension of the problem.
Asked if he agreed with Mr James O’Mahony, former AIB Group taxation manager, that any amnesty in respect of DIRT would require new legislation, Mr Sutherland replied that he was happy to accept the prevailing view that there was an agreement with the Revenue Commissioners which could be implemented.  That, too, was the view of Dr Donal de Buitleir, the AIB head of taxation, regarded as one of most reputable authorities in this area.

Deputy Durkan put it to the former chairman that the reclassification of the bank’s position outlined in the Comptroller and Auditor General’s report had subsequently vindicated the concerns of the former group head of internal audit.  “The level of bogus accounts showed a 60 per default level,” said Deputy Durkan.

“Reclassification does not mean bogus,” said Mr Sutherland.  Neither did it mean that they were not bogus, Deputy Durkan retorted


(2) MacCarthaigh

20 September 1999

The former senior inspector of taxes, Tony Mac Carthaigh, remained adamant yesterday throughout three hours of intense cross-examination by Dermot Gleeson, SC, for AIB, that the Revenue Commissioners had made no deal with the bank on retrospection in relation to DIRT, the Public Accounts Committee inquiry was told.

Mr Mac Carthaigh agreed there was a deal, a proposal with regard to “a reasonable amount of interest”, no penalties, non-publication and significantly, a payment of tax.  But there was no question of writing off tax arrears, he insisted, despite Mr Gleeson’s assertion that AIB witnesses “in something like 20 documents” had indicated that they had an agreement with the Revenue, that there would no retrospection in relation to DIRT.
Counsel put it to the former senior tax inspector, that a deal he had made in 1991, “which is established by the documentary record, had been repudiated later, obliging you to have resort to this utterly absurd conspiracy theory which you, and you alone, have put before the committee”.  Was there any support for that in any part of the Revenue?
In support of this position Mr Mac Carthaigh produced a document written by senior inspector of taxes, Tom Tiúit, in which he referred to a meeting between Mr Mac Carthaigh and three officers of the Revenue’s Investigation Branch with senior executives of AIB.  This was the focus of much of Mr Gleeson’s earlier cross-examination of the senior tax inspector as it was his contention that Mr Mac Carthaigh had a particular agenda in mind in turning up with such an unprecedented number of Revenue officials for such a meeting.
Mr Tiúit’s document, entitled, AIB Deposit Interest Retention Tax 1986-1991, was written “without any assistance, prompting or otherwise from me”, Mr Mac Carthaigh assured the chairman, Mr Jim Mitchell.  It said: * In my opinion, the significance of the meeting of 13 February 1991 between officers of IB and AIB personnel on the above matter should be viewed against the background prevailing at the time within the AIB group.”  The intervention by Mr Mac Carthaigh was a godsend to the bank in that it afforded it an opportunity to to contrive an arrangement that they now seek to construe as consent by Revenue to an amnesty in respect of DIRT which ought properly to have been remitted to the bank.  It also prompts the question: what would the bank have done in discharge of its statutory duty to remit the correct DIRT from inception of the legislation had not Mr Mac Carthaigh intervened, bearing in mind that its own senior management was at the very time discussing and quantifying the scale of non-compliance?

Earlier in the cross-examination Mr Mac Carthaigh had rejected certain key parts of written submissions to the committee by AIB including a note by Jimmy O’Mahony group taxation manager of a phone conversation with the senior tax official, dated 5th March 1991 which referred to an ‘amnesty’ up to 30th June 1991: “…and the reason it came about was due to a manager (he did not say which bank) having been caught red handed on ‘bogus’ non resident deposits.  It was with the approval of the board of the Revenue Commissioners that Enquiry Branch was asked to contact all the financial Institutions with a view to clearing up the act once and for all.”  Mr Mac Carthaigh did not agree with this part of Mr O’Mahony’s recollection of their phone conversation.

