A new system for regulating and supervising the banks and building societies has been promised by the Tanaiste, Ms Harney, following the revelation that the State's largest bank, AIB, managed to pay only a portion of the full amount of tax evaded on bogus non-resident deposit accounts. The fact that AIB paid only £14 million out of about £100 million due to the Revenue in Deposit Interest Retention Tax is shocking, not least when any ordinary PAYE taxpayer or small business caught evading tax would have to pay not only the tax due but penalties and interest, and could face imprisonment.
The latest development follows many months of banking scandals, from the uncovering of the offshore Ansbacher accounts by the McCracken Tribunal to the National Irish Bank scandal. It follows the dissatisfaction expressed by the head of the Garda Bureau of Fraud Investigation with the co-operation he was receiving from the financial institutions in implementing money-laundering legislation. It follows comments from bankers and others that bogus non-resident accounts were commonplace in Irish banks in the 1980s and early 1990s. And there is concern that AIB is not the only bank to have held large numbers of bogus non-resident accounts. But the events of recent months must call into question the competence of the authorities who are responsible for supervising the financial institutions and for collecting taxes due to the State. What were the regulatory authorities doing? Did they know about these accounts? If they did, what did they do about them? If they did not know, could they claim to have been carrying out their supervisory role properly?
The Central Bank is the regulatory and supervisory authority for the banks and building societies. It has wide powers. Its ultimate sanction is the withdrawal of the licence of a financial institution.
But the Central Bank sees its primary role as ensuring the stability of the financial system - the prudential role which involves ensuring that the banks operate sound lending and funding policies and maintain adequate capital bases. This is important for the health of the economy and for savers and borrowers. But there are other important duties of any supervisor. The supervisor must ensure that the institutions comply with the laws of the land and that regular spot checks and monitoring are carried out. The bank carries out its function through a combination of offsite surveillance and onsite inspections involving examination of detailed returns of banks books and records. But through all the banking scandals the Central Bank has come to be seen as the dog that did not bark. Did it find evidence of bogus non-resident accounts? What did it do with any information found? Did it issue any instructions to banks or building societies? Were any sanctions imposed? Did the Central Bank make any reports to the Revenue Commissioners? Earlier this year a joint Oireachtas committee called for an independent financial services authority to supervise all the financial institutions on the grounds that the current situation was inadequate. The committee concluded that existing regulators either do not have enough powers or are structured in a way which prevents them from stopping malpractice in financial institutions.
Bogus non-resident bank deposits appear to have been a feature of the Irish banking system in the early 1980s. They followed the era when it was up to each taxpayer to declare the interest earned on a deposit or savings account in their annual tax return. At that time, tax rates were high, there was a significant level of payments in cash for goods and services and a reluctance to disclose details of financial affairs to the Revenue. Because the authorities felt there was gross under-declaration of interest earnings and thus underpayment of tax on interest, a new system was introduced to tax the interest at source. This was the Deposit Interest Retention Tax, which was introduced in 1986. Banks and building societies had to deduct tax at the standard rate from interest earned on accounts before it was paid to the customer. This meant that the banks became the collectors of tax on interest for the Revenue Commissioners and tax was deducted from every deposit or savings account.
But this was followed by a move to take some accounts out of the tax net. The accounts of non-residents were removed from the DIRT net. Banks were required to ensure that the customers who claimed non-resident status were genuine non-residents. But there is now plenty of anecdotal evidence of people in towns all over Ireland opening non-resident accounts while being very visible local residents.
There appears to have been wholesale flouting of this requirement by the financial institutions. With banks reluctant to lose funds to other institutions, ways were found to allow residents to hold tax-free non-resident accounts.
The rules have been tightened up considerably in recent years. Bank officials are now liable for ensuring that account-holders are genuine nonresidents and from 1995 must know any new customers and establish the sources of their funds. When it became more difficult to open non-resident accounts, tax evaders moved on to the opening of offshore accounts.
It is now clear that at every stage tax evaders have been able to stay one step ahead. As the McCracken Tribunal pointed out, the inability of the Revenue Commissioners to carry out trawls of bank accounts has tied their hands. The Revenue must have the name and bank branch of the suspected account before it can get access to examine it. The Taoiseach, Mr Ahern, said yesterday that AIB would have to pay the full amount due in taxes. That is the least that must happen now. The time has also come for a full examination of how the Irish financial system is regulated.