In response to Mr Gleeson, he agreed that he regarded as “spoofery” Mr O’Mahony’s estimate in another phone call on 16th April 1991 – as conveyed by him in a memo to his immediate superior, the superintending inspector of taxes, Mr Sean Moriarty – to the effect that: “another review of non resident accounts had been done”, and a substantial number had been redesignated as a result, “giving rise to an addition of slightly in excess of 2.5 million pounds to the due payment this month”.
“Would you be happy that the committee should judge your overall credibility and all your evidence in accordance with your contention as to the fake records, the game plan from the start, the invention of phone call and the spoof telephone call about the 2.5 million pounds?”asked Mr Gleeson.
Mr MacCarthaigh was quite happy to rely on the Revenue records “as an honest and straightforward record” of what had happened: “You will not find anywhere in the Revenue records any recitation of a desire that, ‘we will not consult the Revenue – we will not go down that route’.”
That could not be said of the Mr Gleeson’s clients, he told the senior counsel.  There was no suggestion of malpractice anywhere in the Revenue records.


(3) Tax Expert

17 September 1999

A former senior revenue official who became the AIB group’s head of taxation, could not explain why he was recruited by the bank, in 1989, he told the DIRT inquiry.
Dr Donal de Buitleir, who was the acknowledged leading tax expert, had been referred to by the former AIB chairman, as the man “who could clarify all the remaining mysteries” for the Committee, Mr Rabbitte reminded him: “Mr Sutherland reposed more confidence in you than the entire Bar Library.”
Dr de Buitleir could not say why he had been head-hunted and believed it had little to do “with particular knowledge I had”. He had acquired, for a civil servant, an unusual degree of public prominence, as secretary of the Commission of Taxation, he conceded. He thought that might have had some bearing on the issue.
He was aware that 1989 was the year that AIB was “in the throes of cleaning up the situation in the UK”, as Mr Rabbitte put it, in respect of tax liabilities but his recruitment had nothing to do with that. The initiative was just starting when he joined AIB: “I don’t believe that the issue in the UK was anywhere on anyone’s radar screens.”
Mr Rabbitte wondered whether AIB’s difficulties with the British Inland Revenue might not have “set off obvious alarms” on this side of the Irish Sea. Dr de Buitleir thought it unreasonable to make the assumption “that any experience we might have had in the UK was transferable to Ireland”.

He had had a note from the financial director Mr John Keogh in July 1990, Mr Rabbitte reminded him, indicating that the situation in the Republic of Ireland should be examined, because of the bank’s experience in Britain. Although he was head of group taxation at the time, he had not asked anyone about this, he confirmed.
Pressed by Mr Rabbitte as to why there should be such a difference between the bank’s experience in Britain and Ireland, Dr de Butleir replied: “The business in the UK may have been concentrated in certain aspects of the Irish community who might have had a particular attitude to paying tax, that you couldn’t generalise to Ireland.”
“And that was something they picked up in the United Kingdom, in immigration?” Mr Rabbitte asked.
The former head of taxation at AIB declined to speculate.
Earlier, another former revenue official Mr Jimmy O’Mahony, the bank’s former group taxation manager, had insisted that the agreement that AIB believed it had with the Revenue Commissioners could not be considered an amnesty as that would have required legislation.
At a meeting with senior tax inspector, Mr Tony MacCarthaigh, on 13 February 1991, he explained, “we put up our hands and said we had a problem”. His point was that a firm agreement was in place. Mr MacCarthaigh had the full law behind him at that stage if he wished to implement it: “He could have thrown the book at us, but in an estimated assessment which he chose not to do so. Is that not evidence enough that he knew we had an on-going arrangement?

Mr MacCarthaigh was an unlikely Santa Claus, said Mr Rabbitte. “He was a tough negotiator, but honourable,” responded Mr O’Mahony.

“He wasn’t very tough if he gave you an amnesty for a figure of tens of millions that we have yet to quantify.”
There were “other people” involved in this initiative, Mr O’Mahony rejoined. Mr MacCarthaigh had intimated that he was acting with the full approval of the board of the Revenue Commissioners.
And had it gone to the board of AIB? Yes, it had gone to the audit committee and thence to the board.
“What went to the audit committee and the board?” the chairman, Mr Mitchell asked. “My distinct impression was they knew very little.”
It was brought to the board’s attention following (the group internal auditor) Mr Tony Spollen’s presentation, Mr O’Mahony confirmed. The board had become aware of it at that stage.


(4) Taoiseach

9 September 1999

Ireland has a strong tax evasion culture which runs through every section of society, the Taoiseach, Mr Ahern told the Public Accounts Committee on DIRT, yesterday.
He said that even before the DIRT legislation of 1986 there had always been a compliance problem with non-resident accounts.
“I think there is a culture here where people will try, wherever they have the opportunity, to evade tax,” he told the committee, in response to a query by  Mary Irvine, SC, who asked him “where do you think it all went wrong?”.
Whenever Ministers for Finance and the legislature attempted to plug the holes, “somebody, usually the following day or that night, is sending out brochures around the town finding ways of unplugging them”.  He had had numerous debates with the Institute of Taxation, chartered accountants and “my own professional group” about the definitions of avoidance and evasion, when he was Minister for Finance, he said.
Like the other four former finance ministers, Mr Ahern said he had no knowledge of the internal Revenue instruction, SIM 263, which prohibited tax inspectors from examining non-resident declaration forms, until last week.  He was not aware that the powers of the Revenue were not being enforced, he told Frank Clarke, SC.  It was a complete surprise.
The Revenue people he had dealt with were always “very professional”, he said.  He had introduced four Finance Bills in three years: “Normally if they got powers they believed were adequate, they implemented them.”
At no stage was it suggested to him, he confirmed, that Revenue powers of inspection under Section 37 of the 1986 Act should be increased.  Practically everything that “was given to me” in 1992 by the Revenue people, he had “agreed to run with”, he said: “People thought we’d gone over the top. We didn’t stop everything, but we stopped an awful lot.”
Ms Irvine sought clarification over a reference by the Taoiseach in his opening statement to the committee about “alarm bells ringing”.
“The alarm bells, I think, were ringing that if we were to toughen up on our powers, we would, perhaps, get in more money.”  At the same time he was conscious that in introducing full exchange control liberalisation, money could leave the country: “The Revenue’s viewpoint – and my viewpoint – was that Revenue were out there in the field and the best of luck to them.”  The 1993 tax amnesty, he said, had raised £238 million: “It could be argued, in its justification that it helped to broaden the tax base.”  The negative reaction to it, however, has ensured that there will not be another one, the Taoiseach emphasised.
The Taoiseach took issue, however, with evidence given earlier to the committee by Mr Tony MacCarthaigh, a senior tax inspector on the special savings accounts “which I legislated for”.  Mr MacCarthaigh had “made a sweeping charge”, said Mr Ahern that “anyone could open up these accounts all over the place”.  He had referred to these accounts as the “new tax evasion of the Nineties”.  The legislation was designed to ensure that this would not happen, the Taoiseach insisted: “There is no evidence whatsoever that it has happened and in the Comptroller and Auditor General’s report he seems to indicate that it hasn’t happened.”  He had not seen anything from Revenue to indicate that it had, Mr Ahern added.
For many years in Ireland financial institutions were held up as models of integrity and probity, said Mr Ahern.  He hoped to see that situation being restored.  In reply to Mr Clarke who referred to the “two strands of your role as Minister for Finance”, he said he would have expected ACC as a State-owned bank to have informed him about “any significant non-compliance with its tax or indeed any other legal obligation”.
He had a number of meetings with both the chairman and chief executive of the bank, he recalled, during February 1993: “The new Fianna Fail-Labour Government had a proposal on third banking which required me to have a number of meetings with ICC, ACC and TSB.”  At no time had the issue of non-compliance been mentioned.

Was it not the case, Ms Irvine asked, that someone could give a direction in the future which could, in effect, inhibit the Revenue from using the full powers at its disposal, as was the case with SIM 263?  The Revenue should always review the legislation at their disposal, said Mr Ahern.  If it was not being used then it should be amended: “By and large, I think Revenue use the legislation that’s given to them.”
There was a “far different culture now” within the Irish taxation system, he concluded, in respect of compliance compared to the period under review.


(5) MacSharry

9 September 1999

A controversial internal AIB memo which suggested that a former chairman of the bank had been assured by Ray MacSharry that the inspection of non resident accounts was not a priority for the Revenue Commissioners, was hotly refuted yesterday, at the DIRT inquiry – by the former Minister for Finance.
The committee had heard a great deal of evidence and questions pertaining to this note, said Mr MacSharry, suggesting that he had told the late Niall Crowley “that there would never be inspections”.   He had never said that to anybody.
“The Minister has indicated verbally that inspectability will not be an issue at any time and provision will be made in the 1988 Finance Act to cater for this,” the note had said.
“I want to take this opportunity immediately to categorically reject that inference,” Mr MacSharry protested.  He was responding to questions from Mary Irvine, SC, for the committee.

The former minister doubted whether the “unsigned and undated” note could be attributed to Mr Crowley.  The “inspectability” referred to at the start of the note was contradicted at the end, he pointed out, by the assertion, “In the event of failure to incorporate confidentiality into the 1988 Finance Act, it will be necessary to apply DIRT so as to avoid disclosure or inspection”.
In addition, the minutes of a subsequent meeting on 25 May 1987 of the Irish Bankers’ Federation chaired by Mr Crowley, which contained a report of the meeting with the minister, gave no suggestion of “never having inspectors”, Mr MacSharry argued.  Later, on 15 December, Mr Crowley had reported to the federation about another meeting with the Minister for Finance when the question of DIRT was mentioned, said Mr MacSharry.  The minutes noted: “This had proved to be unsatisfactory and although the federation representatives had stressed the level playing field aspects, there had been no positive reaction from the minister…The outcome of the discussion on DIRT was inconclusive.”
Ms Irvine asked the former minister about another document, the minutes taken by Mr Michael Tutty now assistant secretary-general, Department of Finance, at a meeting he attended between Mr MacSharry and representatives of the federation, namely Mr Crowley for AIB and Prof. Louden Ryan for the Bank of Ireland.
“The bank representatives also raised the question of the right of inspection of forms by the Revenue Commissioners in respect of non-resident deposits,” this document said.  “They feared the leakage of deposits because of this right of inspection (under Section 37 of the 1986 Finance Act).  The Minister indicated he was sympathetic in this area and intended looking at thoroughly before next year’s budget.  He was unable to make any changes at present.”
Was Mr MacSharry not clearly sending a message to the banks that he was sympathetic to their situation, Ms Irvine wondered, and was he not saying that he would like to change the law and would think about it for next year’s budget?  There was nothing here, she said, that would seriously have worried the banks in terms of the minister saying, “Listen, it’s very important that these Section 37 forms are filled in and there will be inspectability”.
Mr MacSharry had no difficulty with Mr Tully’s minutes but referred the committee to his Seanad speech at the second stage of the Finance Bill, on 24 June 1987, dealing with requirements on financial institutions for the “payover” of retention tax.  The legislation provided that the institutions would have to make up any shortfall in their 1987 payments by an extra payment in October – and it also protected the yield from future years.  “Any activities by financial institutions aimed at avoiding the tax will be dealt with by legislation,” Mr MacSharry had warned in his Seanad speech.
In response to Ms Irvine, he said that the speech showed clearly that it was their responsibility to look after DIRT.  He was talking about retrospectve legislation, he emphasised and there was “no suggestion” that the Revenue inspectors would not take all steps necessary on the compliance front.
Ms Irvine persisted and referred the former minister to his budget speech on 31 March 1987, in which he said: “It is neither appropriate nor possible in practice for Revenue to institute indiscriminate widespread inquiries into the validity of Section 37 declarations.”  This, she suggested, amounted to a constraint on the Revenue Commissioners.
That was a total misinterpretation of the position, the former minister retorted.    The reference in the speech, he said, was to the attraction of “genuine non-resident accounts” – and giving assurances that interest on such bona fide accounts would not attract any tax: “That was the reality.  How anybody can read any other inference into that I just don’t understand.”



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